Measuring the Feasibility of a Zoning Bonus

Abstract

Abstract This article discusses a methodology for measuring the feasibility of a zoning bonus: sensitivity analysis of the rate of return on investment. The zoning bonus is a density bonus, measured by FAR (floor area ratio), and is a trade-off to a developer for a public benefit—low income housing. The data for determining the internal rate of return are from two prototype buildings in Seattle's downtown office building district. Sensitivity analysis showed that the rate of return for the prototype buildings with the density bonus and the housing cost, determined by equivalent land or site cost, exceeded the rate of return at the base FAR, i.e., without the density bonus. The results of the analysis showed that, if the rate of return at the base FAR is competitive with the rate of similar investments, the market rate, a developer would have a windfall profit with the density bonus. For one of the prototypes, the amount of housing could have been doubled with the density bonus. The article demonstrates that planners can test the feasibility of a zoning bonus system, vis-á-vis the private sector, before implementation.