Mandatory Inclusionary Zoning: 4 New Lessons To Make It Work

Last week, the Furman Center released a white paper on Inclusionary Zoning, Creating Affordable Housing Out of Thin Air.  It’s an incredible comprehensive look at the economics behind Inclusionary Zoning, and leads greatly to understanding how to most effectively shape the economic aspects of a new Mandatory Inclusionary Zoning policy. The paper details many different scenarios and tradeoffs, and both the policy brief and white paper deserve to be read in full. But four big takeaways are:

#1 The program works much better in high-market areas.

Because of the high costs of land and construction, housing – any housing – is expensive to build in New York City.  And the secret to Inclusionary Zoning is the mix of rents – the higher market rents are able to cross-subsidize the affordable ones.

But there’s a threshold. In many markets in New York City, the market rate rents are actually at or below the current rents for the inclusionary program. Regardless of any Inclusionary Zoning requirements, the local rental market simply doesn’t provide enough income to cover the high costs of building in New York without additional government subsidy. As the Furman report makes clear, market rents generally need to be in the $2000+ range in order to make development feasible at all. In order to leverage some affordability, they need to be even higher.

However, once that market threshold is passed, profits increase dramatically – especially when the building is also getting a 421a tax exemption. The level at which current voluntary guidelines start to work, and strike a good balance of providing incentive to developers while providing public benefits, are in mid-market or gentrifying areas where market rents at about $40 a square foot, or about the $2300 range for a one-bedroom apartment. But in higher-market areas like Astoria, Clinton Hill, or East Harlem, the amount of affordable housing required can be increased from the current voluntary levels. And in Manhattan and the booming neighborhoods near it  – Long Island City, Williamsburg, and Downtown Brooklyn – the results are astounding: an inclusionary project could have supported a 50% increase on the amount of affordable housing currently required without having affecting the feasibility of building in these neighborhoods.

This is not to say that Inclusionary Zoning in lower-rent neighborhoods is irrelevant. An MIZ policy put in place now will create a layer of protection for the future, and ensures that the neighborhood will have guaranteed affordability as the market-rate rents rise and the areas sees increased new development.

#2 In high market neighborhoods, added density matters – exponentially.

The above scenarios are just with 33% zoning bonus, the same as the voluntary program. But if a truly significant amount of density is added in high-market neighborhoods, the program can generate incredible amounts of affordable housing. In fact, in these neighborhoods, the report finds that for each square foot of market-rate housing added through zoning bonuses, we can add at least that much in affordable housing.

It’s important to remember that under the Voluntary Program, developers got a significant upzoning – and then got an additional bonus to build some affordable housing. Under Mandatory Inclusionary Zoning, the equation is different.

Take the Williamsburg Waterfront. Most places you can build to a 4.88 FAR without affordable housing, or 6.5 with affordable housing – a 33% bonus.

But that’s not the whole story. Before the rezoning, the area was a low-rise manufacturing area, with a FAR of only 2.0. Most of the upzoning, even with IZ, went right to the luxury housing. In reality, the zoning bonus wasn’t a 33% bonus – it was a 325% bonus.

Imagine if ALL of that added density were required to provide affordable housing – which would be the case under MIZ. We’d be looking at significantly more affordable housing being built in Williamsburg today.

#3 We can also leverage Mandatory Inclusionary Zoning for truly affordable housing.

Under the voluntary IZ program, affordability is generally set at 80% of AMI, which is actually higher than New York City Median Household Income. But according to the report, in high-market areas “inclusionary housing can easily spur the development of units affordable to very low income households without much of a trade-off.”

This is because there’s not much impact, from an underwriting perspective, of lowering rents by a few hundred dollars a month to buy down affordability – not when each additional unit gained by added zoning will net the thousands of dollars a month in rent that new luxury development commands in high-income areas. Mandatory Inclusionary Zoning is one of the best ways we have to not only build truly affordable housing, but to create truly dynamic, mixed-income, inclusive neighborhoods by building it in high-opportunity areas with good transit, schools, parks, and amenities – areas lower-income residents usually can’t come close to affording to move into.

#4  Permanent Affordability Works.

Inclusionary Zoning projects get a benefit from the city – additional floor area – that lasts as long as the building does. As such, the public benefit – affordable housing – is required to last the same amount of time. Not only is this fair, it’s feasible. Both in terms of development and building sustainability, the report makes it clear that the current policy of requiring Permanent Affordability for Inclusionary Housing works.

First, the report “estimate(s) that requiring permanent affordability instead of long-term affordability is unlikely to materially affect developer decision-making.”  This means the oft-heard cry of the Real Estate industry – “but we won’t build!” – isn’t a factor here.

But getting a building constructed is only the first part of the equation. In addition, the building has to pay for itself – rents need to cover debt, reserves, taxes, and operations for the life of the building. Otherwise the building becomes at risk of falling into disrepair. Fortunately, the mixed-income rents of Inclusionary buildings, which provide a steady & hefty cash flow, make this scenario very unlikely. As the report states, this risk of failing to maintain long-term sustainability is “much lower for mixed income buildings, even after accounting for the spike in operating expenses that occurs when temporary property tax exemptions expire.”

The Furman Center’s white paper on Inclusionary Zoning is an excellent look into the economics of Inclusionary Zoning, and should serve as a solid foundation as the City works to develop an MIZ policy that is both a financially sound tool, and also strikes a balance between production, affordability, density, and inclusion. If crafted broadly and correctly, NYC’s Mandatory Inclusionary Zoning program can serve to create a steady stream of permanently affordable housing units, that will help ensure that integrated and inclusive communities will be the key part of our City’s growth.