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Multifamily Market Commentary – April 2017

Cities Strengthen Inclusionary Zoning Programs

Despite the leveling-off of rent growth in the fourth quarter of 2016, national rents are estimated to have risen more than 

13 percent from the pre-recession peak in 2008. During the same period, the estimated national vacancy rate has fallen from 

a recession high of 8.25 percent to 5.25 percent in the fourth quarter 2016. Low vacancies and high rent growth are a 

symptom of a supply/demand imbalance, which is even more acutely felt in the affordable housing sector. Many 

municipalities are attempting to address this imbalance by either strengthening existing or creating new inclusionary zoning 

programs targeting new residential properties, including multifamily. 

What is Inclusionary Zoning?

Inclusionary zoning programs vary and are offered by local or state government agencies to provide developers of residential 

housing certain benefits for including affordable units in new, primarily market rate, properties. Benefits include density 

bonuses, an expedited permitting process, fee waivers, or even relaxed development standards. In some cases, inclusionary 

zoning programs may even provide subsidies that aid the developer in paying for the production of affordable units. Since 

inclusionary zoning programs do not require direct subsidy dollars to create affordable homes and rentals, they are a 

market-based solution for affordable housing. 

Massachusetts: 20 Percent Set Aside for Affordable Units

Some states offer voluntary statewide programs. For example, 

Massachusetts’ Chapter 40B program has been quite successful 

enabling local zoning boards to approve affordable housing 

developments under flexible rules in exchange for long-term 

affordability restrictions. Also known as the Comprehensive Permit 

Law, Chapter 40B was enacted in 1969 with the goal of ensuring that 

10 percent of housing in each community is affordable to lower 

income residents. Of these, at least a quarter of rental units must 

be affordable to lower income residents earning up to 80 percent of 

the area median income (AMI) for their location. Alternatively, the 

project can ensure that 20 percent of rental units are affordable to 

households earning up to half of the AMI.

As of 2016, the Chapter 40B program has created about 48,800 units 

of multifamily rental housing. An estimated 29,800 units, about 61 

percent, were income restricted. Some of the units were also 

subsidized with Low Income Housing Tax Credits (LIHTC). 

According to the non-profit Grounded Solutions Network, which 

conducted a survey of inclusionary housing programs last year, 

Massachusetts also has the Smart Growth Zoning Overlay District 

Act, also known as 40R, which encourages communities to create 

smart growth districts. Among other things, these are districts that 

can be located near bus or train stations. These districts must ensure 

that at least 20 percent of housing units are affordable to households 

at or below 80 percent of AMI. 

Connecticut: 30 Percent Minimum Set Aside

Connecticut also has a statewide program. Under its 8-30G 

statute, in communities where less than 10 percent of housing is 

affordable, developers may receive automatic approval for projects in which 30 percent of units are deed restricted for a 

minimum of 40 years. 

Total 

Units

Affordable 

Units

Affordable 

Units 

Share

Rental 48,800 29,800 61%

Ownership 19,500 5,400 28%

Total 68,300 35,200 52%

Massachusetts 40B Program

Total Units Built or Under Construction 

Source:http://www.mhp.net/writable/resources/documents/

Municipal-role-in-Ch.-40B.pdf (page 4)

KEY AFFORDABLE HOUSING TERMS

Area Median Income (AMI): 

The income for a city where half of households earn 

more and half of households earn less.

Example: 2016 HUD Area Median Income for New 

Bedford, MA metro area was $56,100

80 percent of AMI = 0.8 * $56,100 = $44,900

50 percent of AMI = 0.5 * $56,100 = $28,100

Affordable Rent: 

Rent is affordable when a household spends no more 

than 30% of gross income on housing costs (rent + 

utilities for renters)

Example: 2016 HUD Area Median Income for New 

Bedford was $56,100 per year/$4,700 per month. 

Affordable Rent is 30% of income:

$4,700 * 0.30 = $1,400 per month.

