In November 2020, Portland passed a significant new referendum for the city.

Colloquially known as the “Green New Deal,” the referendum primarily addressed energy efficiency standards on new construction, but also included a change to the inclusionary zoning (IZ) provision that exacerbated the already-strict affordable housing requirements around new development. It has been a year since that referendum went into law, and those changes to IZ have had a major impact on multifamily development in the City of Portland.

Download The Full 2022 CRE Market Outlook

What Is The New Inclusionary Zoning Provision?

• • Any 10+ unit of new construction, substantial rehab, adaptive reuse, or conversion from nonresidential to residential is subject to the new IZ provision.
  • 25% of newly constructed units must be “workforce units,” defined as affordable for households that earn 80% of AMI (area median income). Passage of the referendum amended the ordinance, which previously required 10% of new units to be workforce units and defined workforce units as affordable for households that earn 100% of AMI.
  • Workforce units must be integrated with the rest of the development. They must use a common entrance and must provide no indication from common areas delineating them from market rate units. In other words: they must be under one roof and cannot have a “poor door.”
  • Developers can choose to pay $150,000 per workforce unit to the city as an alternative to providing workforce units, known as a fee-in-lieu.
  • Maximum affordable rent must include electricity, heat, hot water, cooking energy, sewer, water, and trash collection. The current maximum affordable rents for workforce units are:
    • • Studio: $1,189/month
      • One-bedroom household: $1,398/month
      • Two-bedroom household: $1,598/month
      • Three- bedroom household: $1,798/month
      • Four- bedroom household: $1,997/month
  • Reduced term of affordability for units from 99 years to 30 years.
  • Reduced development fees by 25%.
  • Reduced building permit fees.
  • Projects in applicable zones are eligible for density and height bonuses.

How has it played out so far?

Multifamily developments take years from conception to completion, so we will see construction well into 2022. Behind the scenes, however, the pipeline for new projects has shrunk considerably since the new IZ provision passed. According to Christine Grimando, Director of the City of Portland’s Department of Planning & Urban Development, projects are subject to the new IZ provision once they have been to a planning board workshop or meeting (at which point they are considered “on the books”). In 2020, prior to the new IZ provision, 756 units were put on the books. Since passing the IZ provision (at the time of writing this article), only 139 units have been put on the books across three projects—a decrease of 81.6%.

Winchester Woods is a development project made up of four 12-unit buildings on Sherwood Street in East Deering. As of November 30, 2021, it is the only multifamily project approved by the planning board under the new 80/25% IZ provision. The developer, Kevin O’Rourke, acquired the land at a low price and was able to obtain a 25% density bonus. The land was cheap because it was impacted by a utility easement and a 50-foot right-of-way for a paper street around which the buildings ad had to be designed. This perceived hair on the deal had scared off other developers and driven the price down. O’Rourke spent significant money on legal and civil engineering due diligence before moving forward to make sure a development was possible. The 25% density bonus he received increased the number of allowable units from 38 to 48.

This was a “needle in a haystack” deal, as O’Rourke described it. If the land had not been cheap, and if the density bonus had not been granted, the project would not have happened. These kinds of deals are rare; they take creativity, risk tolerance, time, and money. The new IZ provisions have not stopped new multifamily development in its tracks, but they have made it very difficult, and they are having a noticeable negative impact on the housing being built in Portland, a city hungry for housing.

Per Christine Grimando, another strategy deployed by developers to skirt the new IZ provision is to reduce the scope of their projects. For example, one multifamily project originally slated for 20+ units is being redesigned as a nine-unit project, just below the threshold that triggers IZ. This trend is resulting in less housing overall and no additional affordable housing being built in Portland. Other developers are actively working with the city, trying to find ways to bring forward housing proposals that can meet the current requirements. Unfortunately, most are finding it difficult to make the projects financially viable.

How will it play out in the future?

As O’Rourke points out, new deals that meet the 80/25% requirement will be few and far between. In fact, the new requirements will likely reduce the number of both new workforce and market rate housing units in Portland. It is likely we will see an increase in smaller condo and apartment buildings where a larger multifamily might have otherwise been the highest and best use.

For 10+ unit developments, there are two viable routes: traditional workforce housing and luxury units. Traditional workforce housing, which use subsidies in their capital stack, and which would have already met the new IZ provision, will continue to be developed unhindered by the new IZ ordinance. Luxury units can be more profitable because the $150,000 fee-in-lieu remains flat, regardless of the quality or sale value of the unit.

Portland has commanded the lion’s share of multifamily developers’ attention in Maine over the last two decades. Neighboring towns like South Portland, Biddeford, and Westbrook are going through renaissance moments of their own now, and these new IZ provisions may disperse some of the cash and intellectual capital that has had its eye on Portland. There is currently a 336-market rate unit apartment complex going up in Saco, and The Lincoln Lofts redevelopment in Biddeford is nearing completion with 148 market rate units. Inclusionary zoning may be the catalyst that spreads the previously Portland-based development across the state.

 

John Finegan, Associate