Real Estate Advisor: Are You Ready for Inclusionary Zoning?

May 25, 2017

In 2016, the U.S. Supreme Court declined to review a California case challenging inclusionary zoning, thereby opening the door for more municipalities to adopt similar restrictions. If you’re going to successfully navigate inclusionary zoning, you need to understand what it is and how you can work with local representatives to craft the optimal inclusionary zoning model for your project.

Inclusionary Zoning Basics

Inclusionary zoning is a tool cities can use to require or entice private developers to subsidize affordable housing. It allows cities to strike a balance between meeting the needs of both low- and middle-income families for affordable housing and allowing real estate investors and developers to launch new projects to take advantage of the demand for housing.

How can developers benefit? They usually receive some type of incentive for allocating a certain number or percentage of units to affordable housing. The incentives might include:

  • Zoning bonuses that allow developers to build more units than would otherwise be permitted under current zoning rules,
  • Direct construction subsidies,
  • Tax abatements,
  • Fee waivers or expedited approval of projects,
  • Density bonuses in areas where development is already underway, or
  • Looser parking requirements.

Developers also could benefit if the rental market takes a downturn, because the affordable units may be fairly recession-proof and keep occupancy rates up.

Critics, however, contend that included affordable units could make the property less desirable and drive rents and property values down on the high-end units — or increase vacancy rates. In light of this, it might not be realistic to charge higher prices on the high-end units to recoup the cost of the affordable units.

The results remain to be seen, but one thing is clear: Inclusionary zoning is spreading. For example, the Supreme Court case that involved an inclusionary zoning ordinance in San Jose that required residential developments with more than 20 units to sell at least 15% of them to low- and moderate-income buyers. Other cities with tight housing markets — including Los Angeles, San Francisco, and Washington, D.C. — have adopted similar measures. New York City has even made its inclusionary zoning restrictions mandatory in certain circumstances.

Keep Your Options Open

There are creative alternatives to mandatory inclusionary zoning that can help alleviate developers’ concerns. For example, developers can ask their representatives to craft inclusionary zoning programs that give them the option to fund the construction of affordable housing at a site different from their project’s location.

Developers also can push for the ability to outsource their obligations to developers who specialize in affordable housing. Some cities even give developers the option of paying fees in lieu of building affordable units. Then the city can use the fees to build its own affordable housing projects.

Be Proactive

If crafted properly, inclusionary zoning programs can be a win-win for everyone involved. Developers and investors can work with local government representatives and zoning boards to create a model that maximizes the social and financial benefits of inclusionary zoning, while minimizing any potential downsides.