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Madison doesn't need rental inclusionary zoningBy Nancy Jensen
As debate centers on repeal or repair of the ordinance, there are significant underlying issues from the rental housing perspective that need to be recognized and given ample consideration. The Apartment Association of South Central Wisconsin (AASCW) recently completed a report on vacant and affordable rental housing generated by the private multifamily housing industry in Madison. The report compiles utility and marketing data from Madison Gas and Electric, Capital Newspapers and Start Renting for 2003, 2004 and 2005, and reveals a huge quantity of vacant, affordable market-rate rental properties available in Madison. At least half of these vacant units rent for at or less than the regulated IZ rents. Recent MGE data show vacancy rates in Madison conservatively average 7.03 percent, ranging from 3.28 percent to 12.23 percent in ZIP code areas throughout the city. These are conservative numbers that do not include multiple units in a property with one utility account, often found in student housing. Of great significance in any discussion of need are recent data for the second quarter of 2005, which show Section 42 subsidized rental properties in Dane County have an overall vacancy rate of 8.3 percent, and a 10.4 percent vacancy rate for all family properties! About 2,200 of these income-qualified, rent-subsidized units are in the city of Madison. The city has never performed a "needs study" to support a true need for IZ rental housing. We firmly believe there is no need for IZ rental units; the private sector provides a more than adequate inventory of moderately priced (the rent ranges targeted by the IZ ordinance) rental housing for the community. Although the number of approvals of new projects containing IZ units is held up as proof of success, the reality is that very few have actually been constructed, even fewer sold and except for the start of a new student apartment housing project, there are no IZ apartments under construction. Why? Aside from lack of need, restricted income on a property has a direct impact on that property's value to a purchaser. Rental housing is investment property. By capping not only the income of the renter of an IZ apartment, but also creating rent control by capping the rent that can be charged, the net operating income (NOI) is essentially restricted by IZ, unless the owner shifts the costs to the other residents, which makes the housing less affordable for most of the residents in the property. NOI is essentially the amount of money available to the property owner for debt service and major repair and rehab expenses. The cap rate goes up and down, depending on the demand for the specific property and general market conditions. If there is a limit on the income growth potential of the property (which is what IZ does), a purchaser will discount the price he/she is willing to pay to reflect "lost" future income. It's important to remember there are no corresponding caps on property expenses, such as property taxes, insurance premiums, utilities and labor costs. Frankly, who would want to buy an IZ rental property with the revenue capped in a percent of the units, while expenses continue to increase year after year? IZ essentially places a lien on a property, diminishing its value. Although the IZ ordinance overlooks this fundamental premise, developers, investors and lenders can't afford to. And as an unintended and overlooked consequence, because of restricted future income and unrestricted future expenses, if expenses outpace income, the IZ property owner may not have the capital to spend on property improvements, leading to a deterioration of the property's condition, a bad thing for the property's hapless owner, the residents, lenders and the community's housing stock. Of course this can happen in a free market system anyway, but for the government to encourage this negative situation is inappropriate. IZ creates limited value and resale interest for rental properties. It raises developer risk and limits investment and finance opportunities. There are valid reasons IZ apartments are not being built in Madison two years into this ordinance, yet apartments continue to be proposed and built in surrounding communities. Sustained low interest rates, lack of demand from Madison's moderate-income sector (the IZ target), slowed increases in student population - all have contributed to a drop in the renter market. But at the same time, developers build for the future, and low interest rates favor continued development of apartments, which is not happening in Madison. It's not that apartment projects are not on the drawing boards; they are. But the IZ requirements make them financially unfeasible. We believe we don't need government trying to fix a problem that doesn't exist. And, we have seen no local data to support a need, now or in the future, for IZ rental units. The Apartment Association report documents, from very reliable and conservative sources, that there is ample affordable rental housing throughout Madison - it's just not all new or Downtown. madison.com ©2009 Capital Newspapers. All rights reserved. |
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