Skip to Content

Inclusionary Housing: The Basics

Overview

Many communities use inclusionary housing policies (often called inclusionary zoning, or IZ) as a tool to expand affordable rental and ownership opportunities at little or no direct cost to taxpayers. Through the local land-use approvals process, inclusionary housing policies require, or provide incentives to encourage, developers to reserve a percentage of units in new market-rate developments for low- and moderate-income families. By reducing the developer’s building costs through incentives, such as allowing the developer to sell or rent more units than otherwise permitted, these policies are often designed to “offset” in whole or in part the costs of providing a share of units at below-market prices. Inclusionary housing policies are particularly effective in strong housing markets because they tie the development of affordable housing to the development of market-rate housing. In an era of static or declining federal and state funding for affordable housing, localities have also found inclusionary housing appealing because it leads to the creation of homes affordable for lower-income households with less or no need for public subsidy.

In some states, local communities often have considerable flexibility in designing inclusionary housing programs. A local government can tailor elements of an inclusionary housing ordinance or policy to specific local conditions—from the share of units set aside as affordable, to the income level targeted, to the offsets or incentives provided to participating developers, to the options for complying with affordability requirements.

Communities considering the adoption of an inclusionary housing program balance the goal of creating affordable units against the potential that onerous affordability requirements will cool the housing market and slow home construction. Typically, programs require that between 10 and 20 percent of units be set aside for low- and moderate-income households, depending on the strength of the market. Getting the balance right is often a difficult process, and one that is aided by inviting feedback from a broad array of stakeholders, including builders and developers, as well as advocates, when creating or modifying the regulations.

In addition to creating new affordable housing stock, inclusionary housing policies can also help stem displacement of existing residents in neighborhoods undergoing redevelopment, where the cost of housing increases to levels that are unaffordable to current residents. Inclusionary housing policies can require that when redevelopment occurs, a portion of the newly created units must be affordable to individuals and families with lower incomes.

In addition, inclusionary housing policies can play a role in alleviating the “spatial mismatch” that occurs in many high-cost areas when local housing prices rise out of reach of low-wage workers who serve the community. By ensuring that a portion of newly created homes are affordable to working families, inclusionary policies allow lower-income workers to access opportunity- and amenity-rich neighborhoods and avoid long commutes from areas with lower housing costs. However, localities face trade-offs in requiring units in amenity-rich neighborhoods, where development is more costly, versus requiring more units in less-expensive neighborhoods with fewer amenities.

Inclusionary housing policies have been adopted in more than 500 jurisdictions in 28 states. To date, inclusionary housing policies are estimated to have produced roughly 150,000 affordable housing units nationwide. While inclusionary zoning policies have been successful in producing affordable housing opportunities in many markets, it is important to note that this tool is not a panacea or a substitute for a broad-based affordable housing strategy. In particular, inclusionary zoning does not address the fundamental problem of regulatory and other obstacles that constrain the ability of the market to respond to increases in the demand for housing, which can drive up housing prices in the first place. In addition, inclusionary housing policies often do not lead to housing affordable to very- or extremely low-income households without additional public subsidy. Inclusionary housing policies ultimately are most effective as part of a larger and more comprehensive approach to solving a community’s housing challenges.

How Inclusionary Housing Policies Work

Inclusionary housing policies are usually implemented as mandatory requirements, accompanied by various forms of regulatory relief or subsidies to help offset the costs of pricing units so lower-income households can afford them. Most inclusionary housing policies are part of the zoning code, but some policies operate outside of a zoning ordinance—for example, in the general land-use plan or through a neighborhood plan.

Mandatory inclusionary housing policies generally have a much better record of producing affordable homes than incentive-based, voluntary policies. However, some localities have adopted strong forms of voluntary inclusionary housing tied to developer requests for significant rezoning. These policies, sometimes referred to as inclusionary upzoning, are becoming more common and may be easier to adopt than traditional, mandatory policies in places where legal, market or political barriers have historically impeded the adoption of inclusionary housing.

