Daniel Wu is a tech lawyer with a JD and PhD candidate in social policy and sociology from Harvard, currently researching ethical big data and artificial intelligence programs. Shelterforce, The Multifamily Executive, Urban.us, and Product Hubhave featured his research on how technology and law can advance affordable housing and transit. Feel free to connect with him here: http://www.linkedin.com/in/wu12345
Christopher Chou is a land use lawyer with a JD and PhD in economics from Stanford. At a major law firm, he works with clients to navigate innovative projects through regulatory environments. He also served as a law clerk at Public Advocates and Asian Americans Advancing Justice to advocate for affordable housing.
According to housing development failures and social science research, residents often reject development not only due to concerns over congestion and neighborhood character, but also, most significantly, due to outrage over the profits developers will make from development. As a result, state, local, and federal policymakers should incubate and incentivize what are currently the minority — social impact and community-led developers. To deal with the secondary effects of increased development activity, this proposal will also (1) increases access to the planning process; and (2) protect existing renters and owners.
Elizabeth Warren’s new housing bill signals an exciting time for proponents of fair housing. It recognizes that the lack of affordable housing stems not only from land use policies, but also from the lack of capital and weak enforcement against discriminatory institutions. Furthermore, her bill wrestles with the way zoning has been used as a tool throughout history to exclude minorities and low-income families. Minimum lot and building size requirements, for instance, drive up, unsurprisingly, the minimum cost of housing in neighborhoods.
Despite its many strengths, Warren’s bill does not address a critical aspect of housing development: development is owned and produced by a wealthy few. Because it is so expensive, complicated, and highly-regulated, these few have had a say in what our city should look like and who it should serve. By ignoring this issue, the bill fails to tap into what we argue is an important but underutilized resource: the power of local residents of communities and social impact developers to create housing. In this paper we offer a proposal that promotes the autonomy and the entrepreneurial spirit of existing communities and diversify who gets to build housing.
The proposal also addresses the secondary effects of this proposal. To deal with the higher volume of development caused by this policy and to mitigate the favoritism of real estate’s “old boy’s” network, this policy will upgrade the operations of overworked and non-transparent local agencies that oversee housing and transit. And to protect existing residents who fear being priced out from increased development, this new policy will incentivize rent and asset protection.
While many (such as the YIMBY movement, or “yes in my backyard”) believe that building any supply — especially market-rate and luxury units — is the best approach to rising rents, this proposal is more cautious. While it seeks to increase supply by relaxing regulation, this proposal also recognizes that not all housing supply is created equal. We can have market-rate and luxury housing that benefits the wealthy. Or we can have housing that is “affordable by design,” is using cutting-edge technology to increase efficiency and reduce costs, and is responsive to community concerns — housing, ultimately, that benefits a diverse set of residents. Once we help these new modes of development thrive, once we upgrade the operations of cities to become more efficient and fair, and once we measure how to protect existing communities amidst more densification, might we consider “blunter” forms of mass deregulation of the type YIMBYs advocate. Ultimately, more inclusive housing means a healthier society — children who grow up in high-opportunity neighborhoods see boosts in future earnings, employment, and life expectancy.
1. A critical aspect of housing development
Voters don’t like profit-maximizing developers. When potential voters see that that a developer will likely earn a large profit from their new building, UCLA research of 1300 participants found, their opposition to the project increases by 20 percentage points. Voters are twice as likely to oppose development for this reason than they are due to traffic congestion. Furthermore, MIT and Harvard research found that voters — both conservative and liberal — are more likely to support new developments when they include more affordable units and fewer market-rate units. This ties into the first study — developments with more affordable units means less profit and more socially-motivated goals by the developer.
These findings are consistent with rhetoric that have stymied NYC’s recent efforts to build more housing through its mandatory inclusionary housing program. In NYC, for instance, a recent project led by for profit developer Washington Square Partners that claimed a remarkable 50% affordable units failed to pass. Residents opposed it, fearing the size of the development [i think the size issues is interesting—have you seen other discussions/critiques based on scale?], ensuing gentrification, and disgust against wealth disparity. As one resident wrote in the comments, “housing rights of working class people in NYC has gone down the toilet in only a few years mainly due to Developer’s GREED AND PROFIT.”
