Expert Insights on Inclusionary Zoning: A report on the Minneapolis Fed, Family Housing Fund conference

With inclusionary zoning a hot topic among local governments in the Twin Cities and around the nation, the Federal Reserve Bank of Minneapolis and the Family Housing Fund co-sponsored a conference at the Bank April 29 to stimulate an action-oriented discussion among area stakeholders.

The event, titled “Expert Insights on Inclusionary Zoning,” brought a national perspective from researchers and an established IZ practitioner.

Through the Bank’s engagement in the affordable housing issue, officials have been told it would be very helpful to bring in national experts to facilitate what might otherwise be tough discussions among local stakeholders, such as policymakers, housing advocates, and developers, said Minneapolis Fed First Vice President Ron Feldman.

The conference was the Bank’s first attempt to do just that, he said.

Among the key themes that emerged were:

• To formulate an effective IZ policy, some key questions should be answered, including: Who is eligible for the affordable housing? What kinds of developments does the IZ apply to? What kinds of incentives are available for developers? Are there enough resources to monitor the IZ policy to see if it’s working?
• A simple IZ policy with the ability to change quickly has advantages over a complex or harder-to-change policy.
• Any IZ policy needs to be written for the specific market/submarkets within a city.
• Cities should be flexible in their policies and revisit to make sure they are working.
• Prior to implementing an IZ policy, a city should consider the monitoring and data systems needed, as these will help determine if the policy is successful and what could be done to improve it.
• IZ could require cooperation, or at least coordination, across cities in a metro area such as the Twin Cities to avoid cities competing with each other for development, or developers may escape IZ programs by building just across municipal boundaries.
• IZ policies are seen as a kind of tax on developers—it requires them to forgo income, either by providing some below-market housing or paying a fee in lieu of doing so—and that suggests they have all the potential and challenges that taxes have, such as tax avoidance or tax incidence.
• The power of IZ may not be in the total units it creates; rather, some of its advantage comes from its ability to operate outside the city budget process. For example, IZ policies usually don’t require direct public subsidies to developers.

About 100 local government officials, housing advocates, researchers, and developers were present at the conference, including:

• Officials from Minneapolis, St. Paul, Bloomington, and 13 other cities in the Twin Cities metro area.
• County officials and representatives from the Metropolitan Council.
• Affordable housing advocates and housing industry representatives.

Minneapolis Fed First Vice President Ron Feldman welcomed the workshop participants and explained the Bank’s commitment to researching housing issues.Paula Woessner/Minneapolis Fed

The conference was conducted in two segments: first, with experts offering an overview of inclusionary zoning policies around the country and, second, with 10 roundtable discussions among local participants. Participants were grouped by their level of engagement with inclusionary zoning policies and implementation: late stage, early stage, and exploratory stage.

An introductory exercise was conducted via an open-text poll seeking the “one question” participants had about inclusionary zoning. The five most commonly asked questions were:

• What city or region has done IZ well?
• How could you write a policy that automatically adjusts to market conditions?
• Does IZ dampen housing production/investment?
• How can IZ help produce housing for very low-income households?
• How do we overcome biased and racist opinions about affordable housing?

Presentations

(All of the speakers’ presentations are available on video, along with their slides.)

Paula Woessner/Minneapolis Fed

Jenny Schuetz, David M. Rubenstein Fellow, Metropolitan Policy Program, Brookings Institution

Schuetz described inclusionary zoning as simply a class of policies that mandates or provides incentives for developers to build housing units that rent or sell at less than what the market will bear. The idea has become more popular with local governments over the years, as the federal government neglects funding for affordable housing, she said.

A city could, for example, require that one of every 10 housing units be affordable to those earning less than 80 percent of the area median income. It could also offer to allow developers to build more units than zoning allows if one in 10 units is affordable, allowing more revenue to be extracted from the same amount of land.

Though tax dollars are usually not involved, inclusionary zoning is effectively a tax on new housing paid by developers, landowners, or those buying or renting the new housing, she said. Landowners may have to lower the land price to get developers interested. Developers may have to eat the cost to keep housing prices or rents reasonable, or they may pass them on to buyers or renters, she said.

