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Cost offsets for mandatory IZ

On Behalf of | Jun 16, 2021 | Commercial Real Estate |

Most developers are aware of, and wary of, inclusionary zoning policies. Though jurisdictions implement IZ policies to create more affordable housing in low-poverty areas, said policies can hurt developers. In many cases, they deter developers.

To incentivize developers to build in areas with mandatory inclusionary zoning requirements, many policies contain cost offset provisions. Local Building Solutions explores the reasons for cost offsets in IZ policies and what these offsets typically include.

The purpose of cost offsets

Though IZ requirements vary from municipality to municipality, developers can expect to have to set aside a large percentage of units as affordable. Cities know that affordable units take up valuable space that a developer could otherwise allocate to more profitable properties, which is why many attempt to compensate developers for the lost profitability. Without attempting to compensate developers, city leaders know they risk losing relationships with those who bring adequate housing supplies, and money, to their areas.

Common cost offsets

Cost offsets come in many forms. For instance, some communities allow developers to use lower-quality fixtures or finishes in units. These half-hearted attempts to incentivize developers while still ensuring a program’s success rarely work, though, as they barely scratch the surface of the total value of lost revenue. The World Bank explores more successful types of offsets IZ policies typically contain.

The most common and successful type of cost offset is the density bonus. Developers who build in areas with IZ requirements have permission to build more square feet and include more units than would otherwise be allowed under normal zoning provisions. This bonus gives developers more units to rent out or sell and, therefore, more chance to recover lost profits. Other types of offsets include reducing the number of parking spaces otherwise required by building codes and zoning requirements, expedited permitting and fee waivers.

Developers may have the option to opt out of IZ requirements. One way they can do this is by opting into the alternative means of compliance, which essentially involves paying a fee. Another way they can do this is by building IZ units off-site. The latter tactic often defeats the purpose of IZ policies, which is why many cities do not allow it.

IZ policies are a necessary evil in urban development. A legal professional can help developers explore and take advantage of options that have the least impact on profitability.