Inclusionary Housing and Other Proactive Policies

Proactive Policies to Promote Affordable Housing

Some cities take the view that their role with respect to affordable housing is a passive one; it all depends on the market, they assert, and all they can do is wait for a proposal to come to them.  These cities tend to be far behind in meeting their obligation to address affordable housing needs.  Other cities take a more activist view, which can pay off with more and better affordable housing, and with more community buy-in.  The city of Chaska, for example, undertook a lengthy process to develop a vision of the kind of economically mixed community they wanted to create.  They then sought out a developer, presented their vision, and informed the developer that since the city had already gone through this process and achieved consensus on a vision, they had saved the developer two years of work with the city, and as a result, a great deal of money.  Other cities have taken similar approaches, establishing citizen commissions to make affordable housing recommendations or joint city-developer advisory groups. 

Inclusionary Zoning

One of the most potentially useful tools, employed by many cities nationwide, is Inclusionary Housing, or Inclusionary Zoning.  The details vary from jurisdiction to jurisdiction, but the essential concept is that developers are encouraged to make a certain percentage of units in new developments affordable, generally in return for city incentives to make the affordable component feasible.  Hundreds of cities around the country have adopted ordinances requiring inclusion of affordable units in new developments.  Many more cities have policies intended to encourage such inclusion.  Adopting an inclusionary zoning (IZ) ordinance or policy entails some critical choices:

Voluntary v. Mandatory Inclusion of Affordable Housing

Voluntary approaches that offer developers incentives to participate are less controversial but generally less effective in getting affordable units produced.  Many cities, including Minneapolis and Saint Paul, impose mandatory requirements when the developer is seeking city funding.  Other cities also impose IZ where other types of city assistance - such as zoninging approvals - are sought.  A large number of cities nationally have mandatory policies which apply to all residential development, regardless of city involvement.  Mandatory policies are credited with production of thousands of affordable units.  In spite of the large number of mandatory ordinances around the country, there have been only a handful of legal challenges and none of these has ultimately been successful. 

The issue of the legality of such ordinances has recently arisen in Minnesota, resulting in an opinion from the Attorney General indicating that inclusionary zoning is legal in Minnesota. The Attorney General's opinion can be found here.  For background on the legal and practical issues involved, see the Housing Preservation Project's letter to the Attorney General here

Few, if any, metropolitan area cities have taken full advantage of inclusionary zoning.  While a number of cities offer some benefits, such as density bonuses, in exchange for affordability committments, there are no metropolitan area cities which regularly tie approval of rezonings, conditional use permits, or subdivisions to affordable housing committments.  And there are, as yet, no mandatory inclusionary ordinances in the metropolitan area, although some are under consideration.  Legally, it is important that cities adopt policies which apply generally to particular types of development rather than trying to negotiate individualized deals with each developer on an ad hoc basis.  General policies are far less likely to attract constitutional challenges.

Amount, Level and Term of Affordability

Ordinances generally require 10% to 20% of the units to be affordable.  Most ordinances require that units be affordable to households with incomes that vary from 50% to 80% of area median income (See description of affordability levels here).  The affordability level picked varies with local conditions and generally reflects an assessment of the value of the incentives as well as a sense of the reduced profits which might reasonably be required on the affordable units, in return for incentives which benefit all of the units.  Some cities require affordability at even lower incomes, down to 30% of median; and in some cases, with very tight housing markets, a portion of the affordability requirement is set at above 80% of area median income. Often the affordability level is set somewhat higher for ownership units than for rental. 

How much difference can IZ incentives make?  Our initial analyses suggest that IZ incentives alone, unaccompanied by public subsidies, can frequently enable the establishment of affordable units at cost levels affordable to households at 50% of Area Median Income.  Providing housing to lower income groups will generally require additional city assistance.

We are currently developing material relating incentives (see below) to affordability levels and will have that material available soon.  The period during which the housing must be kept affordable typically ranges from 10 to 30 years.  It is important to provide legal guarantees of this long term affordability, as well as a monitoring mechanism.  It is especially important in the case of homeownership units to assure that the initial lower income buyer cannot quickly sell the units and profit personally from the below-market price.  Note that an effective inclusionary housing policy will require adequate staff resources to administer the policy.

Incentives  

Density bonuses are the most common incentive.  These allow additional units to be built without additional land cost, saving tens of thousands of dollars per unit for the additional units.  They also can substantially reduce infrastructure costs, allow more efficient construction, and, where flexible enough to permit more cost-efficient design (such as accessory units, townhouses instead of single family homes, or flat-townhouse combinations) dramatically reduce construction costs.  These cost savings benefit the entire project, but can be applied disproportionately to the affordable units, resulting in dramatic cost reductions.  An expedited approval process and waiver of city fees are also common incentives.  In addition, direct city contributions such as land write-downs or real estate tax abatements can be extremely useful incentives.  Whether as part of a voluntary or mandatory policy or ordinance, every city in the metropolitan area should be making this entire range of incentives available in order to fulfill its obligations under the Land Use Planning Act.  Yet the CURA study found that, although inclusionary incentives were widely acknowledged as an important tool, few cities had used them and few intended to use them in the future.

Unit Quality, Size, Occupancy and Tenure 

Most ordinances require that affordable units be externally indistinguishable from other units.  Many, however, permit more modest interior design and finishing.  Developers will be tempted to try to meet affordability requirements with very small units, especially if the affordability requirements are defined solely as a percent of median income and not adjusted for household size.  This is problematic in that the most pressing need for affordable housing is generally for larger families.  In addition, often there is substantial political pressure to limit affordable units to seniors.  Doing so will not provide housing for workers with modest incomes who need to live near their jobs and will not address the areas most pressing housing needs.  Finally, virtually all inclusionary policies apply to both ownership and rental housing.

Alternatives 

Most mandatory ordinances permit partial or complete waivers in hardship cases.  A related feature often included allows a developer to produce the affordable units offsite, or instead to contribute in-lieu fees to an affordable housing fund.  However, the recemt Attorney General's opinion has called in-lieu fees into question under Minnesota law.

It's Important for Cities to be Proactive

Housing developers frequently have to go to cities and sell them on their proposals.  If the proposal is new or innovative, that selling process can take a long time and, for a developer, time is money.  Inclusionary policies will be far more effective if combined with a proactive approach like that taken by the City of Chaska.  That city decided several years ago that they wanted to preserve the relative affordability and small town feel of their community while still welcoming growth.  As a result, city officials engaged in a lengthy process to research and create a vision of a mixed income community incorporating smart-growth and livability ideas.  They were able to approach a developer with a fully realized vision, which saved the developer considerable time and money as a result.  There is no reason why other communities cannot take this approach.  In fact, many cities have been reviewing the Chaska approach.

It is also important for cities to be intentional in considering how to build public support for affordable housing.  Chaska has taken an interesting approach in this regard.  Rather than beginning with discussion of "affordable housing" or "higher density", public discussions begin with the question, "How do we create places in our community for police officers, school teachers, healthcare workers and others who we need?"  The discussion then moves to what the city must do to create opportunities for those kinds of families.  Chaska officials report that proceeding in this way generated considerably more support for the city's mixed income housing proposals.



Housing Preservation Project, 2007
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Attorney General's Opinion on Inclusionary Zoning
In response to a controversy in Forest Lake, the Attorney General recently issued an opinion that inclusionary zoning ordinances are generally legal in Minnesota.
PDF - 503 KB

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