Source: U.S. Dept. of Housing and Urban Development
© 2017 Fannie Mae. Trademarks of Fannie Mae. 4.14.2017 2 of 6

In addition, 15 percent of units must be affordable to households earning no more than 80 percent of AMI and 15 percent 

of units must be affordable up to 60 percent of AMI. Connecticut’s program has produced about 5,600 units of both singlefamily and multifamily affordable housing since 1989. Recently, it has been used to develop affordable multifamily in more 

affluent suburbs with a shortage of rental units.

Washington, DC: Set-Aside is in Square Footage 

Set aside requirements are not always in units. For instance, Washington DC’s inclusionary zoning program requires a set 

aside of a certain percentage of square footage. The District’s program is mandatory and generally allows up to a 20 percent 

bonus in a residential project’s density in exchange for 8-to-10 percent of a project’s square footage set aside as affordable. 

While the program applies to new construction, it can also apply to a substantial rehab project with at least a 50 percent 

increase in square footage.

While the District’s affordability requirements are permanent, they vary by location. In certain neighborhoods, half of new 

units must be affordable up to 50 percent of AMI while the remaining half must be affordable to families earning no more 

than 80 percent of AMI. In other neighborhoods, all units must be affordable up to 80 percent of AMI. Since the District’s 

program was implemented in 2009, it has produced an estimated 318 units of new affordable rental housing and 84 units 

of affordable housing for sale. But 318 units is a small percentage of the more than 21,000 estimated new multifamily units 

that were delivered during that timeframe. 

New York City: Increased Set Aside 

New York City considers development of inclusionary housing to be so important that in 2016 it strengthened its 

inclusionary zoning program by developing a mandatory inclusionary zoning program and increased the set aside for 

affordable housing. As shown below, the R10 voluntary program established in 1987 required that only between 4-to-5 

percent of new units be set aside. By contrast, the IHDA program established in 2005 increased that requirement to 20 

percent. 

The Mandatory Inclusionary Housing (MIH) program was established in early 2016. The MIH program mandated that a 

much higher percentage of units be set aside than in previous programs. When new housing capacity is approved through 

land use actions, the New York City Planning Commission and the City Council can choose to impose either one or both of 

two basic options: setting aside one quarter of units affordable up to 60 percent of AMI, including a 10 percent set aside of 

units affordable up to 40 percent of AMI; or developers can set aside just under one-third of units affordable up to 80 percent 

of AMI. The city may impose additional affordability restrictions if deemed necessary, including a Workforce Housing 

Option that sets aside 30 percent of units affordable to 115 percent of AMI. New York City is typical of many large cities that

have been increasing the percentage of units set aside with affordability restrictions and, in some cases, creating new 

mandatory programs.

R10 Program IHDA Program MIH Program

Year Adopted 1987 2005 2016

Program Type Voluntary Voluntary Mandatory

Duration of Affordability Permanent Permanent Permanent

Minimum Set Aside (%) 4-5% 20% Two Basic Onsite Options*:

1) 25% at 60%/10% at 40%

2) 30% at 80% AMI

Workforce Housing Option: 

30% up to 115% of AMI

Income Targets (AMI) <80% most areas; up 

to 125% or 175% in 

designated areas

<80% most areas; 

up to 125% or 175% 

in designated areas

Basic options at an average of 60% 

and/or 80%; additional options at an 

average of 40% and/or 115%

New York City Inclusionary Housing Programs for Residential Development
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Inclusionary Zoning Reflects Metros with Increasing Housing Demand

Usually, inclusionary zoning programs have more substantial impact in metros where rising population and job growth fuel 

higher housing costs. As shown in the table below, this includes large, well-established cities, such as Boston and Atlanta, 

as well as rapidly growing smaller metros such as Boulder, CO and Asheville, NC.

Set asides for affordable housing generally increase when a city provides financing, land, or other support. For instance, 

Chicago requires that the percentage of units set aside with affordability restrictions increase to 20 percent from 10 percent 

if city-provided financing is involved. 

