Is Inclusionary Zoning The Best Way to Create More Affordable Housing in Nashville?
A deep dive into the prevailing research shows that inclusionary zoning has mixed results, but are we using the right tools to create more affordable housing?
In addressing Nashville’s affordable housing crisis, time is of the essence. A 2021 report from the Mayor’s Affordable Housing Taskforce projects that Nashville needs to add nearly 54,000 units by 2030 to keep up with demand, or 4,800 units per year. An earlier report found that Nashville would face a shortage of almost 31,000 affordable housing units by 2025.
How do we solve the affordable housing crisis? Well, economists across the political spectrum agree that the best way is to remove barriers to entry by getting rid of exclusionary zoning schemes that favor single-family homes over other housing types.
We need more housing, density, and freedom for developers to build. We need to allow property owners to rent out rooms or accessory dwelling units (ADUs) to non-family members. We need to eliminate parking minimums and reduce lot size/setback requirements. And we need the transit and infrastructure to support a less car-reliant and growing city. We need all of these things yesterday if we are ever going to make it affordable for middle- and low-income people to live and stay in Nashville.
Unfortunately, developers who apply for zoning changes to build higher-density projects are often stalled by Not-In-My-Backyard (NIMBY) groups. NIMBYs oppose high-density housing like apartments or condos from being built in places historically zoned for single-family homes.
But could other things besides NIMBYism be delaying Nashville’s housing growth?
In December 2021, a developer sought rezoning to build a 1,150-unit, mixed-use project on the site of a 212-unit apartment complex in East Nashville called Riverchase. The developer, CREA, entered into a community benefits agreement with the Urban League of Middle Tennessee that would set aside 225 units below market rates. CREA also sought a nonprofit developer to build another 120 affordable units.
But the agreement didn’t go far enough to address the city’s affordable housing needs, some advocates argued. Some groups opposed the rezoning because former Riverchase residents were likely to be displaced by the new development, which they believe should not be the model for our development process.
These community concerns led to multiple delays in Metro Council approving the rezoning request for the project. In light of the delays, the developer submitted a provisional proposal that included plans for 212 to 245 market-rate townhomes with no affordable units in case the city denied its rezoning request.
it has paid more than $550,000 to support residents' relocation, including $212,500 for housing navigation staff, and wrote off approximately $360,000 in delinquent rent. As of October, 12 of the 176 families who lived on the property had not yet found stable housing. CREA has said it will continue to work with those people and is committed to ensuring each resident receives the $2,200 in relocation assistance as required under the community benefits agreement.
The deal still did not satisfy the most die-hard affordable housing advocates, although it’s hard to argue that the change from 212 units to 1,150 units was not a welcome outcome in adding to the city’s housing supply. Still, was a year-long process in getting this deal approved, especially one that already included affordable units, worth a fight that delayed more housing?
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The Fight for Inclusionary Zoning in Nashville
Inclusionary zoning, or policies that require or incentivize developers to include a minimum number of units below market rates in exchange for things like increased density or height, has been a contentious subject in Nashville.
developers proposing five or more units could request a zoning variance for expanded development rights, such as density or greater height. To gain approval, they would have to include a percentage of new affordable or workforce units.
In 2017, the Beacon Center of Tennessee sued the city, arguing that Nashville’s ordinance violates a state law prohibiting municipalities from requiring affordable housing in new residential development projects. A letter from the Center notes how the ordinance’s inclusion of the word “shall” in several sections implied that the law created a mandatory requirement. The Center also argued that the law violated the Takings Clause of the U.S. Constitution:
“The Metropolitan Government may not bargain with land-use permits in order to bypass their takings obligations. To protect property owners from being forced to surrender their Fifth Amendment right in order to obtain a building permit, a variance, or other government benefit related to their property, the Supreme Court applies a heightened level of scrutiny to ordinances like the one at issue here. Under this scrutiny, a ‘government may not condition the approval of a land-use permit on the owner’s relinquishment of a portion of his property unless there is a ‘nexus’ and ‘rough proportionality’ between the government’s demand and the effects of the proposed land use.’ Koontz, 133 S. Ct at 2591.”
