The Two Lenses of IZ

What do you think of when you hear the term Inclusionary Zoning (IZ) laws, which require builders of new housing to set aside a portion of it at below-market, subsidized prices? Is it a cheap way to deliver affordable homes? A policy that reduces economic segregation? A tax that reduces construction and makes housing less affordable overall? A scam that doesn’t produce real affordability? Let’s take a look through two separate lenses: social and economic.

From a social perspective, IZ provides two main benefits: affordable homes and socioeconomic integration. The benefit of the first one is obvious: low-to-middle-income people in our community have a hard time finding somewhere to live, and IZ homes provide that. In addition, socioeconomic integration allows us to fix the historic segregation our governments created. It give everyone the opportunity to live where they want to instead of being divided into different neighborhoods or buildings. Having neighbors from different economic strata drives all kinds of benefits, including better education for children, better health, and equal access to services.

Those benefits can be contentious: the ongoing 7 year saga of the “Weston Whopper” is only one of the more well-known fights against affordable and mixed-income housing. Fortunately, that’s less of an issue in Somerville, where, in David Modica’s now-famous formulation, we’re less likely to “be pricks” about the whole thing.

From an economic view, IZ acts like a tax on market-rate housing. If a certain share of units must be sold or rented below market value, developers push up the price of the remaining units to keep their overall profit balance intact — assuming the market can even sustain those higher prices. Sometimes it just takes longer for prices to reach a viable level, which delays the whole project. That delay hits the affordable units too, since they only get built alongside everything else.

There is also strong evidence that setting the IZ requirement too high makes things worse by suppressing new housing construction — as much as 30% in some cases — which in turn makes existing homes even more expensive. Affordability for IZ lottery winners comes at the expense of renters in other apartments.

IZ also breaks down when new home prices fall, because builders can no longer afford to build anything at all. IZ only works while prices stay high: it's not a good long-term model for producing affordable homes on its own.

There is an alternative model of IZ that is growing in popularity: funded IZ, which aims to keep the positive social outcomes while mitigating the economic ones. Portland Oregon, for example, recently instituted a program that granted tax abatements to new rental buildings that had a full IZ component.

Massachusetts provides a similar mechanism called UCH-TIF, which allows lower taxes for new residential construction in commercial areas if 25% of the homes are affordable. Somerville is already pursuing using this tool in Assembly and East Somerville. However, Somerville has relatively little area zoned for commercial use and therefore this particular tool is not applicable in most of the city. The concept can still be quite powerful.

Meanwhile, Boston recently announced direct investment of $10 million in city and state funds to a 20% Affordable project in Roxbury. A direct funding approach is straightforward and effective, but becomes prohibitively expensive at scale. In contrast, tax-abatement funding gets the new housing built, and the payment comes only in the form of taxes we don’t collect later on.

Somerville cannot keep hoping that “developers will just pay for it”. If there is not economic incentive to build, they will not build. And then we lose the permanently affordable housing we want. If we truly want to help people by creating broad and extensive affordability we must have our government provide viable pathways to getting that housing built.