Inclusionary zoning: background

After yesterday’s posting in which I discussed the use of inclusionary zoning several people asked me what inclusionary zoning is and how it works. Dr. Elizabeth Mueller (pictured) from the School of Community and Regional Planning at the University of Texas at Austin presented a concise paper on this topic to the Intergovernmental Relations committee working group on economic displacement last Wednesday.

Keep in mind, as I mentioned in yesterday’s post, Texas is one of two states that outlaw inclusionary zoning as a result of a bill narrowly passed by the Texas Legislature in 2005 at the behest of the Austin Association of Home Builders. I, along with a handful of others, testified against passage of the bill to outlaw inclusionary zoning. At that time the bill passed there were no active efforts to institute inclusionary zoning anywhere in the state but apparently the homebuilders felt they needed to preemptively eliminate any consideration on the part of any Texas municipality.

There is one narrow exception to the prohibition on inclusionary zoning. Legislation that passed the Texas Legislature in 2007 allows inclusionary zoning within Homestead Preservation Districts which are established under state law in parts of Austin and Dallas.

The state prohibition on inclusionary zoning explicitly does not prohibit voluntary agreements between builders and municipalities or agreements in which the municipalities provide some consideration to the builders for producing affordable units. As noted in yesterday’s posting however, the Law Department of the City of Austin has taken a very narrow view of the city’s ability to provide developer incentives on a case-by-case basis. The city’s lawyers contends that such agreements amount to illegal “contract zoning”. Making clear that “voluntary inclusionary zoning” agreements between municipalities and developers is legal under state law is perhaps one area on which all of us can agree.

Here is Dr. Mueller’s paper explaining inclusionary zoning. The paper is adapted from a longer paper she presented before the Congress on a New Urbanism.

Inclusionary Zoning: Background

Prepared by Elizabeth Mueller, Ph.D., June 4, 2008

Defining the approach

Inclusionary zoning or inclusionary housing is an umbrella term for strategies aimed at including affordable housing in larger, market rate projects. Such strategies can be appealing to localities because they can allow them to address some of their housing needs with modest use of local resources under their control. In addition, they are potentially effective tools for racial and economic integration. How they work, and how successful they are at meeting local housing needs or achieving integration goals depends on the details of program design and implementation—and on local political will.

How it works: the mechanics of inclusionary housing

Programs may either require or incentivize inclusion of affordable units (more on this in a moment). Beyond this general purpose, individual program details vary greatly. Based on recent research, the key to success appears to be matching program parameters carefully to local conditions and local goals. While one size does not fit all, program designers typically address a common set of questions:

What percent of units should be affordable? The most common target is between 10-25 percent of total units. Some cities adjust the required share, depending on the level of affordability reached.

How affordable do units need to be? What income group will be served through the program? In some cases, cities build in strategies for reaching lower income groups. For example, Montgomery County, Maryland gives its housing authority right of first refusal to buy up to a third of units. Cambridge, Massachusetts requires that some portion go to voucher holders.

Do units need to be onsite or could they be elsewhere? If integration is a priority, onsite is more likely to be required. But high land prices and a focus on maximizing the number of units produced may tip policy toward offsite.

Can developers contribute to a fund in-lieu of producing affordable units? Fees must be set high enough to cover production of units. Generally, fees do not yield enough units.

Does appearance of units matter? To avoid stigmatization or even easy identification of units, most cities require that they appear similar to market rate units.

How long must units remain affordable? The trend is to extend this period—30 to 45 years is common now. Some cities are exploring ways to lengthen this period through use of land trusts.

Using inclusionary housing policies to achieve integration goals or to reach the lowest income groups requires a strong local consensus around goals.

Will Developers participate?

Most critical to success is developer participation. The first requirement is a strong market where developers want to build. This is not a strategy that will work in weak market cities.