Supporters of the ordinance contended that the Center “mischaracterized the policy as a ‘mandate’” and argued that it was voluntary because “the requirement is only triggered when a developer chooses to apply for new development rights.”
In 2018, the Tennessee legislature pre-empted the Nashville ordinance with a law prohibiting municipalities from requiring inclusionary or below-market housing in exchange for zoning changes. Advocates argued that the state’s law was obstructionist and prevented cities from using “every tool in the toolbox” to try to create affordable housing.
As the Riverchase example shows, Nashville developers can still offer affordable units to appease community concerns, but the city cannot require them. The Riverchase case study and this legal dispute with the state raise several important questions.
Would Nashville benefit from a more assertive IZ policy?
Do inclusionary zoning (IZ) requirements work? Is voluntary IZ better than mandatory IZ?
Should we impose additional costs on developers to help fix an affordable housing crisis created by our city’s exclusionary zoning and preferential bias for single-family homes?
If community pressures to include affordable units cause delays in building new housing, are we still essentially exacerbating the effects of exclusionary zoning policies?
Does Inclusionary Zoning Create Affordable Housing? The Research Is Mixed
According to a 2019 report from The Urban Institute, only around 150,000 to 173,000 affordable housing units were built in the several decades since municipalities in the U.S. began adopting IZ policies, with most of those units located in Virginia, Massachusetts, Maryland, New Jersey, and California. The report also notes how other jurisdictions that have adopted IZ laws produce few or no affordable units.
According to The Tennessean, Nashville’s IZ ordinance produced no affordable units. Council member Bob Mendes called Nashville’s ordinance “weak” and “the most anemic inclusionary zoning law in America” because it was not mandatory. “But did I think it was going to be zero units in 16 months?” Mendes told the paper. “No. It is disappointing that we didn’t manage to make a dent with this.”
So would Nashville have benefited from a stronger IZ ordinance—one that was an actual mandatory requirement, legal disputes over the language of the original ordinance aside?
First, let’s state the obvious. When any parcel of land is upzoned for higher density, developers can build more market-rate housing than would otherwise be allowed, even if the city requires them to provide a portion of units below market rates. So that in and of itself could be considered a net positive.
And if we can incentivize more density by using tools like IZ, the tradeoffs may be worth it. Law Professor Roderick Hills argues, for instance, that prohibiting inclusionary zoning “limits the bribes with which state and local governments can induce the neighbors to agree to loosen up zoning restrictions [ . . . ] Inclusionary requirements give those local politicians a bit of political cover by making the link between market-rate and affordable housing more apparent.” He also contends that “[i]f cities must choose between unconditionally permitting new market-rate housing or unconditionally excluding it, then they are likely to choose the latter.”
But if including affordable housing in development projects would help developers win zoning approval and curry favor with neighbors, why wouldn’t they do so voluntarily, as in the Riverchase example?
Second, most opponents aren’t just fighting IZ policies because they hate the poor or don’t want affordable housing. Most IZ advocates and opponents want the same thing: to make housing more affordable for low- and middle-income residents.
Opponents believe that IZ requirements will make housing more expensive. In a 1981 article, legal scholar Robert Ellickson argues that economic theory would lead us to the conclusion that inclusionary zoning (IZ) policies act as “a tax on the construction of new housing” that will “increase general housing prices” and limit “the housing opportunities of moderate-income families.” This IZ tax will not be borne by developers but by renters and homebuyers in the form of higher costs and fewer available homes.
While Ellickson’s analysis is consistent with economic theory, the empirical evidence is slightly murkier on the effects of IZ policies. According to the Urban Institute report, the research on the effectiveness of IZ requirements has mixed findings. Let’s look at a few significant studies.
Research from Ann Hollingshead suggests that stronger, mandatory IZ policies can lead to lower rental rates for market-rate and low-cost units than weaker policies. Hollingshead looked at the difference between compulsory and fee-based IZ policies in California and found that optional policies led to “a 2 percent increase in median rental prices and a 3 percent increase in the price of low-cost units.” According to these findings, it’s possible that if Nashville adopted more robust IZ policies, it could create downward pressure on rental prices.
