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When Expensive Cities Rezone, an Unseemly Fight for the Spoils Ensues

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When Expensive Cities Rezone, an Unseemly Fight for the Spoils Ensues

January 6, 2020

As I wrote for E21 recently, the U.S. has serious housing-affordability problems, many of them due to restrictive zoning codes that limit new developments in expensive cities like Los Angeles and New York with high-productivity economies. The problems are so severe that, according to Harvard’s Joint Center for Housing Studies, 10.8 million of the nation’s 43.8 million renter households in 2017 were severely cost-burdened (paying more than 50% of income for housing).

On the rare occasions when such cities propose rezoning in highly marketable areas, they create a cornucopia of opportunities to extract money from developers. The eye-watering rents that housing commands in high-demand neighborhoods characterized by tight restrictions on supply will well exceed those needed to recover the costs of constructing and operating a new apartment building. Left to the devices of the marketplace, the excess value generated by high rents would largely accrue to the landowner of a development site.

But in the environment of artificial housing scarcity that characterizes most of America’s expensive cities, progressive activists routinely mobilize to ensure that their favored public benefit jumps to the front of the line for exactions from rezoning. Private actors cannot be allowed one dollar more of return than theoretically necessary to induce them to undertake a real estate investment.

Such demands on the surpluses from rezoning raise a host of problems when government inevitably fumbles in its efforts to fine tune projects so as to maximize public benefits and minimize developers’ profits. In too many cases, city efforts to squeeze developer profits fail to balance the compromises needed to build coalitions for rezoning with the practical economics of real estate development, presenting yet another obstacle to desperately needed new housing.

This process is currently playing out in the Brooklyn neighborhood of Gowanus, where the New York City Department of City Planning has initiated the long rezoning process by publicly scoping an environmental review. Gowanus lies in a valley abutting the Gowanus Canal, surrounded by the upscale neighborhoods of Carroll Gardens, Cobble Hill, Boerum Hill and Park Slope. Once industrial, the heavily polluted area has become more attractive for residential and commercial development as the canal, a designated federal Superfund site, has been cleaned up. However, most of the area remains a low-density manufacturing zone, in which no new residences are permitted. Two blocks along the canal have been rezoned and two new mixed-income apartment buildings, 363 and 365 Bond St., have been constructed. The rents in these buildings highlight the value that would be unlocked by the more extensive residential rezoning New York City is now considering. Last month, for example, the real estate website Streeteasy reported two-bedroom units at 365 Bond St listed at rents of over $5,000 a month.

The city’s rezoning proposal would permit new, predominantly residential buildings over a large area where none are currently permitted. It would also increase permitted Floor Area Ratios (FARs) in the Fourth Avenue corridor, which already permits new housing. (FAR is the amount of floor area allowed, expressed as a multiple of the lot area. Thus, a building with an FAR of five, on a 10,000 square-foot lot, would be allowed 50,000 square feet of floor area.) New York City’s Mandatory Inclusionary Housing program (MIH) would apply, generally requiring that new buildings include 25%-30% of their residential units as affordable housing offered at below-market rents. The high market rents in this neighborhood make it among the few where the city can impose such requirements without lavish subsidies—aside from as-of-right tax exemptions, developers will not require additional public assistance to offer and maintain the affordable units.

The Gowanus rezoning area is bordered by three New York City Housing Authority (NYCHA) public-housing developments, Gowanus Houses, Wyckoff Gardens and Warren Street Houses. These developments have substantial unmet capital needs and poor living conditions. Pratt Center for Community Development, a Brooklyn non-profit group advocating for affordable housing, proposes that in addition to MIH onsite affordability requirements, developers under the Gowanus rezoning be required to purchase development rights from the NYCHA sites to achieve the full proposed FAR for new residential buildings. The group offers an economic analysis that, it asserts, demonstrates that developers can do both and still, given the high market rents, achieve an acceptable rate of return. Its call was echoed by elected officials.

