## #25Percent

You don't have to be a long time Seattle resident to understand the one topic on everyone's lips: housing affordability. You see and hear it everywhere: on every Seattle-area podcast; in every candidate forum and debate; on twitter, facebook, and reddit; even on the street. Just today on my commute home I overheard a few people talking about how the "rent was too damn high" in this city. And I agree – the rent is too damn high.

The battle lines are drawn around solutions to the skyrocketing cost of rent. Some think the solution is to stop development: they see that new buildings go up, then the rent increase, and believe there's a causal connection between the two. Some think the solution is build a massive number of units and flood the market to lower rents.

The new hotness with Seattle's left – championed mainly by former mayoral candidate Nikkita Oliver and current city council candidate Jon Grant – is the title of this post: 25%. That is, require all new developments set aside a quarter of its units to be below market rents. Specifically, the units are to be affordable for those making 60% of the area median income. In real terms, this means a unit 1 bed room will cost a tenant $1,080 per month according to the chart provided by the city. This scheme is called inclusionary zoning (https://en.wikipedia.org/wiki/Inclusionary_zoning), and it's used in quite a few cities around the world now. In Seattle, we call it "Mandatory Housing Affordability", or MHA. The question from there becomes feasibility. New apartment and condo (and all buildings for that matter!) will go up if and only if the numbers pan out. This article and analysis will hopefully shed some light on whether or not the 25% - or any inclusionary requirement - is feasible.

Some disclaimers here: I'm not a land use expert, a developer, or an urban economist. I'm just a guy with access to excel and google. I didn't make some fancy DCF model or run a regression analysis – this is a simplified version of real world conditions. To make the math work, I had to make some assumptions about market rate rent and typical building unit composition. These are absolutely all assumptions that should be tested and challenged. I'll provide you, one of #HashtagBlog's 27 readers, a link to the excel sheet so you can play around with the numbers. I sincerely hope you do!

With that out of the way, here's the excel sheet: https://1drv.ms/x/s!Anh1gZZ6ay0Vgdw9obgRtINzEEh9Dw

Here are the assumptions I used: For a typical 100-unit building, 20 of those units would be studios, 50 1-bedroom units, 20 2-bedroom, and 10 3-bedroom units. I've assumed that studios rent for $1,400; 1-bedrooms for $1,700, 2-bedroom for $2,000, and $3,000 for the largest units. Again, these are all configurable in the excel sheet, so please play around with these constants!

From there, I used the Multifamily Rental Housing Rental chart for each unit size that I linked above, and used that to calculate how much per month a building would generate if MHA was 0% (today, basically), 5%, 10%, and 25%. I also assume that all market rate units rent for the same amount (an assumption made for simplicity that is clearly false in the real world). And that's all you need to figure out how much the rent a complex's resident will a month! The sheet simply multiplies the number of below market rate units by the "MHA rent" column, and the rest by the "Market Rent" column. One last note – I've left out any rounding issues. Technically the MHA framework says you pay the rounding errors to the city. I was too lazy to figure that whole mess out, but you the reader can try to correct for that detail if you feel like it!

With that out of the way, let's look at the results: The "% Haircut" tag shows you how much rental income the program takes out. A 5% MHA takes away 2% of a landlord's profits, 10% around 4%, and 25% takes away a whopping 11% of income to the building. I included a "what-if" row labelled "Rent increase across all other units" which imagines the rent increase needed if the landlord wanted to be made whole and if the increase was uniform across the complex's market rate units. In a 25% MHA world with these assumptions holding true, each unit would have to bare a *$183 increase* per month, or around an automatic 10%+ rent increase on a 1-bedroom unit.

I think this analysis shows what urbanists have been saying all along – a 25% requirement would make a lot of projects – most projects in fact – not pencil out. 5% does seem feasible to me – a modest 2% tax on development would likely not stop most projects.

But let's go further – every building needs to take out a loan to start construction. If we assume (very conservatively) that each unit costs around $300,000, the entire building will cost around $30M to construct (for the sake of argument, let's leave out land costs and all that jazz). Putting that number into a mortgage calculator with a modest 7% interest rate yields around a $200,000 for a monthly payment. Under a 25% MHA requirement, the landlord simply doesn't generate enough revenue to meet the terms of the loan. This hypothetical project simply would not be built.

Now, here's the rub: MHA is supposed to be balanced out by allowing developers to build higher and/or bulkier – but I frankly can't understand how an upzone would pay for the rental receipt haircuts considering the additional units created by the upzone are subject to the MHA requirements. The math is linear – meaning additional units won't affect the end result; it'll come out the same. I have an email out to some city staff about this and will update this blog and/or make a new post if I hear back, but if you the reader has any thoughts how to understand the "pay-for" here, that'd be swell!

As always, thanks to Maddux for allowing me to write for his blog! And please let me know if you have any questions/comments/concerns by tweeting me @zachlubarsky or message me on Facebook! I have a few exciting blog posts in the pipeline so stay tuned! Next week's will be about a unique healthcare scheme that can save Washington State.