The most contentious issue in discussions of inclusionary zoning is whether or not participation is required of developers. Research shows that, overall, mandatory programs produce more units and are most effective in integrating affordability into higher income areas. But recent case study research adds some important detail to this picture. A recent study of programs in three regions found that local commitment to policy goals is important too. In several communities around Boston, no units were produced through state-mandated programs. Local design and support makes or breaks a program.

While there are hundreds of jurisdictions with inclusionary programs (mostly in California, New Jersey and Massachusetts), a growing number of places are creating incentive-based programs. In a 2003 survey of the 50 largest metro areas in the country, five percent of jurisdictions, covering 14 percent of the population in these areas, had mandatory programs. A much larger group, covering 52 percent of metro population, offered incentive-based programs.

Developers are typically compensated in some way for their participation, whether programs are mandatory or not. In mandatory programs, these ‘cost offsets’ are designed to cover the costs of participation. In voluntary programs, they induce participation. Not surprisingly, voluntary programs require more costly incentives and tend to produce fewer units.

The most common forms of developer compensation offered include:

Density bonuses. Developers are allowed to build at a greater density than otherwise allowed by zoning. This can allow additional market rate units to be built without acquiring additional land. It will be important to set the bonus in the context of the scale and mass of development desired for the area.

Unit size reduction. Smaller or differently configured affordable units may be allowed, reducing land and construction costs. Less useful if need is for family units.

Reduced parking requirements. Fewer or smaller spaces may be required. This works best in high density development, where transit is available. Denver waives 10 spaces for each additional affordable unit, up to 20% of total requirement.

Design flexibility. Setbacks can be reduced, minimum lot size requirements waived. Boston grants greater FARs, Sacramento allows changes in road width, lot coverage. Important to coordinate this with planning goals for the area.

Fee waivers. Various development fees may be waived. Since this is a loss of revenue for the city, it has a budget impact. Austin’s SMART Housing program does this.

Fee deferrals. Allows for fees to be paid later, upon receipt of certificate of occupancy, for example. This can reduces carrying costs to developers.

Fast track permitting. Streamlining the development review process can also reduce carrying costs. Value depends on current process.

What it takes to succeed

Evidence-based consensus on housing needs and policy strategies. Success depends on understanding local housing needs and how IZ can fit into the overall strategy for meeting those needs.

Development cost information. It is important that there be a neutral source of information on market conditions and costs. Otherwise, information asymmetries in setting program parameters can distort programs, result in loss of public funds.

Link city planning and housing goals. These two areas do not usually work together. Housing programs are largely federally funded and report to the federal government. The rise of locally designed and/or funded programs, like IZ, is changing this. But there are significant growing pains. These two functions are interdependent.

Stakeholder engagement on program mechanics. Program parameters must make sense in their local context. Without this level of discussion the result may be little production.

Ongoing monitoring, adjustments, cost-benefit analyses. It is important to watch changes in the market, in needs, in program costs and adjust program parameters as necessary. Montgomery County has made several changes in its program over time. Austin recently adjusted SMART Housing incentives. The process must be iterative.

Montgomery County’s Moderately Priced Dwelling Unit Program

Montgomery County’s program is the oldest IZ program in the country. The program grew out of concerns over rapidly rising housing costs and fair housing concerns. It was designed to help residents stay in the county, emphasized homeownership and explicitly sought to distribute low and moderate households throughout the region. Over time, the county has had to adjust program parameters to match changing market conditions. Adjustments include the length of affordability requirements (increased), density bonus provided (increased), increased emphasis on design flexibility as a benefit, and willingness to allow fee in lieu in limited cases (condos).

Currently, the program requires that between 12.5-15 percent of units in developments of 20 units or greater be affordable. Households at 65-70% of median income are targeted. The county’s housing authority has right of first refusal to purchase up to 1/3 of affordable units and has consistently exercised this right. Despite the loss of many units over time due to the short initial control period, the program has managed to distribute affordable units throughout the region. My own analysis of their program data finds that units are not disproportionately concentrated in minority or low income areas—in fact, they do much better than those produced through use of federal tax credits at dispersing opportunities into higher income neighborhoods.