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Inclusionary Zoning Ban in Montana

Headshot, Greg GianforteIn Montana, Governor Greg Gianforte banned inclusionary zoning. But what does that mean?

What is inclusionary zoning in Montana – and why the ban? Was it working? And what can cities do to encourage affordable housing?

What is Inclusionary Zoning?
The Missoula Current says the ban, “prevents municipalities from requiring that a certain portion of qualifying new and existing housing…at a certain price.” In short, some Montana cities have a policy requiring housing developers to reserve some housing units at below-market prices. Usually, policymakers tailor the regulations to meet the local market’s needs.
 
The rules around inclusionary zoning vary by city. Some cities may limit inclusionary zoning to targeted areas. The land around public transit facilities is an example. Often, the inclusionary zoning regulations only apply to projects over a certain size. What’s more, the income levels served depend on the needs of the city.
 
In some cases, participation is voluntary and incentivized. Cities offer developers density bonuses, lower fees, and fast-tracked approvals. Many cities (like Bozeman, Montana) offer developers the chance to pay a fee instead of compliance.
 
The Upside of Inclusionary Zoning
Inclusionary zoning grows a city’s affordable housing offerings. It’s meant to ensure that all new projects offer some options for households unable to take part in the market due to lower incomes.
 
Often, inclusionary zoning is targeted to certain areas such as those served by transit or next to key employment centers. Access to these amenities allows developers to place a premium on rents and sale prices. Inclusionary zoning ensures that a fair cross section of households can take advantage of these resources.
 
…And The Downside
The downside is that this zoning can throw a wrench in the development financials. Almost all developers need to hit a certain return on developments to secure lenders and investors. Offering units below the production cost can eat into the return enough to render projects unbuildable.
 
Some Montana builders expressed support for the bill, at least in part. That’s because inclusionary zoning can push up housing prices for people who aren’t eligible for subsidized housing.
 
Was Inclusionary Zoning Working in Montana?
Advocates argue that inclusionary zoning was one of few tools to create affordable housing. Opponents say it was little more than a “Band-Aid.”
 
But was inclusionary zoning working in Montana? The answer is…sorta. Developers needed to get creative to assure affordable units were included in their housing projects – but to do so required some trade offs.
 
One such trade-off is raising the price on the market rate units in the development. In turn, this allows the builder to hit their returns while creating the required below-market product. This is a balancing act in pricing the other homes in line with the market. If the prices are too high, those homes may be a challenge to sell or may not appraise.
 
In the worst case scenario, the market won’t bear the costs of housing. That can lead to the cancellation of the project. As a result, the community loses the benefit of an expanded housing supply altogether.
 
Another trade-off is value engineering the affordable units by offering smaller plans, lower finish specifications, and less parking. For example, market rate townhouse plans might include 1,800 square feet, with a 2 car garage. The affordable plans that make up the inclusionary zoning requirement might shrink to 1000 square feet with no garage.
 
But, as building costs have increased, value engineering has become less realistic to keep homes affordable. In weaker housing markets, the value-engineered homes may be more challenging to sell or lease. What’s more, this can also lead to segregation in the community dubbed “poor doors.Usually there are minimal issues between residents in these projects. But, there can be friction in the community with obvious economic disparity.
 
What Now?
Inclusionary zoning doesn’t address the factors that are creating the affordable housing crisis. This provides some units to the market. However, it does so by asking middle income buyers/renters to subsidize lower income buyers/renters.
 
Stagnating wages in Montana cities mean even fewer homeowners can afford premium housing to offset below-market rate houses next door. Tack on rising healthcare, education, and childcare costs, and it’s clear that a lack of affordable housing is a symptom of a deeper community issue.
 
And inclusionary zoning isn’t the answer to these issues. It’s far beyond the scope of one group, one person, or the community of developers. So what else can be done to solve for the lack of housing in Montana’s growing cities?
Other Tools
 
  • Density bonuses for including affordable housing. Density bonuses allow developers to spread land and development costs over a larger number of units. This decreases costs while preserving margins needed to satisfy lenders and investors.
  • Community investment in Class B&C properties. Such investment helps preserve affordable housing. New construction costs have risen to a point where it is not possible to build market rate housing for households below the median income. Partnerships to buy older properties and maintain their affordability is a simple method.
  • Down payment help programs. Programs like these offer forgivable down payment loans to buyers at specific income levels. As an example, Missoula County allocated $90k for down payments for nine families in partnership with Habitat for Humanity.
  • Emergency cash payments. Many costly and disruptive eviction proceedings are for amounts under $1000. Preventing tenants from losing their homes helps to preserve affordable housing. This is especially true in the wake of 2020’s economic turmoil.
  • Keeping inventory available. Limitations for short-term rentals like Airbnb help keep units in the rental market.
  • Focusing on other factors that keep locals from purchasing housing. Many communities have begun discouraging low-wage jobs. That’s done by eliminating economic development incentives for employers paying low wages.
Takeaway
While Montana has banned cities from inclusionary zoning, it’s just one tool available to provide affordable housing. By using other options, cities can make up for the loss of inclusionary zoning. As most major Montana cities struggle with housing crunches, it’s high time to consider more effective alternatives.
For more information, contact Matt Mellott, CCIM/SIOR and Claire Matten, CCIM.