Philadelphia city council is currently reviewing a bill (#170678), introduced by Councilwoman Maria Quiñones-Sánchez, to amend the Philadelphia Housing Code, to implement an inclusionary zoning (IZ) program called the “mixed income housing program.”

If this change in the Philadelphia Housing Code goes into effect on July 1, 2018, (per the date listed on the current version of the bill), new multi-unit developments with 10 or more units will be required to reserve one out of every 10 units for occupants who qualify as “moderate income” or “low income,” or pay a fee into the Housing Trust Fund (HTF) (referred to in the bill as “in lieu of payments”). The HTF rehabs currently existing properties in need of repair, or provides financing for new construction affordable housing.

If the bill is passed with its current language, the Philadelphia mixed housing program will apply to all new development projects with 10 or more units, whether they are rentals or owner-occupied, in the following zones: RM-4, RMX-3, CMX-3, CMX-4 or CMX-5. These units must remain open for occupancy by moderate/low Income residents for 50 years. Projects with permit applications within the above zoning classifications filed prior to July 1, 2018, would not fall under the new IZ program.

In exchange for reserving units for below market-rate residents, developers will be able to build structures taller and wider than the applicable zoning normally allows, via a loosening of zoning restrictions referred to as “floor area and height bonuses.” The intent is that the cost to developers to reserve units for below market-rate occupants (or pay the “in lieu of payment”) will be financed by the ability to build more units in larger structures. What is referred to as “floor area and height bonuses” in the Philadelphia bill is sometimes referred to as “density bonuses” in other cities.

This IZ program would not apply to development projects already using government funds to provide 51 percent or more of the units in accordance with affordability standards, projects developed by schools to provide housing for its students or employees, or units constructed within a pre-existing building.

Philadelphia already has a voluntary IZ program in place for zones RMX-3, CMX-3, CMX-4 and CMX-5. It grants floor and height bonuses to developers who set aside space in a new project for mixed income housing—as well as public space, public art, public transportation access, underground parking, environment-friendly buildings, and other types of public interest-centric development.

News articles reported that few developers in the applicable zones have actually exercised the voluntary option. The new law, if passed, would expand the applicable zones and make IZ mandatory for mixed income housing.

The current bill defines how to determine: who qualifies as a low or moderate income owner/renter; what the “in lieu of payment” would be based on the number and size of units in your development; what the rent or sale price can be for low and moderate income units; and how to calculate the floor area and height bonuses.

The benchmark to qualify as moderate or low Income is based on the average median income (AMI) for Philadelphia, which is promulgated annually by the U.S. Department of Housing and Urban Development (HUD). If a family's income is at or below a certain percentage of Philadelphia's AMI, they may qualify to live in one of these future affordable housing units.

The “in lieu of payment” will vary depending on the occupancy/type of units in the development. For example, the payment for a studio unit will be lower than a payment for a two-bedroom unit.

Also, the “in lieu of payment” required to attain the moderate-income floor area and height bonus will be higher than the “in lieu of payment” required to attain the low-income bonus.

Units reserved for low and moderate-income occupants must be interspersed with market-rate units. All affordable units must be of equal design, construction, and quality of market rate units. All occupants must have equal access to common areas and amenities, regardless of whether they are low, moderate, or market-rate occupants. For owner-occupied units, if the current owner desires to sell the unit, Philadelphia's Department of Planning and Development must be allowed the first opportunity to purchase the Affordable Unit, with 90 days advance notice.

A shortage of available affordable housing is the motivation for the new proposed law. Looking at the local rental market in particular, a January 2017, study by the Federal Reserve Bank of Philadelphia found that since 2000, a decrease in available affordable rental housing units, coupled with increasing rent prices, an influx of citizens looking to rent, and decreasing wages, have left a majority of Philadelphians spending more than 50 percent of their income on rent and utilities.

The same 2017 Federal Reserve Bank study found that almost 24,000 low-cost rental units were lost between 2000 and 2014—even while the number of overall rental housing units increased—and that most of the losses were in gentrifying neighborhoods.

Additional evidence of the affordable housing problem in Philadelphia lies in the fact that the Philadelphia Housing Authority (PHA) currently has over 104,000 people on the public housing waiting list, and is processing applications from as far back as 2004 (per the PHA website).

So, while development over the past decade has helped many and brought an influx of new residents into newly constructed or renovated units, many current citizens have been left behind.

The goals of IZ programs like the mixed income housing program would be to: help combat the affordable housing shortage in the city; allow lower income residents to remain in their gentrifying neighborhoods; and promote mixed-income integration in transitioning neighborhoods.

Other IZ programs exist in San Francisco (2002); Chicago (2003); Boston (2000); New York City (1987 for voluntary; 2016 for mandatory); and Washington, D.C. (2006). These programs in other cities vary in terms of: voluntary versus mandatory participation, applicable zones and neighborhoods (some versus all), the percentage of units required to be made affordable, the definition of “affordable,” and whether the affordability designation is permanent or expires after a certain number of years.

IZ programs are seen as valuable tools to address affordable housing shortages, because changing the zoning law does not require any direct spending to implement. Mandatory programs are replacing voluntary ones as a way to level the playing field for all developers in an area. The logic is that by forcing all developers to abide by IZ, any inconvenience of not producing market-rate units will be felt across the board.

An alternative to IZ programs like the one proposed in Philadelphia is a “linkage fee.” This is a tax on any new citywide development, where the money from the linkage fee goes into an affordable housing funding program account, similar to the HTF in Philadelphia.

Another alternative to IZ, or to be used in conjunction with IZ, is increased funding for housing choice voucher programs (formerly known as Section 8), which provide rental assistance to low income families to afford market rate rentals.

Other affordable housing programs across the country offer tax abatements instead of the density bonuses, but Philadelphia's current 10-year tax abatement has been in existence since 2000 with no additional requirements on developers.

—Francis Shannon Sweeney, a third-year student at the Temple University Beasley School of Law, who is interning this semester at Nochumson P.C., contributed to this article.

Alan Nochumson is the sole shareholder of Nochumson P.C., where his law firm's primary practice areas consist of real estate, litigation, land use and zoning, business formation and general counseling and appellate advocacy. He is also president of Bear Abstract Services, where his title insurance company offers comprehensive title insurance, title examination and closing services. He can be reached at 215-399-1346 or [email protected].