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Inclusionary housing bill would curb new home construction in Baltimore

A bill before the Baltimore City Council that aims to increase the number of new housing units built specifically for low-income residents, known as inclusionary housing, could end up having the opposite effect and even has the potential to stifle any major new housing construction in the city if passed.

The proposed legislation essentially would strike most of existing law and replace it with a set of new requirements that builders must meet for housing developments in the city.

It’s important to keep in mind that all of this is transpiring with the city grappling with a decades-long drain on its population. The city has lost about 300,000 residents since its population peak of 950,000 in the early 1950s and there’s no sign it’s stopping.

Here’s a look at some of the new provisions in the bill.

  • The law would apply to all residential projects of 20 or more units that are either new, completely renovated or converted from a non-residential building where the per-unit cost is $60,000 or more. Current law applies to 30 or more unit projects that receive a “major public subsidy.”
  • The proposal would require that at least 10% of the units be “affordable units, compared to 20% under current law.
  • Notably, the proposed bill would require that 50% of the affordable units must be for low-income households, which in Baltimore means those making between 51%-80% of the average median income (AMI). In 2019 that was about $30,000. The other 50% of the units must be for moderate income households, which is defined in the law as those making between 81% and 120% of AMI. Current law has a tiered system for the number of affordable and inclusionary units based on whether the unit is a rental or ownership and where a renter or buyer falls on the AMI scale.

The goal of the proposal is commendable – increase the stock of low-income and affordable units in otherwise market-rate projects. This in turn would support racial equity, social justice and community connections as projects are occupied by a demographic mix of residents.

Under the city’s current Inclusionary Housing Program, developers can seek funding from the city to help offset the difference between what it costs to build or convert each unit and the lower or negative margin the builder would receive from designating it strictly for low-income households, which pay lower rents.

Herein lies a deep flaw in the current law. The city has rarely offered this financial incentive to developers because it has never been funded. Instead, developers have invariably been granted waivers by the city to the inclusionary housing law. But according to one news report, that doesn’t seem to have done much good as only an estimated 40 affordable units have been built in the past 14 years.

A key flaw

In fact a consultant hired by the Baltimore Department of Housing & Community Development to develop recommendations to improve the city’s inclusionary housing law pointed out this lack of program financing as a key flaw.

An interim report issued by the consultant, Enterprise Community Partners, in October 2021 states: “The current inclusionary housing policy sets ambitious affordability goals but is limited by funding constraints, along with overly complicated administrative and programmatic requirements. This implies that realizing the full potential of the current policy would require identifying additional sources of funding for the City to support the increased cost of the policy.”

The interim Enterprise report also recommended that the city move to a more traditional program that offers such incentives to developers as property tax credits to offset the costs of inclusionary units.

The report also concludes that housing development in the city is already challenging due to high development costs, driven in part by the city’s high property tax rate. Bottom line: It’s tough for developers to make a reasonable profit margin even without the inclusionary housing requirements.

Unfortunately the proposed bill makes no mention of this challenging environment or designating a specific funding source to provide enough incentives to make it financially feasible for a private developer to move forward with a major housing project. Nor does it propose traditional incentives, such a property tax credits.

It’s not clear why the sponsors of the bill ignored the Enterprise report nor waited for Enterprise to issue its final report before drafting a bill.

It all seems like putting the cart in front of the horse to more than a few builders and developers who are deeply concerned about the impact the legislation could have should it be passed by the council and signed by the mayor into law.

The prediction of some in the industry is that major new housing developments in the city will all but cease.

In a letter to the city late last year, The Maryland Building Industry Association, which represents 1,100 companies statewide, offered to work with Enterprise and the city to assess whether any specific new incentives would work financially for developers and thus ensure the city a supply of inclusionary housing comes into the market.

That seems like a reasonable step in due diligence for a bill that could have a significant impact on the city’s new housing stock and by extension the overall attractiveness of Baltimore as a place to live at a time when the city is struggling to find ways to stem a decades long population drain.

It’s clear the city’s current law needs an overhaul as it is not working. But the city council should table this proposal and instead get to work collaborating with the business community, developers and other stakeholders to find a solution that will spur inclusionary housing development and thereby benefit the city in the long-term.

Donald C. Fry is president & CEO of the Greater Baltimore Committee.