Against Inclusionary Zoning

Perhaps a Hot Take

I was having a nice little exchange on Notes with

DeepLeftAnalysis

about the housing shortage and accidentally started typing out a whole essay on Notes, so I thought I’d flesh it out into a real piece. Here's the full context, of our exchange, but to jump in with more succinct context, I wrote:

…In my context of the major west coast metros (a very different situation from most of the rest of the country), a lot of upzoning has already happened, and minimum parking requirements are at least over-ruled close to transit, if not abolished entirely. In these cities, I think the biggest barrier right now is probably overly-burdensome inclusionary zoning requirements. Every required “below market-rate” unit just means the developer needs the market to support extra-inflated rents on the non-subsidized units before the project will pencil out. Fully market-rate projects might be viable at current rents, but instead things aren’t getting built because we’re putting the tax burden of these subsidies on developers.

Portland famously passed a policy that made inclusionary zoning kick in at buildings with 20 or more units. Ever since that policy passed, Portland has gotten a hell of a lot of 19-unit apartment buildings. The inclusionary zoning is just too expensive to work unless you’re building a high-rise with hundreds of units. So this policy failed to actually add subsidized units to the market, while preventing the construction of hundreds of market-rate units.

To which he asked:

To take a step back, “inclusionary zoning” is a well-intentioned policy that was supposed to solve a couple different problems. Inclusionary zoning is not exactly the opposite of the “exclusionary zoning” of the suburbs, but it is named because in part it was supposed to be a solution to the problems of exclusionary zoning. Requiring that the only housing in town be detached homes on large lots excludes those who can’t afford detached homes on large lots. Externalities of living near poverty, solved! …At least, for the people who can afford to buy in.

Meanwhile, mid-century public housing projects that concentrated huge populations of desperately impoverished people into government-built slum towers were being built in abundance in major cities across the country. We know those obviously turned out really poorly. So why not kill two birds with one stone—sprinkle subsidized housing for poor people into nice new apartment buildings, and you get more racial and socio-economic integration, while averting concentrated poverty. Voila.

The problem is that in the standard implementations of inclusionary zoning policies¹, the affordable units are not subsidized by the government, they’re subsidized by the developer. It’s not structured as a literal tax, but just as a requirement that a certain percentage of units are rented out at “below market-rate.”² So instead of developers paying a literal tax that the city uses to subsidize housing, developers are implicitly taxed in the form of foregone revenue. This unfortunately means those homes will only get built if the developer’s profit margin on the other units is so good they can eat those losses.

The actual number of units and degree of subsidy required by most inclusionary zoning policies is related to what income level you set your units for—in California this target would be some band of percentages of the “Area Median Income”. If you price the subsidized units for lower incomes, you can do fewer, or you can set aside a larger number of units for a slightly higher income range. Here in California, housing affordability has gotten so out of hand that a development can satisfy its inclusionary zoning requirements by setting aside some units as “middle-income” units, meaning they’re subsidized to be “Affordable” for households making 80-120% of the Area Median Income. In San Francisco, that could be someone making ~$125,000/year getting a subsidized apartment.

An aside on developers

I know I just used the “D” word a lot without any implied negativity or vilification in that last section, and that might have some readers in a real huff. So much American pop culture and political discourse treats developers as the “bad guys,” that I need to take a moment to push back against that notion. Many Americans really believe developers are all bad people like in the movies. They deserve to be punished, and further, they’re all rich, so they can afford to pay whatever we tax them anyway!

To consider them in another light, I think it’s fruitful to analogize developers to farmers, as they’re both providing a basic human need. If we had a national food shortage, we wouldn’t tax the hell out of farmers to make them pay for subsidized food for the poor. We would try to help farmers grow more food. Development is also comparable to farming in its high degree of financial risk. Costs are unpredictable, construction can take months or years, and when all that time has passed, who knows if rents will be high enough to justify all that expense after all?

We need to understand that developers are in it for profit, and that’s fine, actually. Because development is risky, and hard, and takes a long time, people won’t do it unless the expected ROI is better than other things they could do with their time and money. So saying “this developer is rich, they can afford the taxes,” ignores the fact that if the costs are too high to justify the time and effort and risk, developers will simply choose to not build anything. And if that’s what they choose, your city will be worse off. Because nice new buildings are nice, actually.

“Affordable Housing” vs Housing Affordability

Inclusionary zoning is usually what capital A “Affordable Housing” refers to, which is very politically powerful language. “Who could possibly be against Affordable Housing?” (“Wait, sorry, I couldn’t quite hear you. Did you say affordable housing or Affordable Housing?”) So in this piece, I’m in the awkward position of being the asshole who’s (at least kind of) against Affordable Housing. Because trying to maximize Affordable Housing is actually counterproductive to housing affordability. Here’s a great piece by

Brad Hargreaves

on this terminology problem:

Reclaiming "Affordable Housing"

Local politicians definitely use this ambiguity around “Affordable Housing” as a source of misdirection and confusion. There was a long-standing norm in San Francisco politics that if a district supervisor was against a development in their district, the rest of the board would vote with them, giving each supervisor a functional veto over development within their own district. A classic demand of NIMBY politicians in SF for a long time was that new multi-family construction should be “100% affordable,” which sounds great to anyone who doesn’t really think about what it means, but really just meant for-profit multi-family development was banned in any district with a NIMBY supervisor. The last of those people was thankfully voted out in the 2024 election.

