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The Difficulties of Inclusionary Zoning

| Oct 3, 2016 | Apartment Ownership, Commercial Real Estate, Real Estate Law |

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In response to affordable housing challenges, some communities are considering inclusionary zoning. What is inclusionary zoning?

Inclusionary Zoning: These programs require property developers to sell a certain percentage of newly developed housing units at rates that are below market value to households proving a lower income. Inclusionary zoning programs are politically attractive as they are seen as a method of promoting housing affordability without raising taxes or using publically allocated funds.

Yet when considered from a basic economic standpoint, it can be suggested that inclusionary zoning programs (and other programs based on similar theories) act like a tax on the housing and construction industries. Similar to taxes, burdens of inclusionary zoning are then passed on to housing consumers, new housing builders, and property/landowners. Thus some argue that the trend to turn to inclusionary zoning could become a catalyst that leads to even bigger issues with affordable housing than those they were designed to alleviate.

The debate continues as merits of inclusionary zoning have been outlined over the past few decades, but few to no official, thorough studies have been conducted to determine the effect on housing prices, etc.

When considering the potential benefits of inclusionary zoning, take into consideration the estimated effects on single family housing prices, housing starts, and size of single-family units in California from 1988 through 2005.

In areas where inclusionary zoning policies were adopted:

  • The share of multifamily housing increased
  • The price of single family homes increased
  • The size of single family homes decreased

These side effects evident in areas where inclusionary zoning was implemented are the “costs” that many are claiming do not exist.

Areas that were part of the research on the “costs” of inclusionary housing in California did not seem to exhibit a significant reduction in the rate of single family housing starts, but they did experience an increase in multifamily housing starts (7%). Housing prices were seen to increase approximately 2-3% faster than other areas that did not adopt similar policies/programs. The effects seen were also noticeably more significant in higher priced housing markets in comparison to lower priced housing areas. This is most likely due to the builder’s ability to more easily pass on the increase in production costs in higher priced housing markets. Housing in cities with inclusionary zoning programs in place tended to be approximately 48 square feet smaller than housing in cities without similar programs. Most of the “reduction” in housing size occurred in housing that was priced at or less than $187,000. In this way, housing producers were still able to “pass on the cost” of inclusionary zoning program housing to residents without increasing the price of housing in areas where buyers were more sensitive to price.

Do the benefits of inclusionary zoning outweigh the negatives? The answer is dependent upon a number of factors specific to the project at hand. To discuss it in more detail, please get in touch with your experienced southern California business and real estate attorney at The Law Office of Retz & Aldover LLP.