Another resident criticized officials connected to the project: “[the council member] cried his 23% raise wasn’t enough, that he had “a right” to be paid $175,000 to ‘represent’ a district where the citizens median income is about $36,000.” At the center of these comments are a concern about distributive justice — disgust against state resources benefiting those who are already in power and privilege.
To address these dynamics, this proposal, in sum, (1) prioritizes social-impact and community-led development, (2) increases access to the planning process, and (3) protects existing renters.
2. Prioritize social-impact and community-led development
To address these concerns about who gets to benefit from new housing development, governments should adopt incentives and programs to bolster social impact and community-led developers and mitigate any potential harm to local communities. These incentives include the prioritization of regulatory benefits (for instance, relaxed zoning requirements and by-right zoning for small-scale development) and financial benefits (for instance, public land grants) over for-profit development. Please see the Appendix for a more detailed listing of incentives.
Specifically, we developers keep three goals firmly in mind: (1) affordability (for instance, primarily serving residents who do not make more than 120% of area median income), (2) efficiency (for instance, innovative construction, acquisition, and financing techniques), and (3) community benefits (for instance, forming partnerships with important local leaders and using data to drive development priorities).
Examples of this proposal in action
Below are two hypothetical examples of the types of social impact/community-driven development that this proposal will encourage. The first is large-scale community-led development, learning from efforts in Germany and the United Kingdom. Such efforts encourage multiple residents band together and become a nonprofit developer, cutting out the need to return outsized profits to investors. The second is small-scale community-led development, inspired by efforts in Portland, Oregon. Here, individual property owners build more on their existing lots. The third, while not illustrated here, is social impact development. Existing nonprofit community development corporations, housing cooperatives, and public benefit corporations — all of which embed social responsibility in their legal charters — are the primary actors here.
The two cases below show how governments can empower an underutilized class of developers — groups of residents and social entrepreneurs — and democratize housing development.
Example 1: Large-scale community-led development
Let’s say a group of 50 residents come together, who come from a mix of incomes, 80% of which make no more than 120% of area median income. They live in a suburban and rapidly growing community that has experienced double-digit job growth due to the growth of the tech sector in a nearby city.
They form a baugruppen, a model of nonprofit community-led development popular in Germany and Austria. The residents pool money together and raise funds from both traditional sources and a community crowdfunding campaign targeted to neighboring homeowners.
This community-led model cuts out developers entirely, alleviating concerns about “developer greed and profit.” Their motivation is to find an affordable place to live. Because they don’t have to return profits to investors like traditional developers, baugruppen can cut costs by at least 20%. Marketing, sales, and brokerage costs are also reduced since the members of the baugruppen are simultaneously the development’s future residents.
Because they are a favored type of developer, the city provides a slew of financial and regulatory benefits. Given that land costs alone can reach up to 20% of new development costs, the city drastically reduced their acquisition costs by giving a land grant to the nonprofit baugruppen, instead of a purely for-profit development. Regulatory costs can take up to 30% of total costs, which is mitigated through expedited review and technical support.
After using a tool like coUrbanize to gather data systematically on key community needs, they identify that the community’s top wishes are (1) more green space for local children to play and (2) opportunities for local entrepreneurs. They also survey the architectural design of the local neighborhood to ensure the design of their prefab development fits into the character as much as possible. Finally, they partner with the local church, mosque, and YMCA to ensure that they get buy-in from key community leaders throughout their process.
An architect suggested two designs. The first was based on one large-scale community-led baugruppen in Vienna.
The other was a medium-height “pocket neighborhood.” A pocket neighborhood is a grouping of smaller units surrounding a common green space, which serves as a conduit for social activities. After consulting with their community partners, they decided to go with the second. The first design would be more cost-effective and take better advantage of density. Yet the second design better fits into the character of the neighborhood and was still within their budget.
