Zoning for Inclusion and Affordability: US Lessons on the Opportunities and Limits for Local Housing Policy

Introduction: The Promise of Inclusionary Zoning

The complex relationship between zoning and housing in the US includes a long history of discriminatory and exclusionary regulations (see Whittemore, this volume) as well as efforts to zone for more inclusive development. “Inclusionary zoning” typically describes modifications of land use regulations to link market-rate residential development to the production of rental or ownership units affordable to low- or moderate-income households (see the following box). Since developers benefit from public investments and zoning changes that increase the value of the land they own and build on, advocates of inclusionary zoning argue that governments should capture a portion of development profits to create affordable housing (Calavita & Mallach, 2010; Jacobus, 2015).

In the US, legal challenges to exclusionary practices provided an early foundation for the policy focus on socioeconomically integrated housing. Two critical rulings in New Jersey, known as Mount Laurel I (1975) and II (1983), declared exclusionary zoning practices illegal and established municipalities’ obligations to host a “fair share” of regional housing for low- and moderate-income households.1 Similar principles continue to shape many inclusionary zoning programs, with the policy goal of increasing lower-income households’ access to high-amenity neighborhoods by situating below-market-rate units within or close to market-rate developments.2

Over recent decades, the possibility of leveraging the zoning system to create affordable housing became pivotal in light of reduced federal support for subsidized housing development and fiscal pressure on cities to meet a range of new responsibilities (Sclar, this volume). The bulk of affordable housing in the US is still built through federal, state, and local programs that provide developers with subsidies or tax incentives, but these fall far short of meeting demand. Inclusionary zoning offers localities an attractive complement to these initiatives because it can produce affordable units without direct public fiscal assistance. The tool became particularly popular during the early to mid-2000s, as increased growth and investment intensified affordability pressures in many jurisdictions (Calavita Sc Mallach, 2010; Mukhija, Das,

Regus, & Tsay, 2015; Thaden & Wang, 2017). By 2016, an estimated 886 jurisdictions across the US had inclusionary zoning programs (Thaden & Wang, 2017). More than 60% of programs nationally were adopted from 2000 onward (Stromberg 8c Sturtevant, 2016). Among localities with available data, it is estimated that 173,707 affordable units were created in 675 jurisdictions and that $1.7 billion in affordable housing fees were collected in 373 jurisdictions by the end of 2016 (Thaden 8c Wang, 2017).

Despite inclusionary zoning’s popularity and productivity, it is only effective in certain institutional contexts, and multiple trade-offs complicate its implementation. Drawing on past studies and an original data set of 79 large-city governments, this chapter shows that inclusionary zoning is most feasible in jurisdictions with high affordability pressures, a supportive state government environment, strong market demand, and favorable political conditions.5 The design of inclusionary programs also requires careful consideration of its public and market impacts. Programmatic decisions can have critical implications for equity and involve compromises among inclusionary zoning’s key goals. Two of the trade-offs addressed in this chapter are especially important for planners seeking to create equitable cities. First, the goals of maximizing affordable housing production and promoting socioeconomic integration are in constant tension. Second, incentivizing the creation of affordable units through higher-density market-rate development risks accelerating housing pressures in areas of increasing demand. In light of these issues, inclusionary zoning programs should be designed and wielded carefully, with attention to the local institutional context and the potential adverse consequences for those already disadvantaged in the housing market.

How Inclusionary Zoning Works

Developers undertake construction projects when they can assemble sufficient funding sources (in the form of equity, loans, and subsidies) to cover land, construction, and associated “soft” development costs. Investors and lenders will not provide financing unless the expected revenue from sales or rents exceeds the anticipated operating expenses and loan repayments, thus ensuring a positive cash flow and a sound financial return. Zoning rules directly influence a development’s possible revenue by dictating the maximum size and density of a plot—which translates into the number and size of possible units. Using historical rental and sales figures from similar units, developers then project their revenue.

Pricing units at below-market (affordable) rates reduces developers’ revenue. In inclusionary zoning projects, the income from the market-rate portion of the development typically finances, or cross-subsidizes, units that are offered at more affordable rates either within the market-rate development or elsewhere in the city. To make this financially feasible, inclusionary zoning programs typically provide developers with zoning concessions that increase their projected revenue, such as the ability to build at higher densities than existing regulations allow. If the revenue that can be generated by the increased density allowance (or other incentives) exceeds the cost of providing below-market-rate units, developers have financial justification to participate.

Because inclusionary zoning relies on robust revenue from rental or sales income, this model is most productive where demand for market-rate housing is strong. However, even in high-demand areas, local governments must carefully calibrate program requirements—such as the number and location of required affordable units and the income levels targeted—to avoid unduly suppressing new housing aimed at high- and middle-income households.

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