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Inclusionary zoning (IZ) is a rule that requires developers to include below-market-rate affordable housing in new construction.

It’s popular because it passes the cost of building affordable housing onto developers and the tenants in their new buildings, meaning that cities and their taxpayers don’t have to fund it directly. Another advantage is that new buildings and neighborhoods are economically integrated.

However, it has some important drawbacks. Most importantly, it only works if the market price of housing is already very high. Every dollar of subsidy for below-market comes from the high rents paid in the market-rate units. Fundamentally, inclusionary zoning may blunt the edge of the housing crisis, but it cannot solve the housing crisis. Only abundant housing can do that. And if inclusionary zoning slows or stops production of new housing by making it too expensive to build, then it will worsen the housing crisis.

The danger, then, is in using inclusionary zoning as a solution, rather than a stopgap, because if the inclusionary requirements are too high, IZ can actually block the creation of badly needed housing. Remember, if the numbers don’t pencil out, a builder won’t build. That’s why opponents of high levels of inclusionary zoning often point out that “20% of zero is zero:” they mean that overly-high subsidy requirements result in no housing built, for anyone, at any price.

For example, if someone in Somerville wants to add a third unit to a two-family building, they must offer it below market rate. That’s almost certain to lose money, so we haven’t seen any third units added to two-family homes since the rule went into place in 2019. In late 2023, as part of compliance with the MBTA Communities Act, City Council adopted rules to allow three-unit buildings with no affordability requirements, and we are optimistic that the rules will spur the creation of at least some housing.

But it isn’t just three-unit buildings that our current rules hamper. A 2016 analysis of the economic feasibility of raising our Inclusionary Zoning percentage to 20% found that it “will be likely to end small projects in Somerville.” The city adopted it anyway, and construction of smaller buildings slowed down.

In some cases, that slowdown of construction is deliberate. For example, a number of municipalities opposed to the state’s MBTA Communities Act initially wanted to use high IZ requirements to block new housing of all kinds, and the law eventually included a provision that limited IZ requirements to just 10% in most cases.

It’s true that our IZ policy has seen some major successes, like the new tower in Union Square with about 100 subsidized apartments — but it’s harder to see the failures, because they’re manifested mostly in buildings that don’t get built. Those missing buildings may be hard to see, but they’re very important. Think of the cruel game of musical chairs metaphor: if there aren’t enough chairs to go around, someone’s going to go without a seat. Inclusionary zoning helps lower-income people get chairs, and that’s great. But it also risks stopping the creation of enough chairs for everyone, which would only exacerbate the housing crisis.

Why can’t developers just take a smaller profit?

Recent economic research on inclusionary zoning indicates that it can push development away from areas where we want it. Why is that?

One key reason is that a bank is far less likely to issue a loan to a project that looks like it might not be profitable. Remember, the profit margins on a construction project are estimates, and if a bank thinks the estimate doesn’t have enough of a buffer for contingencies, they won’t lend. If they don’t lend, nothing gets built.

In addition, any investor or lender is looking for a specific balance of risk and return. If they can find a better return or a lower risk, they’ll take it. If a developer thinks it’s more profitable to build in the sprawled-out suburbs of Atlanta, that’s where new buildings will get built. If an investor or lender thinks it’s more profitable to back a company that builds commercial real estate, or roads, or vacuum cleaners, that’s where the money will go. Basically, if we want housing built and don’t want to pay for it with tax dollars, someone’s going to have to make money building it. And not just a little money: they need to be able to make more than they would doing something else, somewhere else.

Just how affordable is this, anyway?

It varies. Inclusionary zoning apartments in Somerville are set on a series of tiers, which are affordable to people making different percentages of the Area Median Income (AMI). Some will be affordable to people making less than 50% of the AMI, others will be offered to people making up to 110%. Tier 1 is for people with very low incomes, tier 2 for low income and tier 3 for moderate income. The city has rules about which apartments get which tiers, and requires most of them to be set aside for tiers 1 and 2.

For specifics, check out this table of prices from 346 Somerville Avenue, in Union Square, which includes a 3-bedroom apartment for a very low income family at $883 a month and one for a median-income family priced at $2,898.

For information about the cost of affordable housing and an explanation of AMI, please see What Exactly Do We Mean by “Affordable Housing?

What do you want the city to do about it?

Somerville should monitor our housing production rate very carefully to ensure that our inclusionary zoning requirement is not blocking overall growth in the housing stock. What worked last year may not work next year.

In particular, it’s worth noting that San Francisco has recently found it necessary to reduce fees and inclusionary zoning requirements to get anything built at all. We should seriously consider revisiting our requirements or offering incentives if housing construction slows or stops.