This paper describes the local government affordable housing tool known as Inclusionary Zoning”. It has also been referred to as “Mixed Income Zoning” or Inclusionary Housing”.(1)
The following discussion summarizes this policy’s origin, evolution, key characteristics, and legal considerations when enacting such an ordinance.
I. INTRODUCTION
“Inclusionary Zoning” is the regulatory embodiment of policies promulgated primarily by local government entities that mandate or encourage developers of housing projects to include a specified percentage of housing that is affordable to lower and/or moderate-income level families.(2) In the face of escalating housing prices, coupled with steadily increasing housing shortages throughout the State, cities and counties increasingly look to inclusionary programs to help meet the housing needs of fixed and lower-income residents who live or work in their communities.
Inclusionary programs can be voluntary or mandatory and may include subsidies and incentives for the developers. The selected approach is then implemented by local governments in one of the following ways, or a combination of both, in order to produce the desired housing opportunity:
- The city may require a developer to construct low-income units either on the development location itself (on-site units) or at some other site that the city/county and developer agree is suitable (off-site units).
- The developer may elect to pay an in-lieu fee that the city or county will place in a housing fund or dedicate to another purpose designated by the city or county.
Although the method of implementation is subject to negotiation between the developer and local government entity, cities and counties have the ultimate authority to select the form they wish to adopt.(3)
II. HISTORY
- Purpose & Authority
Local government entities have utilized zoning as an exercise of “police power” for “constructive” land use purposes, as well as for “questionably constructive” exclusion of low-income housing developments from certain neighborhoods, since the 1920’s and the landmark decision of Village of Euclid v. Ambler Realty Co.(4) This case turned on the Tenth Amendment of the U. S. Constitution, which reserves to the states their inherent powers. The police powers were found in Euclid to entitle communities to take actions, adopt laws, and enunciate policies that protect the public’s health, safety, and welfare. Cities and counties were often encouraged by their constituencies to enact “exclusionary zoning” ordinances designed to bar certain groups from a location, region, or neighborhood. Examples of such ordinances include mandating minimum house sizes, allowing only single-family (not multi-family) residential developments, and setting large minimum residential lot sizes.
Inclusionary zoning ordinances arose as a tool to combat such exclusionary programs. Many local government officials consider them as “the revision of residential zoning rules to encourage (or sometimes compel) the construction of affordable housing in places it otherwise is not built.”(5) Cities and counties may, at their discretion, enact inclusionary zoning ordinances in California; they are not mandated or established by the State Legislature.(6)
The latitude attributed by courts to cities and counties for the exercise of their police powers is quite broad and provides local government entities with substantial discretion to determine use and development of the finite supply of land within their borders. Any controls or regulations that are deemed reasonably related to maintaining the general welfare of the community are permissible, unless preempted by state or federal laws or the respective constitutions. Inherent in the exercise of this police power is the authority to mandate inclusion of development with particular characteristics that further “enhance” the growth of the community. Inclusionary zoning is a direct response to exclusionary land use practices and represents local government’s effort to correct past, as well as perceived existing, residential housing disparities in furtherance of the general welfare.(7)
- Ordinances in Place
As noted above, inclusionary housing programs require developers to subsidize in some manner the construction of affordable housing as a condition of a project’s approval. This may include making a percentage of the proposed project available to low- and moderate-income residents or payment by the developer of an in-lieu fee. Out of 478 incorporated cities in California (107 Charter and 371 General Law) and 58 counties, the following cities (106) and counties (13) report that they have some form of inclusionary housing program: (8)
III. ORDINANCE CHARACTERISTICS
A. Current Trends in California Inclusionary Zoning Ordinances (9)
The following characteristics are most commonly found in the existing inclusionary zoning ordinances of California cities and counties:
- A requirement that 10 to 20 percent of new residential units be affordable.
- Minimum project size typically is 10 units.
- Affordable units and the market units need not be identical—just similar in outward appearance.
- A requirement that the affordable units be spread throughout the development.
- May permit the developer to pay a fee in lieu of construction (ranges from $600 to $36,000 per unit).
