This report by Manna focuses on challenges with the ownership side of the District’s Inclusionary Zoning (IZ) program, and lessons learned from cities with similar economic and housing conditions.
Detailed throughout the report is the District’s opportunity to learn from past mistakes, to pull best lessons from comparable cities, and to be the first high-priced market to deal with rising fees facing lower income buyers. As these cities’ policies will reveal, the District needs to inject flexibility into its program in order to robustly contribute to the creation of new ownership units and benefit lower income individuals and families in the District of Columbia.
Permanent Resale Restrictions
From the beginning, IZ ownership, specifically permanent resale restrictions, has been controversial in the District (see a brief history in Appendix I). Opponents to permanent resale restrictions were concerned about the effect on the economic advancement of lower income households. In essence, they believed that the design of IZ ownership units took away the only substantial asset many lower income families have, making the units more akin to rental or limited equity cooperatives.
Issues with Predecessor to IZ Ownership
Similar to IZ ownership units are Affordable Dwelling Units (ADUs) that were integrated into market-rate condo buildings across the city in the 2000s. Issues faced by owners of these units include:
• escalating condo fees, some increasing over 100%
• expensive special assessments
• being outnumbered and outvoted in their condo associations
• sub-par and expired materials, including flooring and appliances
• structural issues, such as cracks in the walls and damaged plumbing
• difficulty refinancing
• inability to sell units to buyers using FHA loans
• gaining permission to rent, but at a rate that does not cover monthly costs
Lessons Learned From Similar Cities
The structure of the District’s IZ program is often compared to Montgomery County’s program. Such comparisons are inappropriate as the District’s economy, housing market, size of IZ units, available land, and population are different The most comparable cities to the District are San Jose, San Francisco, and Boston. Helpful lessons from each city include:
Instead of permanent restrictions, San Jose employs a recapture model that recaptures “subsidy” in the unit upon resale but gives the owner access to any equity appreciation. This model helps maintain homeownership as an asset for households that purchase. It also allows owners to easily sell in the case of rising condo fees they cannot afford.
Over time, San Francisco has adopted an in-lieu fee system, which generates funding for off-site ownership development instead of IZ unit creation in market-rate buildings. Though not San Francisco’s expressed purpose, this kind of system allows the creation of larger units for families as well as a way to avoid quickly escalating condo fees, which is a serious issue in San Francisco. Boston has a similar in-lieu system, with even higher fee amounts.
Boston’s program highlights flexibility, both in regards to development and resale. If the allowed increases push an owner’s resale price beyond what is affordable to targeted income levels, the Boston government will either 1) purchase the unit and sell at a lower price; 2) permit a higher income buyer to purchase the unit; or 3) give downpayment assistance to the next buyer. Massachusetts has also attempted to pass legislation capping condo fee increases for IZ owners living in market-rate buildings.
Ultimately, the recommendations of this paper are made with flexibility and success in mind, for both the owners and the District government. Without change, the following three things are in jeopardy: 1) the financial well-being and economic advancement of lower-income households, 2) the administrative capacity and costs for DHCD, and 3) successfully meeting affordable housing development goals. The District has a golden opportunity to make the ownership side of Inclusionary Zoning not only work, but excel.
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