The second design also responds to the key findings from their survey. First, they provide new green space that others in the neighborhood can use. Second, part of their space is open as a farmer’s market every weekend, attracting entrepreneurs who own food trucks, carts, and craft-sellers. Their development, as a result, created more trust between its residents — who saw each other more frequently as the farmer’s market became one of the top attractions of the community.
By taking advantage of upzoning and relaxed zoning rules, the baugruppen’s costs per person decrease because they can house more people per lot. They follow “affordability by design” principles, maximizing the use of space through furniture, smart design, and pre-fab construction. By building smaller, yet more plentiful units, they house more people per lot with minimal sacrifice to livability while drastically reducing per unit costs.
Example use of smart furniture to maximize space. Ori’s robotic furniture embeds storage, desk, and a bed to save space. It can also be moved to create more living room or bedroom space based on need.
To deal with concerns about parking and traffic, they initiate several programs since they are not near an established public transit route. They contribute to a local fund for a bus-, carpool-, and bicycle-only lane in that area. To further incentivize this development, the city prioritizes their neighborhood for new construction for those lanes. The city also provides more frequent bus stops in their area to the nearest subway line; such efforts have made even low-density suburbs like York Mills increase ridership levels that rival most stations in Manhattan
The baugruppen also partners with transit providers to reduce the need for parking. By working with the car-sharing operator Getaround, one developer, they learned, saved itself from building 77 spots of parking. They partnered with Via for on-demand car-sharing, Lime for bike-sharing, and Dollaride for frequent and affordable access to high-demand, long-distance routes. To further reduce car ownership, they proposed to the city an autonomous car sharing pilot, learning from one government’s use of his system for school buses in Babcock Ranch, Florida. These efforts reduce the residents’ reliance on automobiles dramatically and catalyze much-needed investments in public transit.
Finally, their homes remain affordable for the long-term.
First, they limit the speculation value of the property. Their baugruppen is incorporated as a limited-equity cooperative and a community land trust owns the ground lease. Limited equity cooperatives restrict the resale value of a share to a percentage increase, so that purchasing a share — and thus moving into the cooperative — remains affordable for the long-term. Yet, as NYC saw with its loss of many Mitchell-Lama limited-equity cooperatives, residents may ban together to remove resale restrictions and unfairly capture the value of the property in hot real estate markets. To prevent such scenarios, the ground lease of these cooperatives can be sold or gifted to nonprofit community land trusts. These trusts rent these cooperatives on the condition of affordability and prevent the temptations of unfair value capture.
Second, they use green design techniques to ensure energy costs remain low for the long-term. Double-pane windows and envelope insulation are used so that houses remain naturally warm in the winter and cool in the summer. Each roof has installed highly-efficient solar.
In the end, the residents were happy with their new community. They developed new friends. They helped each other with childcare and cooking, for instance. And their weekly dinners were a source of fun and community-building, helping each other through hard times.
They wrote up their lessons in a case study, providing detailed information from how much their vendors cost to copies of the vendor contracts they used. This information became a useful resource for future community-led developers to use for new projects. To facilitate this type of development, a whole host of new startups and tech companies arose with venture capital financing, fueling further job growth and productivity.
Example 2: Small-scale community-led development
Let’s say an elderly couple has a large house and unused backyard in a rapidly-growing suburban community with a fantastic school district. They are nearing retirement and are looking for extra sources of income. Looking at their large backyard and their large and mostly empty home, they wish to monetize their extra space. The couple consults an architect to build a small backyard structure to create 2 units and rehabilitate their older home so that it can also become 2 units. In other words, they hope to turn their single family home into a fourplex. They desire to rent out 3 units and live in one of the backyard units.
Given that they are rehabilitating their structure on a plot much smaller than that of the baugruppen, they are able to obtain by-right zoning and bypass most of the community benefit requirements. This drastically reduces their regulatory costs. This proposal creates such an exception for small-scale development to reinforce individual property rights, empower local residents who may otherwise oppose new development, and reduce the barriers for them to develop as they are likely to have less capacity than a larger baugruppen.
