Housing USA: The Inclusionary Zoning Debate

6 min read

There’s a sentiment among housing analysts and advocates—whether right or wrong—that the market can’t fully produce affordable housing. Especially in overheated real estate climates, like New York City and San Francisco, where land values are high and building lots of housing in certain neighborhoods will not necessarily make housing affordable in those neighborhoods. Instead, if they’re to be available to all income groups (which is a worthwhile goal given the economic and health benefits of living in good neighborhoods), policies need to be more intentional. The government, goes the thinking, needs to directly spur affordable housing production in these overheated areas.

State and Federal Low Income Housing Tax Credits (LIHTC) have long been one way of doing that, but resources are limited and subject to political changes. So, Inclusionary Zoning (IZ), which shifts the burdens of building affordable housing from the government to the developer, has become an alternative.

IZ is a common policy, existing in 25 states and 886 jurisdictions. While details vary by city, the basics remain: IZ policies ask developers to set aside a certain percentage of their units as affordable. If developers don’t want affordable units in their projects, they can often pay into an affordable housing trust fund instead. A common IZ scenario might mean asking a developer to set aside 20 percent of their units as affordable, with “affordable” defined as being rented or sold to those making 60 to 120 percent area median income (AMI). One distinction that exists nationwide is between IZ programs that are voluntary versus mandatory. With voluntary IZ, developers agree to meet the affordability requirements in exchange for zoning waivers that allow more density – aka “density bonuses.” With mandatory IZ, the set-aside is required in the by-right zoning.

Regardless of details, IZ has been found by some in its various formats to be ineffective at spurring affordable housing – which is why it is criticized by different groups. Some developers see it as a violation of their property rights and impediment to their bottom lines, and have filed anti-IZ lawsuits. Economists generally oppose IZ for the same reasons they oppose rent control – after all, IZ too is a price control. They believe it discourages construction, misallocates affordable housing resources or raises home prices, since developers purportedly cover for their affordable housing losses by passing it onto the market-rate units. And even anti-poverty advocates are lukewarm on IZ for some of the same reasons. They note that IZ hasn’t produced many units, and that the units are often designated for people who don’t really need it (for example, someone making 120 percent of AMI).

Minimal Impact
The District of Columbia, which has one of the more prominent IZ programs, personifies these failures. Launched in 2009, it applies to projects of ten-plus units, and requires that eight to ten percent square footage is set-aside as affordable for those making 60 to 80 percent AMI. Developers then receive a 20 percent density bonus. In the first six years, this produced only 402 units across 50 projects, according to a Washington Post analysis. In Denver, the IZ program required some developments of 20 plus units to set aside ten percent for households making 80 percent AMI. From 2002 to 2016, this produced a paltry 77 units.

IZ has been found to discourage units elsewhere too. In two separate studies, economists found that for two decades in California, IZ discouraged production and raised prices in different cities, sometimes by 20 percent. Another study by Jenny Schuetz, now of the Brookings Institute, found that IZ had similar effects in Boston. A study this year from the Mercatus Center found that IZ increased prices by one percent in the jurisdictions where it was tried around the Baltimore-Washington region. Even where IZ was voluntary, writes Emily Hamilton, the study’s author, it didn’t produce many units because the density bonuses were inadequate.

Density Bonus
Florida, however, may be a state where IZ ends up working better. Jurisdictions there are allowed to have IZ, but a bill passed this year—HB 7103—requires “a county to provide certain incentives to fully offset all costs to the developer of its affordable housing contribution,” according to the bill’s text.

This reimbursement, which would cover for the perceived losses caused by IZ, could come in multiple ways, says Amanda Gill, government affairs director for the Florida Apartment Association. One way would be to waive the impact fees or “mobility fees,” which in Florida go to fund transportation projects. Another would be to add density bonuses. A third would be to give property tax rebates or credits to developers, or give them cash subsidies.

The density bonus model has already proven to work, says Gill, in counties where it’s part of a voluntary program. For example, Orlando has, since 1993, produced over 18,000 affordable units through voluntary IZ, while Palm Beach County, since 2006, has produced only 873 with its mandatory program. Density bonuses, or other pro-housing measures, may be more common after HB 7103.

“We know the best way to encourage the construction of affordable apartment homes is to make it easier and less cost prohibitive for developers to build,” Gill writes by email. “In the long-term, this policy change will result in more effective inclusionary zoning policies and ultimately a higher number of affordable apartment homes across the state.”

Florida’s HB 7103 could be a policy innovation that other states heed. After all, the goals of IZ programs are fundamentally laudable, as they aim to put multiple income groups into thriving, centrally-located neighborhoods. But IZ won’t be very effective if it causes development “not to pencil” – aka to be so cost-prohibitive that developers have no incentive to build.

The best way around this is to reimburse developers for the cost of IZ; and the cheapest way to do that, from the jurisdiction’s perspective, is to rezone the land for a density bonus. That option is also the one that would produce the most housing – which is supposed to be the goal of inclusionary zoning all along.

Story Contact:
Amanda Gill
Government Affairs Director, Florida Apartment Association