Mixed-use apartment building NYC

Cities Turning to Commercial Real Estate for Housing Solutions

America’s cities are experiencing an economic resurgence that is drawing people back into cities to live, work and play. While local officials have welcomed the revitalization of their downtown corridors and communities, the influx of residents has increased demand for housing. This is reflected in increased development of mixed-use projects across North America which include commercial, retail and residential units.

Local officials are becoming increasingly concerned that housing is becoming unaffordable for individuals and families near or below the local average median income. As a consequence, city councils are turning to commercial real estate and the private sector for relief and assistance.

NAIOP recognizes that affordable housing is an important part of a city’s revitalization and requires comprehensive solutions. Our chapters are working with cities to develop sustainable housing solutions that do not single out the commercial real estate industry, or have unintended consequences that harm a city’s economic vitality.

One means of addressing affordable housing needs is garnering increased attention from local governments. Inclusionary zoning (IZ) ordinances would require owners of new residential, apartment and mixed-use properties to set aside a certain percentage of affordable units for individuals with incomes below the average median income. When applied to rental properties – such as Buffalo’s proposed IZ ordinance designating 30 percent of new rental units for low-income tenants – the ordinance is effectively a rent control program.

Incentives to developers are often included to make set-asides more acceptable; these may include property tax abatements, payment in lieu of participation, bonus density, up-zoning or even the reassignment of affordable housing units to another property. In Seattle, for example, the local NAIOP chapter worked with city officials on an affordable housing ordinance, dubbed the “grand bargain,” that included IZ in return for up-zoning as the incentive for commercial real estate. Now, the developer of a 10-story condo project, for example, may seek additional floors as compensation for the percentage set aside for affordable housing

Legal questions remain regarding the constitutionality of IZ under the Takings Clause of the 5th Amendment of the U.S. Constitution. Recently, the Supreme Court denied a request to hear a case, California Building Industries Association v. City of San Jose, on procedural grounds. However, Justice Clarence Thomas wrote in his concurring opinion denying the petition to hear the case that it nevertheless presented “an important and unsettled issue under the Takings Clause.” The court’s denial left in place the decision of California’s Supreme Court that San Jose had the legal authority to require a 15 percent set-aside of new home construction projects of 20 units or more for affordable housing based on their policing power to provide for the safety and well-being of their communities. Expectations are that the U.S. Supreme Court will eventually take up a similar case in order to clarify property rights and takings under local IZ ordinances.

In addition to IZ ordinances, local governments seek to apply impact/linkage fees and other charges on new development in order to fund local affordable housing initiatives. Similar to the local IZ debate, NAIOP members must remain engaged in the development of local affordable housing solutions in order to avoid unintended consequences that may hinder economic growth and job creation. This was the case in 1990 when the San Diego City Council adopted an ordinance applying a linkage fee on new commercial development to fund a local housing trust fund. The city’s linkage fees stifled economic development because new construction projects were no longer financially viable. The revitalization of San Diego’s Gaslight District did not occur until the city council significantly reduced its linkage fee in 1996. The city council attempted to increase the linkage fee in 2011 to 1.5 percent of total development costs, with an automatic annual increase that did not require city approval. However, NAIOP and the commercial real estate industry executed a legislative strategy that led to the city withdrawing its ordinance and working with the commercial real estate sector to adopt a slight linkage fee increase that would not detrimentally impact the local economy.

Whether it is IZ ordinances, impact fees, or the expansion of housing trust funds, the debate on affordable housing will continue in many metropolitan areas across the United States and Canada. It is important for NAIOP chapters to remain engaged in the local debate in order to ensure that policies intended to address an affordable housing shortage do not inadvertently undermine economic growth, but rather lead to balanced and comprehensive approaches that successfully address a growing problem for many of our nation’s cities.

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