THE MODERATELY PRICED DWELLING UNIT PROGRAM

MONTGOMERY COUNTY, MARYLAND'S INCLUSIONARY ZONING ORDINANCE

Program Summary and Background

Montgomery County, Maryland is located immediately north and northeast of Washington, D.C. It is the most populous County in Maryland with a population in 1996 of approximately 819,000. During the 1970's and 1980's, the County changed from a bedroom community for the central city to the region's second largest employment center. More than 60 percent of the County's residents work in the County.

Beginning in the early 1970's, a shortage of housing affordable to low and moderate income households occurred in the County. In addition to a large increase in young families looking for housing, this situation was exacerbated by a number of other conditions. Controlled growth policies enacted by the County government made it difficult for developers to subdivide raw land into residential lots. The installation of public infrastructure such as water and sewer lines, schools and roads did not keep pace with the demand for housing. The County instituted a sewer moratorium in 1972 that significantly restricted the number of new water and sewer house connections that were permitted.

Because the demand for residential building lots greatly exceeded the supply, prices increased at a rate much higher than general inflation. As the events curtailing the availability of building lots occurred, builders saw a reduction in their housing output. They began constructing the largest and most profitable houses on virtually irreplaceable building lots. The increasing costs of new houses also caused the price of existing housing to increase. Even with deflationary house prices over the last 2 or 3 years, this situation has not improved; it is still difficult for new and young families to find housing in the County that they can afford. The median price of a new single-family detached home in the County in 1996 was $312,500, and the median price for a new single-family townhouse was $189,500. The average turnover rent in April 1996 for a market-rate, two-bedroom apartment was $820.

In the early 1970's, housing advocacy groups such as the Suburban Maryland Fair Housing and the League of Women Voters began discussing the inadequacy of the County's supply of affordable housing. These groups recommended the concept that builders should supply a percentage of all units in new residential developments at prices that would be affordable to low and moderate-income households. The County Council introduced a local legislative bill that proposed an innovative, County-wide inclusionary, zoning and density allowance program known as the Moderately Priced Housing Program. The legislation proposed that builders of most residential housing make a portion of the housing units available at below-market rate sales prices or rental rates.

The proposed legislation raised a number of questions. One of the most important issues dealt with the constitutional question of whether this requirement constituted a taking of property without compensation. Another issue dealt with the implications of the government requiring owners of expensive homes to live side by side with moderate and low-income neighbors. Real estate appraisers raised the question of what economic impact affordable units would have on the value of the more expensive homes in the subdivision. A corollary concern was whether higher income buyers would choose not to purchase homes in Montgomery County in favor of other Washington suburbs that did not have an affordable housing requirement. An alternative proposal was submitted by home builders that would allow a developer to fulfill the affordable housing requirement of a subdivision by constructing the units at another location.

The County Council worked on the legislation for over a year. As a solution to the question of an "unconstitutional taking", the Council revised the bill to provide bonus densities to builders who constructed the required moderate income housing. A major debate occurred over the contention that giving bonus densities would undermine the planning considerations which went into designating zoning densities which were adopted in the County's general plan and in local area master plans. Builders suggested that, if the County were to give the density bonus, this would be sufficient incentive to make it unnecessary for the program to be mandatory.

The bill with a number of major substantive amendments was unanimously approved by the County Council on October 23, 1973. The legislation required that 15 percent of the total number of dwellings in every subdivision containing 50 or more units be affordable to moderate-income households. The total density of the subdivision could be increased by 20 percent. An amendment gave the County's public housing authority (The Housing Opportunities Commission-HOC) the right to purchase one-third of the moderate priced units produced in each subdivision. These units would be used for the Commission's own programs for assistance to low-income tenants.

The County Executive vetoed the legislation because he believed it to be unconstitutional, invasive public policy, and too difficult to administer. On November 6, 1973, the Council overrode the executive veto and the Moderately Priced Housing law became effective on January 21, 1974. Because land previously subdivided did not contain the bonus densities, these subdivisions were exempt from the requirement. The first moderately priced dwelling units (MPDU's) built under the program were offered for sale to qualified purchasers in 1976.

The MPDU program is believed to be the country's first mandatory, inclusionary zoning law that specified a density bonus allowance to builders for providing affordable housing. The density bonus was designed to preclude developers from losing opportunities to build market-rate units and to help offset some of the production costs of the MPDUs. The law presently requires that between 12.5 and 15 percent of the total number of units in every subdivision or high-rise building of 50 or more units be moderately priced. The law is applicable to property zoned one-half acre or smaller. Subdivisions in large lot zoning categories, which are not normally served by public water and sewer, are exempt from the requirement because higher densities are difficult to achieve when installing well and septic systems. The zoning ordinance allows a density increase of up to 22 percent above the normal density permitted under the zone. The ordinance also allows some attached housing in single-family zoning classifications so that optimum development of the property can be achieved and less costly housing can be constructed. The density bonus, in effect, creates free lots upon which the MPDUs are constructed. The builder normally obtains some additional market rate units equal to the difference between the density bonus and the MPDU requirement. Because of physical constraints of the land, the full density bonus cannot always be obtained; the MPDU requirement, therefore, falls within a range of from 12.5% to 15.0% based on the actual bonus density achieved.

