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Photograph by Carlie Statsky
Priced Out: Gretchen Regenhardt of California Rural Legal Assistance thinks the county's definition of what's "affordable" leaves low-income people out in the cold.

Playing the Percentages

For decades Santa Cruz County resisted building affordable housing. Now that it's trying to make right, even that's going wrong. The first in a two-part series.

By Paul Wagner

On Oct. 22, attorney and constitutional law instructor Joe Ritchey made good on word he had given back on June 11 and filed suit against the County of Santa Cruz.

Ritchey's lawsuit, which addressed a recent rezoning of property he and his family own on Seventh Avenue, took a fairly common tack, arguing that the county had inadequately measured the impact the rezoning of his property would have on the environment.

What was uncommon was the rezoning itself. On June 5 the Board of Supervisors approved a measure changing 30 acres of land on seven different sites to a density common to landscaped apartment complexes. That new density, around 20 units per acre (two and a half times more dense than most suburban single-family neighborhoods), was intended to encourage the building of smaller and more affordable new housing units. It also allowed more units per acre than had been permitted in unincorporated areas for nearly 20 years. Further, the rules stipulated that 40 percent of the housing units to be built on those sites be guaranteed affordable to low- and very low-income people. This unusually high percentage would be sweetened with a pot of $15 million dedicated solely to help builders meet that goal.

Ritchey's lawsuit of October didn't address density or affordability directly, technically remaining focused on the environmental impacts. But the 40 percent requirement clearly informs the legal action. In a June 11 letter to the supervisors, Ritchey wrote: "None of the affected landowners ... I have encountered are like the untransformed Scrooge, inclined to put greed ahead of what is right." But, he wrote, they are "worried about what might be the harsh financial impact on us and other of the landowners who have been singled out." Specifically, Ritchey felt singled out for the high percentage of affordability. "It is the County that will be saying, 'Here is the price we will pay you to bail you out from financial losses caused by the government mandate that you must dedicate 40 percent of your land to affordable housing.'" And that, for Ritchey, just didn't wash.What doesn't wash for many landowners is what they see as a triple regulatory whammy: first, being ordered to build at a specific density in the first place; second, being hit with a 180-degree reversal in what the county had required for decades, which is low-density developments; and third, having to absorb the financial cost of a high-affordability requirement.That cost is substantial, given the uncomfortable current economics of building new local housing. Between the decades-long upsurge in the value of coastal land and the skyrocketing cost of every basic building material from wood to copper pipes, most housing units built locally end up costing around 300 percent of what current county residents can afford, which is why most new housing attracts wealthy out-of-towners. Even a 15 percent guaranteed affordability level is stretching the economics of new residential construction. Forty percent, to many developers, looks impossible.

Meanwhile, even as Ritchey was presenting his letter to the board, supervisors and planning staff were holding another letter, sent just two weeks prior by directing attorney Gretchen Regenhardt of California Rural Legal Assistance (CRLA), making a parallel complaint; namely, that the county's new program didn't wash for that group, either.

CRLA's letter, though, came from a distinctly different angle. CRLA'S successful legal action against the County in 2006 on behalf of low-income residents had forced the rezoning in the first place. In late spring, when Regenhardt noticed that the county was proposing an unusually forgiving method for figuring out what "affordability" meant for those seven sites, she opined to the board that the alternative figuring methods would undermine the entire enterprise. The loosening of affordability specifications would make "even this newly rezoned land"—which CRLA had had to sue to get rezoned in the first place—"unavailable to meet the needs of its lowest income residents, frustrating the purpose of the rezoning."

The rezoning as proposed, concluded Regenhardt, "will not address the deficiency in the County's inventory" of sites for low- and very low-income residents' housing. And "deficiency" is a loaded word, because a lack of sites for those populations (prior to CRLA's lawsuit, the county had none at all) is exactly what Regenhardt et al sued over in the first place. In fact, the lawsuit is still sitting on the back judicial burner, and the heat can be raised again at any time.

So the newest obstacle in the decades-old slalom course involving getting affordable housing built locally is not your grandma's concerns about hot rods and hot dog cookouts that may come with the poor, or mama's worries about hordes of potted ficus trees invading newly yuppified neighborhoods. It's about the interpretation of a percentage. And what a percentage it is.

Downzoning, Class Climbing
How percentages of affordability came to be part of housing and zoning policy is a labyrinthine tale all by itself.