- Nearly all programs require units for both low-income (50-80 percent of median income) and moderate-income (80-120 percent of median income) families. About one-half of the programs require very low-income (50 percent of median income) residents to also be accommodated.
- Require restrictions on price or rent for 30 years.
As of October, 2000, these programs had produced 24,000 “low” income units over a 20-year period.(10)
B. Municipalities’ Perceived Benefits
Inclusionary policies are intended to encourage income-integrated communities and to assist in the prevention of an often-perceived stigma attached to affordable housing. The preliminary issues addressed by local government entities when seeking to attain such goals include:
- The magnitude of the inclusionary requirement: how many units; when will they be produced; what affordability levels are targeted; and the size and type of developments subject to the ordinance.
- The term that the units will be required to remain affordable.
- The unit features (size, location, amenities).
Given the affordable housing “crisis” throughout the State of California, as well as the inherent delays associated with the production of such housing, many jurisdictions have considered increasing their inclusionary requirements to at least 20 percent. California’s density bonus law is triggered if 20 percent of the total units are affordable to low-income households or 10 percent are available to very low-income households.
Most municipalities cite housing shortages for very low- and low-income households within their jurisdiction as the fundamental reason for adopting inclusionary zoning ordinances. The local entities’ regional housing needs assessments, housing element considerations, and consolidated housing plans all play a role in the policy decisions with respect to income targeting.
Several jurisdictions in California apply their inclusionary ordinances to all new residential development, while some exempt certain developments based upon “threshold triggers,” such as a certain number of units or high-density developments. Local government advisors consistently recommend that such ordinances be applied equally to all residential development with variations only on the manner in which the obligation can be met by smaller developments.
The production-timing requirement is a key issue for the enactment of any inclusionary ordinance. Many jurisdictions require the inclusionary units to be produced at least concurrently with the market rate units. Others permit “phasing”, or staggering, of inclusionary units in the construction of larger developments
Local jurisdictions want inclusionary units to remain in the affordable category for specified periods ranging from 30 to 75 years. These restrictions come in the form of deed restrictions, resale controls, and rental restriction agreements. If no enforceable restrictions are in place, the ordinance will only benefit the initial renter or purchaser and may be vulnerable to legal challenge for failure to substantially advance a legitimate state interest.(12)
Municipalities encourage developers to construct and disperse inclusionary units on-site and with the same size and outward appearance as the market-rate units. They are also urged to discourage the use of alternatives, such as accessory dwelling units, unless they are necessary to achieve the ultimate goals of the inclusionary housing program.
To avoid unnecessary legal challenges (see Part IV of this paper), local jurisdictions are encouraged to provide standards and procedures for reducing, waiving, or mitigating the requirements. This includes the establishment of a fair process by which a developer can request full or partial relief from the inclusionary requirement.
IV. DEVELOPER OBSERVATIONS & COMMENTS
A. Perceived Negatives (13)
Some developers have voiced the following concerns about inclusionary requirements:
- Reduces saleable value of development upon completion – Developers commonly equate inclusionary zoning mandates with a tax on new development. The developer is forced into making little or no economic profit on these units unless increased costs can be offset by property tax reductions, permit waivers, housing price (rental) increases, or comparable financial incentives.
- Developers cannot make money on such affordable housing mandates – Costs are unfairly piled on a small segment of the community when an entire community is the intended beneficiary.
- Inclusionary zoning strategies are frequently based upon faulty market-supply equations – Many jurisdictions utilize an equation that relies primarily upon a developer’s ability to sell market-level units for a majority of the proposed units.
- Mandatory inclusionary zoning programs without compensation are “takings” – This challenge has become more problematic with the recent California Supreme Court decision holding that an inclusionary requirement is valid if its specific impact can be found to have a reasonable relationship to the purpose of the inclusionary requirement.14
- Developers should not have the burden of curing a community’s affordable housing problems – To alleviate these community-wide problems, all segments of the community should be included in the solution, particularly its financial attributes, not just the developer.
