The Case for MIH

Looking back on the last four years of New York City Mayor Bill de Blasio’s tenure one policy victory stands out more than the rest – Mandatory Inclusionary Housing (MIH). On March 22nd of 2016 the City Council approved the zoning text amendment that effectively ties government approved “up-zonings” to the provision of affordable housing units. While New York City did have a form of inclusionary zoning prior, this was the first time where the provision of affordable housing units would be permanent and mandatory. Despite the policy’s promise, MIH was met with a level of public opposition. Affordable housing advocates have accused it as an agent of gentrification. In their view, the depth of affordability did not reach far enough and would exacerbate gentrification in low-income neighborhoods already facing market pressures. So, this public debate begets the question: “Is MIH a friend or enemy of housing affordability?”

What is Mandatory Inclusionary Housing?

MIH is a form of inclusionary zoning. Inclusionary zoning (IZ) is a tool utilized by local government which incentivizes real estate developers to designate a certain portion within a residential development for below market-rate rental housing units. The purpose of such tool is to link the development of market-rate housing with the production of affordable housing. The idea is that as the real estate market booms, government could capitalize on the moment as an opportunity to incentivize the private sector to build new supply of affordable housing.

In the case of NYC, IZ has existed for a number of decades. Dating back to the time of the Koch administration, IZ was a voluntary program. It was also extensively used by the Bloomberg administration. Real estate developers had the option of building taller buildings if they agreed to allot a certain number of units as affordable. How is affordability defined? Levels of affordability are pre-determined by the U.S. Department of Housing and Urban Development (HUD). Every year, HUD releases its determination of what the Area Median Income (AMI) is in the New York City region. AMI is the magic number that dictates how affordable “affordable” housing is. The government subsidies developers need to leverage in order to build affordable housing are directly tied to AMI. In exchange for the government subsidy, a developer must agree to rent a housing unit to a household earning at or below the specified AMI level and must keep the rent at 30% of that household’s AMI. The 2017 AMI for a household size of 3 in the New York region is $85,900.

Where does MIH fit into all this? MIH is a form of IZ that is more far reaching than its predecessors. MIH dictates that when a parcel of land is “up-zoned” to accommodate greater residential density a developer is then required to build affordable housing units which are permanently affordable. It is no longer a voluntary option; now, when a developer plans to build market rate housing in an area that was up-zoned, he or she must build the affordable housing units (or pay into an affordable housing fund in certain cases). MIH is designed in a way that it creates a list of menu options developers could choose from when building.

• Option 1: At least 25% of the residential floor area is reserved for households averaging 60% AMI; 10% of the 25% reserved for households at 40% AMI
• Option 2: At least 30% of the residential floor area reserved for households averaging 80% AMI
• Option 3 (Deep Affordability Option): 20% of residential floor area must be for households averaging 40% AMI
• Option 4 (Workforce Option): 30% of the residential floor area must be for households averaging 115% AMI; creating units for households earning above 135% AMI is not permissible; at least 5% of the 30% floor area must be dedicated to households earning 70% & 90% AMI

Arguments about affordability are entangled in these options. Many believe building housing for households earning between 40% to 60% AMI is just not affordable enough (40% AMI for a household of 3 is $34,360 in 2017).

Interpreting MIH’s value as a tool for creating affordable housing shouldn’t happen in a vacuum. Reaching a conclusion on this question should include consideration of what tools we could use given legal boundaries.

Dictating how private property could be used and how much income could be generated from it is effectively an exaction. U.S. Supreme Court decisions throughout history have generally authorized government to use its police powers in making land use decisions which protect the public’s general welfare and further overarching policy goals; however, there is a limit on the government’s police powers. The 5th and 14th Amendments are the private citizen’s primary safeguards from government overreach. The 5th protects against the taking of private property without just compensation and the 14th protects an individual’s right to property with the due process of law.

In the SCOTUS decisions Nollan v. California Coastal Commission and Dolan v. City of Tigard the rights of private property owners were strengthened and the government’s ability to apply exactions was narrowed. Therefore, the legal framework we currently live in is that of a post Nollan and Dolan world – it’s a world where if government refuses to issue a building permit to a developer it must clearly demonstrate how the exaction it demands has an “essential nexus” to the building permit and is “roughly proportional” to the development’s impact. In layman’s terms, if government doesn’t grant a developer necessary building approvals until certain conditions are met, those conditions have to be fair and not make the development economically infeasible. Jane C. Needleman’s review of Nollan and Dolan cases in the Cardozo Law Review outlines how the Nollan and Dolan decisions could be triggered.

How does this apply to MIH?

In short, MIH was crafted in a way as to avoid triggering the Nollan and Dolan decisions. It places a requirement on developers to build affordable housing that is proportional to the individual impact of the development without stripping the development of its economic viability. It is plausible that requiring deeper AMI levels could have set off a cascade of legal challenges claiming that the affordability demanded was too steep and qualifies as a regulatory taking of private property. Furthermore, the various options offered within MIH exist so that there’s sufficient flexibility in the law which also acts as a protection from legal challenge. A developer with land in an MIH area has a choice of which option works best. This ability to choose reduces the risk of the law being struck down by the courts.

MIH may not be producing the most deeply affordable housing (perhaps in comparison to public housing), but it is a means of ensuring that as NYC continues to grow it is also creating affordable units that are seamlessly integrated into market-rate developments. In this context, as in others, the true enemy of progress is perfection.