Many ordinances require the affordable units to be built at the same time, in the same location and with an appearance similar or identical to the adjacent market-rate units, helping to create diverse, mixed-income neighborhoods and to create affordable homes in high-opportunity neighborhoods.

Inclusionary housing policies work best in strong housing markets where new market-rate housing development is occurring or projected to occur. If a community is experiencing little growth or new development, adoption of an inclusionary zoning policy will not result in the creation of many new affordable homes. However, communities that anticipate future growth may wish to begin the process of designing an inclusionary zoning policy that can be implemented when the market picks up. This can include policies for emerging neighborhoods in high-cost cities and suburbs.

During an economic downturn, communities may be pressured to rescind their inclusionary zoning requirements in order to remove perceived barriers to new development. A well-structured inclusionary zoning ordinance should provide meaningful offsets to developers to cover the foregone revenue from affordable units; if the offsets are structured appropriately, the policy should not act as a disincentive for new construction during a downturn. Moreover, once an ordinance has been rescinded, it may be difficult or impossible to reinstate. Since most historically strong housing markets can expect the housing market to recover at some point and start producing new housing units, it is important to make sure the appropriate policies are in place to ensure that affordable housing is included in the mix of new residential development.

Common Elements of Inclusive Housing Policies

Inclusive housing policies are usually tailored to address local housing needs and market conditions, but follow a similar structure. Inclusionary housing policies commonly specify:

  • whether participation is mandatory or voluntary
  • the geographic scope of the policy (e.g. jurisdiction-wide or targeted at specific neighborhoods)
  • the types of developments subject to the policy (e.g., rental housing, for-sale housing, commercial developments)
  • the size of developments subject to the policy (e.g., 10 units or more)
  • the share of units to be made affordable
  • the incomes served by the affordable units
  • the required affordability duration
  • whether density bonuses or other cost-reducing benefits are offered
  • the availability of alternative compliance options, such as building the affordable units offsite, paying a fee, dedicating land)
  • the process for appealing for a waiver to the inclusionary requirements

While the essential features of inclusionary zoning policy tend to be similar across jurisdictions, municipalities have considerable discretion over the specific terms of the ordinance. This flexibility allows decision-makers to tailor inclusionary zoning policies to the community and strike a balance between meeting local housing needs and attracting and maintaining the economic viability of new development.

Geographic Coverage of Inclusionary Housing Policies

In general, inclusionary housing policies work best when adopted on a citywide basis, reducing the chances for land owners or developers to “game the system” by pursuing projects just outside of program boundaries to avoid affordability requirements. In some cases, however, it may not be feasible to adopt a broad-based program, for political or other reasons. In these cases, it may make sense to consider an inclusionary policy limited to specific high-demand areas, such as a one-half-mile zone around public transit stations.

Some practitioners advise against creating limited inclusionary housing policies that apply only to neighborhoods surrounding new or redeveloping transit stations to avoid discouraging development in these areas. However, if the market demand for transit-oriented development is strong and the incentives are well designed, this type of approach may work well and be easier to achieve than a city-wide or regional policy. Inclusionary requirements or incentives may be adopted through an amendment to the zoning plan or through the introduction of overlay zones in targeted areas.

In addition to facilitating development of affordable housing near transit and job centers, research has found that inclusionary housing policies can be effective in locating affordable housing units in neighborhoods of opportunity. A 2012 RAND study found that 76 percent of homes created through the inclusionary housing programs studied were located in dispersed, low-poverty neighborhoods. Inclusionary housing units were four to six times more likely to be located in low-poverty school districts than affordable housing created through the Low-Income Housing Tax Credit or accessed through housing voucher programs.

Target Income Level

Localities have a great deal of flexibility in specifying the income level(s) at which inclusionary units must be affordable, however, income requirements typically range from 50 to 120 percent of area median income (AMI). Inclusionary housing policies are most effective at helping to address the affordability needs of moderate-income households (e.g., 60 to 100 percent of median income) who earn too much to qualify for typical federal housing assistance programs but facing housing affordability challenges.

