Inclusionary zoning (IZ) is a policy used by cities across the United States to embed affordable housing units into newly constructed market-rate buildings. Cities leverage IZ to build socioeconomic diversity within neighborhoods at no direct public cost, since developers are responsible for cross-subsidizing the affordable units.
In this report, we examine the implementation and costs of the IZ program in Washington, DC. This program is mandatory for many new multifamily apartment buildings and is associated with a density bonus for new buildings. We then estimate the effects of an alternative approach that could be implemented in cities nationwide, which would introduce higher taxes or fees on new development rather than including IZ units on site; these revenues would then be distributed to subsidize the provision of affordable units in existing apartment buildings.
Why This Matters
Renting or owning a home in Washington, DC, like in many US cities, is increasingly out of reach for thousands of residents with low or moderate incomes, as rents and home values are increasing more rapidly than incomes. The city’s residents continue to be geographically segregated on income and racial lines, depriving many of access to opportunity. DC’s IZ program has generated more than 2,600 affordable units over the past decade and helped to concentrate these units in neighborhoods with good job access and high-quality local amenities.
Nevertheless, DC needs substantially more affordable housing units—and it needs to ensure mor access to affordability in high-opportunity neighborhoods. When accounting for a combination of public and private costs, the IZ program is likely more expensive than alternatives like purchasing existing units and enforcing rent limits on them. IZ requires affordable units to be integrated into new buildings, which, on a unit-by-unit basis, are more expensive than older structures. IZ may also make the financing of new residential buildings more difficult, in essence requiring developers to account for the subsidy that makes certain units affordable. In the context of recent declines in housing permitting in DC and the greater metropolitan area, those higher costs may be inhibiting building to some degree.
Key Takeaways
We recommend that the city pilot a program that allows IZ-applicable developers to either continue providing on-site affordability through the IZ program or accept an increase in property taxes. This approach would enable project-by-project decisions about the most effective financing options and generate a new source of funds for the city to invest in affordable housing in high-opportunity areas that currently lack such units.
Under this alternative approach that still achieves the goal of opening up housing in high opportunity areas to lower income renters, the revenues would be distributed to make housing units affordable in existing buildings in high-opportunity neighborhoods, through either minimum requirements (e.g., all current market-rate apartment buildings must host a certain share of affordable units in exchange for a subsidy) or an opt-in system (e.g., building management can receive a subsidy to accommodate affordable units). Because most DC neighborhoods have a large stock of older housing with substantially lower average rents than new developments, this type of program could theoretically reduce investment costs per affordable unit, but it could be challenging for the city to administer.
We find that this type of alternative program could result in substantially more affordable units in high opportunity neighborhoods than the IZ program in the short to medium term given prevailing market conditions, though the benefit would stabilize over the long term. We also find that it could help provide a new financing mechanism to guarantee a greater number of affordable units in neighborhoods such as those west of Rock Creek Park, which are currently unaffordable for many households with low or moderate incomes.
How We Did It
To conduct this research, we collected and examined data on housing costs, focusing on conditions within 10 large “neighborhoods” throughout Washington, DC. We explored the location of IZ program projects and other affordable housing developments. Next, we estimated the public and private costs associated with the IZ program. (Apart from enforcement, the IZ program is designed to have no government budgetary cost but is a tax expenditure, because affordable units reduce tax assessments, that adds private costs by requiring developers to cross-subsidize affordable units with revenues from market-rate homes.) Finally, we estimated how many affordable housing units an alternative policy would generate compared with the IZ program.
