In October of 2020, the City of New Orleans considered an ordinance that would required affordable housing in its core districts, including the French Quarter. To assess the economic effects of this reform, both on affordable housing in the city and also on the city’s fiscal outlook, I took a closer look at the proposed ordinance and created a fiscal note.

Summary:

The ordinance, Calendar Number 33,113, would designate inclusionary zoning districts on the official zoning map of the city of New Orleans, applying to several neighborhoods in the city core, central business districts, and other high-demand areas in the heart of the city. The ordinance mandates affordable housing in properties and offsets the anticipated supply reduction with regulatory relief for property owners. We expect the overall fiscal impact of the bill to be a decrease in property tax revenues on the order of 0.2% of the current tax revenue raised in the inclusionary sub-districts (about $306,098 in 2020).

Background:

The intent of this inclusionary zoning ordinance is to increase the supply of rental and homeownership units available to low-income households. It does so by mandating that a certain percentage of units in all residential developments with ten or more dwelling units be permanently set aside at lower prices. Residents of these set-aside units must demonstrate incomes below thresholds based on Area Median Income (AMI).

Providing a larger quantity of affordable housing is a pressing goal for the city as real estate prices in the city’s historic core rise. The French Quarter and its surrounding neighborhoods were once centers of working-class communities. But today, housing in those areas is increasingly unaffordable to the city’s low-income residences. In particular, short-term rental services like Airbnb have created new incentives for property owners to transfer units from the long-term rental market to the short-term rental market that caters to the area’s vibrant hospitality economy.¹

Implementation

This proposal designates two tiers of inclusionary zoning, Core and Strong, based on the strength of the residential markets in the areas (see Figure 1). Properties in the Core areas are more profitable to develop and therefore raise more revenues from market-rate units, which they can use to offset the decreased earnings from the mandated inclusionary units. In Core districts, new developments and buildings undergoing substantial renovations must contain 10% on-site affordable units. In Strong districts, development is less profitable and so the ordinance only requires 5% of units to be affordable.

The affordable units are restricted both in resident income and rental price. In both districts, the maximum resident income would be 60% AMI. The pricing of these units must be affordable to households making 50% AMI. The general standard for housing affordability (as maintained by HUD) is that no more than 30% of a household’s gross income should go towards rent or mortgage payments. We present the resulting income limits and maximum rental prices in Table 1.

Household Size	Resident Max. Gross Income	Max. Monthly Rent/Mortgage Payment
1	$29,580	$616.25
2	$33,840	$705
3	$38,040	$792
4	$42,240	$880
5	$45,660	$951
6	$49,020	$1091

New Orleans is pairing this new requirement with two regulatory reform measures for property owners:

1. A density bonus, which allows property owners to fit more units in their buildings by lowering the minimum dwelling unit area by between 30% and 50% (the latter permissible as long as the building remains within the height and floor area ratios permitted by its zoning district)
2. Reductions in parking requirements between 10% and 30% (the latter permitted on a case-by-case basis)

Table 2 summarizes the regulatory changes for owners of properties of more than ten units in the Inclusionary Zoning sub-districts:

	Inclusionary Zoning Unit %	Density Bonus	Parking Relief
Core Sub-Districts	10%	30%-50%	10%-30%
Strong Sub-Districts	5%	30%-50%	10%-30%

Finally, the bill would permit building owners to make a payment in lieu of constructing the affordable housing units. The city reserves the ability to determine the exact amount of the fee and must set it high enough to ensure that it does not become the default, which would undermine the program’s objective to harness the power of the private housing sector to create affordable units in the central business districts. HR&A Advisors recommends this payment be set at $291,000-$305,000 per affordable rental unit and $366,000-$383,000 per affordable homeownership unit.

Market Considerations:

As noted in Table 2, the ordinance entails three overlapping regulatory changes. The net effect will depend on the relative impacts of the three regulations. To tackle this, we treat them one at a time in isolation, then synthesize the findings in a final fiscal summary.

Parking and Density Bonus

The overall effect of the parking and density bonuses will be to increase the quantity of housing units in the affected zones while decreasing their price. In economic terms, these regulatory changes represent shifts in the supply of housing units (Figure 1)

Figure 2 shows how this operates. P₀ and Q₀ represent the “free market” equilibrium of the real estate market: a market with no regulations at all. In the status quo, regulatory costs (parking and density restrictions) have raised unit costs cost (red arrow), which decreases the quantity of housing provided while raising its price (P₁ and Q₁). The ordinance would reel those regulatory costs back (green arrow), leaving us at the intermediate quantities of P₂ and Q₂. This point indicates unit prices higher than the pre-ordinance status quo and a lower quantity of units than had existed in the status quo.

Before quantifying the value of the parking bonus, it is worth noting it will not benefit most of the area covered by the inclusionary zoning policy, as most of those areas are already exempt from off-street parking requirements. Only residences in the Historic Marigny/Tremé/Bywater Commercial District (HMC-2) and Mixed-Use District (HM-MU) are required to meet the current parking space per dwelling unit requirement. However, the expected benefits in those areas are substantial. The literature estimates the per-unit cost of providing a parking spot in an urban area to be $33,700. A 10% reduction therefore corresponds to a reduction in the regulatory burden of about $3,370 per dwelling unit.