Furthermore, affordability, efficiency, and community benefit goals are still promoted. Regarding affordability, the elderly couple still has to provide at least 1 affordable unit within 120% AMI and sell the land under the affordable unit to a community land trust to ensure long-term affordability. The couple is also required to use techniques that encourage efficiency and use a facade design that matches the design character of their neighborhood.
Their new rehabilitated structure looks the same from the outside, except it has two entrances.
For the backyard unit (or accessory dwelling unit, or “ADU”), they draft a design similar to the above. Just as in the first example, the couple uses a host of techniques to reduce the cost of housing: prefab construction, green design, and affordability by design.
As they get older and feel less safe about driving, the couple also realizes the necessity of public transit to stay engaged in their community and reduce congestion. As a result, even though it is a requirement, the couple happily contributes money into a fund for new public transit options, such as bus, carpool, and bike lanes and the city also invests in more frequent and longer bus service to major neighborhood areas and rail lines.
Finally, while they had the capital to build their own housing, they also discovered a different option: simply renting out the extra backyard space. A renter could simply rent the space and then purchase a prefabricated house to place in this space. In other words, the renter would cover their own construction and maintenance costs. In return, this renter would have only paid space rent, which is significantly cheaper.
In the end, as the couple transitions into retirement, their extra units have greatly bolstered their quality of life. Much like the baugruppen, they also write up their lessons and share them for other small-scale developers to learn from. Most importantly, they felt empowered. They were able to creatively use and monetize their existing space. In other words, they became entrepreneurs and were proud of what they built and their ability to contribute to the community.
3. Increase access to the planning process
In 2018, the United States suffered one of the highest increases globally in their citizens’ distrust of their government. In contrast, Scandinavian countries, like Sweden, benefited from large gains in trust.
Societies with higher trust in government fare better. High-trust jurisdictions like Sweden, are able to invest more into public services and recruit higher-quality people to join the civil service. When citizens see their institutions as competent and unbiased, they are more likely to trust their government. It is thus imperative for policymakers to improve the competence and neutrality of their planning departments, especially given it’s highly politicized and controversial role. When public land is handed to private developers through inscrutable processes, public belief in those institutions as being fair and competent dramatically deteriorates.
Yet proposing a one-size-fits all solution among local planning departments is dangerous. Each organization has a set of politics, histories, and environmental pressures that may decapitate the usefulness of any specific policy proposal. Indeed, as we saw from Senator Weiner’s failed housing bill in CA, local governments opposed it en masse because of their concern about “one-size-fits-all” solutions that trample over local context.
To address this concern, this proposal empowers local governments to govern better. Undeniably, this proposal would limit local control to some degree — by providing “by-right” zoning for social impact and community-led development on small plots. Yet it could also provide unprecedented engagement of local citizens to engage with planning departments and promote operational innovation.
So instead of suggesting a one-size-fits all solution, I propose policymakers provide incentivizes for local government innovation in local government. As an R&D lab, this policy can provide initial seed grants — taking a page from HUD’s 701 grants — to authorities that improve competence and fairness in several key planning processes: permitting, hiring talent, procurement, IT infrastructure, auditing, and construction. The permitting process — which can cost up to $45,000 for a 2,000 square foot home in Portland, OR — is ripe for an upgrade.
In addition to funding, the proposal creates empirically-validated tools that can spur further adoption. Grantees must measure improvements based on standardized metrics and compare their outcomes against a statistically-validated matched-case control group. Grantees will publish results, distill their lessons, and share datasets. The most effective solutions can be scaled and funded further.
These grants, for instance, may fund agencies that adopt these new technologies. One example is Camino.ai, which functions as a “Turbotax” for real estate permits — guiding both big and small developers through the entire process of getting a permit. Others include SeamlessDocs, which helps governments transfer to paperless and electronic data systems, and coUrbanize, which obtains data systematically from residents affected by future development. In the realm of transit, governments can experiment with bus rapid transit with bus-only lanes, which has been shown to be more cost-effective than building light rail in many cases. Governments can also partner with shared transit solutions like Getaround, Lyft Line, and Via (see their partnership with the Los Angeles Metropolitan Transit Authority) to promote carpooling and the reduction of automobiles on the road.
