There are three areas of the country that have been implementing inclusionary housing policies for a sufficient length of time to evaluate its long-term effects: New Jersey, Montgomery County, Maryland (outside of Washington, D.C.), and California. In the past 30 years inclusionary housing has been successful in increasing the total supply of affordable housing in these three areas by 100,000 units. Although there is a wide variety in the specific policies implemented in each of the three different areas, inclusionary housing has in general created a ‘win-win situations’ in the communities where it has been continuously applied over several years:

 

New Jersey. In order to comply with New Jersey State Supreme Court decisions (‘Mount Laurel I’ in 1973 and ‘Mount Laurel II’ in 1983) which mandated that every jurisdiction provide their fair share of affordable housing, the New Jersey State Legislature enacted the Fair Housing Act of 1985. The Fair Housing Act required municipalities to construct enough affordable housing to meet regional needs, as determined by the state Council on Affordable Housing. The vast majority of New Jersey municipalities have enacted mandatory inclusionary housing ordinances to realize their affordable housing goals. In fact, seventy percent of all the new housing affordable to low- and moderate-income households in New Jersey has been created as a result of inclusionary housing. In the 23 years it has been in effect, the Fair Housing Act has resulted in the addition of approximately 53,500 affordable housing units statewide. For more information about New Jersey’s experience with inclusionary housing, see the ‘Internet Resources’ section.

Montgomery County (MD). In response to rapidly rising housing prices, Montgomery County adopted a mandatory inclusionary housing policy in 1974, known as the Moderately Priced Dwelling Unit (MPDU) Program. The authorizing ordinance requires residential developments of 50 or more units to make 12.5% to 15% of the units affordable to households with incomes less than 60% of the county’s AMI adjusted for family size. To compensate developers for the additional costs of building the affordable units, the Montgomery County’s ordinance provides a density bonus of up to 22% above what could be built under existing zoning. The density bonus is based on a sliding scale that allows increasing densities for increasing proportions of affordable housing included in the development in order to encourage the highest number of affordable units as feasible.

People already living or working in the county are given priority in buying affordable units and the county requires that the for-sale units remain affordable for 10 years and the rental units remain affordable for 20 years. When the units are resold at market rates at the end of these time limits, the county receives a share of the profits. Additionally, the County Housing Authority or the designated county-wide nonprofit housing group can purchase up to 40% of the affordable units after they are built. By authorizing the purchase of newly-constructed affordable housing, the MPDU program has resulted in the incremental creation of a permanent and ever-growing stock of affordable housing that is dispersed throughout the county.

Since it went into effect, the MPDU program has resulted in the construction of over 10,000 units of affordable housing. The program currently costs the county only $400,000 annually to administer. However, because the affordability requirements are tied to larger developments (50 units or more), the construction of affordable units slows during those periods when the residential real estate market takes a downturn or in communities where most large parcels of land have already been developed. Some Montgomery County residents have criticized the MPDU program on the grounds that the increased density it allows conflicts with the character of existing neighborhoods, results in traffic congestion, and overburdens public infrastructure. For more information about Montgomery County’s inclusionary zoning ordinance, see the ‘Toolkit Links’ section.

California. Since 1989, all California cities and counties have been required by the state to adopt a voluntary inclusionary housing zoning ordinance under the Density Bonus Law (Government Code, Section 65915). As of 1999 (the last time the State Office of Planning and Development surveyed planning agencies on the topic), nearly 250 jurisdictions in California have adopted some form of voluntary inclusionary zoning ordinance. In general, such voluntary ordinances give incentives to those developers who choose to include affordable housing in their developments without being required to do so. Specifically, the California law stipulates that developers receive a density bonus of 25% (or an equivalent financial payment) and any additional incentives the developer can show are needed to offset the cost of the affordable units (such as expedited permitting, relaxed development standards, etc.) if they voluntarily agree to construct at least 20% of the units affordable to low-income households, 10% of the units affordable to very lower-income households, or senior citizen housing. Affordable monthly rent is calculated as 60% of AMI for ‘lower income’ households and 50% of AMI for ‘very low income’ households, with both figures adjusted for household size, multiplied by 30% (the typical affordability standard), and then divided by 12. Affordable rents and sale prices must be maintained for at least 30 years if the developer received a density bonus (or its financial equivalent) plus additional incentives or for at least 10 years if the developer only received a density bonus (or its financial equivalent).

