New Report Shows How Inclusionary Zoning Can Help Produce Strong Mixed Housing Markets

In the United States today, nearly ten million households pay more than half their income for housing. Cities enact policies to foster economic development and affordable housing with mixed results. One of these policies is inclusionary zoning, which requires developers to include a certain percentage of units to be offered at below-market rates for a certain period of time. A new study from the Urban Land Institute in conjunction with ECONorthwest looks at the economics surrounding this policy, and how it can best be put to use.

The negative implications of too-high housing costs are clear; for the household, their personal budgets are constrained and quality-of-life is impacted. For the economy, families have less disposable income to inject into their local economy, the type of spending that creates organic growth. High housing costs may price out young and lower income talent, or cause workers to make long commutes, which affects worker productivity and can have negative impacts upon the local economy around the place of employment.

Inclusionary zoning attempts to remedy increasing housing costs by zoning so that new projects building market-rate housing also provide some below-market rate units. More than 500 cities in 27 states plus the District of Columbia are currently using some form of inclusionary zoning laws or regulations. The point of the study is not to determine whether inclusionary zoning policies work or not, but rather what types of circumstances are ripe for such policies, and how to specifically design and implement policies for success. Policy makers should be aware of the tradeoffs in the different ways a policy can impact renters, developers, and the local economy as a whole.

The study defines the major trade-offs in policy design in terms of flexibility, and breaks them out into six metrics:

  • Mandatory vs. Voluntary – Programs that are mandatory can also vary widely, from only mandatory in certain neighborhoods to only mandatory for certain types of developments.
  • Setaside Amount – The percentage of units in a new development that are set aside for below-market pricing. Typically 10-20% of units, but can be higher or sliding scale.
  • Eligibility and Term – The income brackets for eligibility are typically 60%-120% of Area Median Income (AMI), but can be higher or lower. The length of time for which affordability must be maintained also varies when looking at current policies.
  • Types and Locations – Some policies specifically exempt certain types of housing, like condominiums, and certain neighborhoods within a city.
  • Opt-outs – A policy can be crafted to allow developers to either provide below-market units at another location, or pay into a local housing fund in lieu of providing below-market units at the newly developed site.
  • Incentives – Incentives like tax abatements and direct subsidies can encourage developer participation and offset negative impacts, particularly if a policy is mandatory.

In the study the research reveals that successful inclusionary zoning policies occur in strong housing markets. A city that is going through economic decline does not have a market conducive to profitable market-rate development, let alone development that includes below-market units. However, a strong enough market can see some projects attractive enough to incorporate below-market units even without incentives.

The policy choice of opt-outs is particularly interesting. It seems like there would be a strong attraction for developers to simply pay the fee, assuming it isn’t prohibitively high, and build what they want, rather than deal with the ongoing costs of compliance with zoning regulations. MuniNet spoke with Lorelei Juntunen, Project Director and Partner with ECONorthwest, and she explained that opt-out fees can be used for different policy goals. If a city’s goals are to develop a mixed housing market, then opt-out rates want to be set high to incentivize providing below-market units. However, a local government can also set the fee low with the intent that the majority of developers will simply pay the fee, which can be used to build a local housing fund. As inclusionary zoning is used mainly to target housing for working class households and provide mixed housing, this may be an alternative of the policy that can target housing for lower income households. Otherwise, using inclusionary zoning as a policy for low-income housing would require increases in incentives and subsidies to make the development projects feasible. Such government subsidies may make projects feasible for developers, but make the overall policy too expensive for the local government to maintain.

Care must be given to ensure that a policy does not put such a burden on developers that it constricts housing supply. Such constriction can delay overall economic development and actually increase housing costs, having the opposite effect intended. Getting buy-in from developers is crucial. Finding out what they respond to is challenging, because the many ways inclusionary zoning policies can be crafted, as well as the myriad macroeconomic forces at work on a given market, impedes the ability to make true apples-to-apples comparisons. “It is also [difficult] to measure what would have occurred had a given policy not been put into place”, says Ms. Juntunen. She did clarify that for a given policy, the more options for compliance provided to developers, through subsidies, tax abatements, and opt-outs, the better.

This year, Oregon became the latest state to allow for inclusionary zoning policies (Texas remains the only state prohibiting its use). As such, looking at developments in that state are particularly useful for following how inclusionary zoning policies work in practice, as they are in many cases still in their development phase. Portland is currently developing recommendations for an ordinance to be presented to city officials this fall. You can find information on these efforts and more by visiting the Policy and Planning page of the Portland Housing Bureau.

Although the study does not make a good/bad verdict about inclusionary zoning, it does state that it should only be one tool in the toolbox of policy makers when addressing workforce housing needs. Utilizing expertise for strong policy analysis, as found in this study, is an essential step lawmakers should take to make sure that their inclusionary zoning policy is best crafted for their unique economic and demographic environment. It does seem that there would be few if any cases where a market is so explosive as to make it an effective policy for providing housing for low income families. However, thriving urban environments with diverse economies should consider these policies, as it allows talent that may not be high-income to enter into and stay in a community.

by Jeffrey L Garceau