4. Protect renters affected by new development
As we saw from Senator Weiner’s 2018 CA bill to upzone areas around transit corridors, advocacy organizations are extremely concerned about protecting existing low-income renters. And for good reason — upzoning a particular area has been linked to increased local speculation, even if new supply may ease prices citywide. Many link the failure of Weiner’s housing bill to its disconnect from established fair housing and anti-displacement movements, which initially opposed the bill.
The proposal here, however, is quite different than the CA bill. In Weiner’s bill, any developer could build up to 5-story apartments next to mass transit stops in the state. Absent from Weiner’s bill, from the start, was a focus on affordability and fair housing, which is strongly present in the initial draft of this proposal. This proposal, for instance, prioritizes developments with at least 80% affordable units. Furthermore, this proposal benefits social impact and community-led development, excluding the large swath of professional for-profit developers that would have benefit from Weiner’s upzoning policy.
Regardless of these critical differences, protections must exist for residents who are next to new developments. Informed by the amendments Senator Weiner made to his housing bill due to initial opposition from the left, these policies might include:
- Incentives for existing homeowners to adopt equity protection policies. These protect homeowners from drops in their home values, which many homeowners are concerned about when they see new development happening in their neighborhood.
- Protection of rent-controlled housing. But these rent-controlled units may then be audited to ensure that only those who meet income limits live there.
- Protection of local residents from displacement through a statutory ‘right to remain’ guarantee.
- Researching whether to remove barriers that prevent low-income recipients of social welfare programs from sharing housing.
These policies can mitigate any potential harm to existing renters and homeowners. Furthermore, inclusion of these policies is symbolically important — existing tenants must and should be protected.
In conclusion: toward minimum viable regulation
It may be worth reducing the scope of this policy to a much smaller and randomized set of opportunity-rich neighborhoods. By limiting the scope, we can develop “minimum viable regulation” to test the impact of this policy and refine it before unleashing it on the general public.
Ultimately, for far too long, housing has been created and owned by a few, particularly those who use it as a means of profit generation for the very wealthy.
Let’s change that.
Examples of regulatory benefits are listed below. These regulatory benefits are critical. The National Association of Homebuilders in 2018 claims that regulatory costs — including the cost of review and permitting — can reach up to 30% of a total development budget.
- Upzoning to increase density a certain percentage above the average density of the neighborhood
- More innovative designs, by, for instance, removing minimum lot sizes and setbacks, occupancy limits, parking requirements, and restrictions on the number of units per lot and the size of buildings on those lots. Without minimum unit sizes or restrictions on the number of units to build per lot, the developer can obtain economies of scale by building more, but smaller micro-units or infill units. Some units may even be congregate units, meaning residents share common kitchens and bathrooms to further reduce costs and increase density. Overall construction costs per person decrease due to economies of scale and more efficient, yet livable use of space.
- Expedited review of the plan by the planning agency
- By-right zoning for sufficiently small plots and rehabilitations of older structures to create more units. By-right zoning means the project can bypass extended public participation processes. This empowers owners of naturally-occurring affordable housing.
- Technical assistance by the city and public relations groups.
Governments can also provide direct financial incentives to help these new class of developers make ends meet. Examples of financial incentives include:
- Land grants. McKinsey reports that land acquisition costs can reach up to 23% of total costs. As others have commented, many cities give their public lots away to for-profit developers through obscure processes. Instead, by prioritizing social impact and community-led development, these plots can be kept affordable for the long-term and benefit the general public.
- Favorable loans. Financing costs can take up to 0-7% of a new development’s costs.
- Prioritization of new transit modes. Cities can prioritize bus, carpool, and bicycle lanes as well as frequent bus service in areas with social impact and community-led development. Governments can also consider tax credits for those that invest in these transit modes — such as Denver resident’s crowdfunding effort for bicycle lanes — and those who use buses, carpools, and bikes for transit.
