Affordable Housing
a letter from Rick Theis

8 March 2001

Dear Urban Ecology colleagues,

I have been struggling with the argument that, "We can't demand that affordable housing be built for everyone because it 'doesn't pencil out' and NOTHING will get built." This argument is commonly used by developers who oppose inclusionary housing ordinances.

Those of us who believe social equity is vital to economic and environmental sustainability usually don't have an answer to for these developers. Most of us bleeding heart liberals feel inadequate to argue against those with the sharp pencils because we lack the MBAs or PhDs in Economics.

I have learned that the counterpoint to the sharp pencil holders is quite simple. It has taken several people with lots of patience to explain to me why the "won't pencil out" argument is specious. Please bear with me.

A little over a year ago, Dan Cashdan, a mortgage banker from Los Angeles spoke to the ULI/LGC conference on Smart Growth in San Diego. He explained that developers analyze a project's potential based on "internal rate of return" and that that was an inappropriate measure to use for long-term investments in housing. I asked him to run that by me again but it whizzed right by again.

About six months ago, a CPA and syndicator of nearly a 1,000 acres of vineyard investments in Napa and Sonoma said the high price growers where getting for grapes was simply transferred into higher land costs. Well, I sort of got that but it didn't mean much to me at the time.

Last week, Santa Rosa's director of Community Development (the planning department) made a point that hit a home run. He explained that opponents of inclusionary zoning and in-lieu fees use the argument that these policies raise the price of housing and make it even more unaffordable. Absolutely not true, he said. So I asked who takes the hit? Do we force developers to accept lower profit margins? "Absolutely not!" he said. They won't build it if they can't make their targeted profit margins. They'll do something else with their money. So do we back off from demanding that affordable housing be built? Absolutely not, he said. So where is the give? In the price of land.

A very simple view of land ownership in California reveals that the first people to hold title to land under currently acceptable legal standards got the land as grants. Grants for favors, for hard work, or some other reason, but seldom for money. Once these land grants were made, the land was subdivided and sold to others. How was and is selling price determined? It was based on expectations on what revenue that land could generate for the new buyer--return on investment or ROI (how appropriate, roi means king in French). Most land has been used for agriculture. Around here, good land with vineyards is worth from $40,000 to $60,000 an acre. Pasture land maybe worth a tenth of that. If either is zoned for housing, it will increase in value to about $200,000 and acre.

Pure and simple--The price someone is willing to pay for land is based on his or her expectation for a future revenue stream and/or increased value at the time of a future sale. If anticipated future profits will not adequately compensate the prospective buyer, the prospective buyer will not buy the property. If the current owner wants to sell, he or she must either find someone who can figure out a different way to use the land to make it more profitable, or lower the selling price.

So here we are in a very unique situation. While it is a constitutional right to own land, the courts (since the US Supreme Court Euclid case) have upheld the right of state and local governments to control land uses provided they act within the scope of the police powers granted it (by providing for the public health and safety of the people), and that there is a nexus between the ill and remedy (Nolan) and rough proportionality between the impact of the development and the mitigation required (Tigard). Or, as Dan Curtin points out in his book about California land use, the courts continue to rule that "to develop land is a privilege."

Thus, every city and county is totally within its rights to provide for the public health and safety by enacting zoning and other ordinances that provide housing for all the people who work in its community as well as those who retire from working there and for those unable to work. This is what the basic concept of police power in the US and State Constitutions is all about.

Local government has the constitutional authority to require inclusionary zoning that meets the housing needs of all the workers in its community. Will that halt all new housing development? Absolutely not. Developers unwilling to reduce profit margins will only be willing to pay less for land. Will it make land speculators happy? No. But in most cases, they will still get more for their land today than they did when they bought it, and probably make a pretty good profit by our standards.

I hope I have helped make this issue clearer for you. I also hope you understand why I am so passionate about demanding housing for everyone. Because if we don't, what are we forcing those who we leave out to do? And finally, I hope you will understand why I find it immoral for me--not necessarily for you but for me--to advocate for any policy that does not provide a roof over the head of everyone in the community in which he or she works.

Rick Theis