Density bonuses

Density bonuses policies in which developers are given an option to develop under either a “base zoning” or alternative rules which allow denser, more profitable development in exchange for the provision of costly community benefits. These community benefits could be amenities such as plazas or parks, direct provision of income-restricted housing, or fees to be paid in lieu of the direct provision of benefits.

Relative to lax zoning, density bonuses are economically similar to applying a high-rate tax on the narrow base of new construction. A simple supply-demand analysis says that, relative to lax zoning, density bonus policies will produce less overall new housing. However, lax zoning isn’t necessarily the alternative. Density bonus programs are political deals in which politically-unpopular new development “buys” acceptance by sharing its profits with a broader community.

In order to garner developer participation, the values of fees assessed must be low enough to continue to allow developers to profit from the additional units. Meanwhile, political success can depend on fees being high enough to satisfy those who might otherwise oppose development. The benefits of the program have a ceiling; in times when market rent is much when rents only narrowly exceed construction costs, there may not be a dollar value which both satisfies development opponents and allows profitable development.

Density bonus programs vary in their effectiveness. Austin’s VMU program, passed in 2008, has transformed Austin’s apartment construction market, with a significant percentage of new apartments being constructed under this scheme. Almost every new development in downtown Austin has chosen to participate in Austin’s downtown density bonus program, paying into funds in exchange for permitting more density.

The major areas that density bonus programs don’t address are:

  • Density bonuses are far more politically feasible in adding incremental density to already-dense areas than adding incremental density to low-density areas. For example, Austin has density bonus programs for Vertical Mixed Use along high-traffic corridors, downtown high-rise districts, and student-oriented West Campus. There are no density bonus programs allowing developers to buy their way into the right to construct 4-plexes instead of duplexes on highly-desirable side streets.
  • As a political compromise, density bonuses are subject to similar political forces as any other city process. Development-skeptical politicians can easily adjust density bonuses through “technical fixes” to the dollar value that render use of the density bonus uneconomic.