INC WSIO NARY ZONING ANALYSIS 1 8
10-UNIT SINGLE FAMILY OWNERSHIP DEVELOPMENT
The 10-unit single family ownership development scenario offers an assessment of how inclusionary
zoning could impact the existing development landscape for smaller-scale ownership projects. Table
8 presents the results of the four scenarios tested. Under the current market/baseline scenario
assumptions, a 10-unit single family development yielded a 42.80% IRR assuming the market-quoted
$65,000 land value per unit. This return is more than double the expected return of 20% but only a net
present value of $228,295, meaning the smaller scale of the project creates greater sensitivity in
calculating the return levels. Adjusting the land costs to achieve the expected 20% return on
ownership projects resulted in a per-unit cost of $89,971. Effectively, this differential shows how
market assumptions can create variability in the financial performance of a real estate deal.
To understand financial sensitivity toward the model inclusionary zoning policy, RKG tested
inclusionary zoning requirements of 10% of the units to be priced at 80% of AMI. Under the scenario,
that means one of the 10 new units would be required to be sold at a fixed price affordable to a
household earning 80% of AMI. This single change reduced the IRR of the project from 20% to slightly
below 2% with a net present value of -$191,545. In short, requiring incomed-controlled thresholds in
smaller, homeownership projects have a substantial impact on the financial feasibility of the project.
That said, the inclusionary/bonus density analysis revealed that allowing the developer to build an
additional unit (11 instead of 10), provided sufficient value to return the project to the minimum return
threshold. In other words, implementing a 1:1 bonus ratio for each unit required to be income
controlled created a sufficient financial benefit to mitigate the financial impact of the affordable unit.
As seen in the table, the IRR for this scenario is 21.62% and the NPV is $18,017.
25-UNIT MULTIFAMILY (STICK) RENTAL DEVELOPMENT
The 25-unit multifamily (stick) rental development scenario reveals how inclusionary zoning could
impact smaller rental housing development projects outside downtown Nashua. Table 9 presents the
results of the analysis. The market-based assumptions under the current market/baseline scenario
yields an IRR of 13.58% based on the market pricing assumption of $50,000 per unit land value. This
return is less than the expected return of 15% for rental projects, and well below current market
expectations of 20%+. To reach the 15% IRR return level requires a land price of $36,803 per unit (as
detailed in the second scenario). In other words, the market is not strong enough to support a market
rate only project at the anticipated land values for smaller multifamily projects. Land costs need to be
reduced (either through greater density and/or a financial inducement) to meet market return
expectations
RKG Associates applied the model inclusionary zoning policy to the second scenario to understand
developer sensitivity toward inclusionary zoning. Under the scenario, 23 market rate units and two
affordable unit at 80% AMI would be required. As seen in the table, the impact to the developer of
having to provide the affordable unit is negative, resulting in an IRR of 14.34% and a NPV of -$108,064.
The reason the NPV is negative is because of the loss of revenue (the value gap) between delivering a
market rate unit versus an affordable unit. From the developer’s standpoint, the inability to realize