Designers of an inclusionary housing policy may allow some flexibility in the pricing of individual units, but require that all inclusionary homes achieve an “average” level of affordability. Some localities choose a tiered approach, specifying requirements for multiple levels of affordability in order to address a range of needs. For example, for homeownership units, Boston, Mass. mandates that all units must be affordable to households earning no more than 100 percent of AMI, with half being dedicated and affordable to those at or below 80 percent of AMI.

In recent years, some programs have begun allowing developers to select from a menu of affordability targets. For instance, a program that normally asks a developer to make 15 percent of total units affordable for households at 80 percent of AMI might also allow the developer to meet the obligation by making a smaller share of apartments affordable for households at 50 percent of AMI, or a greater share affordable at 100 percent of AMI.

HUD’s recent report on worst-case housing needs shows that households with incomes below 50 percent of the area median income typically have the most severe housing needs. By themselves, however, inclusionary housing policies do not reduce rent payments to a level affordable to the lowest income households. This is because the amount of foregone revenue needed to make units affordable to families with such low incomes would dwarf the value of any cost offsets that could be provided to developers.

To serve very-low-income and extremely low-income families, localities will likely need to layer additional rental subsidies on top of minimum affordability requirements. Communities can prioritize a portion of federal project-based vouchers, for example, for use in homes near transit stations, including affordable units created to comply with inclusionary housing program requirements. This approach ensures that below-market homes are affordable to the lowest-income families and remain so for the longest possible period.

Another approach is to use an “administrative set-aside,” wherein a share of moderately affordable units produced through inclusionary zoning is specifically reserved for purchase by a nonprofit or public entity that commits to maintaining long-term affordability for very-low-income families. For example, Montgomery County, Md., and Fairfax County, Va., are able to achieve deeper income targeting by enabling the counties to purchase some of the affordable units and rent them out to very- low- and extremely low-income households. Some communities also require that a small share of inclusionary zoning units be rented to Section 8 voucher holders or, on the owner side, offer additional homeowner assistance in order to enhance affordability. Still another option is to dedicate in-lieu fees to serving very-low-income families—for example, as gap funding to make a low-income housing tax credit deal work.

On-Site or Off-Site Units

Most inclusionary housing policies require developers to meet their affordability obligations by building affordable units in the same building or development as the market-rate units. But some programs have an off-site option.

The decision whether to allow inclusionary housing requirements or incentives to be satisfied through the off-site construction of affordable housing units depends in part on the jurisdiction’s principle goals in adopting an inclusionary housing policy. If the jurisdiction wants to ensure that affordable housing units are spread throughout a community or located in specific high-growth areas — such as within transit-oriented development or within walking distance of public transit — it may choose to require on-site affordability.

However, to the extent a jurisdiction seeks to maximize the overall number of affordable housing opportunities, it may want to consider allowing affordability requirements to be met through off-site construction. In some cases, production of affordable housing units may be less expensive in off-site locations, increasing the number of units that can be built or reducing the amount of offsets the communities may need to provide. Allowing off-site construction also may lessen opposition to the ordinance among developers and land owners. Communities that permit off-site construction should consider the amenities offered by the off-site location to ensure that the affordable housing opportunities are provided in opportunity-rich neighborhoods near public transit and jobs.

Some places resolve these competing goals by increasing the set-aside for developers who choose to build new units off-site. In Sacramento, Calif., developers may fulfill inclusionary requirements off-site only if they are able to demonstrate that the off-site location is either more cost-efficient for production of the inclusionary zoning units, offers greater transportation access or otherwise exceeds standards established by the city’s residential planning criteria.

In some jurisdictions, market-rate developers are able to make onsite land available to a nonprofit developer who then assumes responsibility for developing the affordable homes needed to satisfy local inclusionary zoning requirements. In general, this approach makes it easier for developers to comply with affordability requirements by allowing all parties to specialize in what they do best: for-profit developers can focus on building conventional market-rate homes, while nonprofit developers familiar with affordable housing programs and financing can build, and in some cases manage, the inclusionary units.