- Any Inclusionary program should be “voluntary”, not “mandatory” – Communities with major economic development needs are best served by establishing an incentive-based inclusionary zoning ordinance. Mandatory programs are relatively unsuccessful except when applied to developments of 50 or more units.(15)
B. Optimal Features or Options to be Sought
Below is a list of features that give developers an array of options when deciding whether or not to enter into an inclusionary program:
- In-lieu Fees – This option permits a developer to pay into a designated local fund an amount equivalent to the cost of producing the mandated units. While local jurisdictions may seek to unilaterally set this fee at a level sufficient to pay for the perceived cost of producing the mandated units elsewhere, the developer must take whatever steps necessary to ensure that such fees are actually negotiated, a formula set, and resolution adopted by the appropriate Council or Board to secure reliability in its application.
- Land Dedication – This option permits a developer to donate an alternate site to the municipality upon which another producer, such as a non-profit developer, can build the mandated inclusionary units. The site must be physically and economically suitable for the units mandated.
- Transfer of Credits – The developer is granted credits for producing more inclusionary units on one of its development projects to “offset” its obligations on a different development. Developers may also seek “credits” for financial contributions to another development (e.g., assisting a non-profit developer to complete an affordable housing development).
- Waiver, reduction, or deferral of fees – The local government’s waiver of fees will provide the greatest benefit, but may not always be possible due to exactions needed to pay for particular services or infrastructure for which they are levied. Deferral of fees in such an instance should be sought until certificates of occupancy are issued (and income generation commences).
- Increase density bonus options when appropriate – A density bonus can reduce development costs and/or financing gaps. Significant density bonuses over those required by state law can considerably reduce development costs, depending on the land costs in the area.
- Reduce or modify zoning and development standards – State density bonus law mandates the provision of an incentive or concession if a developer agrees to provide the requisite percentage of affordable units. The law defines an incentive or concession to include:
- A reduction in site development standards, including reductions in setbacks, square footage requirements, and parking standards.
- A modification in zoning code requirements.
- A modification in architectural design requirements and minimum state building standards when it is necessary to meet projected housing unit goals.
- Approval of mixed use zoning when the affordable units are proposed for a mixed commercial, office, or industrial development.
- Expedited application and permit processing – Mandate as part of the inclusionary agreement the special processing treatment for all regulatory activities. Significant reduction in time between submission of project proposal, application approvals and issuance of necessary permits will substantially reduce developer costs, (e.g., “one-stop” permit process).
- Financial incentives – Tax abatements, subsidization, or provision of infrastructure for the development, and/or transfer of ownership of additional property for unconditional development in exchange for the inclusionary affordable housing development commitment. Local government entities can take at least 2 actions to assist developer financing needs:
- Provide in the inclusionary ordinance that the city or county will take whatever local action is required to qualify the development project for state or federal financing resources.
- Provide local sources of funding to compliment or supplement non-local sources. Inclusionary programs can direct that inclusionary units have priority for locally generated funds such as Housing Trust Funds; Redevelopment “Set-Aside” Funds; or Mortgage Revenue Bond Financing.(16)
V. THE PREVAILING WAGE Dilemma
Uncertainties in the state-imposed prevailing wage requirements have begun to inhibit inclusionary housing programs and the construction of affordable housing. While privately funded housing construction is not subject to the prevailing wage requirements for “public works,” some trade union representatives have argued that an agreement between a developer and a local government to provide affordable housing can trigger the prevailing wage requirements, especially when the local government provides the concessions/incentives as offsets for the additional costs to develop affordable housing. Developers argue that it is counterproductive for local governments to entice private development with regulatory concessions on the one hand, and then subject such development to the financial disincentive of “public works” status on the other hand, which would increase construction costs significantly.
VI. LEGAL CONSIDERATIONS
A. State Law
California requires each municipality to adopt a comprehensive, long-term general plan for the physical development of the city. The plan must contain seven mandatory elements, including a housing element. The Supreme Court has determined that the general plan is the paramount legal document for a city’s development.(17)
- The Fair-Share Housing Requirements of Municipalities
A general plan’s housing element must identify the municipality’s housing needs, including the jurisdiction’s fair-share regional housing requirements for low- to moderate-income housing. One key program that assists local governments’ meet their fair-share housing obligations is through inclusionary housing programs.(18)
- California Law Requires Cities and Counties to Grant Developers Density Bonuses and Other Incentives under Specified Circumstances: The “Density Bonus Statute”(19)
Applicable to both mandatory and voluntary inclusionary ordinances, the mandates of this statute are triggered when a developer’s housing construction plan does at least one of the following:
- 20 percent of the total units in development are set aside for low-income households; or
- 10 percent of the total units are set aside for very low-income households; or
- 50 percent of the total units are set aside for persons aged 55 years or older.
