City of Portland on Fast Track to Adopt Inclusionary Zoning Requirements

More of Portland’s developers are about to find themselves in the affordable housing business. Whether they like it or not.

The Urban Land Institute’s 2017 Emerging Trends Report identifies Portland as the nation’s third hottest real estate market. Portland has evolved from a sleepy mid-sized town to a highly desirable 18-hour city, and rising housing demand and prices reflect that desirability. As demand and prices increase, however, the very affordability that has served as a competitive advantage and attracted new businesses and residents has become increasingly tenuous. The passage earlier this year of SB 1533B, removing the statewide ban on inclusionary zoning (“IZ”), is intended to provide cities and counties with a new affordability tool, and the City of Portland is working to get its IZ program in effect by February 1, 2017.

SB 1533B enables cities and counties to adopt IZ provisions applicable to multifamily buildings containing 20 or more units. In these buildings, municipalities may mandate that up to 20% of the residential units be affordable for sale or rent to those earning 80% of the county’s median family income. A voluntary inclusion program may be adopted providing for deeper levels of affordability. Municipalities imposing IZ requirements must provide developers with financial incentives to assist with the costs of providing units at below-market rates, with potential incentives including density bonuses, expedited permitting, tax abatement, system development charge waivers and finance-based incentives. The local program must also include an option for developers to pay a fee in lieu of including affordable units in their projects.

Portland’s Planning and Sustainability Commission (“PSC”) held a public hearing on the Housing Bureau’s IZ proposal prior to holding a work session and forwarding its recommendation to the City Council. The many potential benefits of IZ were extolled, but there was also testimony concerning the potential that a program with poorly calibrated incentives could dampen housing production and exacerbate Portland’s affordability challenges. Ultimately, the PSC recommended that the City Council adopt an IZ program that takes advantage of the highest percentage of mandatory affordable units (the inclusion rate) allowed by state law but also ensures that the incentives provided by the City be sufficient to, at least initially, protect developer returns such that housing production is not dampened. The PSC recommendation included holding developers’ residual land value harmless and limiting the types of incentives made available in a manner that protects other existing housing affordability programs. The PSC also recommended that the City Council provide a voluntary program option with 10% of units affordable to those making 60% of median family income and that the City Council reduce the amount of affordable units required if, upon considering the City’s budget and the available incentive packages, the City Council determines residual land value cannot be held harmless. The PSC concluded that it will be key to monitor the performance of any program and that it may be appropriate at some later date to change the incentive level, but that proceeding slowly at first would reduce the risk of the program decreasing housing production.

The City Council will hold a public hearing on the IZ proposal in November and may or may not accept the PSC recommendation. In whatever form the program ultimately takes, however, it is likely that new multiunit residential development in buildings containing 20 or more units will be required to participate in some form of IZ starting February 1, 2017. Providing affordable units alongside market-rate units is recognized as a way to make neighborhoods well served by amenities accessible to residents with a broad range of incomes. To the extent that developers of market-rate units will now find themselves in the affordable housing business, developers should start to look ahead to how they will manage those units within their developments, whether they will partner with nonprofits or other developers to manage affordable units, or whether in their circumstances it is better to pay the fee in lieu.

Contact Stoel Rives for more information on the program as ultimately adopted, utilizing incentives and options for managing developments with affordable and market-rate units.