One innovative response to the affordable housing crisis now at center stage is inclusionary housing.
This transformative approach is reshaping the way we think about real estate and creating opportunities for a more equitable future.
In this comprehensive guide, we’ll explore the ins and outs of inclusionary housing, its significance, and its role in the real estate industry.
Let’s get into it!
1. What is Inclusionary Housing?
Inclusionary housing, at its core, is a policy-driven approach that aims to integrate affordable housing units into new residential developments.
This strategy ensures that people from a diverse range of income levels have access to affordable housing options.
The principle behind inclusionary housing is to leverage the private sector’s ability to create and finance housing development projects by incorporating affordable units into the mix, thereby reducing the burden on public funding.
The implementation of these policies varies across different jurisdictions, each tailoring its approach to suit its specific needs and goals.
Common strategies include offering developers incentives such as density bonuses, expedited permitting, or reduced fees in exchange for including a certain percentage of affordable units in their projects.
Other jurisdictions may mandate a specific proportion of affordable units in all new developments, or they may employ a combination of mandatory and voluntary policies.
Despite the variation in execution, the overarching objective of inclusionary housing remains the same: to create more inclusive, equitable, and diverse communities by ensuring the availability of affordable housing for all.
2. Examples of Inclusionary Housing
While the concept of inclusionary housing is gaining momentum globally, it is important to understand how these policies take shape in real-world settings.
A huge aspect of inclusionary housing is inclusionary zoning, a regulatory tool that encourages or mandates the inclusion of affordable units in new residential developments.
These zoning regulations, which can have significant impacts on real estate development, are designed to create diverse and inclusive communities.
Let’s dive into some prominent examples of inclusionary housing and zoning policies in action across the United States and around the world.
New York City, USA: The city’s Mandatory Inclusionary Housing (MIH) program, established in 2016, requires developers to set aside a certain percentage of units as permanently affordable in new residential developments located in rezoned areas.
This program has helped create thousands of affordable housing units within mixed-income communities.
San Francisco, California, USA: San Francisco’s Inclusionary Housing Program requires developers to provide a percentage of affordable units in new market-rate housing projects or pay a fee to the city’s affordable housing fund.
As of 2022, the program has created over 3,000 affordable units since its inception in 2002.
London, United Kingdom: The London Plan, a strategic development blueprint for the city, includes a target of 50% affordable housing in new developments.
Boroughs are expected to negotiate with developers to achieve this target, with the ultimate goal of creating mixed-income neighborhoods.
Vancouver, Canada: The city’s inclusionary zoning policy, known as the Housing Vancouver Strategy, aims to create 72,000 new homes within 10 years.
This policy includes rezoning areas for higher density, as well as offering incentives and partnerships to developers to include affordable housing in their projects.
These examples showcase the varied ways in which inclusionary housing and zoning policies can be implemented to create more equitable and diverse communities, demonstrating the adaptability of these approaches to different contexts and urban environments.
3. What Does Inclusionary Housing Do?
The impact of inclusionary housing on communities and the real estate industry is multifaceted, addressing various challenges associated with urban growth, affordability, and social equity.
In this section, we’ll delve into the key contributions of inclusionary housing and how it shapes the urban landscape, fostering more inclusive and sustainable communities.
Creates mixed-income neighborhoods: Inclusionary housing promotes socioeconomic diversity by integrating affordable units into market-rate developments.
Increases the supply of affordable housing: Mandating or incentivizing developers to include affordable units helps contribute to a greater overall supply of affordable homes.
Reduces income segregation: Integrating affordable units in various neighborhoods allows these policies to counteract income segregation and promote social cohesion.
Encourages public-private partnerships: Inclusionary housing often involves collaboration between public entities and private developers, leveraging resources from both sectors to create affordable housing.
Provides incentives for developers: To encourage the inclusion of affordable units, policies may offer benefits to developers, such as density bonuses, tax breaks, or reduced fees, making these projects more financially viable.
Fosters sustainable and equitable urban growth: Promoting affordable housing within new developments supports the creation of balanced and diverse communities, contributing to long-term urban sustainability.
