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Senate Bill 1533 – Oregon Jurisdictions May Allow Inclusionary Zoning In Narrow Circumstances

ApartmentsAs part of a four-bill package – SB 1533, SB 1573, HB 4143, and HB 4079 - the Speaker of the House, Tina Kotek used the short session to try and push housing advocates’ agenda forward, but the bills got hijacked by development interests. This post explores the so-called inclusionary zoning bill, Senate Bill 1533. Inclusionary zoning is a planning tool that requires new housing developments to offer a portion of the new units at affordable levels for purchase or rent.

Housing advocates never expected inclusionary zoning to singularly solve the affordable housing crisis, but hoped it would be one avenue to create equitable neighborhoods. The hope was to have affordable housing placed in all neighborhoods, near transit options, fresh food, and quality schools. But, at the end of the day, Oregon jurisdictions are left with little in the way of mandating inclusionary housing, except for possibly, the City of Portland.

In most inclusionary zoning programs across the country, the threshold sale or rent level is left to the local government to decide and is often set at 60% of the median family income as determined by the Department of Housing and Urban Development. Under SB 1533, affordable housing is defined as housing where rents are set at 80% or above of the median family income for the county in which the housing is built, and it is at that level where local governments can impose the affordability requirement. For example, in 2015, Multnomah County’s 80% median family income for a family of three was $52,950 and corresponded with rental limits for a two-bedroom unit of $1,323 per month. In comparison, the 60% median family income for a family of three in 2015 was $39,720 and rental limits for a three-bedroom unit were $1,051 per month. Thus, SB 1533 artificially reduces the populations that can be served by inclusionary zoning programs, and acts to exclude people who cannot afford $300 in additional rent per month.

The authorization under SB 1533 to impose the requirement to construct affordable units to offer to the 80% median family income group, requires that the new construction is a multi-family structure. The definition of multifamily structure is really where Senate Bill 1533 got lost in translation. The multifamily structure definition is a structure with three or more housing units sharing at least one wall, floor or ceiling surface in common with another unit. However, inclusionary zoning requirements can only be imposed on multifamily structures that contain at least 20 housing units. Most cities in Oregon do not support this kind of high density development occurring within single structures, and those that do will face development proposals that artificially reduce density below 20 units to avoid inclusionary zoning impacts.

Moreover, developers must be provided with the option of paying an “in lieu fee” to avoid building inclusionary units. This in lieu fee option further erodes the equity factor that housing advocates sought because the city or county is under no obligation to use those fees to create housing in particular neighborhoods. Further, the efficiencies of inclusive housing are lost when the developer – schooled in construction of housing – can add units to a project at lower cost than government funded housing developments.

In addition, SB 1533 offers cities and counties the ability to impose a construction excise tax on those projects that add new residential structures or additional square footage in an existing residential structure, in residential zones; and commercial and industrial zones. The tax may not exceed the low percentage of 1% of the permit valuation for residential construction permits. However, the funds raised through the excise tax in residential zones must be used in the following manner:

  • 50% to fund developer incentives for inclusionary zoning (which could include, but are not limited to, increasing the number of affordable housing units in a development and/or building affordable units for households who have qualifying incomes below 80% median family income);
  • 15% distributed to the Housing and Community Services Department to fund home ownership programs; and
  • 35% for programs and incentives of the city or county related to affordable housing.

Some have suggested that in those cities or counties where inclusionary zoning will never occur, the jurisdiction must still adopt an inclusionary zoning ordinance in order to adopt an excise tax for residentially zoned property, and 50% of those funds must be held aside until a qualifying project comes along. It is unclear how this provision will play out.

The use of excise tax funds raised in commercial and industrial zones are less restrictive than those funds raised in residential zones. The only restriction on the use of these funds is that 50% of the funds raised must be used for housing.

What should have been straightforward overturning of Oregon’s statutory ban on inclusionary zoning, instead became a closed loop system for multifamily developers – offering extensive incentives to entice developers to construct inclusionary units; and collecting taxes from developers and redistributing them among the very same developers through the construction excise tax. Instead of giving local governments the option to create inclusionary zoning programs that work in their neighborhoods, it is likely that only the City of Portland will be able to impose a workable inclusionary system – and it will be at least six more months before we know what the City’s program could entail.

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We regularly update clients about changes in real estate law and on industry trends. This includes briefing clients on legislative proposals in the federal tax, housing and other legal areas affecting their businesses. Staying current enables you to anticipate and prevent legal problems as well as capitalize on new developments.
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