Maybe We Should Re-Frame the California Density Bonus as a "Market-Rate Penalty"

Rendering of TCA Architect’s Camden Glendale apartments, which received a 32.5% density bonus in exchange for building a number of affordable units.

I'm a big fan of California's density bonus law. To me, it's a straightforward, win-win process. It lets developers build a little bit more housing—up to 35 percent more than "baseline" density—if they set aside a share of the units for low or moderate income residents. Those affordable homes are subsidized by profits earned on the additional market-rate units, so not only do we get more affordable and market-rate units (both of which are in short supply here in Los Angeles), we get them at no cost to the public.

It's a great law in theory, but in practice the participation rates in Los Angeles don't seem to be very high. It's nearly impossible to get exact numbers, but it appears that less than half of the affordable units that could be built through the density bonus actually do get built. That's just pure financial loss from the perspective of the city, which otherwise spends upwards of $100,000 per unit to subsidize affordable homes.

One of the reasons for this shortcoming is the additional bureaucratic hurdles that density bonus projects have to go through. These extra steps can cause months of delay on an otherwise "shovel-ready" project, adding many thousands (or even millions) of dollars in financing charges, risk premiums, etc. Recognizing this, last year Mayor Garcetti signed Executive Directive #13, requiring that City departments expedite the processing of projects with affordable units, and prioritize them over market-rate multifamily applications. Hopefully that helps. Governor Brown's proposed law goes further, and may speed things up even more.

Another problem, and the focus of this post, is one of perception. To some, a density "bonus" sounds like a giveaway, and as we all know there's nothing worse than giving away money to those greedy developers. (Never mind that the law is passed down from the state and applies equally to all developers, so corruption really isn't at issue here, or that the vast majority of benefits from the law accrue to low income Angelenos, not developers.)

That negative perception leads to opposition from local residents, and projects are often either downsized in response—affordable units are the first to go, of course—or the developer doesn't bother sticking its head in the lion's mouth in the first place, avoiding the density bonus and affordable units altogether. In a region where we're wasting time fighting over whether development should occur at all, asking for anything perceived as "extra" is an open invitation for trouble. Whatever the specific mechanism of failure happens to be, this all helps to perpetuate LA's affordable housing shortage, low vacancy rates, and rising rents.

So maybe we should re-frame the issue. 

Re-Framing the "Bonus" as the "Baseline"

Right now, developers receive "bonus" density by providing affordable housing. What if, instead, the bonus density was treated as the baseline, and developers suffered a "penalty" or "density reduction" if they failed to provide any affordable housing? In theory, this would just mean changing some basic language for how we write and talk about the law—its function would remain the same.

Right now, if you own a parcel that's zoned for up to 100 housing units, you can get a 35 percent bonus by providing some affordable housing—that gets you to 135 units total, so long as 20 of them are reserved for low income households, or 11 are for very low income households. In other words, 100 units is the baseline and 135 units is what you can build after the bonus. This is how the law is currently framed.

Reversing this dynamic would mean treating the 135 units (including 11 or 20 affordable homes) as the baseline. The density, height, bulk, setbacks, and parking required to achieve this would all be a part of that baseline assumption. If the developer didn't want to build those affordable units, they would lose the right to build as densely—they would receive a "market-rate penalty."

These two scenarios are equivalent, but people are more likely to gamble when presented with the second scenario, which is framed as a certain loss. From research by Tversky and Kahneman.

Why It Might Help

I think this works for a few reasons.

One is that it takes advantage of the human species' natural aversion to loss. The psychic pain we suffer from the loss of something we already have (in this case, some number of affordable homes in any given project) is greater than the happiness we gain from acquiring it. By framing the bonus density as the baseline, we shift the perception: The affordable housing is a part of the project from the get-go, so opposing a project means losing affordable housing. That's tougher to swallow than accepting that we simply won't gain more affordable housing, even though it sounds equivalent and the practical impact is exactly the same. The housing is lost regardless, but it's easier for us to compromise or take a risk in order to prevent a loss than it is to achieve a gain.

In truth, this might actually be more of a combination of loss aversion and anchoring. (I'm not a behavioral economist nor do I play one on TV, so this is all just speculation.) We anchor people's assumptions to a higher baseline, then we frame the issue in terms of what would be lost rather than what is gained (in both cases, affordable housing). Since loss hits us harder, we're more averse to acting in ways that might lead to a loss of affordable housing, including by opposing projects on the basis of height, bulk, density, etc.

This also plays on people's distrusting, punitive attitude toward developers. Rather than giving developers a prize for doing what we want—which is an idea that many people have trouble with—we penalize them when they don't do what we want. Currently the density bonus system gives us two options:

  1. Accept the baseline development without affordable housing; or
  2. Give the developers a bonus and get some affordable housing in the process.

Switching to a "market-rate penalty" sets up a new dynamic. Either we:

  1. Accept the baseline development with affordable housing; or
  2. Take some density away from the developers if they fail to provide affordable housing.

Not only do we remove the option that appears to benefit developers most (the "bonus"), we also create a situation in which we can't penalize developers without also reducing the supply of new affordable housing.

To some of you, this probably sounds like semantics that don't actually make a difference in real life. It's just framing, after all—the law wouldn't change in any way. But framing matters: When presented with a choice between beef that is 90% lean versus 10% fat, we prefer the former, even though they're the same thing. A $50 late registration fee is more motivating to us than a $50 discount for registering on time. Examples abound of how distinctions in framing help shape our behavior, even when we're presented with options that are completely equivalent in every other way.

Long-Term Framing Concerns

My biggest concern with this re-framing is that there could be long-term harm in codifying our antagonistic approach to developers. The reality is that, if we believe that housing is a human right, we need someone to actually build the stuff. Developers can't all be evil and the sole providers of a basic human need. I would hope that someday we can recognize this and evolve a more productive relationship with the people we rely on to build such an important component of our built environment, and of our lives. It's possible that framing the density bonus as "baseline versus penalty" could harm those efforts in some small way.

I also worry that our collective antipathy toward developers is so strong that we might actually choose penalizing developers over affordable housing. In practice, that's what we've been doing for decades. I'd like to think that if we frame things such that the trade-offs are more clear, we'll get better results. But I'm not certain it would work out that way, because as this entire framing discussion demonstrates, people don't always act rationally.

It might be that the solution is just a better name than "market-rate penalty," "affordability penalty," "density reduction," etc. If you have an idea for more effective language, or another kind of framing that might work better, feel free to share it with me in the comments or on Twitter.