Good, Bad or Just Overrated?: The Wrap On Inclusionary Zoning.

Inclusionary zoning, the policy of requiring developers to set aside a certain percentage of new apartment units for low to moderate income renters, has become the default strategy for fighting the country’s affordable housing crisis among cities large and small. Its not hard to understand why this is happening. Politicians like this approach because it shows them taking decisive action and, in tough fiscal times, it pushes the problem of providing affordable housing (nominally seen as a “public good”) onto the private sector. Developers, of course, are not quite as enthusiastic. They say that in a still inflationary economic climate where both construction costs and interest rates remain high, any form of rent control no matter how seemingly innocuous or well-meaning can quickly kill projects by limiting the amount of rental revenue used to service increasingly high project debt loads. This leads, they say, to fewer projects getting built overall resulting in less housing supply being added, resulting in higher rents for everyone else. So what is the real effect of these policies and how can they be improved?

Like most things the answer is a mixed bag. While it does seem true that inclusionary zoning (IZ) policies have helped make incremental gains in the affordable housing inventories of a few very high rent cities like Boston, New York and San Francisco (where extremely high market-rate rents, often supplemented by public subsidies can help “carry” the affordable units), the situation in other cities has been less than spectacular. Advocates in these communities typically count the addition of new affordable housing units in increments of dozens not hundreds. What they also don’t talk about is the number of projects that may have died at the preliminary pro-forma stage because they couldn’t’ demonstrate basic financial feasibility with the imposed affordability requirements. This could be because these stillborn projects may have never have been visible to them to begin with never having progressed past the “back-of-napkin” stage. ?

Such are the hidden societal costs of inclusionary zoning policies often cited by many real estate economists. They often claim such policies only benefit the very few (those lucky enough to qualify for the units) at the expense of the many who end up paying higher rent because of the constriction of new housing supply. Paradoxically, they argue, the net result of IZ policies is an actual worsening of the affordability problem facing many cities as the normal housing “filtering”, or downcycling process is slowed because of fewer units overall being delivered to the market. On the slightly more positive side, inclusionary zoning, by forcing a more mixed-income distribution of housing, can help blunt the wholesale gentrification of entire neighborhoods and help deconcentrate low-income households.

What both advocates and detractors of IZ do seem to agree on is that these policies -- if they are to have any shot at making a dent in urban America’s housing affordability problem -- should be supplemented with developer subsidies and incentives to offset the financial hit to developers. Such incentives often include a combination of relaxed parking requirements and density bonuses both of which however frequently raise the ire of neighborhood groups who sometimes work to oppose these projects (ostensibly on the grounds of traffic if nothing else). In addition, increased density, in some cases, may involve having to change from timber construction to much more expensive (and incentive-nullifying) steel high-rise construction; whereas reduced parking can complicate developer financing. In most housing markets, these incentives alone have not proven themselves to be able to effectively neutralize the bottom-line impacts to developers.

Other incentives often include some form of limited tax abatement. The problem with how many of these programs are structured however is that the tax abatement period is often for an arbitrarily fixed, lower number of years than the stipulated affordability period (i.e. the number of years that the units must he held open for low to moderate income renters only). This mismatch can result in the project reaching a “financial cliff” (and potentially back-end financial feasibility problems) when the tax abatement runs out but the units are still generating only limited rents. For abatement and other subsidy programs to be effective, there needs to be a closer alignment between aggregate benefits and aggregate costs. Generally, this is best addressed by having a closer tie between the agreed-upon incentive period and the required affordability period. Fifteen years seems to be a common sweet spot acceptable to many politicians and developers. Coincidentally, this the same affordability period that applies to Low Income Housing Tax Credits (LIHTC) although it should be noted that affordable housing and “low income” housing are two very distinct housing segments serving two very different populations and shouldn’t be confused (though they frequently are).

Besides incentives, most advocates and detractors also seem to agree that these programs in isolation, will never be enough to fix urban America’s housing affordability crisis absent the deployment of other wrap-around programs. Strategies such as widely permitted ADUs, reformed single-family zoning, wider acceptance of manufactured housing, regional fair share compacts and community land trusts will be familiar to most planners. These need to be coupled with other programs from the domain of community and economic development – especially programs that increase opportunities for affordable homeownership. These include: so-called “soft financing” tools such as grants and low interest 2nd mortgage products, downpayment assistance and interest rate write-downs. In the wake of COVID, some cities have created pools of gap financing to provide direct cash subsidies to developers to convert older commercial office buildings to mixed-income residential use. All of these approaches will require financial resources and political will in near equal measure.

What is clear is that cities are increasingly adopting multi-pronged affordable housing programs and policies to address what has become a national issue affecting both urban and suburban communities. Thoughtfully designed IZ policies can surely be part of the solution so long as they are not seen as the sole, or even best, solution in all situations and places.