Requiring Cheap Units Inside an Expensive Building
Many cities require developers to include below market apartments in new market rate projects. The policy delivers real units and functions economically as a tax on new construction, which is the tension it never escapes.
The Mechanism
Inclusionary zoning requires that a share of units in a new residential development be affordable to households below a specified income level, with the affordability maintained for a defined period, often decades.
The typical requirement sets a percentage of units, commonly between ten and twenty five percent, an income target, frequently a share of area median income, and a duration. Most programmes offer alternatives to building the units, including paying an in lieu fee, building the affordable units at another site, or dedicating land.
Programmes are either mandatory, applying to all qualifying projects, or voluntary, offering incentives such as additional density in exchange for participation.
Who Actually Pays
The units are below market, so somebody bears the difference. The question of who is the entire economics of the policy, and the answer depends on timing and market conditions.
| Bearer | When This Happens |
|---|---|
| Landowner | Requirement is long established and capitalised into land prices |
| Developer | Requirement imposed after land was purchased |
| Market rate tenants or buyers | Where demand is strong enough to raise prices |
| Nobody, project does not proceed | Where the requirement makes the project uneconomic |
The first row is the most important and the least intuitive. In a market where the requirement has been in place for years, developers bidding on land subtract the cost of compliance from what they can pay for it. The land price falls to accommodate the requirement, and the burden lands on the landowner selling the site.
That is a reasonably efficient outcome, since land is in fixed supply and taxing it does not reduce the quantity available. It is also why economists generally consider a long standing, predictable requirement far less damaging than a newly imposed one.
A requirement announced today falls on developers holding land bought yesterday. The same requirement twenty years later falls on land prices. The policy is identical and the incidence is completely different, which explains why studies of it disagree so persistently.
The Supply Objection
The consistent criticism is that inclusionary zoning taxes new construction specifically, at a moment when the underlying problem is generally that too little housing is being built.
The logic is straightforward. If the requirement raises the cost of development, marginal projects become uneconomic and do not proceed. Fewer total units get built, which raises prices across the market, which harms exactly the households the policy targets.
The empirical work is genuinely mixed. Some studies of mandatory programmes in constrained markets find measurable reductions in permitting and increases in prices; others find small or no effects, particularly where the requirement was modest, long established, and paired with density bonuses that offset the cost.
The honest reading is that the effect depends on the size of the requirement relative to project economics and on whether meaningful offsets are provided, rather than on the policy category.
Why Cities Adopt It Anyway
The political economy is decisive and worth stating explicitly. Inclusionary zoning produces affordable units without a line in the municipal budget. No appropriation, no bond, no tax increase.
It also produces mixed income buildings rather than concentrated affordable developments, which has genuine support in the research on neighbourhood effects and avoids the siting fights that standalone affordable projects attract.
And it is politically resilient in a way that appropriations are not, since a requirement written into the zoning code does not need to be renewed annually.
The Density Bonus Changes the Calculation
The design element that most affects whether the policy suppresses supply is whether it comes with a density bonus, permitting more units than the base zoning allows in exchange for the affordable share.
Where the bonus is generous enough, the additional market rate units generate revenue exceeding the cost of the affordable ones, and the requirement stops being a tax at all. Development becomes more attractive, not less.
Where the bonus is nominal or where other constraints such as height limits, parking requirements, or design review prevent it being used, the requirement is a straightforward cost. Many programmes offer bonuses on paper that cannot be realised in practice for exactly those reasons, which is where the gap between policy design and outcome usually sits.
The In Lieu Fee Question
Allowing developers to pay a fee instead of building the units is efficient in principle, since the city can pool fees and fund affordable housing where land is cheapest, producing more units per dollar.
It also undermines the mixed income objective, and the fee level is difficult to set. Too low and every developer pays it, producing revenue and no units in the buildings the policy was aimed at. Too high and it is not a real option.
In practice fee levels are politically negotiated rather than calculated, and the share of developers choosing the fee is a reasonable indicator of whether it was set correctly.
The Bottom Line
Inclusionary zoning creates below market units at no direct budget cost, which is why it is popular, and it does so by imposing a cost on new construction, which is why it is contested. Its incidence falls on landowners where it is long established and predictable, and on developers and projects that never happen where it is newly imposed or set too aggressively. The design detail that matters most is whether an effective density bonus accompanies it, because that is the difference between a tax on building and a trade that makes building more attractive.