Inclusionary Zoning

Issues Addressed:
Affordable Housing
A diagram of a single-family subdivision with twelve homes. Eight homes in red are labeled "Base Market-Rate Units." Two homes in yellow are labeled "Affordable Units." Two homes in blue are labeled "Bonus Market-Rate Units."

What is it?

Inclusionary Zoning (IZ) is a land use regulation that encourages the creation of deed-restricted affordable housing (homes that must be rented or sold at a price affordable to the typical household) within market-rate developments. The name “Inclusionary Zoning” is meant to reference and counteract “exclusionary zoning,” the practice of crafting zoning rules to limit the presence of low-income households, racial and ethnic minorities, and other groups.

The typical IZ law specifies that certain zoning rules (maximum density, dimensional rules, minimum parking) can be relaxed for new developments of a certain size if that development rents or sells a portion of its units at an affordable rate to income-eligible households. Under New Hampshire law, IZ must be voluntary (i.e., a developer elects to provide the affordable units in exchange for zoning relief). Some states allow for mandatory IZ, in which all developments of a certain size must provide affordable housing. Usually, IZ’s affordable housing units must be provided on the same site as the market-rate development. Some IZ laws allow affordable units to be built off-site. Others allow developers to pay a fee in lieu of building the units themselves. This “payment-in-lieu” is a way some communities capitalize their funds for affordable housing development.

In the case of most developments built under IZ, the market rate units “cross-subsidize” the affordable units, making up for any financial loss that below-market-rate prices create. For cross-subsidies to work, there must be sufficient market-rate rent to cover the affordable units and deliver the profit that financiers expect from developers. This real estate balancing act is tricky and will be very specific to your community.

How can it help?

Inclusionary Zoning can…

  • Increase affordability without reliance on scarce government funding.
  • Encourage housing production (if a bonus is included).
  • Create more community support for housing development generally.
  • Produce more diverse housing options.
  • Produce affordable units even when costs are rising.

Getting Started

  1. Recognize and promote IZ’s impact on common master plan goals, such as increased housing options and increased affordability. 
  2. If undertaking a master plan, include adoption of IZ as a recommendation.
  3. Conduct a real estate financial analysis to determine whether and at what levels IZ will work in your community. This step is needed to ensure any IZ law provides the most amount of affordability without foregoing housing production generally or regressively passing affordable housing costs to low-income households. The analysis should consider typical home rents/prices, land and construction costs, your community’s income distribution, the proportion of affordable units within an overall development, the level of affordability of those units, the number of units in a development at which IZ goes into effect, density bonuses or other zoning relief, the impact on market-rate rents/prices, and more. 
  4. Hold a public engagement process to discuss the costs and benefits of IZ in your community. Use the real estate financial analysis to educate the community on what is possible and what trade-offs there are. Use the public discussion to determine a vision for IZ in your community.
  5. Draft and adopt an IZ law that reflects both the market realities and your community’s vision.
  6. Work with local developers to help them understand the IZ law and take up the IZ option for their developments.

Considerations

  • IZ is a very technical intervention into the private market. Passing a law without considering its market impact will cause the law to fail. It could encourage “gaming” of the law, a failure to produce an optimal number of units. It could also shift affordable housing production costs from the government to the most vulnerable populations.
  • New Hampshire law does not allow mandatory IZ requirements, which are common in some other states. Mandatory IZ must be similarly (if not more) calibrated to local market conditions in order to prevent unwanted outcomes. New Hampshire lawmakers may consider allowing local mandatory IZ laws in the future.
  • IZ typically works best in high-demand downtown or village areas. Applying IZ in low-demand markets or in rural and suburban single-family areas may not result in uptake of the program.
  • Payments-in-lieu are a great way to build up local coffers for affordable housing development. They should only be used if your community has the capacity to spend the money, typically through an active Housing Authority or Housing Commission, but potentially through municipal staff with existing relationships to nonprofit housing developers.
  • Payments-in-lieu can be difficult because there are many ways to put a dollar value on an affordable housing unit. Consider all the options and their impacts
  • There is a lot of controversy around IZ. It can drive affordable housing production during periods of government austerity, but it relies on homebuyers and renters to directly cover the costs of affordable housing, pushing up overall market rents and prices.

State Law

Case Studies

  • Chester, NH
  • Exeter, NH
  • Seattle, WA
    • Read more

Resources

Related Tools

A diagram with two versions of the same plot of land, one over the other. On the top version, the land contains only one single-family home with many wings and a large garage and a long driveway. This version is labeled with a large 'X' and "Regulations cannot mandate unaffordable housing everywhere." The version below contains two modestly sized single-family homes at the front of the site, and a driveway leading back to a cottage court, containing six small single-family homes around a central green. This version is labeled with a large checkmark and "Workforce housing must be allowed in a majority of residential areas."
Workforce Housing Ordinance
Three axonometric diagrams connected by one-way arrows. First, a small home on a small plot of land labeled "Historic, compact development pattern." Second, a larger home on a larger plot of land with arrows specifying setbacks, etc. labeled "Development mandated under zoning." Third and finally, a home and land parcel the same size as the first drawing, with arrows indicating setbacks, etc. and labeled "Reduced requirements."
Reduced Zoning and Subdivision Requirements
A diagram showing an axonometric view of an area with several colorful 1.5 and two-story homes. An area is demarcated on the land and labeled "Designated Housing Opportunity Zone." Below the axonometric drawing is the label "Taxes in Housing Opportunity Zone" with a column chart with two bars. The column on the left is labeled "Before new development" and "Taxed value on property before development." That column is small and shown in green. A larger column on the right is labeled "After new development." The portion of the column equal to the "Before new development" column is also green. The portion above that is gray and hatched and labeled "Untaxed value on new development: savings for up to 10 years."
Housing Opportunity Zones
A diagram of an idealized age-friendly neighborhood. The neighborhood includes a mix of housing types, including detached single-family homes of various sizes, mixed-use buildings, and a cottage court. The diagram includes the following labels pointing to aspects of the drawing: "Nearby retail, community center, and open space;" "Diverse housing options, including apartments and starter homes;" "Single-story housing layouts with shared amenities;" "Sidewalks and other accessible infrastructure;" and "Accessory dwelling units for multi-generational households."
Age Friendly Neighborhoods