Recent local discussions about changes or repeal of Madison’s Inclusionary Zoning* program have focused on several issues. The first one I’d like to address is what we refer to as the “equity model”. The equity model determines how much money the owner of a house purchased through the inclusionary zoning program gets and how much money the city gets when the inclusionary zoning homebuyer sells their home.
Currently in the ordinance, there is a VERY complicated equity model (see page 10). The idea behind it, which I never bought into but was supported by Ald. Brandon, the Mayor and others, is that they wanted buyers to be incentivized to move out of their homes after about 11 years. So the buyer gets a different percentage of the “market equity” (the money the buyer gets because of the increase in the value of the home) depending upon when the buyer moves out. The maximum amount of the equity the buyer could get is 50% of the market equity but that is only in year 11. Additionally, if the buyer sells their home in the first 2 years, they would get no market equity at all.
In addition to the “market equity”, there is also “improvement equity” that is based on improvements that someone makes to the home and the “paid equity” which is what the homebuyer puts into the home. In this model, there are requirements about notices to the City about improvements that the buyer makes, the City has to purchase every home in order to keep it affordable, it is complicated for the City to keep track of the value of the homes and it is complicated to explain to the homebuyer. Additionally, we are hearing reports that homebuyers don’t want to purchase the homes because the program is too complicated.
The changes that have been recommended by the Mayor, myself and others gets rid of the complicated formulas, the complicated improvements issue, the notice required to the city when someone refinances a home and hopefully, is easier for the homebuyer to understand.
In the changes that we recommended the equity is calculated as follows:
1. If a home is worth x, but is being sold at an inclusionary zoning price of y, the amount of the equity the City has in the home is x – y.
2. If x – y = 25% of the value of the home, when the home is sold the city gets 25% of appraised value of the home because the City helped to reduce the price of the home by 25% in order to make it affordable.
This eliminates the complicated equity formula, likely gives the homeowner a larger portion of the market equity in the home and hugely simplifies the ordinance as described above. If a person makes improvements to the home, we don’t need to figure out the value of the improvements because improvements will be included in the market value of the home. Also, part of the policy decision is that part of the way to keep the homes affordable is to not make major improvements (adding a room, etc.) and yet the homeowner has incentives to keep the home in good repair because if they don’t keep their home up, it decreases in value.
The biggest criticism about these changes, which usually comes from the developers, is that the City still gets too much equity and it’s not fair to the homebuyer. The recommendation I keep hearing from the folks who still don’t think this is fair is that they City should only get the amount of money they put into the deal. Some are even arguing that the City shouldn’t be allowed to get credit for the value of the incentives, but instead only the actual amount of cash the City invests in the homes.
In other words, if the value of x – y = $25,000, when the buyer of an inclusionary zoning home sells, the City would get $25,000. The homeowner would not only get the market value on the amount of their investment into the home (y), but they would get the value of the increase in market equity on the entire value of the home (x).
Some people at least argue that the City should get some percent for inflation, others argue we should not. Those who argue that the City should only recieve equity for the portion of cash the City puts in argue that because they do not want to recognize our incentives have value, primarily they do not want to recognize the value of density bonuses.
Note: There are some issues surrounding the equity model that merit further discussion in the days to come. In the changes to the ordinance, we use a second mortgage to keep the home affordable, which needs further explanation. Additionally, there is the issue of how affordable these homes will be in the future and if we will be able to sustain the affordability or continue to invest in these homes. This is just the first in a series of comments on inclusionary zoning, so stay tuned.
* Inclusionary Zoning is a program that requires developers/home builders to provide 15% of their homes at more affordable prices. Affordable housing is defined as lower than 80% of the Area Median Income for homebuyers and 60% of the Area Median Income for renters. Income levels and other information about the program can be found here.