Most early housing laws limited housing costs, but not placement. Vague references exist to Biblical Jerusalem's leaders pushing odorous metal smelters out of family neighborhoods, but extant text is hard to find. The Code of Hammurabi, posted in black stone in the public square in Babylon circa 1760 B.C., restricted homebuilders' fees to two shekels per sar (the size of an average garden plot), but zoning consisted solely of one informal rule: build whatever wherever, but if your building got in the way of the king's procession his chariots could knock it down without compensatory consequence. Outside of occasional royal orders to keep views from the palace pleasant, naming specific areas as zones for exact uses wasn't common practice until the industrial revolution.

And even when the upsurge in smokestack industries led European and American communities to begin separating factories from homes in the late 1800s, zoning didn't come naturally. The Supreme Court, in fact, tossed out local zoning ordinances as unconstitutional, noting that zoning could easily become a race-based discriminatory system. It wasn't until the expansive reformations of the New Deal that the court finally relented, granting localities the right to zone and identifying zoning as a police power. But like all police powers, the court warned, local zoning could not be used in ways that were arbitrary, discriminatory or contrary to public purpose.Local governments, however, ritually ignored those prohibitions, and within several years had begun to regulate, restrict and impose outright bans on entire classes of housing serving whole ranges of residents. Simple prohibitions were the most direct, so many localities just made backyard second units, multi-family apartments, and other small-unit housing illegal to build.

Less direct, but equally effective in changing proportions of race and class over time, were laws lowering density. Downzoning, as it's called, lowers the number of housing units per acre allowed to replace dwellings that have reached the ends of their structural lives. Over time, this converts neighborhoods of, say, small inexpensive cottages with small yards into neighborhoods of large pricey homes on newly combined large lots. And in the process, whole social classes, especially those of lower income, are slowly and silently replaced with those who are wealthier.The result of this process, replicated over thousands of localities, was exactly what the Supreme Court had originally feared: the system of establishing separation between uses had hardened into "exclusionary zoning."

The answer to this dilemma was, to many public policy advocates, obvious: challenge exclusionary practices—all of them—as unconstitutional. A handful of local governments, however, came up with an alternative: "inclusionary zoning." This is a policy promising that some proportion of new building be reserved for those currently being chased out. It guarantees that for some significant period of time, some lower-income residents will be able to afford to continue to live in their communities, at least in some units. And how to specify "some"? By percentage.

Too Much of a Good Thing
Specifying percentages so that they actually work is a Herculean task. It's such a headache that Oakland—one of the cities most in need of affordable housing—is only now considering adopting an inclusionary requirement, some three decades after many communities, including Santa Cruz County, put them into place.

The reluctance to specify percentages comes from many sources. Builders resist them due to lowered profits in an already risk-filled industry. Buyers in new developments oppose them because the costs of supporting affordable units raise their own purchase prices. Anti-regulatory residents oppose them on general principle. And two strictly practical matters also intrude. On one hand, it's easy to under-require, which produces little benefit in return for the high administrative cost of monitoring the limits. On the other, it's easy to over-require, which can shut down housing production altogether. Watsonville learned that lesson the hard way.

"Our inclusionary requirement was 25 percent for 10 years or so," recalls city of Watsonville principal planner Keith Boyle, of the city's ambitious early '90s affordable housing requirement.Ambition, however, is not necessarily success. "We got no housing built," Boyle says. So even as the city's population expanded, its housing stock remained moribund, prices skyrocketed, and overcrowding became troublingly common. That led to a wide community dialogue in the year 2000, one in which many residents participated. Many wanted more housing. The outcome is that the 25 percent requirement was taken off the books in 2001 and replaced with the more commonly used 15 percent.

That reduction apparently did the trick. "We've gotten around 1,750 units built since," Boyle says. And the number of guaranteed affordable units produced is even greater than what the former regulation required: 500, or about 29 percent. Requiring less produced more, Boyle, notes, due to a snowball effect: "Once projects started being built again, builders were able to get financing. And between financing and tax credits, newer projects began piggybacking off the success of others." New housing construction—including several award-winning near-zero-energy subdivisions—has been roaring ever since.

Looking back at the 25 percent inclusionary policy, Boyle observes, "It wasn't a very successful experiment. It's better to have the housing than not have the housing." Boyle also offers a stark assessment of what will occur in any locality that requires a high percentage of affordable housing: "It won't happen. Nobody will build it."Which is perhaps why other localities such as the city of Santa Cruz keep their requirements far lower than Watsonville did in its ambitious 25 percent phase.

