Austin Zoning and Affordability Issues

Austin has an affordability problem and there are solutions. Will our city council take the necessary steps to fix these issues? I interviewed Chris Affinito with Heartwood Real Estate and we’re going to jump into some of the big issues in Austin that we see with development and density.

About Chris Affinito

Chris grew up in New Jersey, about 45 minutes from New York City. He went to school for undergrad at Villanova, in the suburbs of Philadelphia. When Chris graduated with a finance and real estate major, he returned to New York and worked for KPMG. KPMG is a big accounting firm, but Chris did commercial real estate valuations for them, basically appraisals.

He then moved over to real estate development where he ended up working as an office developer. Chris was in charge of finding new clients, finding a capital partner for deals, and doing all the financial analytics. After being there for a year and a half, Chris moved to Austin for a lifestyle change.

Chris’ wife, Isabel, started working for CBRE, a prominent commercial real estate company. She ended up moving over to residential real estate and did really well where she had a lot more freedom and the confluence of that freedom, income, and desire just to get out of the Northeast.

Chris and Isabel joined Spyglass Realty in 2019, prior to that in 2018, he developed his own company and building in about one month. Chris started Urban ATX, a luxury home building company. By the time they came over to Spyglass Urban ATX had grown quickly where they had a good listing inventory.

Obtaining Building Permits in Austin, Texas

There’s a big dividing line between single-family and multi-family, the complexities of construction and project management, and the capital required to do it. However, from an entitlement standpoint, if you wanted to flip or if you want to rebuild a house on an existing residential lot, you just apply for a building permit.

This sounds flippant according to Chris because a lot of people in Austin are very unhappy with how difficult it is to obtain a building permit. Relatively speaking, that’s a straightforward several-month process. When you go beyond that, this would be basically anything more than a single house or a duplex, all of a sudden, you need a site plan, which is a building permit to develop the site infrastructure and all of the utilities and everything.

It will then require heavy work from a civil engineer where the minimum would take a year to 18 months. It’s a long pipeline for someone who’s been an infill builder relying on hard money to fund these projects. The longer you hold, the longer you pay.

Entitlement is something that a lot of big developers with all the capital in the world don’t necessarily want to take on if they don’t have to. One of the reasons for that according to Chris is the primary objective is putting money to work. 

If they can take something, everybody’s got to go through the site plan. It’s rare that you can pick up something midway through the site plan or after the site plan, but that is not what they’re calling entitlement risk.

Entitlement risk is more about changing the zoning or getting approval to do what you need to be able to as opposed to just running through the site plan to do what the zoning code currently allows you. 

That ladder thing is not really the entitlement risk that they shy away from, says Chris. It’s that they don’t want to mess around with having to figure out how to rezone a property that will remove other developing restrictions so that they can deploy capital quickly.

Proposed Changes to Austin Zoning

When it comes to the proposed code changes, Chris thinks it’s not going anywhere. It was shut down again at the appellate level. It was designed in 1984 when the city of Austin looked so much different than it does now and the prevailing political sentiment at the time was slow growth. 

It is still somewhat pervasive in the face of the fact that it’s undeniable at this point that we’re in a serious housing crisis and that’s why we’re just seeing some momentum appear now.

In 2012, the City Council passed an initiative to direct staff to rewrite the zoning code and give it back to the City Council to debate it and pass it. It took all the way from 2012 to 2019 to get something that they can agree on.

It passed and was immediately taken to court and the basis of that lawsuit is a state law that basically says, imagine a 200-foot-deep doughnut around your site, and if you take up the square footage of that doughnut, and you add up all of the neighbors, obviously if the city owns half of that, because it's a road, that's one thing.

However, the neighbors behind you, the neighbors on the sides of you, if 20% of the square footage of that doughnut is represented or owned by people who sign up petition against you or rezone, it becomes what's called a valid petition, which triggers, and this is state-level laws.

Vertical Mixed Use Development

The Vertical Mixed Use has been around since the early 2000s and it’s a zoning overlay which means you've got your base zoning that says it's commercial. There are rules about how high you can build and how many square feet you can build that use floor area ratio right for most people in real estate are familiar with. That is the ratio of square feet of your building to the square feet of your land and it limits the size of your building.

There are a couple of restrictions. What Vertical Mixed Use does is in exchange for making a couple of things, making 10% of your units affordable to people who earn 60 or 80% of median income.  In addition to making like an attractive street front, retail commercial space, you get a waiver from some of the restrictions like building setbacks.

VMU 2 is the idea that in exchange for a little more affordability of around 12%, you can now go from whatever your initial height was. 

The idea would apply to anything that was zoned in VMU and there was a question of whether you inherit the right to choose VMU original or VMU 2 or if it becomes like a different zoning overlay where you would have to rezone from the regular VMU 2 right to VMU. 

About the larger and the medium corridors, it was prompted by a debate over the fact that we have something in Austin called Compatibility Setbacks and this is the single biggest obstacle to developing more dense housing in the city of Austin.


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Compatibility Setbacks

Compatibility setbacks are the concept that you may be allowed to build up to 60 feet. If you're right next door to a residential structure, then there's an additional limit on your height. 

Chris says that it’s interesting when you look at other comparable cities that have this such as, San Antonio, Dallas, and Houston, obviously, and you want to look at Denver, Portland, Seattle, and Atlanta, to the extent that these cities also have compatibility setbacks, if you looked at that graphical representation of it, it's like vertical. The idea is that you can be much closer to this house and still have your height.

Vertical mixed-use properties whose maximum heights are 60 feet, can't actually achieve 60 feet because of compatibility setbacks. 34% of current VMU properties can get up to 60 feet and some smaller amounts would be able to get up to 90 feet. So what we're doing thing is we're taking on the housing crisis by passing an ordinance that functionally does very little.

No-brainer Ways to Solve Affordability in Austin

The single biggest obstacle is compatibility in terms of what the city can do to help development easier for developers and bring more affordable housing to the market.

The Reyna

Chris was written up in the Austin Business Journal about The Reyna. Reyna is an upcoming 16-unit townhome development. Chris has other projects that they would love to talk about that are much bigger and affordable.

The Reyna is a very large piece of residentially zoned property on the right off the South Congress. They saw an opportunity, got an acre and a half of single-family zoning, and landed on the idea of multifamily zoning.

Affordability Waivers

Chris had other projects on the horizon. 1200 Springdale and 1418 Frontier Valley. Both are apartment buildings which they’re utilizing a development bonus called affordability unlocked. Affordability unlocked is one tool that really applies city-wide as opposed to being in downtown Austin where you get a waiver from compatibility setbacks. You also get a height bonus and a waiver from all kinds of things.

50% of these have to be affordable. It is a sledgehammer of a development bonus and an affordability component. 50% affordable at 60% of median income. It’s great for a number of reasons, but it doesn’t work in a lot of cases.

What affordability unlocked allows you to do among all these other things is putting apartment buildings on pieces of property that aren’t necessarily already zoned for apartments. We have dirt cheap land. We have the opportunity to get a property tax abatement, and when you combine those two things together, we have a viable deal. It's financed, by the way, all with private funding. There are no federal tax credits or local government bond money being used. 

Final Thoughts on Affordability

Affordability is not going to get better if it is in a recession, it’s going to just continue to get worse when the economy comes out of a recession. It’s going to get more expensive because of an imbalance of supply and demand. It’s hard to imagine that we already haven’t reached the point where it’s just unconscionable not to do enough.

Connect with Chris Affinito

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