In addition, California’s Community Redevelopment Law (Health and Safety Code, Section 33413) stipulates that all residential projects in redevelopment areas include affordable housing units. Private developers are required to construct at least 15% of all housing units as affordable, with at least 40% of these affordable units available to very low-income households. Public development agencies are required to have 30% of housing units as affordable, with at least 50% of the affordable units available to very low-income households. (Click here to see how to calculate income thresholds for California redevelopment projects based on examples from nine counties in Southern California.) The affordability of these units must be maintained for at least 55 years for rental units or 45 years for owner-occupied units.

Requiring cities and counties to adopt voluntary inclusionary zoning ordinances and requiring redevelopment agencies to include affordable housing in all residential redevelopment projects are both important measures to help create affordable housing. However, the overall impact of these policies on the affordable housing supply in California has been limited because compliance with the requirement isn’t mandatory (in the case of voluntary ordinances) or the geographic scope of the requirement is restricted to specific areas (in the case of the redevelopment requirements).

On the other hand, a mandatory inclusionary housing requirement has the potential to generate a much greater number of affordable housing units in your community. This is because mandatory inclusionary housing requires all developers to include affordable housing in all residential projects in the jurisdiction as a condition of project approval. Between 1973 (when the City of Davis adopted the nation’s first mandatory inclusionary zoning ordinance) and 1998, approximately 24,000 units of affordable housing were constructed statewide in California under mandatory inclusionary housing requirements. And as of 1996 (the last time the State Office of Planning and Development surveyed planning agencies on the topic), approximately 120 jurisdictions in California have adopted some form of mandatory inclusionary housing. As these statewide figures indicate, a growing number of California cities and counties have adopted mandatory inclusionary housing requirements and such requirements are helping to increase the affordable housing supply in these areas. To better understand how mandatory inclusionary housing has worked over the long-term in California, consider the experience of the City of Palo Alto.

City of Palo Alto. The City of Palo Alto is located in the Bay Area in the heart of Silicon Valley and has historically been characterized by extremely high housing prices relative to many other California communities. Through its Below Market Rate (BMR) Inclusionary Housing Program adopted in 1974, Palo Alto began requiring all new rental housing developments with 5 or more units and all new for-sale housing developments with 3 or more units to provide at least 10% of the units to low- and moderate-income households. On development sites larger than five acres, 15% of the housing units must be below-market-rate. If it isn’t feasible to provide the affordable units within the development or if the project is too small to “owe” at least one affordable unit (i.e., projects with less than 10 units), developers have the option of providing the units at another site or to pay an in-lieu fee. The in-lieu fee is 5% of the sales price of all of the market-rate units in the project (for owner-occupied units) or 5% of the project's appraised value (for rental units). Both owner-occupied and rental units must be kept affordable for at least 59 years. Adherence to BMR requirements is monitored by the non-profit Palo Alto Housing Corporation under contract to the City.

Because compliance with Palo Alto’s BMR Program is mandatory for all new housing development within the city’s boundaries, affordable housing units are dispersed throughout all residential neighborhoods. In addition, the city specifically encourages inclusion of affordable housing in areas that are well served by transit, schools, and other public services. To date, the results of Palo Alto’s mandatory inclusionary housing program include the following successes:
 

One limitation of the program is that very little housing has been constructed for extremely low-income households. The “Below Market Rate” units that developers are required to construct must only be affordable to people making 80-100% of AMI for owner-occupied units and 50-80% of AMI for rental units. Since the AMI of Palo Alto in 1996 was $77,500, the BMR program has not been very successful in providing affordable housing for households whose incomes fall substantially below the area’s high median income. For very low-income households, the program’s relatively high eligibility requirements do not adequately offset the extremely high housing costs in Palo Alto: according to the Housing Element of the city’s Comprehensive Plan, the median home value in Palo Alto in 1996 was $490,000 and the median monthly rent was $1,193. For example, a one-person household in Palo Alto earning 30% of AMI ($23,250) in 1996 would not have qualified for the city’s BMR program, despite the fact that this household would have paid more than twice the amount of rent considered affordable (30% of income, or $581) in order to rent a median-priced apartment ($1,193) in Palo Alto. For more information about California’s experience with inclusionary housing, see the ‘Toolkit Links’ section.