What’s wrong with fees-in-lieu?

One of the tools the city of Austin uses to promote affordable housing is a “density bonus.” The city provides a developer additional entitlements (more units,¬† greater height etc.) if the developer agrees to provide a certain amount of “affordable” housing (units restricted to people at certain income levels). But sometimes, if the developer says they can’t provide affordable units on-site, the city will accept a “fee-in-lieu” that it will use to build housing elsewhere.

The city has a variety of density bonus programs, some of which have produced a lot of housing, and others that have produced a lot of fee revenue. As Phil Jankowski reported in August:

According to a 2016 city report, density bonus programs had generated $4,831,364 in fees and 1,653 affordable units overall. Nearly half of the units were built in West Campus, and many house students attending the University of Texas. The downtown density program had generated $2,352,960 in fees but had produced zero affordable housing units.

There are two reasons that a lot of people aren’t fans of the fee-in-lieu option. While the top goal of density bonuses is to to create affordable housing, a second important goal is to¬†promote mixed-income housing. Austin, by some estimates, is one of the most economically segregated cities in the country. A fee-in-lieu doesn’t necessarily serve that second goal, especially if the money is used to build traditional public housing that is geared exclusively towards low-income people. Public housing does a tremendous amount of good, but it can also entrench segregation.

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Texan North Campus apartments on N. Lamar. A market-rate development that includes some income-restricted units.

Another criticism of fees-in-lieu is that if developers are choosing to pay them instead of providing on-site housing, it’s probably because it’s simply cheaper. And if that’s the case, the city is not getting what it bargained for.

Finally, fees-in-lieu create more work for the city. Even if the price is fair, it still means the city has to invest staff time finding a way to use the money.

Of course, there are times when it’s tempting to forgo on-site housing. The developer could offer to provide off-site housing somewhere where land is cheaper and where it can provide more units. Or it could provide the funding necessary for the city to do that. Again, that leads to balancing the dire need for housing with the need to reduce segregation.

Public policy is tough.

A key part of CodeNEXT was to develop a new density bonus program that would apply to a much greater portion of the city. In the weeks before Council voted to scrap CodeNEXT, a familiar discussion about what the bonus program should do emerged, with Mayor Pro Tem Kathie Tovo stressing that she wanted developers to provide on-site housing, and consultants and city staff cautioning that if the program demands too much, developers simply won’t participate. We’ll see what happens as Council gears up for another attempt to overhaul the land development code.

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