Exploring Inclusionary Zoning’s Effect on Affordable Housing

Exploring Inclusionary Zoning’s Effect on Affordable Housing

Local governments have increasingly used inclusionary zoning ordinances — over 400 jurisdictions since the 1970s — as a tool to expand the supply of affordable housing. These ordinances typically provide residential developers with incentives to reserve a certain number of homes in a development at prices affordable to low- and moderate-income households, or require them to make affordable homes available at an alternative site or pay a fee in lieu of development. Inclusionary zoning (IZ) can be a cost-effective way to provide affordable housing, with the public and private sectors assuming the costs of administration and financing, respectively. Some argue that the merits of IZ also include the social benefits thought to be associated with intermingling affordable and market-rate residential units in mixed-income developments.

At a time when declining household incomes, increased demand for rental units, and curtailed lending intensify the need for affordable housing, policymakers are seeking more information about the impact of local inclusionary zoning (IZ) on the affordable housing supply, and want to learn more about inclusionary zoning programs from those who operate them. A recent pilot study sponsored by HUD’s Office of Policy Development and Research, “Inclusionary Zoning and its Effect on Affordable Housing: Lessons From Two Counties,” examined the IZ programs in Montgomery County, Maryland and Fairfax County, Virginia. Both counties have seasoned inclusionary zoning programs and share contextual similarities in that both are located in the Washington, DC metropolitan area with populations that are relatively affluent, well educated, and racially and ethnically diverse. The housing markets in these counties are strong, despite the current slowdown in new construction.

Observations and Findings

Researchers collected primary and secondary source materials about the counties and the two IZ ordinances and conducted confidential interviews with program administrators, developers, property managers, and affordable housing advocates. They gathered information about the basic requirements of each county’s IZ ordinances, the history of their amendments, key stakeholders and their relationships, developer involvement, use of in-lieu fees, issues related to occupancy and unit management, monitoring and enforcement of affordability requirements, effects on consumers, and interactions with other county programs. From this information, the researchers were able to formulate the following findings:

• The number of new affordable units built vary widely from year to year, depending on housing market conditions and development opportunities. Although the affordable housing inventories in both counties grew over time, the number of units produced annually in Montgomery County has ranged from 77 to 1,200 units and from 18 to 376 units in Fairfax County. Overall, Montgomery County’s program produced 13,000 affordable units between 1976 and 2011 and Fairfax County’s program built 2,448 from 1992 to 2011.
• Both IZ programs are complex, involving many government agencies and organizations with tasks and responsibilities that go beyond ensuring that a development’s plan is compliant with the inclusionary zoning program. For example, the administration and oversight of Montgomery County’s program includes roles for at least 7 different county and state entities; nonprofit housing organizations that buy affordable units to rent or sell to low- and moderate-income families; builders, developers, and property managers; and other stakeholders.
• The IZ ordinances are dynamic, rather than static, and change markedly over time, not necessarily in a linear fashion. Fairfax and Montgomery Counties have mechanisms in place with which to revise their ordinances and a wide range of stakeholders are involved in consideration and passage of amendments. Amendments have been made to price-control periods, affordability levels, unit requirements, and the percentage of affordable units required.
• The programs change in ways that seek a workable balance between affordable housing goals and the interests of developers. Too great a change in either direction can impede developer participation or public benefit. Changes in ordinances have centered on consumer benefits to a greater degree in Montgomery County than in Fairfax County, where developer interests appear to hold greater sway.
• For developers, predictability appears to be the most important element of an inclusionary zoning program. They consider clear requirements and consistent administration necessary. Developers who were interviewed stressed the importance of being able to plan, estimate costs, and accurately calculate their profit. Without this element of predictability, researchers concluded that developers would be less willing to build. In fact, some Montgomery County developers were of the opinion that, if passed, a proposed pricing amendment under consideration might deter building, because it would negatively affect their ability to estimate profits. In the past, pricing has been based partly on construction costs and partly on residents’ ability to pay. The amendment would base the pricing only on purchasers’ ability to pay.

The findings from this pilot study are promising, and suggest that the effects of inclusionary zoning on affordable housing merit possible inclusion on a future research agenda. Specifically, the researchers suggest that further study of IZ administration, developer involvement, consumer effects, and the involvement of housing agency and nonprofit organizations is needed. In-depth analysis of these issues would enhance the understanding of inclusionary zoning programs and their role in expanding the nation’s affordable housing stock.