Brilliant Transit Oriented Development Bill Passes Second House

Both Washington State Houses have passed HB 1491, a fantastic Transit-Oriented Development Bill (TOD) that will create a lot more opportunity to build housing. After some sort of concurrence, it is likely to make its way to the Governor.

TOD Bills in General Are Awesome

TOD bills are a lot like they sound—they open up opportunities to build housing near transit. And this one opens up a lot of opportunities for more housing. The bill legalizes dense five and six story buildings within a ten-minute walk of light rail stations, and four story buildings within a five-minute walk of “bus rapid transit” stations. Bus Rapid Transit (or “BRT”) is a kind of enhanced bus service, like the new line on Madison Street in Seattle, or Swift Bus Routes up in Snohomish County.

There are some extra density bonuses available for buildings that provide all affordable or workforce housing, and some state funded infrastructure investments for the station areas. While I have not yet seen an analysis of how much this will help us address our housing shortage, studies of similar policies in our region have shown that the impact could be very substantial.

This bill is great for all kinds of reasons. First and foremost, we have a desperate housing shortage and any opportunity to open up space for more housing is extremely welcome. When people live next to frequent, fast, and reliable transit, they are much less likely to own and use cars, and even if they do, they do so less often. By building housing in a way that reduces car trips, we maximize the (already fantastic) climate-related impacts of building housing in already urbanized areas. The developments also save the residents tons of money, as transit is much cheaper than driving. It also does a better job of squeezing value out of our expensive public investments in transit, by getting more riders on the trains and buses we are paying for anyway. It’s about as win/win as you can get.

Research has also shown that the not-too-tall, dense buildings legalized by this bill are the best for reducing greenhouse gas emissions. They produce the density- related benefits of less driving and the energy efficiency of shared walls, almost as effectively as high rises. And since the buildings aren’t too tall, they don’t require so much concrete and steel per unit in construction like high rises—concrete and steel are particularly carbon intensive. On net, they are the best building size for climate and also among the most affordable forms of construction for high density living.

The Gordian Knot That Tied TOD Up for Years.

State Representative Julia Reed led the TOD charge, this being her third annual attempt to get this beast of a bill over the finish line. But this year was finally different. In past years, the bill kept getting stuck. The key sticking point between the various pro-housing coalition members was “inclusionary zoning” (or, “IZ”). Inclusionary zoning requires that developers set aside some portion of the new housing they build and provide it at affordable levels. Sometimes they can just pay a fee that funds affordable housing development instead, as in Seattle.

Developers and their legislative allies claimed the IZ requirements were too high, and too inflexible - profit margins that might be enough to produce housing and fund affordable housing in Bellevue might not do so in Vancouver. In any case, they argued, with interest rates and material costs so high, most new projects are unlikely to be profitable as it is. If we tack on these huge costs, we’re just not going to get housing at all in these station areas. In fact, they noted, inclusionary zoning itself is really just a very high tax on something we want—more housing.

Progressives pushed back, though—they wanted to make sure that at least some of this development was set aside for working class families, who face an even more acute housing shortage. Lower and middle income families would also most benefit by access to cheap transportation through transit. And they pointed to examples of inclusionary zoning in our state that have produced significant amounts of market rate and affordable housing—arguing that the objections to inclusionary zoning are overstated.

Cutting the Gordian Knot

Sightline, a local think tank, (and, full disclosure, one of my consulting clients), started pushing for a third way we call “Community Funded Inclusionary Zoning” or “Funded Inclusionary Zoning.” In my work with Sightline, I did some work quietly evangelizing this concept to a possible coalition of supporting organizations last summer.

Funded Inclusionary zoning works differently than regular inclusionary zoning. Yes, it still requires the set aside of some number of units at prices that are more affordable.

But instead of hoping the developer has a high enough profit margin to pay for these units and will still choose to build the housing—the community pays for the affordable housing through a tax “abatement” program, that works kind of like a tax write off. The aim of the bill is to make it so the amount of money the developer saves from the lower taxes are roughly equal to the lost revenue associated with providing below-market-rate housing. That way the affordability requirements don’t dissuade projects from getting built.

This is great because it means we are more likely to get the market-rate housing we desperately need and more likely to get the affordable housing we even more desperately need.

For those reasons, I vastly prefer this approach over traditional inclusionary zoning. Not because I want to give gifts to developers—they spent hundreds of thousands of dollars keeping me out of office! The truth is, the scale of the annual real estate development market just doesn’t involve enough surplus money in it to fund much of our affordable housing needs.

Pretending this isn’t the case doesn’t help. When we aren’t honest with ourselves about this uncomfortable reality we usually layer on so many restrictions and fees that we just end up building too little housing.

In addition, pretending the inclusionary zoning is going to produce ample affordable housing is a convenient way to dodge the whole community’s responsibility to take care of our fellow community members. We do indeed need to build lots of market rate housing and lots of affordable housing, and we need to tax the wealthy and rich to pay for that affordable housing if we ever want to do that at any reasonable scale. While funded inclusionary zoning is by no means a complete approach, it is a better fit.

While I won’t get too technical about the matter, I have had some folks ask me if these tax abatements will starve local governments of revenue. The short answer is, no, or at least probably not. If you are curious about why, I explain in the appendix.

A Divided Housing Coalition 

Though the real estate industry is often supportive of supply-oriented bills, they do oppose this one. They object to the mandatory nature of the affordability program. Some worry that the tax offsets might not be enough to make up for loss revenue. Others have argued that the uniformity of the tax offsets might work in some localized markets but end up insufficient in others, and of course market conditions change quickly.

I think the third is probably the most reasonable claim, but if this does materialize in any local submarkets, a tweak later could empower the department of commerce to adjust localized abatement programs. All in all, there are few offset programs like this nationally that are remotely this generous—it is extremely likely to offset most of the unintended consequences of inclusionary zoning, and result in many, many more thousands of homes being built than would otherwise. It’s a great bill and I celebrate that it has gotten this far.

Appendix

Why I don’t think this will hurt local governments: The biggest part of the abatement should not reduce local revenues. The main source of abatement is a program that provides a reduction in property taxes. But that reduction should not impact the total taxes collected (although technically a county assessor could choose to go another way) - it just reallocates those taxes to the hundreds of thousands of other parcels in the relevant county, slightly raising taxes on other properties. Think of it as a teensy, tiny property tax rise on other properties to pay for affordable housing. I vote for “housing levies” when they come along, and so I’m quite happy for this one too.

There is another form of abatement in the bill - that relies on reductions in something called “linkage fees.” These often go to local investments in infrastructure to support the new housing. This will cut some of that one-time government revenue, but I assume this is the reason the bill came with localized infrastructure investments—to offset any loss.

I also wanted to add to the discussion of inclusionary zoning, I actually did a full (boring!) review of economic studies on inclusionary zoning last year as I was preparing to work on this issue. The truth of its effect is more mixed than developer advocates or opponents tend to believe, in case you are wondering, but I don’t meant to try to lay out the case right now.