But what about the broader societal costs? How do IZ policies affect other housing costs and the housing supply?
A 2010 paper in the Journal of Urban Affairs by Vinit Mukhija, Lara Regus, Sara Solvin, and Ashok Das “found no statistically significant evidence of inclusionary zoning's adverse effect on housing supply in cities with inclusionary mandates” and “conclude that critics underestimate the affordable housing productivity of inclusionary zoning, and overestimate its adverse effects on housing supply.” They also found that mandatory IZ policies were more effective.
However, a 2009 study in the journal Cityscape by Antonio M. Bento, Scott Lowe, Gerrit Knapp, and Arnab Chakraborty found, in California cities that adopted IZ policies between 1988 and 2005, the price of single-family homes increased compared to those that did not have IZ policies. The authors found no statistically significant difference in the supply of multi-family housing between cities that adopted IZ policies and those that didn’t.
Other studies have found that IZ generated similar effects on housing prices but that those effects were dependent upon the state of the housing market. A 2010 paper in Urban Studies by Jenny Schuetz, Rachel Meltzer, and Vicki Been looked at the effects of IZ policies in Boston and San Fransisco. The authors found that in Boston, IZ “contributed to increased housing prices and lower rates of production during periods of regional house price appreciation.” In San Fransisco, IZ policies “increase housing prices in times of regional price appreciation, but [ . . . ] decrease prices during cooler regional markets.” They found no statistically significant effect on the housing supply in San Fransisco.
Some studies have found more substantial adverse effects on both home prices and supply. A 2012 paper in the Journal of Public Finance and Public Choice by Tom Means and Edward Stringham concluded that California cities with IZ policies had “9 percent higher prices and 8 percent fewer homes overall” between 1980 and 1990 and had “20 percent higher prices and 7 percent fewer homes overall” between 1990 and 2000.
Mercatus Center Senior Research Fellow Emily Hamilton found that mandatory IZ policies in the Baltimore-Washington region increased housing prices by around 1 percent each year. However, she did not find evidence that new housing construction decreased.
The takeaway from the literature is that evidence supports both sides of the argument, although more studies than not find some broader societal costs associated with IZ policies.
If IZ policies lower rents and don’t affect the housing supply, that’s great, but policymakers should consider the other potential costs that these researchers have found. There might also be other unintended consequences that we cannot account for. For instance, do IZ policies make developers more likely to build luxury housing to offset the costs of providing affordable units?
Case Studies Worth Considering
In a 2021 article on Strong Towns, a pro-housing advocacy group, Daniel Herriges notes how something peculiar was happening in Portland, OR. Building permits examined over the prior three years showed that a lot of 19-unit apartment buildings were being built in the city. That’s because in 2016, the city passed an IZ ordinance requiring affordable housing in developments with 20 or more units. An article in City Observatory called Portland’s IZ policy a “slow-motion train wreck.” Another commentator observed that “many sites of potential mixed-income buildings are instead remaining car washes” in the city. Herriges also notes how similarly strange unit counts were occuring in Minneapolis, Newark, NJ, and London, UK due to the same sort of mandates.
When the New York City neighborhood of West Chelsea upzoned a special district, an IZ agreement required that the developers offer 27 percent of the over 5,500 new apartments at below-market rates. But this meant that fewer homes were built, as an article in The Villager pointed out: “Building density in the entire district has been reduced from the previous plan in order to provide more incentives for developers to apply for higher density under the inclusionary housing program.”
Further, the existence of IZ can lead affordable housing advocates to oppose city- or state-wide pro-density reforms because they believe it takes away a bargaining chip to entice developers to include affordable units.
In 2011, when California attempted to pass legislation that would have reduced parking minimum requirements for new developments, affordable housing groups opposed the law because it would “undermine what they consider important incentives [ . . . ] that gives both nonprofit and for-profit developers density bonuses for including or increasing affordable housing in a given development.”
In other words, before this law, cities would offer reduced parking minimum requirements in exchange for developers providing more affordable housing in new developments. But reducing parking minimum requirements across the state would have done more to make housing affordable.