If any of the above conditions are met by the developer, the local government is required to grant the developer a bonus in one of the following ways:
- Grant a 25 percent density bonus over the current density allowed and provide at least one of several additional zoning or other incentives; or
- Provide other incentives of equivalent financial value based upon the land cost per dwelling unit.
The Density Bonus statute also requires that the inclusionary units must remain “affordable” for at least 10 years, but the statute gives local jurisdictions the authority to impose a much longer requirement, (e.g., City of Berkeley requires that units remain affordable for the life of the building.20)
B. Case Law
Constitutional analysis of inclusionary zoning ordinances essentially must consider two types of potential challenges: “Facial “and “As applied”. The former is a challenge to an ordinance based upon the requirement itself. The latter is a challenge based upon application of the specific requirement to a particular development. Legal advisors to local government entities generally advise them to protect against potential challenges for unconstitutional application of an otherwise constitutional provision by including procedures that provide developers with the opportunity to request alternatives or exemptions from the proposed obligations if developers can prove that the requirements go beyond constitutional limits and/or create undue hardship. 21
- “Facial” Challenges
Homebuilders of Northern California v. City of Napa22 is the leading California case upholding the constitutionality of an inclusionary zoning ordinance confronting a “facial” challenge. The court found that the ordinance, described below, met the required elements, defeating a facial challenge through a finding that it substantially advanced a legitimate State interest by requiring the provision of affordable housing. The Napa ordinance had the following key features:
- Housing Trust Fund;
- Housing Impact Fee on Non-Residential Development; and
- Inclusionary Zoning/In-Lieu Requirement for Residential Development, including:
- Findings describing the need for new employee housing.
- Finding of lack of affordable housing for lower-income residents.
- Recognition of Housing Element requirements as well as a dwindling supply of land.
- Stated desire to retain a balanced community with housing available to low- and moderate-income households.
- Requirement that at least 10 percent of all new dwelling units must be “affordable”; for rental units, one-half of the affordable units must be affordable to very low-income households and one-half to low-income households. If affordable units are at level attainable for households with incomes not exceeding 80 percent of median, the developer is entitled to a 5 percent density bonus or equivalent incentive.
- Affordable rental units must be available in perpetuity.
- Affordable units must be comparable in number of bedrooms and construction, but may have reduced square footage and interior amenities.
- Affordable units must be dispersed throughout the development, but the City may permit clustering.
- Multi-family residential housing developer may propose to meet inclusionary obligation through payment of an in-lieu fee or alternative equivalent action if so approved by the City. In-lieu fees are calculated on a percentage basis of projected construction costs.
- A developer is entitled to a reduction, adjustment, or waiver of the inclusionary requirement if there is “an absence of any reasonable relationship or nexus between the impact of the development and either the amount of the fee charged or the inclusionary requirement.” This flexibility was very important to the Napa court in upholding the constitutionality of the ordinance.23
- “As Applied” Challenges
Inclusionary ordinances that are less than “artfully” constructed can be susceptible to a constitutional challenge on an “as applied” basis. This is particularly so if it is applied to a residential development in a manner that clearly fails to advance a legitimate state interest. It must be implemented by clear standards and procedures and not in an arbitrary or discriminatory manner that demonstrates a failure to advance a legitimate state interest.
Local government entities are encouraged to include several procedural safeguards in their inclusionary programs to aid avoidance of improper application, such as regulatory concessions and incentives to developers. This is necessary to offset financial restrictions of the ordinance.
Local entities should also provide a fair and clear “appeal” process for developers. This mechanism is a vital “due process” requirement that provides a developer the ability to request, and potentially receive, full or partial administrative relief from the Inclusionary requirement in the form of a reduction in the obligation, alternative forms of compliance, and/or complete waiver of the requirement.
