Developers and business groups are mobilizing against the latest attempt by the city of Los Angeles to force developers to include below-market apartments and condos in their projects or pay fees to the city to subsidize other affordable housing.

While the effort to require affordable housing set-asides is in the early stages, some developers contend that any mandates could force them to abandon projects and prolong the downturn in residential construction.

"This is absolutely the wrong time to proceed with this mandate," said Carol Schatz, chief executive of the Central City Association, which represents downtown businesses and development companies. "We should be doing everything we can to incentivize development, not put burdens on developers."

While the city has put incentives on the table in the past, developers say the incentives wouldn't have offset the loss of income from affordable units.

Opposition from developers and some neighborhood groups killed the city's two previous attempts this decade to craft an ordinance requiring below-market-rate housing.

Developers argued that they would drop projects in Los Angeles if such a requirement was adopted because they would lose money. Neighborhood groups feared the ordinance would force low-income housing in their communities, bringing with them an increased risk of crime and lower property values.

The key issue for most developers is to avoid citywide requirements for affordable housing.

"An incentive-based system is much more preferable to one that relies on punitive measures," said Bill Witte, president of Related Cos. of Southern California, which has developed several mixed-income projects in the region and is the lead developer on the Grand Avenue project downtown.

Affordable housing shortage

The lack of housing for low-income residents has grown increasingly acute as more rent-controlled units have come off the market, and unemployment and underemployment have increased. This has resulted in overcrowding as people forced out of their own units have doubled up or even tripled up in other units or been forced onto the streets.

Mayor Antonio Villaraigosa launched the latest drive as part of his 2008 call for up to 20,000 affordable housing units. He wants the new ordinance to require developers to set aside some units for households earning less than the county household median income of $60,000 or pay into a fund for building units elsewhere. This would qualify more people to move into any new affordable units than past proposals, which were targeted to lower-income families.

"This city has produced more than enough housing for people at the high end of the income scale, but way too little for low-income households and virtually nothing for moderate-income households," said Helmi Hisserich, the city's deputy mayor for housing. "That's why we need a mandate as one of the tools to produce more affordable housing."

However, she said the exact percentage of set-asides and the income thresholds for the affordable units remain open to negotiation and compromise.

City planners are now crafting the ordinance, which should be in draft form this fall and could make it to the City Council for a vote in spring 2010.

This time, they have changed the name of the ordinance from "inclusionary zoning" to "mixed-income housing," to better reflect the goal of having both lower and higher incomes in the same multifamily buildings. And city officials say they are making more of an effort to reach out to developers.

"We're trying to move more incrementally this time, to give us a chance to build consensus," said Jane Blumenfeld, deputy planning director. "We are also trying to be more realistic about what it costs to build housing in the city."

But so far, developers said that there has been little indication the city is moving to address what has long been their main concern: setting aside a certain percentage of their units for lower rents or prices would make their projects unprofitable.

"There's a big gap between the cost and return on affordable housing and the cost and return on market-rate housing," said Renata Simril, vice president of development for Forest City Enterprises Inc., a Cleveland developer that has built several mixed-income projects in Los Angeles, including the Metropolitan Lofts near the Staples Center in downtown. "The incentives that we have seen coming from the city don't go nearly far enough to bridge that gap."

Need for incentives

Simril and other developers said the focus should be on providing enough financial incentives so that developers can make money on their projects.

In past proposals for affordable requirements, the city has offered developers density bonuses. Those are rights to build more units than would otherwise be allowed. The city also promised to fast-track the approval process and cut fees.

But those measures might not be enough help, according to Jim Atkins, managing director in the Los Angeles office of Merlone Geier Partners, who was previously with South Group, a partnership that developed three major market-rate for-sale loft projects in downtown Los Angeles: the Elleven, Luma and Evo. Atkins, along with Simril, served on an advisory group set up by the city to study construction costs in order to prepare for the new ordinance.

While giving developers certain advantages, density bonuses make projects more expensive up front because bigger buildings cost more money.

Meanwhile, fast-tracking would require additional city staff workers and fee reductions would cost the city revenue. Neither would be palatable for the council given the current budget crisis.

Also, it's easy for the city to grant density bonuses in concept, but more difficult to deliver them: Neighborhood opposition, stirred by concerns over traffic and building height, would often prevail in the past.

Some developers have sought to avoid an affordable housing set-aside mandate. Downtown developer Geoff Palmer even went so far as to sue the city to prevent the imposition of an affordable unit set-aside for the Visconti Luxury Apartments project just west of downtown. Palmer prevailed and the Visconti was built without low-income units.

Simril said other more substantive incentives are needed. Those could include bond or redevelopment funds. She said the Community Redevelopment Agency sold the land for Forest City's Metropolitan Lofts at a deep discount in order to get the project built with some affordable units.

"You can have a mandate, but you need major incentives to make the math work," Simril said.

Hisserich, the deputy mayor, added that a number of city incentives to help developers bridge the cost gap for affordable units are on the table for discussion. Those include density bonuses, expedited permitting, discounts on land purchases for properties in redevelopment areas, and access to low-interest loans or bond monies.

Mandate 'unfair'

Atkins of Merlone Geier said he supports the goal of building more mixed-income projects in the city. But he believes a mandate would drive up the price of new market-rate housing.

"You're pushing the burden of subsidizing affordable housing on to a very small group of people, the buyers and renters of new market-rate units, instead of all homeowners or taxpayers," he said. "That's fundamentally unfair, both to these buyers and the developers of market-rate housing, which this city desperately needs more of."

But city officials said they've tried other solutions, including asking voters to support a $1 billion affordable-housing bond in fall 2006. The bond narrowly missed getting the required two-thirds majority. Former Mayor James Hahn and current Mayor Antonio Villaraigosa have also set aside general fund dollars to build up an affordable-housing trust fund. The budget crisis has temporarily stalled contributions to the fund.

"This city faces an acute shortage of affordable housing and we desperately need to do something," said Andrew Westall, deputy for housing, transportation and planning in the office of Councilman Herb Wesson, a backer of the affordable-housing set-aside ordinance. "The key is to do it in such a way that it does not impede the building of more housing."

Business leaders said a citywide mandate for low-income set-asides would hinder new housing construction.

"We oppose a citywide mandate," said Stuart Waldman, chief executive of the Valley Industry and Commerce Association. "This has to be done on a case-by-case basis and should be targeted more to areas around transit centers."

THE ISSUE

L.A. city leaders want developers to include affordable housing units in their projects or pay into a fund that would create below-market units in other projects.

THE BACKGROUND

Two proposals to create an "inclusionary zoning" ordinance in the past were defeated by developers who said they'd lose money, and homeowners who feared poverty, crime and lower property values.

THE NEXT STEP

A new "mixed-income housing" ordinance will be introduced in draft form later this year and could go to a City Council vote next year.

For reprint and licensing requests for this article, CLICK HERE.