These tradeoffs and unintended consequences shouldn’t be ignored.
Conclusion: Should Nashville Adopt IZ or End EZ?
It’s hard for us to think about the long term. We want affordable housing units now, not later. But this impulse can also put the cart before the horse and lead to unintended consequences for the city.
We likely get stuck in this short-term, small-scale thinking because Nashville takes a piecemeal approach to zoning reform. Rather than proposing major changes to our land use system, city leaders consider rezoning for one parcel of land at a time. Some cities have taken a more transparent and holistic approach to planning and development. In 2015, New Rochelle, NY created a system that laid out standardized community benefits for all new developments in the city rather than trying to reinvent the wheel each time a developer made a rezoning request. By 2021, the city had approved 32 new projects and built 7,000 homes with 1,000 at below-market rents.
If Nashville relaxed its zoning laws and moved away from an exclusionary system that favors single-family housing, we would see a boom in missing-middle housing types. This liberalization would open the door for developers to build various housing options that would be more affordable for all income levels.
The mixed findings from the empirical literature suggest that inclusionary zoning is merely a band-aid for creating housing affordability at the individual development level but may only have minor positive effects or even negative consequences. Removing exclusionary zoning would go much further to create affordable housing writ large in Nashville, especially considering it is the main reason we have an affordability crisis in the first place. As researcher Emily Hamilton explained to Greater Greater Washington:
In Hamilton’s view, a better way to build affordable housing would be to subsidize it directly, and to remove the underlying zoning restrictions that make IZ valuable in the first place.
“As I see it, inclusionary zoning can never be a remedy for exclusionary zoning, because what gives density bonuses their value is underlying exclusionary zoning that prevents home builders from building as many houses as they would like to,” Hamilton said.
If we liberalize zoning in Nashville, we could significantly increase the housing supply and put downward pressure on prices. Even if we could build more market-rate housing, even so-called “luxury” apartments, can open up affordable housing for lower-income individuals. When “luxury” housing is built, it’s usually filled by a higher-income person who leaves an older apartment in the city. That person’s older apartment is now available to someone at middle income, whose even older/cheaper apartment is now available to someone at a lower-income level.
That may be a simplistic explanation, but it bears out in empirical studies. Finnish researchers found that, over two years, for every 100 market-rate housing units built, "29 units get created through vacancy in bottom-quintile income zip codes and 60 units in bottom-half income zip codes.” Timothy B. Lee summarized research from University of Notre Dame economist Evan Mast, which found similar results in the U.S.:
Mast found that 67 percent of people who moved into a new luxury apartment building came from another apartment in the same metropolitan area. Of these, only 20 percent of the people who moved into luxury apartment buildings came directly from neighborhoods with below-average incomes. But that set off a moving chain that was more likely to reach lower-income neighborhoods. By the sixth link in the chain, 40 percent of movers were coming from neighborhoods with below-average incomes.
Let’s not forget that exclusionary zoning is a contributing cause of poverty and inequality in the first place. Not only was zoning a tool to maintain racial segregation in many U.S. cities but economists Chang-Tai Hsieh and Enrico Moretti also estimated that stringent restrictions on housing supply reduced aggregate U.S. economic growth by 36 percent from 1964 to 2009. This stymied growth harms lower-income people the most. In his book Arbitrary Lines, researcher Nolan Gray summarizes a study, which shows how exclusionary zoning reduces output and wages:
A more recent paper by economists Giles Duranton and Diego Puga [explore] what might happen if some of our largest and wealthiest cities liberalized zoning[. T]heir model suggests that output per person in a place like Boston would rise by just over 13 percent. The gains would be most pronounced for new arrivals, who would see real incomes rise by just over a quarter. In the aggregate, if our three most productive cities were to tame zoning, U.S. real per capita income would rise by just over 8 percent.
Indeed, people will still inevitably fall through the cracks, even with liberal zoning reforms. But we can find better ways to incentivize affordable housing without imposing a tax on developers or maintaining the status quo. Inclusionary zoning only works as an incentive due to the existence of exclusionary zoning. Perhaps it can be a stopgap to getting some affordability now, but it shouldn’t be the end goal.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International.