Inclusionary Zoning, Explained

Inclusionary zoning (IZ) is a local land-use policy that ties new affordable homes to new market-rate construction. A city or county requires developers, or gives them an incentive, to reserve a share of the homes in a new project for households under an income limit. Those homes are rented or sold at below-market prices. Many practitioners use the broader term inclusionary housing, because some programs operate outside the zoning code.

The policy is both widespread and contested. A national survey by Grounded Solutions Network counted 1,019 programs in 31 states and the District of Columbia at the end of 2019. Supporters see a way to create income-restricted homes in high-cost neighborhoods without direct public subsidy. Critics see a tax on new housing that can reduce construction. The research suggests that outcomes depend on program design and the strength of the local market.

How Inclusionary Zoning Works

An inclusionary ordinance usually answers six questions:

1. Which projects are covered? Most programs exempt small projects. In the 2019 survey, the most common threshold was 6 to 10 units.
2. How many units must be affordable? This share is called the set-aside.
3. Affordable to whom? Income limits are set as a percentage of area median income (AMI).
4. What alternatives exist? Common options include paying a fee or building the units elsewhere.
5. What does the developer get in return? Many programs offer offsets such as extra density.
6. How long do the units stay affordable? The term is recorded in a deed restriction or similar agreement.

Suppose a city has a 15% set-aside. A developer proposing a 100-unit apartment building would have to rent 15 of those apartments at prices affordable to income-qualified households. The other 85 would rent at market rates. In exchange, the city might allow a taller building than the base zoning permits.

The name reflects the policy’s origins as a response to exclusionary zoning, rules such as large minimum lot sizes that keep lower-cost housing out. Montgomery County, Maryland, has run one of the earliest and most widely copied programs since the early 1970s. Nearly three-quarters of the programs counted in 2019 were in New Jersey, Massachusetts and California, three states whose laws push localities to plan for affordable housing.

Mandatory vs. Voluntary Programs

The most basic design choice is whether developers can opt out.

HUD’s research office, summarizing the literature in 2013, reported that mandatory programs produce more affordable housing than voluntary ones. The Lincoln Institute of Land Policy’s 2015 report by Rick Jacobus reached a similar conclusion. It cited a Seattle study that found most developers were unlikely to use the city’s density bonus, because the taller construction it allowed cost more to build.

A middle path applies requirements only in areas that receive a significant upzoning. The added development rights and the affordability obligation arrive together.

The Main Design Choices

Set-aside percentage

The average set-aside among programs surveyed in 2019 was 16% of units. About 55% of programs required between 10% and 20%, 29% required 20% or more, and 5% required less than 10%.

Income targeting

Most inclusionary units serve low-income households, defined as those earning up to 80% of AMI. Among programs with a single income ceiling, about three-quarters set it at 80% of AMI. Rental requirements tend to reach lower incomes than for-sale requirements. Within that same group, 22% of rental programs set the ceiling above 80% of AMI, compared with 47% of for-sale programs.

Deeper affordability costs a developer more per unit, so many programs offer a trade. Portland, Oregon, for example, lets a building with 20 or more units restrict 20% of them at 80% of median family income or 10% of them at 60%.

In-lieu fees and other alternatives

Nearly every program allows on-site units. In 2019, about half (49%) also allowed an in-lieu fee, 42% allowed off-site units, and 21% accepted donated land. Fees typically flow into a local housing trust fund.

Cities set fees in two main ways, according to the Lincoln Institute report. One is the gap between a unit’s market price and its affordable price. The other is the public cost of producing an affordable unit elsewhere. Each approach involves trade-offs:

• Fees can stretch further. Seattle put $27 million of in-lieu fees into nonprofit projects, which helped finance 616 homes and drew $97 million in state and federal funds, according to an analysis cited in the report.
• Fees can undercut integration. A fee set well below the cost of on-site units encourages developers to pay rather than build. Because land is cheaper in lower-income neighborhoods, homes financed with fees may be concentrated there.

An in-lieu fee differs from a linkage fee, which is charged on new commercial or residential development, often per square foot, as the primary obligation rather than as an alternative to on-site units. About a third of the programs counted in 2019 were linkage or impact fee programs.

Offsets and incentives

Most programs reduce the cost of compliance. In the 2019 survey, programs offered:

• A density bonus (57%)
• Other zoning relief, such as reduced parking or design requirements (24%)
• Fee waivers, reductions or deferrals (17%)
• Expedited permitting (13%)
• A tax abatement (6%)
• Direct public subsidy (4%)

About 29% offered no incentive at all. Offsets are not free. Tax abatements and fee waivers reduce public revenue, and added density brings infrastructure costs.

Affordability terms

Early programs often let restrictions expire quickly. Montgomery County created more than 12,000 affordable homes between 1973 and 2005. Because the homes were regulated for only 10 years, about 3,000 remained affordable by 2005. That year the county moved to 30-year terms that renew each time a home is sold.