The new Inclusionary Zoning requirements would have the effect of raising prices for HR&A Advisors estimates the value of the density bonus to be about $28,850 per unit. This means that the overall reduction in regulatory costs due to the parking and density bonuses combined is $28,850 per unit except for the Historic Marigny/Tremé/Bywater districts where the reduction in regulatory costs will be about $32,220 per unit.

Inclusionary Zoning

The new Inclusionary Zoning requirements would raise the prices and decrease the quantity of market-rate units while also increasing the quantity of price-restricted affordable units. Figure 3 shows the general effect of inclusionary zoning.

First, the ordinance would impose a higher quantity of low-priced units on developers (the green lines at P_I and Q_I highlight that requirement). As a result, the original equilibrium price of housing (P₂ and Q₂) splits into two prices, one for market housing units (P_M and Q_M) and a lower price for inclusionary housing units (P_I and Q_I). The yellow region represents the cost to developers, who will be required to lease affordable units at lower prices than they want to accept.

Next, the supply curve will shift upward as landlords reduce their provision of housing in response to higher costs. The red region corresponds to the portion of deadweight loss due to this shift that will be borne by developers. Of course, developers will likely continue to generate some surplus value (shaded in blue).

At some point, the producer’s marginal surplus from renting an additional market-rate unit will equal their marginal cost due to the inclusionary unit requirement. That balance will determine the final amount of market-rate housing provided in the market.

Fiscal Considerations

HR&A Advisors’ analysis implies that the net result of the market considerations will be a decrease in housing supply growth in the target areas. While HR&A expects multifamily housing developments to remain feasible and profitable in the Core districts, they expect multifamily housing feasibility to become borderline in the Strong districts.

This slowing supply growth is likely to affect city finances by decreasing the basis for property taxes. In addition, developers are likely to change their design plans in response to the policy. To close the budget shortages caused by the affordable units, most developers will need to take advantage of the 30-50% density bonus by building more units per project, with each unit somewhat smaller than the historical average. Small units have lower assessed values and generate less property tax revenue.

As summarized in Tables 3 and 4, in 2020 the city should expect about a 0.2% drop in property tax collections in these districts, from $137,257,765 to $136,951,667. Although this drop is small, it will compound over time. The policy will apply to virtually all new housing built in the Core and Strong districts into the foreseeable future. That means a growing proportion of the housing stock in these areas will be taxed at lower assessed values as more housing comes online. So over time, the “lost” property tax growth due to the ordinance will mount.

In the analysis presented below, I make the simplifying assumptions that all residential buildings have the same market value and that the inclusionary zoning requirements will impact all of them – that is, none of them will be exempt, nor will they opt for the payment in-lieu option. One uncertainty in this analysis is the policy’s impact on multifamily development in the Strong districts. If rents grow in these areas, multifamily projects will become more financially feasible. More units will mean higher city revenues. However, if rent growth slows, the city should expect new multifamily development in the Strong districts to stagnate, limiting property tax growth.

Conclusion

In summary, Calendar Number 33,113 will have two important fiscal effects:

1. Housing unit supply growth is likely to underperform the historical average in Strong regions; and
2. New residences built in the Core and Strong areas will have more units, but each unit will pay lower assessments to the city than we would otherwise expect.

In 2020, the city should expect about a 0.2% drop in property tax collections in core and strong districts, from $137,257,765 to $136,951,667. Most of these losses will occur in the Strong districts. We expect property tax revenues in core districts to continue their historical growth. However, the policy’s effect on the Strong districts is a point of uncertainty, and the city should periodically revisit its inclusionary zoning maps to ensure the policy continues to balance affordable housing goals with the city’s revenue needs.

Current Revenues
	Core	Strong	Total
Market Value	$ 523,300	$310,700
Assessment Ratio	0.10	0.10
Assessed Value	$52,330	$31,070
Tax Rate	$145 per $1000 of AV	$145 per $1000 of AV
Tax	$7,588	$4,505
Effective Rate	0.0145	0.0145
Households	8,475	16,193	24,495
Total Tax Revenue	$64,308,300	$72,949,465	$137,257,765

Revenues Under Inclusionary Zoning Ordinance
	Core	Strong
	Market	Inclusionary	Market	Inclusionary	Total
Market Value	$523,300	$313,980	$310,700	$186,420
Assessment Ratio	0.10	0.10	0.10	0.10
Assessed Value	$52,330	$31,398	$31,070	$18,642
Tax Rate	145 per $1000 of AV
Tax	$7,588	$4,553	$4,505	$2,703
Effective Rate	0.0145	0.0145	0.0145
Number	8,416	84	16,079	100	24,679
Tax Amount	$12,225,417	$1,048,132	$13,528,625	$579,202	$27,381,378