The Truth and Nothing but the Truth about Inclusionary Zoning (IZ) (Part 1)
Inclusionary Zoning (IZ) seems like a great “solution” to the housing affordability and supply issue; in theory perhaps, but in practice?
IZ policies can include voluntary or mandatory measures that encourage affordable rental or for sale homes in a development. The premise behind IZ is that it requires builders of rental housing to set aside a certain number of rental homes for people with lower incomes. In exchange for including below-market rents developers get incentives that should offset the cost of the lower rents.
Local governments are increasingly using mandatory IZ policies without seriously delving into what makes it work in their community. As with rent control, these types of policies result in the opposite outcome than intended, i.e., overall rent increases. The truth of the matter is, mandates like IZ act as a tax on housing construction, which increases building costs and reduces housing supply.1 Why is this?
Policymakers must understand that IZ is NOT a “costless” solution to the affordability issue. The truth is inclusionary policies impose significant costs on new rental development by reducing total rents on the property and thereby making it harder for developers to get the financing they need to build. The economics of development must be understood in order to determine the most effective way to craft an IZ policy specific to one’s jurisdiction. There is no such thing as “one size fits all” when it comes to IZ.
North Carolina is a “Dillon’s Rule” state, meaning local governments only have the powers granted to them by the state constitution and statutes. However, some North Carolina communities have put into effect a form of mandatory inclusionary zoning, despite its legal ambiguity. In 2010, the Town of Chapel Hill decided to adopt a quasi- IZ policy despite the fact that “the legal ability to implement the requirement was unsettled.”2 Chapel Hill’s so-called IZ policy applies to for-sale housing only. The Town is prohibited from applying its requirements to rental units because again Dillion’s Rule won’t allow it. Doing so would be considered a form of rent control and local governments in North Carolina cannot enact any form of rent control.
It would be a benefit to our communities if IZ worked in theory and practically. The challenge is that in order to work, these types of policies need the ability to adapt in response to changing market conditions as development does. Again, one size doesn’t fit all the time. Part of the success of an inclusionary zoning policy involves consistency and flexibility. Another key to making IZ work whether voluntary or mandatory is that the incentives provided must be substantial enough to offset the costs imposed. Has Chapel Hill’s IZ policies worked? Stay tuned for Part 2 next month!
1Ed Glaeser, New York Times, Ease Housing Regulations to Increase Supply
https://www.nytimes.com/roomfordebate/2013/10/16/housing-thats-not-a-luxury/ease-housing-regulation-to-increasesupply
2Mike Cronin, Strategy requires that new apartments have affordable units.