Long terms are now the norm. In 2019, 93% of programs required affordability for at least 30 years, and about one in ten required it permanently. Among programs with fixed terms, roughly three-quarters restart the clock when the property is resold. Most for-sale programs use shared equity homeownership models, in which resale price limits keep the home affordable for the next buyer.

Who Pays for the Affordable Units?

Developers generally cannot pass the cost on to market-rate tenants and buyers, the Lincoln Institute report argues, because new homes must compete with existing ones on price. Over time the cost is absorbed by lower land prices, lower developer returns, or both.

The risk lies in pushing too far. If a requirement lowers what developers can pay for land below what owners will accept, fewer projects get built. Less supply can raise prices for everyone else. Emily Hamilton of the Mercatus Center argues that, where offsets such as density bonuses do not cover the cost, inclusionary zoning works as a tax on new construction.

Cities try to find the right level with economic feasibility studies. A 2018 convening hosted by the Terner Center at UC Berkeley, Grounded Solutions Network and the Lincoln Institute found no standard method for these studies. California law allows the state housing department, in certain cases, to request a feasibility study when a city requires more than 15% of rental units to be affordable at 80% of AMI or below.

What the Evidence Shows

Production is real but modest

In the 2019 survey, 258 programs reported creating about 110,000 affordable homes in total, roughly 70,000 of them rentals. Another 123 programs reported collecting at least $1.76 billion in fees. Output per program was small. Among programs that had produced at least one unit, the average was 27 units a year and the median was five. One-third of programs with unit data reported no units at all, though some of those were newly adopted. For scale, the Low-Income Housing Tax Credit had produced about two million homes by 2015, according to the Lincoln Institute report.

Effects on supply and prices are mixed

The Los Angeles study is a simulation, not a count of actual buildings. It models a voluntary Los Angeles incentive program that, when the study was published, gave density bonuses to projects reserving units for extremely low-income households. In the simulation, keeping the bonuses with a requirement of 16% or less produced more total housing than a scenario with no bonuses and no requirement. Keeping the bonuses and dropping the requirement produced the most housing of all, 38% more than under the 11% requirement then in place. Market-rate output fell with each increase in the requirement, and affordable output peaked at 25% before falling too.

Access to opportunity

A 2012 RAND Corporation study of 11 programs found that inclusionary homes were spread throughout their jurisdictions rather than clustered. HUD’s summary of that study reported that 76% of the homes were in low-poverty neighborhoods. The homes were also assigned to public schools that performed better than other schools in the same jurisdiction. That geographic reach is the main argument for on-site units as a route to mixed-income housing.

Legal Limits and State Law

Two bodies of law constrain local programs.

Takings law. Developers have challenged set-asides as uncompensated takings of property. In 2015 the California Supreme Court upheld San Jose’s ordinance as an ordinary land-use regulation. In Sheetz v. County of El Dorado (2024), the U.S. Supreme Court held that permit conditions enacted by legislation are not exempt from the stricter test that applies to development exactions. Under that test, a condition must be connected to, and roughly proportional to, a project’s impact. The case involved a traffic impact fee, not inclusionary zoning. The Court left open how precisely a fee that applies to a whole class of projects must be tailored, a question that matters for in-lieu and linkage fees.

State statutes. States set the outer boundary of local authority:

• Texas bars cities from capping the sale price of privately produced homes, while allowing density bonuses and other voluntary programs.
• Oregon allows mandates only for buildings with 20 or more units. It caps the set-aside at 20% and requires both an in-lieu fee option and at least one financial incentive.
• California expressly authorized rental requirements in a 2017 law, provided that ordinances offer alternatives such as in-lieu fees, land dedication or off-site construction.

Inclusionary Zoning and Workforce Housing

Inclusionary programs tend to serve households earning between 60% and 120% of AMI, the Lincoln Institute report notes. That range overlaps much of the workforce housing band, the upper part of which most federal rental subsidies do not reach. For-sale programs in particular often target moderate-income buyers earning 81% to 120% of AMI. Fairfax County, Virginia, planned for 20% of homes in its Tysons redevelopment to serve households between 50% and 120% of AMI. Park City, Utah, has used its ordinance to house seasonal ski resort workers, among others.

Whether that is the right target is debated. Units at higher income limits cost developers less, so a city can require more of them. Housing need is usually most severe at the lowest incomes, however. Arlington County, Virginia, found an adequate local supply above 80% of AMI, and its housing working group recommended aiming the program at 60% and below.

Inclusionary zoning also produces affordable homes only where market-rate homes are being built, so it does little in weak markets. Communities usually pair it with other approaches described in how workforce housing is financed and what local governments can do.

The Bottom Line

Inclusionary zoning asks new development to include, or pay for, homes that lower- and moderate-income households can afford. It places those homes in neighborhoods other programs rarely reach and can serve the workforce income band, usually without direct subsidy. It is also modest in scale, and a requirement set beyond what local projects can absorb can shrink the supply it depends on. Research and practitioner guidance point to four ingredients: a set-aside matched to the local market, meaningful offsets, carefully priced alternatives and long affordability terms.