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Sunday, July 02, 2017

Libertarians' self-defeating attacks on inclusionary zoning

Over at Market Urbanism, Emily Hamilton lays out the argument that inclusionary zoning violates SCOTUS's Nollan/Dolan standards for exactions. Hamilton has helped write an amicus brief submitted in 616 Croft Avenue v. City of West Hollywood, a case with a cert petition pending before SCOTUS. After the jump, I will explain why I believe that this brief has got the law wrong. But I am much less interested in legal doctrine and much more interested in how these sorts of attacks on inclusionary zoning can, as a matter of politics and economics, be a self-defeating policy if the ultimate goal is to loosen zoning restrictions.

Inclusionary zoning is the practice of demanding that developers rent some percentage of their housing units at below-markets rates as a condition for permitting the developer to build market-rate units. As Bob Ellickson noted thirty-five years ago, such demands can effectively reduce the supply of affordable housing, because those inclusionary requirements may cause developers to build fewer units of market-rate housing, thereby accelerating the upward "filtering" of existing housing (aka "gentrification"). Put simply, if developers do not build new luxury condos in New York City, then buyers who would otherwise bid on those condos will instead bid on existing brownstones, causing the latter's rents to rise even faster.

Using Nollan/Dolan to restrict inclusionary zoning, however, limits the bribes with which state and local governments can induce the neighbors to agree to loosen up zoning restrictions. Neighbors do not give up the limits of their zoning laws lightly. Inclusionary requirements give those local politicians a bit of political cover by making the link between market-rate and affordable housing more apparent. If Emily Hamilton's and her colleagues' brief succeeds in persuading the SCOTUS to apply a higher level of scrutiny to inclusionary requirements, the result will be that local governments will simply impose unconditionally restrictive zoning rules: Federal constitutional doctrine will have obstructed deals that actually made everyone better off relative to a baseline that federal takings doctrine does not affect -- the baseline of unconditionally restrictive zoning.

Why cannot libertarians see that these Nollan/Dolan attacks on inclusionary requirements undermine libertarian goals?

One reason may be an ideological commitment to challenging faulty economic reasoning. It may simply irk libertarians to read "nexus" studies purporting to show that the construction of market-rate housing will deplete the supply of affordable housing, because the former will attract wealthier people to the city. Such studies, typically thrown together by consulting firms like Keyser Marston, are treated with contempt by academic economists, and with good reason: They are rooted in a crude planning model that ignores new market-rate housing's "filtering effect" -- that is, the possibility that existing residents will move into new market-rate units, thereby opening up existing housing that otherwise would be occupied by newcomers. Even the California Legislative Analysts' Office, hardly a libertarian think-tank, has accepted the obvious point that new market-rate housing retards rather than accelerates gentrification. The contrary notion that market-rate development causes gentrification indeed seems just as silly as the idea that umbrellas cause rainstorms.

As a matter of land-use politics, however, this quest for judicial validation of sound economics is self-defeating. If cities must choose between unconditionally permitting new market-rate housing or unconditionally excluding it, then they are likely to choose the latter. Since Nollan/Dolan does nothing to restrict unconditional prohibitions on new housing, the effect of these lawsuits is simply to encourage such unconditional restrictions. Cities like Berkeley, San Francisco, Walnut Creek, and other hyper-restrictive jurisdictions will be delighted to shut down housing markets altogether with their absurdly restrictive limits on multi-family housing. Inclusionary requirements provide a bit of political cover for local politicians seeking to loosen the zoning envelope, Bar those conditions, and you likely leave housing markets even more regulated.For the sake of deregulation, then, I hope that the SCOTUS denies cert in 616 Croft Ave.

Putting aside practical politics, what about legal doctrine? The difficulty with applying Nollan/Dolan to $500k in fees imposed on Croft Ave's 11-unit condo development is that none of those fees looks like an unconstitutional condition. The California Supreme Court was likely correct California Building Industry Association v. San Jose to argue that Nollan/Dolan applies only to those conditions on construction that are plausibly unconstitutional takings if imposed unconditionally. Demands that developers rent units at below-market rates (or donate firetrucks, plop part, playground equipment, or even cold cash to the zoning authority) are not unconstitutional if imposed unconditionally, so making compliance with such demands a condition for getting a building permit likely falls outside of Nollan/Dolan's "rough proportionality" test. Of course, Koontz complicates the analysis, but Koontz's limit on monetary exactions is best read as limiting only fees that are the equivalent of a forced dedication of specific real estate. As I have argued elsewhere, any other reading would draw the federal courts into an intractable quagmire of policing land-use conditions that are the routine prices for new construction in the United States today.

As I say, however, my focus is politics and economics, not law. These attacks on inclusionary requirements will likely put at risk the very goal that the attackers seek to advance -- a less regulated housing market.

