The Economics of Inclusionary Development

With nearly 10 million low- and moderate-income working households paying more than half their income towards their rent or mortgage, cities are increasingly using their zoning authority to encourage the development of new workforce housing units. A study by the ULI Terwilliger Center for Housing assesses and illustrates the economics of the most common approach: inclusionary zoning (IZ).

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Through IZ, cities require or encourage developers to create below-market rental apartments or for-sale homes in connection with the local zoning approval of a proposed market-rate development project. Interest in IZ approaches is surging, with cities across the U.S. and in Canada moving to enact new policies or strengthen an existing ones.

IZ policies aim to generate a below-market real estate use—workforce housing units—that the private market on its own would not produce at a given location. In pursuing this worthwhile goal, though, an IZ policy may make available land less valuable than it would be if developed to its highest and best use.

The positive news is that cities have at their disposal a variety of tools to make inclusionary development more favorable from the landowner’s and developer’s perspectives. Using those tools to optimize private developer participation—and spur the desired development of new workforce housing units—is challenging for most cities. Many have asked ULI District Councils and members for their advice on the best way to do it.

This study–based on in-depth analytic modeling, an extensive literature review, and interviews with developers and other land use experts–provides such advice on what incentives work best in which development scenarios. The study’s purpose is to enable policy makers to better understand how an IZ policy affects real estate development and how to use the necessary development incentives for IZ to be most effective.

Unsustainably high housing costs are not only detrimental for working families; they are also bad for business and local competitiveness. In the right real estate market environments and with the optimal mix of development incentives, IZ policies can be one useful approach as part of what must be broad-based local workforce housing strategies.

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