4. Pros of Inclusionary Housing
The growing popularity of inclusionary housing policies is fueled by the numerous advantages they bring to communities, residents, and the real estate industry as a whole.
These policies create a positive ripple effect that extends far beyond simply providing affordable housing options.
Here are the significant benefits of inclusionary housing and how it contributes to building diverse, equitable, and thriving neighborhoods for all.
Social and economic diversity: Integrating affordable units into market-rate developments promotes diverse neighborhoods, and fosters social interaction and understanding among people from different backgrounds and income levels.
Access to better opportunities: These policies can help provide access to better schools, job opportunities, and amenities for low-income households, contributing to an improved quality of life and increased social mobility.
Reduced reliance on public subsidies: Inclusionary housing leverages the private sector’s resources and expertise to create affordable units, decreasing the burden on public funding and taxpayer dollars.
Balanced urban growth: Ensuring that affordable housing is distributed across different neighborhoods can help counteract the concentration of low-income residents in specific areas and promote equitable urban development.
Supports local economies: Mixed-income communities can boost local businesses by attracting a diverse range of customers, leading to economic growth and job creation.
Enhanced marketability of developments: Inclusionary housing projects can improve the appeal of new developments by offering a variety of housing options that cater to different income levels.
Environmental benefits: Promoting the development of affordable housing in urban areas with existing infrastructure can help reduce urban sprawl and minimize the environmental impacts associated with extensive land development.
Long-term affordability: Many of these policies require that the affordable units remain affordable for an extended period or even permanently, ensuring that future generations can also benefit from these housing opportunities.
5. Cons of Inclusionary Housing
As the saying goes, there’s no such thing as a free lunch, and the same applies here.
While its benefits are undoubtedly compelling, we must also take a moment to explore the potential hiccups and hurdles that may emerge when putting these policies into action.
Here are the key concerns and criticisms associated with inclusionary housing:
Potential increase in housing costs: Some critics argue that inclusionary housing policies may inadvertently lead to increased housing prices for market-rate units as developers pass on the costs of providing affordable units to the rest of the development.
Limited scope: Inclusionary housing policies often only apply to new residential developments, meaning they may not have a significant impact on the overall supply of affordable housing, especially in cities with limited new construction.
Disincentive for development: In some cases, inclusionary housing requirements may discourage developers from pursuing new projects, particularly if the costs associated with providing affordable units outweigh the benefits of incentives offered by the municipality.
Variability in success: The effectiveness of inclusionary housing policies can vary significantly depending on the local real estate market, the specific regulations in place, and the capacity of local governments to monitor and enforce these policies.
Potential for economic segregation: Inclusionary housing policies may inadvertently contribute to economic segregation if developers choose to pay in-lieu fees instead of including affordable units in their projects, resulting in the concentration of affordable housing developments in select neighborhoods.
Administrative complexity: Implementing and managing inclusionary housing policies can be complicated and resource-intensive for local governments, particularly in jurisdictions with limited staff or expertise in affordable housing development.
Acknowledging and tackling the challenges of inclusionary housing policies allows us to strike a better balance between the pros and cons.
Fine-tuning these initiatives can unlock their full potential and ultimately pave the way for communities that embody the essence of inclusivity and equity.
6. What is Mandatory Inclusionary Housing vs Voluntary Inclusionary Housing?
As cities and local governments adopt inclusionary housing policies, they often choose between two primary approaches: mandatory and voluntary.
Both methods aim to increase the availability of affordable housing in new developments, but they differ in the level of obligation placed on developers and the incentives provided.
Understanding these distinct approaches can shed light on the varying strategies used to address housing affordability challenges.
Mandatory Inclusionary Housing
Mandatory inclusionary housing (MIH) policies require developers to include a specific percentage of affordable units in new residential projects, typically as a condition for receiving building permits or zoning approvals.
These policies are binding, and developers must adhere to the requirements to proceed with their projects.
While some mandatory programs may offer incentives to developers, such as density bonuses or reduced fees, the primary emphasis is on ensuring that affordable units are integrated into new developments by making it a compulsory part of the process.
Voluntary Inclusionary Housing
In contrast, voluntary inclusionary housing (VIH) policies offer developers incentives to include affordable units in their projects, without making it a strict requirement.