Duration of 

Affordability

Minimum Set Aside Renter Income Targets (AMI)

New York City

(MIH program)

Permanent Two Basic Options:

1) 25% at 60%/10% at 40%

2) 30% at 80% AMI

Basic options at an average of 60% and/or 80%; 

additional options at an average of 40% and/or 

115%

San Francisco Permanent 25% onsite for 25+ unit projects Up to 55% for new units;

Up to 60% for re-rents

Boston 50 years; 

potential to 99 

13% Up to 100% in Zone C

Up to 70% all other Zones

Chicago 

(ARO Program)

Minimum of 30 

years

10% but increases to 20% with city 

provided financing

Up to 60%

Seattle 

(MHA program)

50 years Varies by location; up to 11% min. Up to 80%

San Diego Permanent 10% 65%

Portland Permanent 20% for central

15% all other

Up to 80%

District of 

Columbia

Permanent - 8% sq. footage for steel and concrete 

building

- 10% for all other

Varies by location:

- Half of units affordable up to 50% AMI/half of 

units affordable up to 80% or

- All units affordable to 80%

Atlanta Permanent 15% for projects with city funds Two Options:

10% at 60%/15% at 80% AMI

Asheville, NC 15 years 20%

(50 units for workforce program)

50%-80%/80% to 120%

Up to 120% AMI for workforce)

Boulder Permanent 20% Up to 80% of AMI

Montgomery 

County, MD

99 years 12.5% to 15% Up to 80% of AMI

Inclusionary Zoning Programs for Residential Development - Select Metros

Sources: 

New York City: http://www1.nyc.gov/site/planning/plans/mih/mandatory-inclusionary-housing.page

Boston: http://www.bostonplans.org/getattachment/91c30f77-6836-43f9-85b9-f0ad73df9f7c

San Francisco: http://sfmohcd.org/inclusionary-housing-program-developer-and-agent-information

Seattle: https://www.seattle.gov/housing/housing-developers/incentive-zoning

San Diego: https://www.sandiego.gov/sites/default/files/dsdib532.pdf

Portland: https://www.portlandoregon.gov/phb/72302

Asheville: https://www.buncombecounty.org/common/planning/WorkforceRentalHousingApplication.pdf

Atlanta: http://www.investatlanta.com/news-press/press-releases/press-release-new-afforable-housing-policy/
© 2017 Fannie Mae. Trademarks of Fannie Mae. 4.14.2017 4 of 6

Alternatives to On-Site Inclusionary Development

In addition to setting aside a percentage of affordable units for a particular new development seeking approval, many 

jurisdictions allow developers to create the equivalent number of units “off-site” at another location. Under another option 

known as “fee-in-lieu” or “payment-in-lieu,” developers may opt to contribute to a fund that is designated to create 

affordable units elsewhere in the jurisdiction. For instance, depending on the location of a development, Chicago’s 

Affordable Requirement Ordinance (ARO) allows developers to contribute between $50,000 and $175,000 to the city’s 

housing trust fund in lieu of directly setting aside affordable housing units in a new project. 

Seattle Has Multiple Programs

Seattle recently strengthened its inclusionary zoning program by creating the Mandatory Housing Affordability (MHA) 

program that requires commercial and multifamily developers to contribute to affordable housing by either including 

affordable units in a new development or by making a payment-in-lieu to fund affordable housing to be built throughout 

the city. MHA aims to create 6,300 units of rent-restricted housing by 2025.

The program creates three tiers of MHA requirements for multifamily residential and commercial development based on 

location in what are deemed Low, Medium or High Cost Areas and whether the zoning increase moves a zone from one 

category to another. Set asides for affordable rentals range from 5 percent to 11 percent depending on the type of property 

and location; however all rentals must be affordable up to a maximum of 60 percent of AMI. Seattle’s MHA program was 

added to supplement its existing voluntary inclusionary zoning program.