Transferable Development Rights (TDRs) are a zoning device that moves unused development rights from one lot to another. New York City’s zoning resolution generally allows development rights to be moved around, but only to adjacent lots on the same city block, provided that height limits and other restrictions on building massing are respected. Unused development rights have been permitted to move farther afield, to adjoining blocks or within a defined area, for several purposes: Landmark preservation, the creation or preservation of public open spaces, and the implementation of large-scale area plans.

New York City Mayor Bill de Blasio’s NYCHA 2.0 plan, announced in December 2018, proposed to raise funds for NYCHA’s repair backlog both by developing new buildings on the often ample open land and parking lots within NYCHA developments, and by transferring development rights to adjoining private lots. The Gowanus NYCHA developments have substantial open areas that—consistent with the Mayor’s plan—could be used for mixed-income infill housing, with rents on market-rate units raising funds that NYCHA could use to address the repair backlog in the adjacent public housing. The Pratt Center report does not address why TDRs are necessary given this option. However, in other areas infill development proposals have been controversial with NYCHA tenants.

Transferable Development Rights to preserve NYCHA developments raise a number of issues. It’s easy to send TDRs up into the air, but often difficult to land them. New buildings end up bigger than they would be under normal rules, and neighborhoods may be impacted as a result. Pratt Center’s solution is to make buildings no bigger than already proposed—but this raises the question of why property owners in Gowanus, but nowhere else, should be responsible for preserving NYCHA housing in addition to the underlying affordable housing requirements imposed by the city’s MIH program.

Typically, TDR mechanisms confer density-ameliorating benefits that could not otherwise be achieved—for example, the sale of TDRs in the Manhattan neighborhood of Chelsea allowed the city to create the High Line, an outstanding public space. In contrast, the NYCHA projects are subject to permanent commitments as low-income housing. The NYCHA capital shortfall is a public obligation of city, state, and federal government, not a problem that arises from the proposed rezoning. The city would arguably be forcing developers in Gowanus to provide a cash payment to fund a public need unrelated to the impacts of their developments.

Moreover, the Pratt Center’s financial analysis, although correct in noting the potential for high rents, is not ironclad. Much depends on assumptions such as future capitalization rates, which in turn are influenced by interest rates and inflation. Guessing wrong could seriously impair the effectiveness of the rezoning. The city should prioritize actually getting the projected housing developed in Gowanus at least as much as it does extracting excess profits from developers.

Coalition-building is important in any rezoning, and there is a benefit in making NYCHA tenants supporters, rather than opponents, of the rezoning. However, the city needs to stand firm that new mixed-income housing on open land in NYCHA superblocks must be part of the solution. The city also needs to make clear that any agreement to divert some of the public benefits of the Gowanus rezoning to the NYCHA projects’ capital needs is a last resort, to preserve neighborhood economic diversity if the proceeds from infill development on NYCHA land prove to be inadequate. Additionally, such a diversion should not impose new and greater obligations on property owners in Gowanus, beyond those of the existing citywide MIH program. If the Gowanus rezoning is to be used to preserve and maintain NYCHA housing, then the share of affordable housing required in new residential buildings should be lowered accordingly.

In the longer run, New York—like other American cities with high land values and restrictive zoning—needs to clarify the proper uses of zoning exactions. If zoning continues to be treated as a cash machine, city governments and activist groups will continue to have an incentive to maintain the restrictive land use policies that are largely to blame for affordability problems in the first place. Property owners should be able to make money when their property becomes more valuable. And cities should rezone for sufficient development capacity to meet demand. An environment in which developers can build more freely will drive down the windfall profits from any one project—eliminating the need to fight over who gets to keep the returns from artificial scarcity.

Mr. Kober is an adjunct fellow at the Manhattan Institute. He retired in 2017 as director of housing, economic and infrastructure planning at the New York City Department of City Planning.

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