When designing an inclusionary zoning policy, cities should consider their goals, according to Schuetz. Are they aiming to prevent gentrification? This means requiring affordable units in areas with high land value, which means the real cost of each unit goes up and fewer of them will be built. Are they aiming to get as many affordable units built as possible? Allowing developers to build the required affordable units away from their market-rate development in areas with low land value would cut costs, but this would result in less inclusive, mixed-income housing.

Paula Woessner/Minneapolis Fed

Cities should also have enough staff members to implement their IZ policies and to gather data to see that the policies are working as intended.

Heather Schwartz, Senior Policy Researcher, Rand Corporation.

Schwartz offered a virtual primer to those seeking to design inclusionary zoning policies in their communities. She asked and then answered the following:

• Who is eligible for the affordable housing?
  
  • Schwartz said eligibility depends on a city’s goal. Some aim to ensure that critical workers, such as firefighters and teachers, aren’t priced out of the market. Some want to help not just lower-income renters but also first-time home buyers.
• What kinds of developments does the IZ apply to? What is the smallest number of units that triggers IZ requirements? What is the percentage of units in a development that must be set aside as affordable housing? How long must the affordable units remain below market rate?
  
  • Schwartz said cities can make IZ requirements mandatory or voluntary with incentives, but the latter usually doesn’t result in many affordable housing units.
• What kinds of incentives are available for developers?
  
  • The options here are vast. Developers can get “cost offsets,” such as density bonuses that allow more units per acre, waivers of city fees, expedited permits, or decreased number of parking stalls required per unit. They can also be offered alternatives to IZ set-asides, such as paying the city a fee in lieu of providing the required affordable housing, giving the city land it can use for affordable housing, building more affordable housing in another development, or trading the set-asides with other developers.
• Are there enough resources to monitor the IZ policy to see if it’s working?
  
  • As Schuetz earlier pointed out, cities may need to hire more staff to do this, but it’s necessary to know if their IZ policies are actually working.

Indeed, both Schwartz and Schuetz warned that it’s all but guaranteed that something will not go as planned during the first go-round of an inclusionary zoning policy because it’s simply difficult to predict how the market will react.

Anthony Simpkins, Managing Deputy Commissioner, Housing Bureau, Chicago Department of Planning and Development

Simpkins said Chicago overhauled its 2007 IZ policy as the housing market heated up after the Great Recession, and the policy proved more effective in some areas than others.

Previously, the in-lieu fee was $100,000 per unit throughout the city, but it became clear that, in some areas with very high demand, the fee wasn’t high enough because most developers just paid it instead of building affordable units. The IZ policy failed to halt the march of gentrification, so city leaders divided the city into three zones. In lower-income areas, they cut the fee 50 percent. In higher-income areas, they increased it 25 percent. And in downtown, where demand is highest, they increased the in-lieu fee 75 percent for rental units and 225 percent for condos.

In areas where gentrification was most stubborn, Simpkins said the city ratcheted up its requirements even more, including getting rid of the in-lieu fees.

The city continues to monitor the IZ policy’s effects, he said, and in-lieu fees may get a fresh look to ensure that they’re at the right level.

Lessons learned

Looking at IZ policies around the country, Schuetz and Schwartz said it’s hard to glean very many specific lessons because results vary so much. Some communities saw a lot of affordable housing built, and some saw not much. Some resulted in many low- to moderate-income households mixed in with higher-income households, and some continued to have relatively high economic segregation.

A study Schuetz co-authored compared the number of IZ units with those produced through a low-income housing tax credit, the affordable housing program with a long track record. In Southern California and Washington, D.C., suburbs, IZ and LIHTC units were built at close to the same rate year to year. But in the Boston suburbs, only one IZ unit is built for every five LIHTC units, and in New York City, it’s one IZ unit for every 25 LIHTC units.

Schwartz, in a study she co-authored, found that some communities such as Irvine, Calif., and Fairfax County, Va., had around 90 percent of IZ units integrated in low-poverty neighborhoods. In other communities, such as Denver, Colo., and Cambridge, Mass., had less than 10 percent of IZ units in low-poverty neighborhoods.

Schuetz emphasized the need to change IZ policies to fit the economic context. “It’s actually really common for places to go back and revise [policies] after a couple of years,” she said. “A lot is put into place that you think is going to work, but watch what happens, talk to the developers, see what the hitch is.”

