This is part of our harder truths series.

Inclusionary zoning ordinances are among the most controversial approaches in modern urban planning. Briefly, these ordinances intend to expand the supply of affordable housing stock by requiring developers to include it as part of new development or redevelopment projects.

(We are defining “Affordable” here using the guidance provided by Housing and Urban Development (HUD). HUD calculates Area Median Income (AMI) – the benchmark for income eligibility (based on family size and annual income) and Fair Market Rent (FMR) – the range of reasonable rents based on ZIP code and the number of bedrooms in a housing unit.)

Affordable housing is typically mandated as a percentage or ratio of the development’s total housing units. For example, if a community has an inclusionary zoning ordinance requiring that 10 percent of new for-sale housing units in multifamily buildings are “affordable,” a developer proposing 150 housing units must ensure that 15 homes are sold or rented as affordable units. Affordability for these units is maintained in perpetuity or over a certain time period using deed restrictions.

Chapel Hill has been using inclusionary zoning, both informally and formally, since 1995. The Town’s adopted ordinance currently includes both mandatory requirements and voluntary incentives for affordable housing in development projects of certain sizes, with some variations based on zoning district. Inclusionary zoning requirements apply to the following:

  • Single-family and two-family unit developments with:
    • At least five single- or two-family dwelling units
    • At least five single-family lots; or
    • Two-family lots in which six or more residential units are allowed (either individually or as part of the same subdivision)
  • Multifamily unit developments:
    • With at least five multifamily dwelling units
    • Any vertical mixed use building creating at least five multifamily dwelling units
    • Renovation or reconstruction of existing buildings increasing the number of multifamily dwelling units by at least five (5)
    • Any change in use of all or part of an existing building from a nonresidential use to a residential use that has at least five (5) dwelling units.

Affordable units must be included for development projects meeting the above descriptions. If the development is in a Town Center zoning district (TC-1, TC-2, and TC-3), 10 percent of units must be reserved as affordable. In all other zoning districts, 15 percent of units must be affordable. The Town also provides floor area bonus incentives for two-family or multifamily developments going above and beyond the required affordable housing requirements (Developers receive an additional 3,400 square feet per affordable dwelling unit if building has no interior common elements; or 4,400 square feet per affordable dwelling unit for buildings with interior common elements, with the exception of R-SS-C and MU-V zoning districts).

What’s Wrong?

In theory, inclusionary zoning seems like a great idea. A town adds affordable housing when any new development is built.

But, in practice, these ordinances remind us that “the road to hell is paved with good intentions.” In 2018, The Indy conducted a deep dive into Chapel Hill’s inclusionary zoning ordinance, to assess the impact of the policy.

At the time of publication, they found that just eleven affordable units had been constructed since the formal ordinance went into effect in 2011. Another $800,000+ was collected through payments to the Town’s affordable housing fund. Habitat for Humanity of Orange County noted to The Indy that the cost to construct a Habitat home in Orange County (in 2018) was approximately $78,000. Using that figure, we can add another 10-ish homes to the eleven units for a grand total of 21 homes in eight years.

So…what went wrong?

Regulatory Restraint

Municipalities in North Carolina only have the powers delegated to them by the state. Inclusionary zoning is not prohibited in North Carolina, but it’s not explicitly allowed, either. This hinders the Town’s ability to adopt a strict or broad inclusionary zoning ordinance for fear of legal ramifications.

The Town is also prevented from applying the requirements to rental units because local governments in North Carolina cannot enact any form of rent control. This means Chapel Hill’s inclusionary zoning policy only applies to the development of housing units that are for sale, not those available for rent, Because Chapel Hill has such a robust rental housing market – 50% of people who live here rent – this is a significant gap.

Rental Runaround

The regulatory challenges discussed above often result in unintended consequences. And the Town’s watered-down version of inclusionary zoning leaves loopholes open for developers to avoid the requirements.

For example, because rent control is prohibited, the Town can only require affordable housing set-asides in for-sale developments. This means that developers constructing rental properties avoid the requirement. This contributes to an overabundance of rental properties and disincentivizes the construction of for-sale units.

Too Many “Opt Out” Options

Chapel Hill’s inclusionary zoning ordinance leaves an escape hatch wide open for developers. The Town Council (or Planning Commission, in cases where that body gives final approval) can approve the following alternatives to constructing on-site affordable units:

  • Land dedication
  • Dedication of existing dwelling units through covenants, contractual arrangements, or resale restrictions
  • Off-site construction of affordable housing
  • Payment in lieu of housing
  • An alternative proposed by the applicant that directly provides or enables the provision of affordable housing units

These options further disincentivize the development of affordable housing units in new developments.

More Regulations = Higher Housing Costs

While initially conceived as a means to catalyze affordable housing development, in practice, inclusionary zoning policies have stifled housing development, restricting housing stock and contributing to rising housing prices. This is true in most communities that have experimented with inclusionary zoning, it is not exclusive to Chapel Hill.

However, Chapel Hill is already known for their relatively high cost of development and long and arduous approvals processes. Adding more regulations like inclusionary zoning requirements has exacerbated this situation. The Indy’s 2018 article referenced a developer who had spent $7,785 (plus $30/ one hundred square feet) for a special use permit in Chapel Hill and compared this to the cost for the same permit in Wake County ($800). You might remember that TBB published a brief post in May 2022 after a developer revealed that “it costs $1 million to plan to build a project in Chapel Hill. Not to actually build it, just to get it to the point where it is ready to go before the advisory boards and town council (where it will inevitably face changes that increase project costs).”

What’s the alternative? Glad you asked!

Housing experts generally agree that, to help resolve this crisis, we must allow more housing by-right as opposed to adopting more regulations or discretionary review processes. “By-right” or “as of right” development means that fewer builders need to go through long development review processes, cutting down on design and construction time. And we all know that time=money!

Equity Implications

The bottom line is that, while the goal of the inclusionary zoning ordinance is laudable, this regulation is not performing as planned and it must be reformed or amended. The very people who were meant to be helped by the policy are experiencing the most harm as housing prices continue to rise, supply continues to be restrained, and affordable housing (for all!) continues to slip through our grasp.

TBB is hopeful that, in Chapel Hill, a Complete Community means evolving in ways that expand, not restrict, opportunities in our community. And the best way to do this is removing artificial restraints on development like broken and underperforming regulations and by supporting, not preventing, new development to house our neighbors, coworkers, and families.