The Failures of New York’s Mandatory Inclusionary Housing Program

Inclusionary zoning encompasses various sets of policies meant to promote the production of below-market-rate (BMR) housing. Mandatory inclusionary zoning (MIZ) is a type of inclusionary zoning that mandates that new residential developments have a portion of their units set at a BMR level. Proponents of MIZ argue that it produces affordable housing with no public subsidies and promotes economic integration by allowing people of lower incomes to live in communities that would be unaffordable to them otherwise. Yet, looking at New York, we can see that the MIZ’s implementation through the Mandatory Inclusionary Housing program (MIH) has not been effective at producing affordable housing and currently inhibits housing production.

General Theory of Mandatory Inclusionary Zoning

The two main pieces to mandatory inclusionary zoning laws are the percentage of units that are below market rate and the level of affordability those units are set at. The level of affordability is typically expressed in terms of a percentage of the area’s median income (AMI). For example, a local government could pass a MIZ law that any new multifamily residential development must have 20% of its units at 60% of the area’s median income. The official definition of “affordable” as defined by the U.S. Department of Housing and Urban Development (HUD) is “housing on which the occupant is paying no more than 30 percent of gross income for housing costs, including utilities,” for localities this can be defined as 30% of the AMI.1 According to an Urban Institute study on inclusionary zoning, the level of affordability generally varies from “60 to 120 percent of area median income.”2 Thus, inclusionary zoning laws are generally not aiming for the production of “affordable housing” as defined by the HUD. The BMR units are funded from the profits of the development, making it an effective tax on developers. Similar to taxes, these affordability requirements distort the actions of developers. There is a tradeoff between the percentage of BMR units mandated and how below the market rate they can be. The larger the percentage of units mandated to be below-market rate, the less below-market rate those units need to be in order for the project to pencil out and be built. This means MIZ struggles to build meaningful amounts of affordable housing for lower incomes. As a Harvard faculty research working paper concludes, “IZ (inclusionary zoning) is most effective at producing moderate-income housing units rather than very low-income housing units.”3

Projects need to be sufficiently profitable in order to be built, and affordability requirements cut into the profit of developments and can lead to projects no longer penciling out. This forces developers to raise the price of the market-rate units or abandon the project entirely, leading to no market or below-market housing getting built. This floor of profitability is called “the hurdle rate,” and it’s the rate of return on a project needed for a developer to go through with building it. In designing MIZ laws, policymakers need to carefully consider what to set the affordability requirements to not deter development by having profitability go below the hurdle rate. Additionally, legislators need to consider market conditions such as local construction costs, housing demand, zoning laws, and decisions on which income groups to prioritize.

Exclusionary zoning is the limitation on the construction of certain types of housing, typically denser forms of housing multiplexes and apartments. It serves as the foundational barrier against housing affordability through its impact on supply. A review of the literature on the relationship between housing supply and affordability by NYU Professors Vicki Been, Ingrid Gould Ellen, and Katherine O’Regan at the NYU Furman Center concludes that “the preponderance of the evidence shows that restricting supply increases housing prices and that adding supply would help to make housing more affordable.”4 Exclusionary zoning is specifically important to discussions around inclusionary zoning because inclusionary zoning policies are often incentivized by allowing developers to bypass restrictions on development on the condition they follow IZ laws. Local governments have leverage over developers as they control the regulations of what can or can’t be built, so developers must concede to the demands of the government in order to build projects. The concessions that are derived are typically framed in terms of “value capture.” When a city allows developers to bypass zoning restrictions through upzoning or the loosening of other regulations, it generates value which translates into profit for the developer. Policies like MIZ purport to “capture” this value and can direct it to benefit the public rather than all developers.

Analysis of NYC’s Mandatory Inclusionary Housing (MIH) Program

NYC’s mandatory inclusionary housing program is an example of such a capture. It mandates that “a share of new housing in medium- and high-density areas that are rezoned to promote new housing production—whether rezoned as part of a city neighborhood plan or a private rezoning application—to be permanently affordable.”5 According to a 2020 study of the impacts of MIH by Eric Kober of the Manhattan Institute, MIH was “designed on the edge of financial feasibility” due to the sought after affordability requirements.6 As a result, public subsidies are required in order to push projects targeted at low-income areas to pencil out. According to data collected by NYU’s Furman Center from 2010 to 2020, all targeted low-income units, defined as at or below 80% AMI, benefited from public subsidies.7 This is consistent with Kober’s assertion that “a fundamental goal of MIH was to increase the percentage of permanently affordable units above VIH’s 20% and lower the target income threshold below 80% of AMI when public funding was used. However, no development subject to such requirements could achieve financial feasibility without tax exemptions.”8 Thus, it is public financing that is driving the production of affordable housing, not MIH itself. The Furman Center’s data does not distinguish between targeted low-income units built as a result of MIH, but Krober does those calculations and finds that between the program enactment in 2016 and his data analysis in 2019, 2065 MIH units have been permitted or completed, with most of them being “deeply subsidized and concentrated in low-income areas.”9 This means that MIH has not only failed to create significant amounts of affordable housing for a city as populous as NYC but also failed to achieve its goal of economic integration. It is important to mention that this outcome is attributed to the disproportionate rejection of rezonings in more affluent neighborhoods by the present city council. MIZ, in theory, works best in a strong housing market (i.e., when rents are high) in order for the market rate units to subsidize the cost of the affordable units. MIZ is going to be more effective in producing affordable housing in markets suffering a shortage and higher prices. If there were a strong increase in supply leading to a broad increase in affordability, market rents would go down, and it becomes harder and harder to meet the affordability requirements. If the MIZ laws are not adjusted, then the lowered prices lead to developers going below their hurdle rate and projects no longer penciling out. Rather than a continued decrease in affordability and supply, developers will stop building housing. In this scenario, MIZ will end up being counterproductive to overall housing affordability by reducing supply if it’s not updated or removed. This is corroborated by NYC’s Department of City Planning financial feasibility report on MIH, concluding, that with MIH, housing development is ‘most feasible in the strongest market conditions, and projects generally requiring public subsidy to support feasibility in the weakest markets.”10