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Thursday, January 29, 2015 |  Madison, WI: 31.0° F  Overcast
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Mayor Dave's housing plan fizzles
Ordinance mandating affordable units falls short of hype
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Subeck: 'We took a terrific idea and screwed it up.'
Lisa Subeck: 'We took a terrific idea and screwed it up.'

In January 2004, Madison Mayor Dave Cieslewicz called inclusionary zoning "the centerpiece" of city efforts to add affordable housing. IZ proponents predicted that their plan to require developers to include affordable units in their housing projects would add between 200 and 300 lower-cost housing units each year.

But as the IZ ordinance's fourth anniversary approaches on Feb. 15, only 41 houses and condos have been sold or have accepted offers to purchase. That's a far cry from the 800 to 1,200 units the public was led to expect.

Cieslewicz declined to comment on IZ's performance with Isthmus, saying through his press secretary that he is awaiting a staff assessment. But in December he admitted to the Wisconsin State Journal, "I don't think you could look at the program right now and call it a success."

Ald. Julia Kerr agrees: "Everybody hoped for better."

Even Ald. Brenda Konkel, the ordinance's foremost advocate, sees problems and has resigned herself to the long view. "It will take years to see the payoff," she now says.

But whether the mandatory program gets those years is another question. IZ is set to automatically terminate in January 2009, and renewal by the Common Council is not assured.

The program's poor performance comes despite a tremendous investment of city staff time and energy in its success, including a 2006 ordinance revision to deal with obvious problems.

"We took a terrific idea and screwed it up," complains housing advocate Lisa Subeck

The rationale for inclusionary zoning seems sound. It holds that the city, the schools and employers would all be better off if Madison's neighborhoods offered a fuller range of housing choices, especially affordable workforce housing.

Affordability became a major issue in the 2003 mayoral election. Cieslewicz championed a mandatory, city-only program that would require developers to mix lower-cost units in their housing projects. His opponent, former Mayor Paul Soglin, wanted a countywide effort involving suburban communities that was less prescriptive and more cooperative in dealing with developers.

In liberal Madison, that proved a huge mistake: Soglin was denounced as a tool of real estate interests, and his comeback hopes were dashed at the polls.

The IZ program that emerged from the Common Council 10 months later was a complicated plan that left both consumers and developers leery of participating.

Here's how it was supposed to work:

On most housing projects, developers must set aside 15% of their units as affordable to families making no more than 80% of the area median income. For a family of three, the maximum would be $53,050 a year.

On the housing side, IZ prices are set so that qualified buyers pay no more than 30% of their income for their house or condo. For developers, that means selling those units for less than their market value.

To offset the financial loss, the city offers various inducements, including the ever-popular tax increment financing and "density bonuses" that allow for the building of extra units and presumably greater profit.

To maintain an IZ unit's affordability into the future, the city retains a residual financial interest. The buyer must grant the city a second mortgage pegged to the difference between the reduced IZ sales price and the actual appraised value.

At the Capitol West condominiums, for example, that gap is about $40,000 for a one-bedroom IZ condo that sells for about $120,000 but has a market value of about $160,000, according to Natalie Bock of the Alexander Co.

When the unit is eventually sold, the city has the first right to buy it (at the appraised value) to resell as an IZ unit. This is the long-term IZ benefit that Konkel applauds. If the city fails to exercise the option, it still shares in the proceeds of a private sale based on a predetermined percentage of the home equity. The city's payout is then rolled into affordable housing, and the program continues its long-term good work.

At least that's the theory. Reality has been far different.

Most IZ units are never sold as such, although the city has approved plans for around 300 of them. With the housing market tanking, many of these units - such as those approved for Union Corners and Hilldale Heights - were never built.

Others were marketed for the required 240 days (badly marketed, critics say), failed to sell and were released from the IZ program (as the ordinance allows) to be sold as more costly market-rate housing. The result was just 41 IZ units bought or spoken for in the past four years.

To be sure, the city program has been broadsided by forces beyond its control. In 2006, the courts struck down its provisions for rental properties, saying they constituted illegal rent control. The downturn in the housing market, which has choked off single-family construction, is the latest blow.

But inclusionary zoning's core problem may be intrinsic - both homebuyers and real estate professionals have reasons of self-interest to distrust it.

"It's the un-American dream to share the upside of a home sale," says UW-Madison real estate professor Tim Riddiough. "Americans create wealth by owning their own houses, but here you have a program where you share the gain with the city."

Barb Constans, who administers the IZ program for the city, says the equity-sharing formula in the original ordinance was "horrible."

"It didn't provide enough equity to the buyers," she says. "In fact, it provided a disincentive because they were never going to get any equity out of it. I used to say - and I was only being a little bit facetious - nobody in their right or left mind would buy an IZ unit."

Developers and sales agents had their own reasons for not embracing inclusionary zoning: Released IZ units could sell on the open market for more money with less work, yielding bigger commissions and more profit. So why push IZ sales? (See "Housing Law Called 'Emotionally Draining,'" 11/30/06, for a case in point at Monroe Commons.)

Constans says the 2006 ordinance revision improved the equity formula and toughened the marketing requirement, but the housing slump has blunted any interest in IZ housing.

In fact, as Phil Salkin of the Realtors Association of South Central Wisconsin points out, the market slump has done a better job of producing affordable housing than the ordinance.

"Prices are moderating or being cut," he says, pointing to more than a thousand Madison listings for homes priced at $200,000 or less, including 439 under $150,000.

Buyers of those homes and condos will avoid IZ's equity-sharing bite when they sell in the future, he notes, thus capturing all of the appreciated value in the time-honored American fashion.

Salkin still feels the city has an important role to play in affordable housing. He wants to see greater attention paid to down-payment programs, buyer education, rehab loans and condo-conversion assistance, among other efforts.

What seems clear now is that inclusionary zoning won't be the centerpiece of anything at all.

More on IZ

For a list of inclusionary zoning units currently on the market:

For answers to commonly asked IZ questions:

For other IZ information, call city staffer Barb Constans at 608-267-1983.

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