The experience in the US shows that to be fully effective IZ programs should incorporate a number of key aspects. These aspects deal with how the rules in IZ programs should be framed and approached rather than with what specifically should be in them. (The latter is addressed in an introductory way in this website in A Guide to Developing Inclusionary Housing Programs.)
1) Make the programs mandatory
First and foremost, the programs should be mandatory – that is, they should require the developers to provide affordable housing as a condition of obtaining a development approval.
Voluntary (otherwise called incentive-based or optional) programs have been proven to be far less effective in producing affordable housing. Developers have shown little interest in voluntarily providing that housing even in exchange for incentives. As a consequence, voluntary are no longer considered to be a credible option.
Municipalities also should be aware of a crucial difference between the two. In voluntary programs, the municipalities will be expected to provide sufficient compensation to make the developers “whole” again – that is, to cover the cost burden associated with the affordable housing. In well-designed mandatory programs, municipalities will not have that responsibility, for the cost burden can be passed back to the land.
2) Apply the obligation as universally as possible
In order to achieve the greatest output, the affordable housing obligation should fall on as many developments as possible. These should include developments proceeding as-of-right, as well as those getting a rezoning. Also, they should include small developments because they typically represent a significant proportion of the total housing production.
Applying the obligation as widely as possible is also important for another reason: it is necessary if all developers are to be treated consistently and fairly.
3) Use fixed and non-negotiable rules
The rules should be fixed, non-negotiable and set out in advance. This applies most particularly to those rules determining the cost of the affordable housing obligation, and also the value of any concessions (if any) provided by the municipality.
Fixed rules are fundamental to mandatory programs, as there can be no mandatory obligation if it can be negotiated away. They also are important for treating all developers consistently and fairly, and for facilitating the approval process.
Finally, fixed rules crucially affect the need for compensation in the programs. When developers know the cost burden of the affordable housing obligation with certainty and ahead of time, they will offer correspondingly less for purchasing the land for development. In effect, this will reduce or eliminate the need for other compensation by passing the cost of the affordable housing back to the land.
4) Target “below-market” housing
The programs should be directed at extending the affordability range of the housing currently being made available. They will serve little or no public purpose if they are used to produce more of what private developers are doing already. So, the programs should clearly target “below-market” housing – meaning housing provided at a price or rent below what the market is providing for the equivalent housing
5) Allow enhanced provision through negotiation
The programs should be capable of taking advantage of, and even encouraging, opportunities to secure enhanced provision. Most developments can be expected to meet the minimum provision with no negotiation, and with no change to the required obligation nor the concessions (if any) offered. But there will be others willing to provide an enhanced provision – possibly through a larger number of affordable units and/or the units at a deeper level of affordability. To achieve, the programs will need to be open to negotiating compensation specific to the added costs associated with that enhanced provision, and to fostering partnerships with non-profit providers.
6) Maintain affordability “permanently”
The affordability of the affordable units should be protected for a long period of time, if not permanently. Those protections should ensure the housing remains available at an affordable rent or price, and only to income-eligible households.
During that period, the units should not be sold in the open market, even if the value of affordable housing is recaptured, because the inclusionary benefits of the housing will be lost.
7 Provide flexibility but within limits
The regulations should provide some flexibility in how the affordability housing obligation is met – particularly, by allowing the use of cash-in-lieu payments and off-site development. Both of these are important and useful ways of producing a wider range of affordable housing types and/or housing at deeper levels of affordability. They also potentially have the added benefit of engaging the non-profit sector in producing that housing.
There is a downside to allowing unlimited access to these options. Many developers will take advantage of them, with the consequence that the benefits of inclusionary developments will not be achieved.
So, the options should be available only at the discretion of the municipality, and only then where they can be demonstrably shown to produce a greater public benefit than the on-site obligation. There could be still other limits, such as requiring these options to be used only on developments in close proximity to the originating development.
8) Recognize the importance of growth
These programs depend upon harnessing market activity to provide affordable housing. They take a share of what the developers are otherwise building. Where there is little or no such activity, IZ by itself is not capable of producing much affordable housing.
As a consequence, it should be recognized that the programs work most readily in communities or areas facing sustained and strong growth. They work well there because the growth leads to rising land values that can be tapped to support the provision of affordable housing.
What is not necessarily needed – compensation
Compensation for the affordable housing is not necessarily needed in mandatory programs in order for them to be productive. This is shown by the many productive programs that provide no or only limited compensation.
Mandatory (unlike voluntary) programs can be designed so that cost burden is passed back to the land – that is, reflected in the purchase price offered for the land. This can be achieved by setting reasonable affordable housing obligations, and using fixed rules that establish the cost burden with some certainty in advance.
Most of these programs do offer compensation, but only mainly through concessions available through the regulatory process – such as, relaxed development standards (notably, increased density), fee waivers and fast-tracked approvals. These typically do not include cash subsidies, property tax abatement, nor state or federal assistance of any kind.
Density increases are the most effective and widely used of these regulatory concessions. They are particularly valuable because the economic benefit generated by additional density will be by itself sufficient to cover the cost burden of the affordable units.
In most cases, however, that compensation can be best described as being no more than notional or token. The amounts are arbitrarily set and not related to the cost burden. They are based on what the municipalities can readily provide, and not what they need to provide. Once set, the compensation is seldom adjusted, although the cost burden changes over time and project-by-project.
There is certainly no evidence – whether in their ordinances or actions – that the municipalities in mandatory programs have ever assumed any obligation to make the developer “whole” again, or even to cover the cost burden in any calibrated or substantial way.
Compensation is provided the most in particular circumstances – namely, where the developments provide an enhanced provision beyond the minimum obligation. To do this, these developments need to be offered incentives covering the added costs specifically due to that enhanced provision. Because they are often negotiated on a one-off basis, this leads to much wider range of compensation being used than normally associated with these programs.