Simpkins agreed. He said when Chicago overhauled its IZ policy in 2015, it included developers in the process, even helping to set the in-lieu fees at a level they can afford.

Nationally, housing advocates have considered different strategies for adaptive IZ policies. One strategy is to establish some sort of market-based index, such as land prices or median rents, and adjusting IZ requirements around changes to the index. Another is to conduct market studies frequently, sometimes in response to major events, such as the announcement that a large employer is relocating or expanding.

Roundtable conversations and concerns

During their discussions—among those grouped by being at similar stages on the IZ engagement spectrum—table mates were asked by Family Housing Fund President Ellen Sahli to address two topics out of five that she offered.

The topics proposed were:

• Imagine a successful inclusionary zoning policy. What is one thing you hope it would do or not do?
• What is one major challenge or concern you have with the implementation of an IZ policy?
• What actions or practices related to IZ would you seek to start, stop, or continue? (Try to provide answers for each category.)
• What do you foresee as unintended consequences of inclusionary zoning? How would you address them?
• What is one piece of advice you would give to cities or other stakeholders who are just starting their exploration of IZ?

As it turned out, more than half the tables—and across the stages of engagement—chose the implementation question. That included tables with city officials who thought their city was still exploring inclusionary zoning as well as officials who thought their city had substantial experience with IZ. One big concern was how to take a regional approach so that cities don’t end up losing development to neighbors with laxer rules. Participants were also concerned about how to set those rules so that they fit the economic context.

“Overwhelmingly, I heard this question and the need for more information about the regional context and how a policy impacts other communities,” Sahli said.

But, in response, Schuetz said she doesn’t know of any regional approach to IZ policy, though many regions know that would be a good thing. But there is a kind of informal coordination, she said. “For instance, one local government decides to adopt inclusionary [zoning], and to figure out what it should look like, they essentially take a look at what their neighbors have.”

She warned that this copycat approach could backfire if a city borrows an IZ policy from a neighbor with a housing market that’s completely different.

Minneapolis Mayor Jacob Frey wrapped up the conference, noting the complexities of inclusionary zoning.
Paula Woessner/Minneapolis Fed

Unintended consequences

The other big concern for participants was the unintended consequences of IZ policy.

Half the tables chose that topic to discuss, most of them with officials who said their city was in the exploratory stage. Instead of leveraging the housing market, they fear IZ would harm it. Some worried that smaller developers will not have the capacity to negotiate inclusionary zoning rules and be forced to cede the field to larger developers, reducing competition. Others worried that developers will stop building new housing and turn to renovating existing housing, which may now be affordable, in hopes of making them appealing to renters with deeper pockets.

Schuetz said cities that are worried about being overly aggressive with their inclusionary zoning policies could conduct a market simulation by mocking up pro formas that developers might use to predict their projects’ financial success. Then all could see how the pro forma changes based on different IZ changes.

For many cities, though, the challenge is acceptance of IZ as a legitimate tool in the first place, as some participants alluded to. Opponents of inclusionary zoning see such policies as unfairly foisting the cost on landowners, developers, and new residents.

Eagan Mayor Mike Maguire said participants at his table agreed that how the issue is framed matters a lot. He said cities need to work with developers and on “messaging to the community around the economic importance of affordable housing to continued growth.”

Lisa Bender, president of the Minneapolis City Council and a big proponent of the city’s IZ policy, said it’s important to reiterate that many places where demand for housing is high got that way because local governments invested in good schools, good parks, and good access to public transit.

Schuetz agreed: “You’re exactly right to think of this as essentially a form of land value capture. The land values have increased, and the public should get some benefit from that. I don’t think just the landowner that happens to have been there when we made the public investment in building, for example, a light rail station should get to keep all the wealth and not provide some of that back.”

Minneapolis Mayor Jacob Frey wrapped up the conference, noting the political challenges of IZ.

“The concept of inclusionary zoning, to say the very least, is a very complex and nuanced one. It’s very difficult to start a rallying cry like you would, for instance, like ‘$15 an hour,’ around inclusionary zoning,” he said, referring to the city’s minimum wage law.