"Our inclusionary requirement is 15 percent for all residential development," notes city of Santa Cruz planning director Greg Larson. The requirement is flexible, too: while the city encourages the units to be built on-site, builders choosing not to do so may pay into a fund that subsidizes affordable units elsewhere, such as the Salz Tannery project.The only exception to the city's 15 percent affordability requirement is for the very smallest, most densely built for-sale housing; namely, Small Ownership Units (SOU) units, which are in the 400- to 650-square-foot one-bedroom range. They're required to provide 30 percent of new units at a guaranteed affordability level to moderate-income residents.

Given that housing construction may well shut down entirely when 25 percent of units must be affordable to those of median income and below, there appears to be only one way a 40 percent requirement can work, and that's for someone—usually government or a nonprofit organization—to toss in a huge subsidy.

Norman Schwartz, whose Bolton Hill Company produced the first-ever for-profit 40 percent affordable project several years ago, has seen that for himself. Schwartz coordinated the two-site 1010 Pacific / Schaffer Road project, in the city of Santa Cruz, both of which offer guaranteed affordability for 40 percent of their all-rental units.

Schwartz says the project demanded "funding source after funding source" to pull it off, and a combination of private commitment and public funds that isn't easily replicated. Even with subsidies, Schwartz says, "Forty percent is hard to accomplish." For one thing, in smaller markets, builders can simply hop to the next town where requirements are lower. "Why would someone do that when they can go to neighboring jurisdictions and build at higher density with only 15 percent affordability required?"

Mr. Housing
So from the perspective of many landowners, builders and backers, 40 percent guaranteed affordability is burdensome and unachievable. From the view of those promoting a socially stable community, it's an entirely justifiable standard given the county's long pattern of violating the rights to "the enjoyment of residence, landownership, tenancy, or any other land use" guaranteed to all state residents, including those of lower income.Sitting in the middle of these divergent views is county Planning Director Tom Burns, perhaps the most activist director in recent decades. Burns has, in his few years in office, worked assiduously to scrape away the layers of barnacles accumulated on a creaky county planning process. By carefully loosening severe strictures on building, he's gotten the county its first provisional state approval of its overall housing plan since 1985, shepherded nearly two dozen significant regulatory relaxations through the board of supervisors, and led the entire rezoning project. Burns sees the 40 percent requirement from a different angle. Asked about Boyle's prediction that such a high requirement might quash all new residential building, Burns cites a wider perspective."I would agree," he says, "if we were doing this under an ordinary program." But he believes that the $15 million the board of supervisors has set aside specifically to subsidize that unusually high inclusionary requirement will make a huge difference, and so will the flexibility of the ordinance.

"To keep ourselves honest, we assured builders that if we couldn't meet financial requirements"—that is, make up the difference in what the county's standard 15 percent affordability requirement would cost a builder and what the special 40 percent requirement would cost—"their affordability level will go down." In short, Burns says, "We offer an out." If a builder says the 40 percent goal is impossible to reach, the builder can petition the board of supervisors for a subsidy. If the board turns the builder down, or if the subsidy is insufficient to close the financial gap, many of the units can revert to market-rate price.

Only to a certain point, though, Burns says. "Fifteen percent is the requirement no matter what."

Good Intentions
The state of California, Burns observes, requires none of this to certify local housing elements (the locality's general approach to housing) as compliant; state housing officials "could care less whether there are any affordability requirements at all." While the state's Housing and Community Development Department (HCD) has long lobbied for a far higher local commitment to affordability, the state legislature settled a longstanding fight between HCD and suburban localities by simply specifying a minimum density of around 20 units per acre, on some minimum acreage in every community, as proof of local intent to allow smaller, more affordable dwelling units. In Santa Cruz County the state wanted to see least 30 acres of land rezoned to that density, which, given the county's relatively small average parcel size, demanded seven different sites.The complete lack of inclusionary units on the higher-density sites concerned Burns and planning staff. "We went to the board and said, 'This didn't sound right,'" Burns says. The staff proposed the 40 percent inclusionary requirement, which the board of supervisors passed on June 5, and which prompted Joe Ritchey's Oct. 22 lawsuit.

That total package, including the 30-acre rezone, earned the county its first provisional housing element approval from the state since 1999—and access to millions of dollars in state housing and emergency relief funds each year.But there's a twist: in order to get landowners, builders and for-profit developers—in short, anyone besides nonprofit housing developers, who are few and far between—to sign up to work with the 40 percent requirement, Burns and the county had to change the very definition of "affordability" itself.
Part II of 'Playing the Percentages' will follow next week.

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