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
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.