The County imposes certain resale and occupancy restrictions on the MPDUs when the completed units are sold. The price for which the unit can be resold is controlled for 10 years. The MPDU must be owner-occupied and when the unit is first sold at market price after the control period expires there is a split between the County and the owner of any "excess" or "windfall" profit obtained through the sale.

Program Goals

The goals of the MPDU program are:

The average annual MPDU production rate is about 250 units with an additional 200 units resold under the 10-year price controls. Because of the high demand for the MPDUs, the County conducts lotteries to select potential purchasers of the units in each offering. The units range in price from $60,000 for a 1 bedroom condominium to approximately $110,000 for a 3 bedroom detached house with a basement and garage.

Program Administration and Funding

Operation and administration of the program takes place within a unit of the Housing Division of the County's Department of Housing and Community Affairs. The section includes a program manager, a program specialist, one planning assistant and two administrative aides. Operations are overseen by the Chief of the Housing and Code Enforcement Division. The current annual operating budget for the MPDU office is approximately $400,000 which includes salaries and fringe benefits for the staff, office space, printing and postage, computers and telephones. Funding is through the County's general operating budget.

The program is established under County zoning legislation adopted by the County Council and approved by the County Executive. Certain program requirements such as income limits, maximum sales prices and rental rates are set through executive regulations developed by the Department, and approved by the County Executive and the County Council.

The program's implementation involves both the public and private sectors; the local government in regulatory and administrative functions and the building industry as the producer of the housing. Builders must subdivide their land, obtain building permits and construct the units. They notify the MPDU office when units are to be offered for sale or rent. The Moderately Priced Housing Office certifies the eligibility of individuals and families who want to purchase or rent units under the program, enters into agreements with builders for staging the construction of the units, establishes the MPDU sales and rental prices and oversees the selection of potential buyers and renters through a lottery selection process. The MPDU section also enforces the occupancy and resale provisions of the law and oversees the resale of existing units.

Funding for HOC's acquisition of MPDUs comes from a variety of sources, including federal acquisition-without-rehabilitation program funds, local tax exempt bonds, private sector investment in federal low-income housing tax credit partnerships, and from funding through the Maryland Housing Finance agency.

Evolution of the Program

There have been a number of changes in the program since its inception. The original MPDU legislation required that 15 percent of the total number of units in the subdivision be MPDUs, with a density bonus of 20 percent above the normal zoning category. Controls on the resale price and rental rate of the MPDUs lasted for 5 years and the units were for sale or rent as determined by the builder.

In 1981, after five years of experience with the program, the building industry requested that the MPDU requirement be reduced to 10 percent of the units in the subdivision because they believed the 15% requirement was excessive. The County Council compromised by reducing the requirement to 12.5 percent, but enacted two other amendments that strengthened the program. The price control period was extended from 5 years to 10 years, and all MPDUs had to be for sale unless they were located in an all rental subdivision.

A committee composed of builders, staff from the County's planning agency, Housing Department staff and members of the County Council studied the program again in 1988 and recommended substantive changes that were adopted into law in 1989. The major changes: (1) increased the bonus density to 22 percent; (2) based the MPDU requirement on a sliding scale ranging from 12.5 percent to 15 percent depending on the bonus density achieved; (3) increased the rental control period to 20 years; (4) required that a portion of the appreciated resale price of an MPDU sold after the expiration of the price control period be paid into the Housing Initiative Fund; and (5) permitted an increase in the MPDU sale prices to enable builders to pay for improvements in the design of the MPDUs to make them more compatible with the market rate houses. Another major amendment provided for alternative methods of meeting the MPDU requirement when the units are not affordable because of high condominium or homeowner's association fees and where the services provided cannot be eliminated or modified for the MPDU residents. An example would be a luxury high-rise, condominium building. The alternative program permits the developer to make a payment to the Housing Initiative Fund or provide units at another location; the alternative must result in more units or units that are more affordable. Use of this provision is limited and has only been allowed six times since 1989.

The County Council recently passed amendments to provide greater enforcement powers to the MPDU Office as a means of dealing with the occasional abuses of the law. MPDU owners have occasionally vacated their units and rented them without permission or the MPDUs have been sold during the resale control period for prices greater than allowed. A change in the applicability section of the law may be considered to expand its scope to include one-acre zoning classifications when the property is served by public water and sewer.

