New Legislation Would Significantly Modify Baltimore City’s Inclusionary Housing Law by Repealing Cost Offsets and Waivers

New legislation was introduced in the Baltimore City Council that would significantly amend the City’s existing Inclusionary Housing Ordinance, which is currently set to expire on June 30, 2022, by imposing stricter mandates. The provisions of the existing Inclusionary Housing Ordinance are summarized below, followed by a summary of the notable changes proposed under the new legislation.

Briefly, the bill directs developers of new residential projects containing more than 20 units to set aside 10 percent of the units for affordable housing. Most significantly, the proposed legislation would modify current policy by shifting the cost of providing those affordable units exclusively to the project/developer.

Under current law, the City is obligated to provide a cash reimbursement to the developer to offset the financial impact caused by setting aside a percentage of units at below-market rates. If the Housing Commissioner determines there are not sufficient funds to offset the financial impact, the project must be exempted from the inclusionary housing requirements. There are also provisions for waiving requirements if the proposed market-rate units to be provided exceed certain threshold costs.

In practice, during the 14 years since the City’s existing inclusionary housing law was enacted, only 37 affordable units have been created because either: (i) the fund from which cash subsidies are to be provided to developers is routinely tapped out, or (ii) the delta between the market-rate rent and the rent that would qualify as “affordable” routinely exceeds the threshold costs that limit how much the City may spend to reimburse the developer.

In lieu of pushing to more provide more resources to the offset fund (or perhaps as a result of the Council’s inability to unilaterally increase budget line items), the lead sponsor of the proposed legislation, Councilwoman Odette Ramos, has described the bill’s design as being aimed at removing loopholes preventing the creation of affordable units by removing the exemption requirement.

The draft legislation’s design is impactful as it not only removes the exemption requirement, it also removes any provision for providing cost offsets or tax abatements to mitigate the lost value to a residential project associated with providing below-market units. This is significant as it contradicts the conclusions in a report commissioned by the City to evaluate the current inclusionary housing program and recommend changes and updates. The draft report concludes cost offsets or tax abatements are necessary to make it feasible for a market-rate residential project to set aside units at reduced rental rates. That is, the consultants opine the reduction in a development’s projected revenue due to having to provide 10% (or even 5%) of units at a below-market rate would reduce that development’s projected net operating income to a level that would be insufficient to generate a suitable return for a developer, lender, and/or investor to move forward.

A hearing has not yet been scheduled on the pending legislation, but Councilwoman Ramos has indicated that there will be opportunities for discussion, so it is possible there may be amendments coming out of those discussions. For example, the draft report indicates that with a 15% tax abatement, certain traditional inclusionary zoning policy options would be feasible, albeit only in “core markets.” There are also other strategies adopted in other cities that could be implemented in Baltimore City to promote the creation of additional housing that would make it more housing more affordable across the City, such as adopting an accessory dwelling unit ordinance, eliminating parking requirements citywide, and permitting duplexes and triplexes in single-family zones.

We will be closely tracking the legislation and provide updates if their status changes or new information emerges. For more information about the existing or proposed inclusionary housing provisions in Baltimore City, please contact the author or any of the other members of the Land Use and Zoning Practice Group at RMG at 410.727.6600.

Background – Current Inclusionary Housing Law (Ord. 07-474)

Baltimore’s current Inclusionary Housing Law was enacted in 2007 “for the purpose of requiring certain residential projects to provide units at affordable ownership costs or affordable rents.” It generally requires developers of residential projects with 30 or more residential units to make 20% of those units “affordable” for a 30-year period.

Of the total affordable units required, the current law provides that units must be affordable to households at various income tiers.

• For rental units: At least 30% must be affordable for households earning 30% of Area Median Income (“AMI”) or less; at least 25% must be affordable for households earning between 30% and 60% of AMI; at least 25% must be affordable for households earning between 60% and 80%; and the remainder must be affordable for households earning less than 100% of AMI;
• For ownership units: at least 25% must be affordable for households earning between 30% and 60% of AMI; at least 50% must be affordable for households earning between 60% and 80% of AMI; and the remainder must be affordable for earning between 80% and 120% of AMI.

Under the current law, the City is responsible for providing direct resources to offset the cost of creating affordable units, which it provides in one of two ways: (1) a 20% density bonus to be granted at the discretion of the Board of Municipal and Zoning Appeals; or (2) direct funding from the City.  However, if a developer is able to show the density bonus units do not sufficiently compensate them for the extra cost of providing the affordable units and/or the City lacks sufficient funds to offset the financial impact of providing affordable units, the Housing Commissioner is required to exempt the project from the Inclusionary Housing requirements.

Because of the large gap between market-rate rents and the rents that are affordable to households at low incomes, the 20% density bonus rarely offsets the cost to a developer of providing. Additionally, as noted a recent draft report commissioned by the City’s Department of Housing and Community Development (“DHCD”), there is often no funding available for the Inclusionary Housing Offset Fund to provide the direct funding from the City. As a result, nearly all projects end up not being subject to the Inclusionary Housing requirements and only 37 affordable units have been created since the law was enacted.

Proposed Legislation – City Council Bill 22-0195

Recognizing the paucity of affordable units created under the existing inclusionary housing law, Councilwoman Odette Ramos recently introduced legislation co-sponsored by 9 members of the City Council, which would largely repeal the existing law and replace it with a simpler and more straightforward approach, summarized below.