“As applied” challenges most often focus on the theory that a particular development is being subjected to a requirement that represents an exaction with no reasonable relationship or connection to the government interest in providing affordable housing. It is clear that the specific impact of any inclusionary requirement must have a reasonable relationship to the purpose of the inclusionary ordinance.24 Developers have argued that because mandatory fees or land dedications are often considered “exactions”, application of an “in lieu” fee or land dedication option was not reasonably related to the provision of foregone housing units. This posture is rebutted by an ordinance that provides an adequate method for ensuring that the amount of the required alternative is reasonably related to that necessary to facilitate production of the affordable units elsewhere.25
VI. CONCLUSION
Inclusionary zoning programs have worked best when combined with developer incentives, density bonuses, and related commitments to mutually attractive economic stimulation of such developments. It allows higher-income communities to achieve balanced economic composition and helps limit “urban sprawl” by concentrating impacted construction in a single location.
The overwhelming impetus for inclusionary zoning is the combination of tight and expensive housing markets with a civic interest in providing both housing opportunity and economic balance. There must always be an underlying sensitivity, however, to the locality paying for it and the population benefiting from it.26
(Endnotes)
- 1 Inclusionary Zoning- Legal Issues, California Affordable Housing Law Project and Western Center on Law & Poverty (December 2002) p. 2
- 2 See California’s Housing Element Law
- (Cal. Govt. Code Secs. 65580- 65589.8) wherein local governments are required to make “adequate provision for their fair share of the regional housing needs of all income levels”, including the needs of households with very low income
- (income at 50% or less of the area median) and low income (income at 80% or less of median).
- 3 See Inclusionary Housing in California, Calavita & Grimes, 64 J. Am. Plan. Assn., 151 (1998)
- 4272 U. S. 365 (1926)
- 5 See An Egalitarian’s Market: The Economics of Inclusionary Zoning, Dietderich, 24 Fordham Urb. L. J. 26 (1996)
- 6 Calavita, supra, note 3, at 151
- 7 Inclusionary Zoning: Legal Issues, supra, note 1 at pp 3-5
- 8 www.ceres.ca.gov/planning/bol/survey_housing.html; www.cacities.org/doc.asp?id=53
- 9 Inclusionary Zoning and Affordable Housing, Tustian, New Century Housing, supra, note 9 at 24
- 10 These numbers clearly indicate that the current system does not come close to meeting the housing needs of California’s most needy residents. Attracting developers with voluntary, incentive-based programs, rather than the “present plethora” of mandatory programs, would seem to be “a better way to go.”
- 12 See Yee v. City of Escondido, 503 U.S. 519 (1992)
- 13 Inclusionary Zoning: Pros and Cons, Burchell and Galley Vol. 1, Issue 2, New Century Housing, 3-12 (2000)
- 14 San Remo v. City and County of San Francisco, 27 Cal. 4th 643 (2002)
- 15 Arguments Against Inclusionary Zoning You Can Anticipate Hearing, Tustian, New Century Housing, supra, note 9, at 17-20
- 16 Inclusionary Zoning: Policy Considerations and Best Practices, California Affordable Housing Law Project and Western Center on Law & Poverty (December 2002) pp 15-23
- 17 Lesher Communications, Inc. v. City of Walnut Creek, 802 P. 2nd 317, 322 (1990)
- 18 Calavita, supra, note 3, 156
- 19 Calif. Govt. Code Secs. 65915 et seq.
- 20 Zoning Ordinance 23C sec. 12.060(F), City of Berkeley
- 21 Inclusionary Zoning: Legal Issues, supra, note 1 at p 7
- 22 90 Cal. App. 4th 188 (2001)
- 23 Inclusionary Zoning: Legal Issues, supra, note 1 at pp 8-9
- 24 San Remo v. City and County of San Francisco, 27 Cal. 4th 643 (2002)
- 25 Inclusionary Zoning: Legal Issues, supra, note 1 at pp 13-14
- 26 See “Inclusionary Zoning: Pros and Cons”, supra, note 9, at p 9