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What Is Inclusionary Zoning, and Why Is It So Controversial?

[Updated: Mar 19, 2020] Mar 19, 2020 by Matt Frankel, CFP
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Inclusionary zoning is an urban planning concept that requires developers to construct a certain number of low- to mid-income affordable housing units in new real estate developments. Specifically, developers building under inclusionary zoning, or IZ, programs must designate some of their units as "below market rate" units. The majority of inclusionary zoning programs are mandatory for developers, but some are opt-in programs with incentives for developers who participate.

The main idea behind inclusionary zoning is that it helps address the need for affordable housing in certain areas and gets the private sector to subsidize the cost. Instead of paying to construct low-income housing, which can be a major burden on a city's financial resources, inclusionary zoning requires developers to produce a certain number of affordable units on their own dime.

In addition, inclusionary zoning helps to maintain diversity in neighborhoods that otherwise wouldn't have much and to keep desirable areas with thriving job markets and great school districts affordable, if only to a select few residents.

Inclusionary zoning programs have grown tremendously in popularity since the concept began in the 1970s. At the end of 2016, there were inclusionary zoning laws in 886 markets in 25 states and Washington, D.C.

An example of how inclusionary zoning works

For a real-world example of inclusionary zoning, let's take a look at the Washington, D.C., program. The District of Columbia has an inclusionary zoning program that requires 8% to 10% of residential floor space to be used for affordable housing units (either for rent or for sale) in new residential development projects of 10 or more housing units, or in certain rehabilitation projects that add 10 or more units.

Inclusionary zoning homes in the district are available to qualifying low- to mid-income residents and are rented or sold to tenants on a lottery system due to high demand.

As one specific example, an apartment building that recently opened in the district's Petworth neighborhood has 31 housing units. Monthly rent for two-bedroom units ranged from $2,400 to $2,745 at the time. However, three of the 31 units (9.7% of the total) were designated as inclusionary zone homes, and those apartments rented for an average of $1,636.

Why is inclusionary zoning so controversial?

One reason for the controversy is that many economists say it lowers the overall supply of housing, thereby causing prices for non-designated housing units to rise even further in already-expensive markets.

There's also controversy about how much of the affordable housing problem inclusionary zoning is actually addressing. For example, in 2018 it was reported in The New York Times that 95 apartments constructed under inclusionary zoning policies in San Francisco had a staggering 6,580 applications. So, the people who needed affordable units in the city had a 1.4% chance of actually getting one.

Finally, developers are often opposed to inclusionary zoning programs, especially mandatory ones, as it essentially requires them to create a less-profitable development than otherwise would be possible. In fact, in many cases the cost of building an inclusionary zone housing is greater than the developer is allowed to sell it for. Many experts say that for this reason, inclusionary zoning programs can have the undesired effect of discouraging new housing development, further contributing to housing supply problems.

With all of these points, there is conflicting data. Some experts say there is no evidence that inclusionary zoning leads to higher housing costs, and others say that it has no noticeable effect on the rate of new housing construction. Whatever the case may be, inclusionary zoning is a major factor in new multifamily home construction in many of the largest housing markets in the United States.

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