Housing Insight: Can Inclusionary Zoning Solve Our Housing Problem?

As our community continues to lurch through the process of refining its land use code, the question as to how to assure housing affordability will be addressed is a central point of intrigue. Existing neighborhoods are keen to protect their quality life while adamantly embracing the idea that any new development be required to supply housing for families unable to afford prevailing market prices. This applies to both homeownership and rental housing in equal measure. A tool that often surfaces is Inclusionary Zoning.

The concept is very simple, which helps explain the widespread appeal. For every new housing development – whether a subdivision of detached single family homes, or a high-rise apartment building – a percentage of the dwelling units must be priced such that the total housing cost to a low-to-moderate income household does not exceed 30% of gross monthly income. This is the classical definition of “affordable housing.” Over time, rents and home re-sale prices can only grow in lock-step with the consumer price index (or household incomes) to maintain affordability for a set period, usually 30 years or longer. How this scenario is achieved is where the trouble starts, and it snowballs from there.

First, a bit more background. In Colorado, HB21-1117 opened the door for local jurisdictions to adopt Inclusionary Zoning Ordinances (“IZO”) covering both ownership and rental housing. In return, the jurisdiction must provide regulatory allowances that improve the economics of the development, while also offering the opportunity for the project developer to opt-out through payment of a “fee in-lieu” or constructing the required housing units on a separate site. Allowances include reduced parking requirements, increased density, taller buildings, fee waivers or deferrals, et cetera.

Statute provides guidance as to how the fee in-lieu can be calculated, though cannot create an excessive burden for a project developer. Collected fees must be expended in support of alternative affordable housing projects within the community. Adoption of an IZO appears very attractive to the community as elected leaders can claim to be addressing a housing shortage through an easy-to-understand policy without spending taxpayer money.

Here’s the rub. IZO has produced a mixed record nationally and very limited success within Colorado[1].  So, can an Inclusionary Zoning Ordinance solve our housing problems in Fort Collins? No, it will make matters worse. Here’s why.

Geography: Inclusionary zoning requirements work best in geographically isolated market areas. Fort Collins is not located on an island or in a box canyon. If developers perceive our community as difficult to develop, requirements limit compensation for risk, or costs are too high, Weld County is a short drive away. Thus aggravating local social, economic, transportation, environmental, and housing objectives.

Maintaining Affordability: IZO assumes affordability is achieved at the time of development and remains so for as long as restrictions remain in place. Not only does this require a robust administrative program to monitor compliance but fails to recognize that maintenance and operating costs such as property taxes, insurance, and utilities are not tethered to any index. What is affordable today will undoubtedly grow unaffordable over time without ongoing financial intervention.

Developer Contribution: It is commonly assumed that a project developer would be willing to accept a lower rate of return for the opportunity to enter a strong and growing market – or as a matter of civic duty. Maybe, but development activity will definitely suffer. In the real world, the required subsidy to make a single unit “affordable” is greater than the profit that might otherwise be recognized if that unit were priced at market. Even working for free doesn’t pencil out in the absence of additional financial support.

Burden Shifting: The logic behind allowing more units to be constructed on given site, and other regulatory allowances, is based upon cross-subsidy within a project. Lowering the development cost per unit to a sufficient level allows the prescribed number of housing units to be offered below market while elevating the price on unencumbered units. In practice that means a renter earning 61% of AMI is paying more of their income toward housing so their neighbor making $200 less a year can live more comfortably. As untethered cost inputs exceed allowable rent limits over time, this shift in housing burden becomes even more pronounced.

Statistical Flaw: Unless the required percentage of affordable units matches the actual distribution of household income within the community, an IZO plans to underserve demand. Understanding that 100% of area median income (“AMI”) means half of all households earn less than that amount, and assuming households are evenly distributed across the income spectrum, referencing 60% AMI translates as approximately 30% of all households in the market [50% x 60% = 30%; likewise, 80% AMI represents 40% of all households]. This means an IZO that requires 20% of new housing units are to be reserved for renter households earning 60% AMI, or less, fails to recognize at least 10% of low-income households. Moreover, IZOs apply to new development only. As a result, any existing deficiency of affordable housing inventory, plus the “orphan population” must be addressed through other means.

Neighborhood Fatigue: Practitioners understand the need for multiple tools and significant financial resources to deliver truly affordable housing that is functionally and economically sustainable. Most residents do not. When they learn new developments are required to provide affordable housing for the community, it is assumed the problem is being solved when, in fact, the problem is most likely getting worse. This leads to heightened acrimony as publicly-subsidized housing projects are proposed near and within existing neighborhoods.

As a business community, we understand the critical need to increase the supply and diversity of housing options that are affordable to our workforce. With our elected leaders and policymakers, we must continue to explore all available paths to achieve this objective. But we must also be willing to work past suggestions that sound good but fail to improve conditions.

[1] Prior to adoption of HB21-1117 in 2021, an IZO could only be applied to for-sale housing in Colorado due to strict limitations on local rent control policies.

Source: Fort Collins Area Chamber of Commerce
February 29, 2024

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