Inclusionary zoning( IZ) efforts completely depend entirely upon getting the incentives right. Otherwise nothing gets built. Greater housing choice and affordability do not happen by decree or assertion. There is actual math involved. Developers will have to do that math, so I figure it is only reasonable for the elected officials who vote in IZ requirements should do the math as well. IZ incentives typically include things like;

• An additional story in building height above what the base zoning allows.

• A density bonus; more dwelling units than the baseline zoning allows.

• A waiver of impact fees on the affordable units.

• A partial or total abatement on the property taxes on the affordable units for a specific period.

If there is still a dumb zoning provisions on the books like excessive suburban setbacks, or minimum off-street parking requirements, granting a density bonus that cannot be built without going from surface parking to much more expensive underground or structured parking (raising construction cost, increasing operating expenses and raising rents.)

If your town currently has a really lousy baseline zoning code, low density, high off-street parking requirement, the density bonuses and partial parking reductions may not be enough to make a project pencil under an IZ approach.

If the density bonus can only be used by stepping up the design of the building to a more expensive building type, say from a three story wood frame walk up building with a single stair to a four story building with two exit stairs and an elevator, the cost of the building may no longer be supported by the likely rents. Depending upon the specifics of the project, a density bonus can easily take you one step forward and two steps back on building cost.

I have seen a number of well intentioned and politically popular Inclusionary Zoning efforts turn into the delivery of very few units. These measures can be politically popular because of the magic thinking people are able to do if they don't have to actually look at the math. IZ feels like affordability can be manifested by making the developer do it. Forcing the developer to do something under duress, without looking at the math can a popular, but ineffective approach.

If the developer has to deliver affordable units under duress or pay an in-lieu fee, what happens? The in-lieu fee or cost of the affordable units whose rents cannot support the cost of building a new apartment and managing it gets born by the rest of the project.

If the market rate units have to internally subsidize the affordable units while still providing a return on capital for the developers investors, the rents on the market rent units are going to have to be increased. This can squeeze out the middle income units. —An unfortunate, if unintended consequence.

Some developers just pay the in-lieu fee and build more expensive units because they don't want the risk and the brain damage of keeping affordable units in compliance for an extended period.

The theory behind IZ is that if the economic burden of delivering affordable units is shared across every project above threshold number of units, eventually the people selling land that allows for denser development will have to reduce their sales price. The reasoning is that what a developer pays for land is supposed to be a residual cost (as in all the other costs come off the top and what is left over, the residual is the amount available for the land purchase. The problem with this economic theory is that land owners holding property zoned for dense development have very low holding costs and almost no property taxes to worry about. Let the other guy take a lower price for their land. I will sit on my sites and speculate that next year the number will be better. Land speculators are not real estate economists.

So here’s the deal. If you think IZ is a good and necessary policy, you have to be rigorous about the implementation. Do. The. Math.

Sit down and model actual projects to see if the project still pencils under the combination of required affordable units and incentive. If there is nobody on the planning staff who can perform the Dark Arts of basic developer math, contact someone like Neil Heller at Neighborhood Workshop.

https://www.neighborhoodworkshop.org/