A resurgence in the economics of American cities is drawing people of all ages back in to live and work. Local officials have been welcoming the change and worked to revitalize downtown communities, but the influx of residents has created an increase in demand for housing that has not been met.

As a solution, there has been increased development of mixed-use projects which include commercial, retail and residential units. Increasingly concerning, housing is becoming unaffordable for individuals and families near or below the local average median income. As a consequence, city councils are turning to commercial real estate and the private sector for relief and assistance.

Inclusionary zoning (IZ) ordinances as a means of addressing affordable housing needs has seen increased attention from local governments. IZ ordinances would require owners of new residential, apartment and mixed-use properties to set aside a certain percentage of affordable units for individuals with incomes below the average median income. When applied to rental properties, the ordinance is effectively a rent control program.

Incentives to developers are often included to make the set aside affordable units more acceptable. These may include property tax abatements, payment in lieu of participation, bonus density, up-zoning or even the reassignment of affordable housing units to another property. Some cities work to create incentives for commercial real estate developers so that the developer/property owner of a 10-story condo project, for example, may seek additional floors as compensation for the percentage set aside for affordable housing.

Legal questions remain regarding the constitutionality of IZ under the Takings Clause of the 5th Amendment of the U.S. Constitution. Recently, the Supreme Court denied a request to hear a case, California Building Industries Association v. City of San Jose, on procedural grounds. However, Justice Clarence Thomas wrote in his concurring opinion denying the petition to hear the case that it nevertheless presented “an important and unsettled issue under the Takings Clause.” The court’s denial left in place the decision of California’s Supreme Court that San Jose had the legal authority to require a 15 percent set-aside of new home construction projects of 20 units or more for affordable housing based on their policing power to provide for the safety and well-being of their communities. Expectations are that the U.S. Supreme Court will eventually take up a similar case in order to clarify property rights and takings under local IZ ordinances.

In addition to IZ ordinances, local governments seek to apply impact/linkage fees and other charges on new development in order to fund local affordable housing initiatives. This was the case in 1990 when the San Diego City Council adopted an ordinance applying a linkage fee on new commercial development to fund a local housing trust fund. The city’s linkage fees stifled economic development because new construction projects were no longer financially viable. The revitalization of San Diego’s Gaslight District did not occur until the city council significantly reduced its linkage fee in 1996.

Whether through ordinances, impact fees, or the expansion of housing trust funds, the affordable housing debate will continue across the United States in the foreseeable future.

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