The Lottery

The quantity of “Affordable” units generated by inclusionary zoning obviously doesn’t come anywhere close to the number of people who would like them, so while market rents keep going up, some tiny sliver of people can get arbitrarily cheaper rent through a literal lottery. The city/county “Office of Housing and Community Development” has an email list you can sign up for where you get notified of these lotteries, and in most cases, hundreds of people are signing up for a lottery for just one or two apartments.

The expectation that the neediest people among us will have the awareness, time, and cognitive capacity to sign up for an email list and fill out a fresh form to enter every new lottery is some kind of sick joke. So compared to the overall population of people with low incomes, the lottery pools are going to be disproportionately full of people who are relatively politically aware, technologically savvy, and have time on their hands. In other words, starving artists or elite-aspirants with underpaid non-profit jobs.³ Y’know, people like me.

One time I was number 51 for a lottery where 5 subsidized apartments were all available at once - pretty close! Even after subsidy, the rent for this “affordable” apartment would have been $2,700/month. Seriously. Inclusionary zoning is a counter-productive policy that doesn’t work, but since most people don’t pay any attention to local politics, they’ll generally keep voting for more “Affordable Housing.”

Political Maneuverings, Looking Forward and Back

The one redemptive caveat I will give for inclusionary zoning is this: these policies in some jurisdictions are designed around offering a “density bonus,” where a developer who sets aside more “Affordable” units is allowed to build a larger building with more units overall. To break out of the NIMBY status quo, this was genuinely a great way to proverbially sneak the pill (up-zoning) into a spoonful of peanut butter (more Affordable Housing). But at this point, policy-makers acknowledge that waiving inclusionary zoning requirements can make more developments financially viable in a time when we desperately need more construction.

In San Francisco, the Hayes Point project at the intersection of Van Ness and Market got stalled out by rising interest rates coming out of the pandemic. The developer is ready to cut their losses with a giant hole in the ground. Back in September, the out-going Mayor and Board of Supervisors convinced the developer to come back to the table by offering to waive the Affordable Housing requirement, while still allowing them to build to the full density bonus they had planned. I would be happy to see a lot more of this. If the inclusionary zoning density bonus is a foot in the door to unqualified up-zoning, all the better.

As far as I know, this proposal seems to still be under consideration⁴, to be decided upon by the new Board of Supervisors. I don’t think this should take much consideration. It seems fairly obvious to me that 333 condos is a much better use of space at one of the most transit-rich intersections in the city than a giant hole in the ground.

And it’s worth noting that as far as charges to developers go, inclusionary zoning is just adding insult to injury. Quoting from the SFist piece linked above: “Lendlease (the developer of Hayes Point) has already, reportedly, paid out $13 million to the city's affordable housing fund, and spent $27 million to cover other impact fees to the city.” This is utterly insane. The NIMBYs set these taxes so high back when they were in charge because they wanted development to be prohibitively expensive. Now that we know we not only want more development but need it in order to avert the urban doom loop, what are we even doing?

Considering Inclusionary Zoning as a Tax

The Prisoner's Dilemma of the Fragmented Metropolis

In this previous piece of mine, I didn’t explicitly call out inclusionary zoning, but this what I was talking about when I wrote,

In the prisoner’s dilemma of “Rational Fiscal Strategy,”⁵ taxing more to subsidize housing for poorer people is the “cooperate” option, when all the suburbs are defecting.

If you look at inclusionary zoning as a tax, the incidence of that tax is distributed between the developer and the market-rate tenants of the new building who are being charged higher rents to cover the foregone revenue of the subsidized units. It’s certainly a progressive tax on net, and I’m generally for progressive taxation, but this is just a badly designed tax. The local level is not the right place to levy overly progressive taxes, because it is very easy for the rich to simply leave your city to avoid the tax, and rich people have a lot of positive effects that you would like to keep in your city. Amidst the ongoing difficulties cities like San Francisco and Portland face in recovering from the pandemic, convincing affluent people to stick around seems like a genuinely critical priority.

A tax is a disincentive. I do not want to disincentivize living in the city. I do not want to disincentivize apartment dwelling. And I definitely do not want to disincentivize apartment construction.

Housing subsidies for the poor are fine and dandy, but this is not the way to pay for it. Dripping a few more units into the tiny bucket of “Affordable Housing,” while choking off the hose of market-rate housing makes no sense. For as long as we keep restricting supply, the gap between market-rate and affordability will continue to widen. Broad up-zoning, and unleashing the construction thwarted by excessive taxes on development, would do far more for housing affordability than continuing to try to shovel subsidies into that chasm.

1. Inclusionary zoning is almost always a local (or sometimes state) policy, so without picking a specific jurisdiction, one must refer to these policies with some degree of generalization.

2. Or it can be applied to a condo development in the form of deed restrictions on a certain number of the condos.

3. I suppose this can be seen as naive and stupid policy design. Or if you see it as intentional, it could be seen as pretty vile and despicable. Or, it could be seen as a complete political masterstroke. Look at this way: affluent educated progressives get to placate the guilt they feel about their riches, while still vaguely targeting the fiscal handout at their less-affluent progressive and educated peers, as opposed to the kinds of poor people who the affluent wouldn’t want to live near. No one would ever fess up to it, but I bet there are a lot of people in places like California or Portland or Boston who love this.

4. When I tried to directly Google whether this proposal has moved forward, Google’s AI claimed the proposal was approved, but the articles it cites are all from around the same time as the one I link as a source, with the SF Chronicle saying, “The legislation will be reviewed by the city’s Planning Department and Board of Supervisors in the coming months.” One article seemed to mis-interpret that the policy was already finalized, while another article from a few days after that one still referred to it as “pending.”

5. If you want to know what “Rational Fiscal Strategy” is… read the piece 🙂