Fee In-Lieu

Rather than mandating the fulfillment of inclusionary housing requirements through new construction, some communities allow developers to pay a fee in-lieu of construction of the affordable units. The fee is generally based on the cost of development and may be determined by a formula or negotiated on a case-by-case basis. Fee revenue is normally allocated to a local affordable housing trust fund that is used to finance other affordable housing initiatives.

The option to pay a fee in-lieu provides greater flexibility, particularly for developers of small projects; however, in areas with high land costs, few buildable lots or where the fee is set too low to allow new development, the trade-off may be fewer affordable units built. In response to these realities, some communities require proof that development of affordable units will create an insurmountable burden, economic or otherwise, before granting permission to pay a fee in-lieu.

Long-Term Affordability Requirements

The duration of affordability that inclusionary housing programs require ranges widely (from five years to in-perpetuity), but most programs require affordability periods of 30 years or greater. Approximately one-third of inclusionary housing programs nationwide require affordability for the life of the building, 99 years or in-perpetuity. The affordability period in inclusionary homeownership programs involves trade-offs. Programs that require lasting affordability are generally preferable, as short restrictions can quickly result in a windfall for the first homebuyer and the loss of an affordable unit. In all cases, some form of oversight is required to ensure that homes remain affordable upon resale or when leased to a new family.

In general, longer periods of affordability will be more effective in providing a lasting increase in affordable opportunities for moderate-income families, whereas shorter affordability policies have the effect of transferring wealth to a limited number of beneficiaries. Several localities, including Montgomery County, Md., have extended their affordability period in recent years to avoid the loss of inclusionary units. Inclusionary housing can also be combined with other tools, such as shared equity homeownership and community land trusts to facilitate long-term affordability while still ensuring opportunities for individual asset growth.

Localities use a variety of means to ensure that inclusionary properties continue to be sold or rented at affordable prices over the life of the affordability term and are not lost due to illegal sales, foreclosure or lax rental management practices. These include requiring developers to record a deed of trust, proactive monitoring programs, pre-purchase and post-purchase workshops, shared equity homeownership programs with carefully designed resale restrictions and placing inclusionary housing units with community land trusts or local nonprofit managers.

Additional Resources and Reports

 

Inclusionary Housing (Policy Focus Report): Creating and Maintaining Inclusive Communities. 2015. By Rick Jacobus. Policy Focus Report. Cambridge, MA: Lincoln Institute of Land Policy.

Making Inclusionary Housing More Flexible: Four Ideas for Urban Settings. 2015. By Robert Hickey. Washington, DC: National Housing Conference.

“California Supreme Court Upholds Inclusionary Zoning”. 2015. Oakland, CA: Public Interest Law Project.

Creating Affordable Housing Out of Thin Air: The Economics of Mandatory Inclusionary Zoning in New York City. 2015. New York City, NY: NYU Furman Center for Real Estate and Urban Policy.

Inclusionary Housing Sample Documents Library. 2014. Portland, OR: National Community Land Trust Network.

Inclusionary Upzoning: Tying Growth to Affordability. 2014. By Robert Hickey. Washington, DC: National Housing Conference.

Achieving Lasting Affordability through Inclusionary Housing. 2014. By Robert Hickey, Lisa Sturtevant and Emily Thaden. Cambridge, MA and Washington, DC: Prepared for the Lincoln Institute of Land Policy by the National Housing Conference.

After the Downturn: New Challenges and Oppor­tunities for Inclusionary Housing. 2013. By Robert Hickey. Washington, DC: Center for Housing Policy.

Expanding Housing Opportunities through Inclusionary Zoning: Lessons from Two Counties. 2012. Washington, DC: U.S. Department of Housing and Urban Development, Office of Policy Development and Research.

Is Inclusionary Zoning Inclusionary? A Guide for Practitioners. 2012. Santa Monica, CA: RAND Corporation.

Inclusionary Housing in International Perspective: Affordable Housing, Social Inclusion, and Land Value Recapture. 2010. By Nico Calavita and Alan Mallach.

