Dispelling the Myths of Density Bonuses

When granted by municipalities to allow developers to build more units on a given site than local zoning laws would normally allow, density bonuses can be useful tools. In theory this lowers the cost per unit so the developer can make some portion of the units affordable for lower-income residents.

Unfortunately, density bonuses don't work quite so efficiently in practice and no single silver bullet will solve our national affordable housing problem. To create more affordable housing, we need the right combination of policies and incentives, and an active partnership between the private and public sectors.

To take you back to Philosophy 101, remember the concept of necessary and sufficient conditions. It's necessary to have gas in your car to make it work, but gas is not sufficient to make it work; you must also have air in your tires and, of course, your car keys to drive anywhere.

Density bonuses are most often implemented as part of a local inclusionary zoning program, and while they are a necessary incentive to compensate developers for producing affordable units, they are rarely sufficient to cover the cost of the additional affordable units required.

As Harvard University's Joint Center for Housing Studies wrote, “[Density bonuses] work well within single-family detached and townhouse developments, but they work less well for high-rise and, to some extent, mid-rise properties.”

Pluses and minuses

To understand when density bonuses work requires an understanding of the economics of development. The marginal cost of adding more units can push the construction cost of the property so high that it becomes no longer financially viable, often the case high-rise construction.

In addition, adding more units often requires owners to add more parking, and in mid-rise and high-rise construction, parking is a significant cost. Adding two parking spaces to a high-rise building for a density bonus unit could add another $40,000 to $60,000 to costs. In other words, sometimes a building simply cannot accommodate 10 additional units or 10 more parking spaces, either because of the costs or because of the site.

Ultimately, the biggest problem with density bonuses is that the longer they are used in a jurisdiction, the less effective they become. First, they typically do not keep up with land and construction costs. Say a jurisdiction calculates when it creates its density bonus program in 1995 that a 10% bonus is sufficient to offset the cost of the affordable housing units.

By 2005 though, developers and owners are facing increases in taxes, insurance, utilities and other operating expenses that exceed the value of the density bonus, which typically remain static. Is the cost per unit today and the value of the density offset reflected in the density bonus of a decade ago? This is not a criticism of density bonuses, but a reflection of the dynamic environment surrounding development and zoning.

In addition, it's necessary to analyze the actual value of the density bonus. These days, the theoretical benefit one should receive is getting neutralized by the fact that the land seller anticipates this benefit and incorporates it into the sales price of the parcel. So, the density bonus that was meant to help offset high land costs and provide incentives to incorporate lower-rent units may be losing its value.

A policy prescription

While density bonuses have value, they are not a one-size-fits-all solution. They aren't sufficient on their own to produce affordable housing. They need to be regularly re-evaluated and readjusted based on economic conditions. When density bonuses are a part of an inclusionary zoning policy, there should be flexibility to allow developers options such as building units off-site or paying a fee into an affordable housing fund instead.

The single most important step a municipality can take is to provide additional tax abatement to the density bonus units to make them affordable. Also, when jurisdictions review and update their land-use and zoning requirements, this process must look at the changing supply and mix of residential and commercial properties and the full set of public policies that can be linked to the plans and codes.

Relying on density bonuses without also considering tax abatement, land banking, transferring set-aside requirements and other public policy tools results in the situation we find ourselves today.

Doug Bibby is president of the National Multi Housing Council in Washington, D.C. For more information, visit www.nmhc.org.

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