When developing commercial real estate, developers, construction professionals and investors need to be aware of a city or town’s zoning ordinances. A zoning ordinance is a regulation on what commercial and residential land can be used for. Generally, developers will need a zoning permit before building anything on the land.
Once you have your predevelopment loan and the permit is acquired, there are also restrictions on how much you can build, and what can be built.
Sometimes, however, developers and investors can negotiate a deal with the city to allow for more building and land development. This arrangement is called a density bonus.
What Is a Density Bonus?
A density bonus is an incentive cities offer that allows developers to expand their property in exchange for helping the community with its “public policy goals.” If the city grants permission to extend development beyond its legal limits — for instance, building more housing units — developers in return have to assist the city and its residents in some predetermined way.
The 2 Main Reasons Why Communities Grant Density Bonuses
There are a number of reasons why a city or town would grant a density bonus. But, in all cases, the incentive is meant to help further public policy and housing programs.
1. To Increase Affordable Housing
“The number one reason is to encourage the creation of affordable housing,” said Michael Shavolian, a law clerk at the firm Fried, Frank, Harris, Shriver & Jacobson.
For instance, a density incentive might permit a developer to increase the number of housing units or floors allowed in a building, in exchange for a percentage of affordable units being allocated to low-income households.
New York, for instance, has a voluntary density bonus program, called the Inclusionary Housing Program, that “promotes economic integration in areas of the City undergoing substantial new residential development by offering an optional floor area bonus in exchange for the creation or preservation of affordable housing.” This agreement mandates that a certain percentage of housing units — either within the building or within a half mile radius of the building — be set aside for permanent affordable units.
2. Environmental Protection
Sometimes density bonus units are granted to promote land conservation. A community might allow a developer to build more units in exchange for protecting green spaces or making environmental improvements through landscaping or the development of nature trails on the land.
In Milliken, Colorado, incentive zoning is issued for properties that conserve areas in wetlands, valuable habitats, natural geologic hazard zones and other environments that need protection.
Benefits of Density Bonuses for Investors and Developers
A density bonus benefits both the community and the developer.
For the community, they now have more affordable housing, or more protected nature.
For the developer, the additional profit from the bonus offsets the decreased revenue from the affordable housing units or the environmental preservation areas. Essentially, density bonuses allow for more profit.
How to Apply for a Density Bonus
Different jurisdictions all have unique application processes and requirements for density incentives. Usually, however, the steps are somewhat similar. A sample density bonus application instruction page for the city of Saratoga, for instance, can be found here.
Describe the Project
The first requirement in applying for a density bonus is to provide a detailed, written description of the project. Do you want to build more housing units? Increase the height of a building? Add value? Develop more land? Make sure to be as specific and detailed as possible in your application so the city planning division can make an informed decision.
You can sweeten the deal for the community by offering to add a childcare facility or more parking spaces to your multifamily housing development. These offers will incentivize the city to accept more affordable units because you’re making an effort to accommodate the increased density.
Provide a Map and/or Blueprint
In addition to a written description, you also want to provide a map or blueprint of the proposed location and layout.
Create a Written Request
After creating the written description and the map, most cities also require a detailed written request. This letter should include sufficient reasoning to show why these plans are necessary, as well as the economic feasibility for both you and the community.
Demonstrate Project Feasibility
After you’ve made your case about the project, you then want to show the project is feasible. For this goal, it would be good to outline development costs, debts and profits, and show how you will carry out the terms of the density bonus.
Wait for a Decision
The final step is to wait until the city reviews your application and makes its decision. In New York, according to Joe Marvilli, Deputy Press Secretary in the NYC Department of City Planning, “Land use applications go through a public review process that often includes a Community Board recommendation, a hearing and vote by the City Planning Commission (CPC), and if the CPC approves the application, a hearing and vote at the City Council.”
Example of Successful Use of a Density Bonus
The Voluntary Inclusionary Housing Program in New York has been widely successful thus far. According to Marvilli, the program was first enacted in 1987 for R10 districts, which refers to the ratio of space per “dwelling unit.” The program “was expanded to other medium-density districts in 2009,” Marvilli said. Because of this program, there’s more guaranteed affordable rental units in the city, and developers are able to profit off the additional units.
Density Bonuses Help Developers and the Community Alike
If you’re looking to build more housing units or develop your land beyond what city zoning allows, it might be a good idea to look at the available density bonuses in your jurisdiction. While you’ll have to give back to the city in some way — whether through affordable housing or environmental improvement and preservation — in the long run, the extra revenue you can generate from your bonus could prove highly profitable.