These incentives can take various forms, such as financial subsidies, expedited permitting, or zoning variances, and are designed to encourage developers to voluntarily provide affordable housing.
The effectiveness of voluntary policies depends largely on the attractiveness of the incentives offered and the willingness of developers to participate.
How Do They Differ?
Although mandatory and voluntary inclusionary housing have the same goal of increasing affordable housing, they vary in the level of requirements imposed on developers and the methods employed to reach their goals.
Local governments often tailor their policies to suit the specific needs and characteristics of their communities, and in some cases, may even adopt a hybrid approach that combines elements of both mandatory and voluntary inclusionary housing.
7. Which is Better?
Deciding whether mandatory or voluntary inclusionary housing is the better approach depends on various factors, such as local housing market conditions, community needs, and the capacity of local governments to enforce and manage these policies.
Here are a few considerations to help you or your government determine the most suitable approach:
Housing demand and market conditions: In areas with high demand for housing and strong market conditions, mandatory inclusionary housing may be more effective, as developers are more likely to absorb the costs associated with providing affordable units.
In weaker markets, voluntary programs with attractive incentives might be more successful in enticing developers to participate.
Local government capacity: Mandatory inclusionary housing policies require robust enforcement and monitoring, which can be resource-intensive for local governments.
If a local government lacks the capacity to effectively manage and enforce mandatory policies, a voluntary approach might be more feasible.
Community needs and priorities: The specific needs of the community should be considered when choosing between mandatory and voluntary policies.
If the primary goal is to ensure a certain percentage of affordable units in all new developments, a mandatory approach may be more appropriate.
On the other hand, if the goal is to encourage a diverse range of housing types and affordability levels, a voluntary program with various incentives might be more suitable.
Flexibility and adaptability: Voluntary inclusionary housing policies can offer more flexibility, allowing local governments to adjust incentives based on changing market conditions and community needs.
However, this flexibility may come at the cost of reduced predictability and certainty for developers.
8. Most Common Rules
Mandatory inclusionary housing policies can vary greatly depending on the jurisdiction and specific regulations in place.
However, some common rules and guidelines tend to emerge across different programs.
Understanding these typical requirements can help developers and policymakers better navigate the complex landscape of mandatory programs.
Let’s take a look at some of the most prevalent rules:
Set-aside percentage: Mandatory Inclusionary Housing policies usually require developers to designate a certain percentage of affordable units on site (typically 10% to 30%).
Affordability levels: The policies often define affordability levels based on Area Median Income (AMI), with requirements to provide units for households earning specific percentages of AMI.
Long-term affordability: Many programs require that inclusionary units remain affordable for a specified period or even permanently, ensuring continued access to affordable housing for future generations.
On-site vs off-site development: While most policies prioritize the inclusion of affordable units within the same development as market-rate units, some programs may allow developers to provide off-site affordable units or contribute to an affordable housing fund in lieu of on-site provision.
Developer incentives: To offset the costs associated with providing affordable units, Mandatory Inclusionary Housing policies may offer incentives to developers, such as density bonuses, tax breaks, or reduced fees.
Final Thoughts
Inclusionary housing policies, whether mandatory or voluntary, represent a significant effort to address the growing affordability crisis in many urban areas.
By encouraging or requiring the integration of affordable units into new developments, these policies aim to foster more diverse, equitable, and sustainable communities.
As the housing landscape continues to evolve, it is crucial for policymakers, developers, and stakeholders to collaborate and adapt these policies to meet the changing needs of our cities, ensuring that everyone has access to safe and affordable housing options.
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.
Prior to starting Gokce Capital, Erika received a Bachelor of Architecture from the University of Southern California and a graduate degree in Urban Policy from Columbia University. She worked as both an architectural designer and engineer in New York before joining the New York City Department of Housing Preservation and Development.
Erika currently lives in the New York Metropolitan area with her spouse, daughter and cat. She is originally from Chicago and still considers herself a midwesterner at heart.
Erika also loves to read, write and travel (fun fact, she has visited all 50 states and more than 30 countries!). Her new book, Land Investing Mistakes: 11 True Stories You Need To Know Before Buying Land, is now available on Amazon.