Posted by Rick Hills on July 2, 2017 at 11:20 PM | Permalink


@brad and @PaulB. I enjoyed these comments - thanks. There's a serious point, though, namely that it is much easier to get officials to act when you deliver them private goods ("the Chicago way") than when you offer them the public good of a more affordable city. Rick & David S. have a 2015 piece that gets at this; the key is to design your bribes in ways that are transparent and accessible to the public, so that (hopefully) the results are more likely to satisfy some kind of cost-benefit analysis, everyone can play, etc.

Posted by: BDG | Jul 5, 2017 5:33:34 PM

For those of you who think Brad is kidding (including Brad?), I worked for a development firm looking to build a high rise office building in both San Francisco and Chicago around the same time. In San Francisco, we hired an endless number of lawyers, environmental consultants, community outreach specialists, and every other specialty you could imagine with no guarantee that we would have the right to build anything after 3 to 5 years. In Chicago, we hired a small law firm recommended to us by our Biglaw firm ("you need a specialist for this") in the city. The kind of firm that billed like they were Kirkland and Ellis but had all their paralegals taking every Election Day off to work as Precinct Captains. The project went through in eight months.

Posted by: PaulB | Jul 5, 2017 5:15:08 PM

Looking at the program through the lens of property taxes and expenditures make it even clearer how stupid these programs are. At least in NYC the affordable units are paid for not just by zoning waivers, but also by gigantic tax abatement. The net present value of the rental benefits are generally less than the net present value of the tax abatement, so if you converted the rental subsidies into a property tax you'd have a residual tax abatement plus zoning waivers in exchange for nothing. Then, in order to replicate the other side of the transaction, you'd have to pay out of general funds rent on some of the most exclusive properties in the country and give away the rented apartments by lottery. Because that's clearly an efficient way to spend government money.

I think outright corruption, cash in bags style, would produce a net superior outcome to these kind of programs. If we need play in the joints to get buildings built maybe we should encourage the US Attorneys to stop investigating local government officials for corruption.

Posted by: brad | Jul 5, 2017 4:05:41 PM

In effect, the libertarian position is a rejection of Rawls's veil of ignorance/original position concept. In this instance, the position in question is "property ownership at the moment of the transaction under scrutiny." The libertarian position makes sense if, and only if, that ownership is ipso facto reified (and validated) as both just and economically efficient. One need not go so far as "$24 and a barrel of whiskey for that island over there" to see that there are... problems... with making such an assumption universal. The libertarian-property-policy difficulty is that examining the assumption is prohibited in all instances.

One fundamental problem with takings law — and there may not be a way to "solve" it in a principled fashion — is that it attempts to take a moment-in-time snapshot of a single electron when the policy in question was designed to regulate stereoisomer configuration of a complex kilodalton molecule.* The libertarian position presumes that one can form proper molecule-level "policy" by some form of simple accretion of these snapshots... or, too often preferably, have no policy at all simply because the snapshots don't accrete in a simple, arithmetic fashion. Of course, the converse case is ethically inappropriate: It is inappropriate to presume that any impairment of a given electron is justified per se by the beneficial molecule. Thus, I can't see a principled solution that does not require breaching the veil of ignorance.

* I can't help that I was a biochemistry undergrad.

Posted by: C.E. Petit | Jul 5, 2017 11:46:35 AM

This whole doctrine is baffling to tax people, or at least this tax person. Is there any doubt the city could impose a property tax on new development and earmark it for affordable housing? And, eh, how is that different than affordable-unit requirements? Further, to the extent that the mandate is economically equivalent to a property tax, we should think that the incidence falls not on developers, but instead on capital markets ... that, as Rick knows, is the "new view" of the incidence of the property tax. So nothing has actually been taken.

So I think the more intriguing questions, presumably not on the menu for the Supreme Court, are those of institutional design - i.e., should I condemn these laws because they're stupid? I accept the Baumol & Oates point, translated to this context by Ellickson, that the tax has ambiguous effects on output; an affordable-housing subsidy paid out of general tax revenues would *un*ambiguously increase affordable housing. Why, then, do cities choose this mechanism? Is it just to get the subsidy "off budget"? Is there a political economy story, as you hint at Rick, that explains why this is the only available mechanism for delivering subsidies?

Posted by: BDG | Jul 5, 2017 9:57:32 AM

Inclusionary zoning often allows the developed to build more units than the current zoning allows so that he/she will provide the "affordable" housing units AND build the other units that sell at market price.

Posted by: Paul | Jul 5, 2017 12:36:38 AM

Inclusionary zoning is the practice of demanding that developers rent some percentage of their housing units at below-markets rates as a condition for permitting the developer to build market-rate units.

Awardable housing! With scant doubt the people who get the concessionary rents will be connected to local Democratic pols.

"Inclusionary zoning' is a nice bit of marketing for what's known colloquially a 'extortion' and 'graft'.

Posted by: Art Deco | Jul 3, 2017 4:58:59 PM

If libertarians could give up their love of localism, which is even really a libertarian doctrine to begin with, the solution would be staring them in the face.

A councilman or even mayor may worry about upsetting the residents of Bernal Heights or the East Village, but a Senator or President won't care.

Posted by: brad | Jul 3, 2017 7:30:55 AM

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