- Tax incentives for these developer and investors. Tax incentives for investors may help inject much-needed capital into social-impact development, which has trouble getting capital now.
- Monetary grants.
As discussed above, the purpose of this policy is to bolster a new class of developers that place social impact and affordability top of mind. To be eligible for this policy, these affordability-focused developers will:
- Build at least 75% affordable for those who make no more than middle income (often defined as 120% area median income). A percentage of that 80% should also be set aside for the working poor (30-80% of AMI) and the very poor (less than 30% AMI). 25% of the housing can be market-rate or luxury, which will help subsidize lower-income units. Nonprofit developers routinely build units of 80-100% affordable housing, but suffer from operational inefficiencies. One of the policies below targets this concern. Small-scale developers who rehabilitate existing structures need to provide at least 50% affordable units for the middle income or below, if they are renting out at least 2 units.
- Promote long-term affordability through limited-equity cooperatives and community land trusts. The former restricts the resale value of a share in the housing unit and the latter holds the ground lease and rents it to the housing structure on the condition of affordability. For small-scale developers who are rehabilitating their existing structures, cooperatives may be infeasible, but the land for affordable units may be sold to community land trusts.
- Be structured as nonprofits, cooperatives, or public benefit corporations — all of which have social impact embedded in their legal DNA. Additional financial incentives will be given to (1) efforts to convert privately-held units into these socially-oriented corporate forms and (2) community-led development. community-led development can be large-scale (a group of 50 pooling their resources together to develop properties) or small-scale (a single homeowner developing out extra space on their lot).
- Target areas of high job growth, good schools, and/or public transit. These are areas most likely to face increased rental pressure.
In addition to meeting certain affordability criteria, developers must also adopt practices that increase its efficiency:
- Use new methods that reduce construction, maintenance, and financing costs by a quantifiable amount. New methods might include coliving, prefab modular construction, community crowdinvesting, shared equity, and group-buying. Prefab development, for instance, can further reduce costs from 10-20%.
- Design for affordability. By efficiently using smaller spaces, developers can cut construction costs and house more people. Examples include micro-units and congregate housing, where residents have separate rooms but share common space, like kitchens and living rooms. This also means the restriction of mansionized housing, creating a cap on the size of housing, as Portland has done, to ensure long-term affordability and waste-reduction. Relatedly, some banks have created loan products to incentivize such affordability measures.
- Partner with transit authorities and startups to reduce traffic and parking, such as sharing rides using technologies like Via and bikes and pool money into cost-effective public or pooled transit, such as bus-only or carpool-only lanes and protected bike lanes. Small-scale developers should limit the amount of new parking they consume and also contribute funds to new public transit modes.
- Use building techniques that reduce energy waste and incorporate renewable energy sources to reduce maintenance and utility costs for residents.
- Develop on underutilized lots and structures, such backyards and parking lots, or modify existing structures to convert it into multiple units as smaller multi-unit housing, also called “middle housing.”
- Share data around their experiences developing housing and using methods to cut housing costs. The purpose, here, is to promote best practices and lower information asymmetry for new entrants.
Finally, developers must use practices that benefit the community. These efforts align the economic interests of local homeowners and renters with the new development and get them invested in the new development. Except for the requirement to match the facade design of the local neighborhood, these practices are targeted for large-scale development.
- Use tools to systematically gather data on key community needs and help respond to those needs in the development.
- Provide for architectural facade design surveys to match the aesthetic character of the local neighborhood.
- Enable mixed-use commercial development that respond to key community needs and promotes “affordable entrepreneurship,” such as food halls and public markets, such as Mercado La Paloma and Grand Central Market.
- New developments offer crowdfunding opportunities for local neighbors, allowing them to benefit from the development and rewire local economic incentives. Furthermore, by directly obtaining funds from lenders, this mode of financing can reduce transaction costs from which nonprofit developers suffer.
- Develop partnerships with or advisory boards including key stakeholders and community leaders.