• Removal of City Cost Offset Requirement. Most significantly, the new legislation removes the current law’s requirement that the City provide a financial subsidy to offset the cost of providing affordable units in a residential development project. By comparison, under the current law, if the City does not have funding available to offset the cost of providing units, the Housing Commissioner is required to exempt the project from the inclusionary housing requirements.

• Inclusionary Requirements Applied to Smaller Projects. The inclusionary housing requirements will apply to any residential project: (1) that provides 20 or more dwelling units; (2) that is newly constructed, wholly renovated, or converted from a non-residential building; and (3) where the cost to construct, renovate, or convert is greater than or equal to $60,000 per dwelling unit. By comparison, the current law applies to projects with 30 or more units.

• Reduced Affordability Set Aside. The legislation will require at least 10% of all dwelling units to be “affordable units.” By comparison, the current law generally requires 20% of the units to be affordable, subject to the City providing the cost offset.
• Adjusted Affordability Mix. Of the affordable units required to be provided, 50% must be for low-income households (defined as earning between 51% and 80% AMI) and 50% must be for moderate income households (defined as earning between 81% and 120% of AMI). By comparison, under current law, a portion of units must be provided to households with income at or below 30% of AMI.

• Annual Reporting Obligation. All residential projects “subject to the affordability requirements” of the legislation would be required to submit an annual report to DHCD and the Inclusionary Housing Board. The required contents of the annual report would be established by the Housing Commissioner and the reports would be posted publicly. By comparison, the current law mandates owners of affordable rental units subject to the inclusionary housing requirements to “periodically report” to the Housing Commissioner on their compliance with the inclusionary housing requirements.
• Requirement of Comparable Design/Placement of Units. As in the current law, affordable units required to be provided under the proposed law must be comparable in quality & appearance to the market-rate units and dispersed throughout the residential project, but may vary in size and finish, consistent with standards to be set forth in the Housing Commissioner’s rules and regulations. The proposed law eliminates a provision in the current law that allows developers to request a variance from these requirements.

• Reduced Affordability Period. The affordable dwelling units must remain affordable for at least 20 years from the date of their initial occupancy. By comparison, the current law mandates a 30-year affordability period. The proposed law also adds a new provision stating “the affordability period for each unit starts each time ownership of the affordable unit is transferred.”

• Addition of Criminal Penalties. The proposed law creates criminal penalties for violations. A violation of the inclusionary housing subtitle is a misdemeanor and if convicted, would be subject to a fine of not more than $1,000 for each offense, with each day a violation continues being a separate offense.

Conclusion

It is extremely likely that at least some changes to the City’s existing inclusionary housing policy are coming. Most observers would acknowledge the current inclusionary housing policy has not worked as hoped, and as a practical matter, the new legislation has been co-sponsored by a supermajority of the members of the City Council so it would appear to have the votes necessary to be enacted.

The legislation has been referred to Planning for review and consideration by the Planning Commission. No hearing date has been set for the Planning Commission to consider the legislation, but we will continue to monitor and keep readers informed.

Notably the bill’s lead sponsor indicated that there will be opportunities for discussion, and it would appear likely that some amendments would be in order so residential developers will want to watch this space.

For example, as drafted, the new law does not provide for cost offsets or tax abatements; however, in their draft report, the City’s own consultants note that a cost offset or tax abatement would be necessary to make it feasible for a market-rate residential project to make 10% of the units in a project affordable. The report further notes that, even with a tax abatement, inclusionary housing projects would only be feasible in “core markets” along the harbor and adjacent to Downtown. This is consistent with findings from New York City’s feasibility analysis of its inclusionary housing policy, which concluded that “[r]ental projects in moderate and weak markets do not achieve sufficient returns to achieve feasibility without subsidies, even before incorporating an inclusionary requirement. This reflects the reality that few market-rate rental projects are being built in markets with relatively low rents, as they are unable to support current construction costs and land prices.” Accordingly, without amendments, the draft legislation as drafted runs counter to stated goals of promoting development in areas outside of Downtown and in historically underinvested neighborhoods.

There is also research analyzing data from the Baltimore-Washington region revealing that for each year a mandatory inclusionary zoning policy is in place, a jurisdiction’s house prices increase by about 1% beyond what they otherwise would, and thus, “the housing affordability ‘fix’ makes the problem worse for everyone who doesn’t get a subsidized unit.” The City’s draft report predicts that if the proposed inclusionary housing policy were in place (albeit, with a tax abatement) from 2016-2021, approximately 270-540 affordable units would have been created; however, the City has tens of thousands of cost-burdened households. Thus, the increased cost to unsubsidized units would fall hardest on the households that lost the lottery drawing to get into one of the affordable units. Accordingly, without amendments, the legislation as drafted runs counter to the City’s stated Equity in Planning aims.

There undoubtedly is a benefit to the low-income residents who are lucky enough to live in the same building with high-income residents, with research showing a clear benefit to low-income children who move out of high-poverty neighborhoods. However, the economics of inclusionary zoning are complicated. If the proposed policy depresses the creation of new housing supply by deterring new construction, it may negate the benefits, or worse. Not only will there be lost blue collar jobs, but the general housing shortage will increase housing costs for households across the income spectrum. Further, a building that does not get built due to inclusionary housing policy never does not contain any affordable units: 10% of zero is still zero.