“Inclusionary Housing, Incentives, and Land Value Recapture”. 2009. Land Lines. Cambridge, MA: Lincoln Institute of Land Policy.

Long-Term Affordable Housing Strategies in Hot Housing Markets. 2008. By Jesse Mintz-Roth. Washington, DC: NeighborWorks America and Cambridge, MA: Harvard Joint Center for Housing Studies.

The Effects of Inclusionary Zoning on Local Housing Markets: Lessons from the San Francisco, Washington DC and Suburban Boston Areas. 2008. New York City, NY and Washington, DC: NYU Furman Center for Real Estate and Urban Policy and Center for Housing Policy.

Housing Market Impacts of Inclusionary Zoning. 2008. By Gerrit-Jan Knaap, Antonio Bento and Scott Lowe. College Park, MD: National Center for Smart Growth Research and Education.

Inclusionary Zoning: A Framework for Assessing the Advantages and Disadvantages. 2008. By Dustin C. Read. Charlotte, NC: Prepared for Homes for Working Families, Center for Real Estate at University of North Carolina Charlotte.

Delivering on the Promise of Inclusionary Housing: Best Practices in Administration and Monitoring. 2007. By Rick Jacobus. Oakland, CA: PolicyLink.

National Survey of Statutory Authority and Practical Considerations for the Implementation of Inclusionary Zoning Ordinances. 2007. By Timothy S. Hollister, Allison M. McKeen and Danielle G. McGrath. Washington, DC: Prepared by Shipman & Goodwin LLP for National Association of Home Builders.

Affordable by Choice: Trends in California Inclusionary Housing Programs. 2007. San Francisco, CA: Non-Profit Housing Association of Northern California.

On Common Ground: Joint Principles on Inclusionary Housing Policies. 2005. San Francisco, CA, and San Ramon, CA: Non-Profit Housing Association of Northern California and the Home Builders Association of Northern California.

The Builder’s Perspective on Inclusionary Zoning. 2005. By Edward A. Tombari. Smart Growth, Smart Choices series. Washington, DC: National Association of Home Builders.

Strengthening the Moderately Priced Dwelling Unit Program: A 30-Year Review. 2004. By Aron Trombka, Michael Faden, Sonya Healy, Marlene Michaelson, Ralph Wilson and Sally Roman. Montgomery County, MD: Prepared for Montgomery County Council.

Voluntary or Mandatory Inclusionary Housing? Production, Predictability, and Enforcement. 2004. By Nicholas Brunick, Lauren Goldberg and Susannah Levine. Chicago, IL: Business and Professional People for the Public Interest.

The Inclusionary Housing Debate: The Effectiveness of Mandatory Programs Over Voluntary Programs. 2004. By Nicholas Brunick. Zoning Practice 9, part 1.

Inclusionary Zoning: The California Experience.  2004. NHC Affordable Housing Policy Review 3(1).

Inclusionary Zoning: Lessons Learned in Massachusetts. 2002. NHC Affordable Housing Policy Review 2(1).

Inclusionary Zoning: A Viable Solution to the Affordable Housing Crisis? 2000. New Century Housing 1(2).

Inclusionary Zoning: Legal Issues. 2002. Oakland, CA: Prepared by the California Affordable Housing Law Project of the Public Interest Law Project and Western Center on Law & Poverty.

Inclusionary Zoning Guidelines for Cities and Towns. 2000. By Edith M. Netter, Esq. Boston, MA: Prepared for the Massachusetts Housing Partnership Fund.

Issues to Consider When Creating an Inclusionary Housing Ordinance. No date. Policy Tools Series. Chicago, IL: Business and Professional People for the Public Interest.

California Inclusionary Housing Policy Database. California Coalition for Rural Housing.

Equitable Development Toolkit. Oakland, CA: PolicyLink.

Opening the Door to Inclusionary Housing. No date. By Mary Anderson. Chicago, IL: Business and Professional People for the Public Interest.

Refine Topics