Consultant: 20% affordable housing requirement is too high for most of Somerville
Christopher Beland
At last Thursday's City Council meeting, a consultant hired by the city reported that the inclusionary zoning ordinance, which requires 20% of units in new construction to be income-restricted, makes residential development in Somerville unattractive outside of the Union Square/East Somerville zone. By unattractive, they mean the expected return on investment is lower than what is generally demanded financial markets. (In technical terms, that's a 5.75% Return on Cost and 12.50% Internal Rate of Return, which is like the equivalent compound interest rate.) In order to allow a reasonable profit, the 20% affordable requirement would have to be adjusted to 13% in central Somerville and 8% or lower in the rest of the city, including Davis.
My interpretation of this is that under current policy, residential projects in Davis Square will struggle to get financed, and also that any money spent on Community Benefit Agreements will be cutting into a profit margin that is already below market expectations. It seems residential construction here is not entirely unprofitable yet, but the fact that it's typically only slightly profitable means that where it's still happening at all there are probably special circumstances, like the developers being self-financed or the property being a giant pit or abandoned house or soon-to-be-abandoned office space (thinking of the parcels currently under development) and waiting is an even worse financial move. The city is also giving tax breaks or other financing to make certain big projects happen, like the abandoned Star Market on Winter Hill and the TransMedics complex at Assembly.
Lance Davis asked if upzoning could fix this. The consultant said upzoning to 5 stories might help, but beyond that rents in Somerville are too low to justify financing a taller building, which would have to use steel or mass timber. (!!)
Another big policy problem that came up is that the city is having trouble finding tenants for units restricted to people making 110% of area median income (AMI). These units are too close to market rate (especially after fees and utilities) for many people to justify the paperwork, some of which is required by state and federal regulations the city can't control. One unit went vacant for a year and a half; some potential tenants have had to hire a lawyer to help them get certified.
The city asked what the financial impact on developers would be to eliminate the 110% tier and make affordable units only be 50% and 80% of AMI. The consult's math determined the affordable requirement would have to be lowered to 16% to keep residential construction as unattractive as it currently is. (Combining this with the previous recommendation, it sounds like doing this and making projects attractive to finance means the affordability requirement in Davis would need to be lower than 4%.)
The city also asked about the impact of requiring more affordable units be 3-bedroom. (Currently it's 20% of the affordable 20% for projects with 30+ units.) It's not great; if 100% have to be 3-bedroom, the affordability requirement would need to be dropped to 14%-15% to keep construction equally unattractive as it is now. As an alternative, they recommended granting a density bonus of 3 market rate units for every additional affordable 3-bedroom. They also suggested a better metric would be 20% of floor space, not 20% of units, because 3-bedrooms take up more floor space than smaller units.
A third policy change the city asked about was to add a 30% AMI tier, either as a fourth or replacing the 110% AMI tier. To make this financially neutral for developers, the affordable requirement would have to be reduced to 16%-18%. Alternative are for the city to commit to housing vouchers restricted to 30% of AMI, and for the city to subsidize the capital cost of these units.
The consultant also found that the buy-out provision for the affordable percentage (if the developer doesn't want to build affordable units on-site) is too expensive to be feasible for developers to use, because it has a multiplier of 2x to 2.5x. This might prevent certain developments from happening, I guess because the paperwork to actually get tenants is burdensome?
The consultant heard from residential developers that permitting timelines in Somerville are too long and unpredictable. They recommended combining meetings which are currently held weeks or months apart, and reducing the time between application and Planning Board review. Projects in the 5-25 unit size are the most sensitive to these challenges. Their report says 20%-30% of the zoning team's time is spent dealing with conflicting requests from different parties in the review process (the Design Review Committee by which I think they mean the Urban Design Commission, the Planning Board, Mobility, and LEED certification). Historic preservation / demolition review, and very specific zoning laws (I assume they mean the form-based zoning) were also cited as adding delays and complexity compared to other jurisdictions. The availability of city staff to take notes and city councilors and board members to host meetings are also bottlenecks they suggest eliminating.
Documents are here:
Video of presentation is here:
https://somervillema.granicus.com/player/clip/2751?view_id=1&redirect=true
In other local news from that meeting, discussion of the closure of the Community Path between Thorndike and the Cambridge border has been referred to the Housing and Community Development Committee, and informally assigned to Emily Hardt, who is newly seated.
The council also balked at an MWRA plan that would require the city to pay almost all the cost for prevention of combined sewage overflows, which would require 10-15% water bill increases, every year for five years. They want state law to change to allow MWRA to pay for stormwater upgrades.
-B.