Madison, Wisconsin Inclusionary Zoning Ordinance

Manna, Inc.

Fall 2006

In July, 2006, the Common Council in Madison amended its Inclusionary Zoning (IZ) ordinance (officially adopted in 2009; see the new ordinance at http://legistar.cityofmadison.com/attachments/6d209e52-df91-4561-94d2-55026dabc5d6.pdf), the second of its kind in the Midwest, in response to perceived resistance of buyers of IZ homes to the permanent resale restrictions in the original ordinance. The original ordinance included a formula intended to preserve long-term affordability of IZ units.  The formula determined what percentage of appreciation (between 0 and 50%) the homeowner could realize in order to keep the IZ unit affordable to the next eligible purchaser.  The restrictions were permanently tied to the particular IZ unit. For the new

After 18 months, the City conducted a study of the IZ program and found that one major concern was that “it is difficult to attract potential buyers to discuss the purchase of inclusionary units.  Some cite the complexity and effect of the equity sharing model in the ordinance.” (p. 21, Inclusionary Zoning Ordinance Evaluation Study, Madison, WI,http://legistar.cityofmadison.com/attachments/3243.pdf)

The new ordinance, adopted in July, releases IZ units from permanent resale restrictions and initiates a model whereby the City and the owner/seller share the proceeds of sale.  The new model substitutes a City share of the sale proceeds for long-term affordability of the original IZ unit.  The City share that is recaptured upon resale is placed in a fund to subsidize future affordable homes.  This new model provides incentives for the IZ homeowner to maintain and improve the home, allows the homeowner to build equity and take risks commensurate with the market, provides the City with a permanent source of funding for affordable housing development that increases as the market increases, and gives the flexibility and opportunities of homeownership to lower-income households.

For example, in simple terms, an IZ unit is assessed to be worth $300,000, but an eligible buyer can only afford to pay $200,000.  The City’s interest is 1/3, or 33%, of the IZ unit.  Fifteen years later, the homeowner sells the IZ unit at its assessed market rate, now $400,000, and pays the City 95% of its interest in the property, which is $126,654 that the City will then recycle into further affordable housing development.  The owner/seller can now take his proceeds, $273,346, and put them toward a larger home, a college education for his kids, etc.

Subsection 26.9 of Madison IZ Ordinance

(h) Distribution of proceeds from sale of an owner-occupied Inclusionary Dwelling Unit.

1. At the time of the qualifying sale of an owner-occupied inclusionary dwelling unit, the income eligible family shall provide the City with a promissory note, secured by a second mortgage, for an amount that is the percentage difference between the appraised value of the unit, determined within thirty (30) days prior to the sale, and the sales price of the unit. The resulting City percentage share of the value of the inclusionary dwelling unit shall be the percentage of the total value represented by the difference between the appraised value and the sales price divided by the appraised value of the inclusionary dwelling unit.

2. At the time of the sale of an inclusionary dwelling unit, the amount of the sale proceeds paid to the City shall be the City’s percentage share of ninety-five percent (95%) of the sales price of the inclusionary dwelling unit. This provision applies to all inclusionary dwelling units sold by income eligible families before or after the effective date of this amendment.

3. Any proceeds of a sale that are remaining after the seller’s share shall be deposited in the Inclusionary Zoning Special Revenue Fund.

4. The seller cannot offer the inclusionary dwelling unit for sale at a price below the assessed value unless approved by the Director of the Department of Planning and Development.

Conclusion

Stakeholders, housing advocates, City officials, developers and non-profit housing providers in Madison, Wisconsin observed that their IZ program created significant barriers for lower-income residents and changed the affordability requirements from a permanent resale restriction tied to IZ units to a Recapture/Recycle model that gives lower-income homebuyers the opportunity to build equity and the City the ability to recapture public investment and recycle the proceeds into further affordable housing.

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