Program Acceptance and Criticism

The MPDU program has received broad general support in Montgomery County. New home buyers are among the most vocal supporters because the program makes affordable housing available to persons who otherwise would not be able to purchase a house in the County. Employers and businesses are helped because the program makes housing available to entry level and mid-management employees. Affordable housing organizations and citizens= groups advocate for the program because it provides for a wide geographic distribution of low and moderate income housing which encourages economic and racial integration in the County. Elected officials back the program because of its low impact on any given community or neighborhood and because the program does not require a large financial investment by the County. Although, in the past, builders expressed objection to some of the procedures and regulations, they are generally supportive of the program and have made numerous suggestions for its improvement.

The most likely critics of the program are those who advocate no growth or slow growth because the program offers increased densities in existing zones. The MPDU Program has been criticized for causing additional congestion on County roads, and requiring more funding of County facilities, infrastructure, and services. Because the units are not assessed at the market price, "fairness in taxation groups" has criticized the program because MPDU owners do not pay a fair amount in property taxes relative to the amount of public services they receive.

It would be expected that criticism of the program would come from the communities in which the low and moderate cost housing is being built. This criticism has rarely occurred because the program is equally administered in all parts of the county and, if properly designed, only a small portion of a subdivision is built as low or moderate cost housing. The criticism that does occur from neighborhood groups most often deals with an insistence that alternative proposals of meeting the MPDU requirement be discouraged, and that all neighborhoods be subject to the same MPDU production requirement. MPDUs have not been shown to have a detrimental effect on the value of the market priced housing and the program has never been legally challenged by either developers or citizens.

Program Achievements and Limitations

The most important achievement of the MPDU program is the production of more than 10,000 affordable housing units. Housing constructed as MPDUs now constitutes about three percent of the County's total housing stock. The program has also provided a means for the Housing Opportunities Commission and other nonprofit housing groups to purchase approximately 1,600 units for long term retention as part of the County's low-income housing supply. The program contributes to the economic and racial integration of the County because MPDUs are marketed to an economically and racially diverse group; 55 percent of MPDU purchasers during the 1991-1996 period were minority households.

The program's most significant limitation is its reliance on a favorable housing market; the production of MPDUs is based on the accompanying production of market rate housing. At the recent rate of production following the economic slow down of the early 1990's, fewer than 350 units are being produced annually; supplying less than 20% of those on the waiting list. Although builders have occasionally constructed a subdivision's MPDUs ahead of schedule because they can be sold easily, there is little the County can do to stimulate MPDU construction during slow housing sales periods. Most of the land in the County which is zoned one-half acre and smaller (R-200) has been built on; therefore, fewer subdivisions of 50 or more units are being submitted for development approval.

Another limitation is the loss of an owner occupied, affordable house at the end of the 10-year price control period. While some consideration has been given to extending the controls, an initial premise of the program was that MPDU purchasers be able to have the same advantages of home ownership as other homeowners. A compromise was achieved when the law was amended to require that half the "excess" or "windfall" profit made when the MPDU is sold at the fair market price after the control period expires be paid into the Housing Initiative Fund (HIF). The fund is used to provide construction and permanent financing for both public and private affordable housing projects.

Because of a number of factors, including a change in the income tax laws dealing with rental housing investments, little rental housing except for those projects with low-income tax credits or tax-exempt bond financing have been constructed. The bonus density does not provide enough incentive to construct apartment projects. To solve this problem, the County has offered construction and permanent financing through the HIF to nonprofit housing sponsors to purchase and renovate existing apartment houses and to build new rental projects.

Replicability of the Program

The Moderately Priced Housing program can be replicated in any jurisdiction that has local legislative and zoning powers and significant residential construction activity. Because localities bear little of the financial cost of this program, it is an attractive alternative or supplement to traditional housing subsidy programs. Both developing suburban areas and more urbanized areas undergoing residential expansion or redevelopment can often be improved by the inclusion of an affordable housing component in market rate developments in exchange for increased density allowances.

Two of Montgomery County's neighboring/jurisdictions, Fairfax and Loudoun Counties in Virginia, have enacted inclusionary zoning programs modeled, to a large extent, after the MPDU program. Fairfax County is implementing its Affordable Dwelling Unit program after first trying a voluntary program and then convincing the County's Board of Supervisors and State General Assembly of the need for a mandatory program. The Fairfax County staff received support from the building industry in getting its legislation approved. These programs have some differences from Montgomery County's program for instance Fairfax requires 50 year price controls.

If you would like additional information on the program please contact:

Eric Larsen, Program Manager
Moderately Priced Housing Office
Montgomery County DHCA
100 Maryland Avenue, Fourth Floor
Rockville, MD 20850
Telephone: (301) 217-3705; Fax: (301) 217-3709

36 (22%) 47 (26%)
3 persons 40 (24%) 41 (24%) 51 (21%) 37 (22%) 41 (23%)
4 persons 21 (13%) 27 (16%) 35 (14%) 19 (12%) 29 (16%)
5 persons or more 8 ( 5%) 9 ( 5%) 13 ( 6%) 10 ( 6%) 12 (7%)

UNIT SIZE