Interestingly, Seattle already had an even more generous set aside program. Seattle’s Multifamily Property Tax Exemption 

(MFTE) Program provides a 10-to-12 year tax exemption on new multifamily buildings in exchange for setting aside between 

20-and-25 percent of a project’s units as income- and rent-restricted for 10 years. In some areas 25 percent of units must 

be affordable up to 80 percent of AMI, while in others 40 percent of units must be affordable below 60 percent of AMI.

Some Cities Increasing Set Aside Percentages

San Francisco's Inclusionary Housing Program requires developers of projects with 10-or-more units to pay an Affordable 

Housing Fee or, instead, to sell or rent a percentage of the units at a "below market rate" price that is affordable to low- or 

middle-income households. An estimated 3,000 units have resulted from this program. 

Since 2013, that percentage of units set aside for affordability has been increasing, as shown in the table below. In fact, for 

residential units developed on or after January 12, 2016, in projects of at least 25 units, the set aside percentage increased 

to 25 percent from just 12 percent in 2013.

Before 1/1/13 Before 1/1/14 Before 1/1/15 Before 1/12/16 After 1/12/16

10-24 unit projects 12.0% 12.0% 12.0% 12.0% 12.0%

25+ unit projects 12.0% 13.0% 13.5% 14.5% 25.0%

Besides New York and San Francisco, several other cities have recently increased set aside percentages for affordable 

housing and/or created mandatory programs, including Portland, Boulder, and Seattle. Cambridge, MA is currently 

considering a proposal to increase its set aside requirement to 20 percent from 15 percent.

In fact, according Grounded Solutions Network, an estimated 40 jurisdictions now have minimum set asides of 20 percent 

or more. While most are located in high-cost California, some are located in more unexpected places. For instance, in North 

Carolina, in addition to Asheville, Winston-Salem and Manteo have programs with minimum 20% set asides.

On-Site Set Aside Percentages for Residential Development - San Francisco

Applies to residential developments of 10 units or more.

Source: http://sfmohcd.org/inclusionary-housing-program%20
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Variability in Producing Affordable Units

According to a May 2016 report from the nonprofit National 

Housing Conference’s research division Center for Housing 

Policy, entitled Separating Fact from Fiction to Design Effective 

Inclusionary Housing Programs, over 500 local jurisdictions 

have adopted inclusionary zoning policies, but there is 

considerable variability in the number of units produced, as 

shown in the adjacent table. 

Including both single-family and multifamily affordable units, 

the oldest inclusionary housing program is located in 

Montgomery County, MD, which has produced slightly more 

than 13,000 units since 1974, averaging 358 units per year. By 

contrast, Denver’s newer inclusionary zoning program is 

estimated to have produced fewer than 100 units in total since 

its creation in 2002. In fact, since some of these inclusionary 

zoning programs are in their infancy, they have yet to produce 

a single affordable unit.

Inclusionary Zoning Shows Promise

More and more inclusionary zoning programs are being 

implemented across the country and existing programs are 

being strengthened. However, it can be challenging to track the 

number of units created under these programs. While not 

required, state and local inclusionary zoning programs may 

allow federal subsidies and developers may use fee-in-lieu to 

satisfy inclusionary zoning requirements, making it 

challenging to track the number of additional affordable units 

created under these programs. By one estimate, these 

programs have created up to 150,000 units of affordable singlefamily and multifamily housing. Unfortunately, short of the 

creation of a national database to identify and track all of the 

nation’s various programs, the real impact of inclusionary 

zoning remains elusive. 

Affordable Housing Units Produced by 

Local Inclusionary Zoning Programs

* New Units, Excludes units produced with in-lieu fees

Source: Separating Fact from Fiction to Design Effective Inclusionary 

Housing Programs
© 2017 Fannie Mae. Trademarks of Fannie Mae. 4.14.2017 6 of 6

Tanya Zahalak

Senior Multifamily Economist

Multifamily Economics and Market Research

April 2017

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