Incentive zoning

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What Is Incentive Zoning?

Incentive zoning is a land-use regulation strategy that allows local governments to grant developers additional building capacity or flexibility in exchange for providing desired public benefits. This practice, a component of urban planning, offers a "bonus" in terms of development rights when developers contribute positively to the community⁸⁴. These benefits can include, but are not limited to, the creation of affordable housing units, public spaces such as parks or plazas, community facilities, or contributions to infrastructure improvements⁸¹, ⁸², ⁸³. Incentive zoning aims to align private real estate development interests with broader community goals by offering concessions from standard zoning regulations.

History and Origin

The concept of incentive zoning first emerged as a tool to shape urban development beyond mere restriction. New York City pioneered incentive zoning in 1961 as part of an overhaul of its original 1916 Zoning Resolution⁷⁸, ⁷⁹, ⁸⁰. The initial focus was on encouraging developers to construct open public spaces, such as plazas, to alleviate sidewalk congestion and improve light and air access in dense urban areas⁷⁵, ⁷⁶, ⁷⁷. By offering additional Floor Area Ratio (FAR) to developers who provided these amenities, the city aimed to incentivize building designs that enhanced the public realm⁷³, ⁷⁴. This early application led to the creation of hundreds of privately-owned public spaces throughout New York City⁷².

Key Takeaways

• Incentive zoning is a regulatory tool where municipalities offer development bonuses in exchange for public benefits.
• Common incentives include increased density or height, while benefits often include affordable housing, public open space, or community facilities.
• It serves as a voluntary mechanism for developers, offering a path to build more on a given site if the value of the incentive outweighs the cost of providing the community benefit.
• The effectiveness of incentive zoning depends on a strong demand for development and a careful balance between the value of the incentive and the cost of the public good.
• While offering flexibility, incentive zoning can face criticisms related to potential for abuse, equitable distribution of benefits, and increased complexity in the development process.

Formula and Calculation

While there isn't a universal mathematical formula for incentive zoning, the core concept revolves around an "exchange rate" or a proportionality between the value of the incentive granted to the developer and the cost of the public benefit provided.

The general principle can be expressed as:

Where:

• (V_{incentive}) = The economic value a developer gains from the incentive (e.g., increased saleable square footage from a higher Floor Area Ratio (FAR) or additional units from a density bonus).
• (C_{public_benefit}) = The cost incurred by the developer to provide the public benefit (e.g., construction costs for affordable housing units, land acquisition costs for public spaces, or direct financial contributions).

The specific calculation for (V_{incentive}) often involves assessing the increased profitability from the additional development capacity. For example, if a developer is granted a density bonus allowing for more residential units, (V_{incentive}) would be the projected revenue from those additional units minus their construction costs. Similarly, (C_{public_benefit}) would be the direct expenses associated with providing the amenity. Municipalities aim to strike a balance where the incentive is attractive enough to motivate developers without providing an excessive windfall⁷⁰, ⁷¹.

Interpreting Incentive Zoning

Incentive zoning is interpreted as a flexible and performance-based land use tool that encourages desired community outcomes through a quid pro quo arrangement between local governments and developers⁶⁹. It shifts from traditional prescriptive zoning regulations to a more adaptive approach, where deviations from standard rules are permitted when they serve a broader public benefit⁶⁷, ⁶⁸. The effectiveness of incentive zoning is often judged by its ability to generate public goods that might not otherwise be economically feasible for private development to provide⁶⁵, ⁶⁶. It is also seen as a mechanism to foster public-private partnerships in urban development and economic development⁶⁴. Successfully implemented incentive zoning programs require clear guidelines for both the incentives offered and the expected public benefits to ensure transparency and prevent perceptions of "zoning for sale"⁶², ⁶³. The goal is to ensure that the amenities provided genuinely enrich the community and are not merely mitigation measures or improvements that solely enhance the development's value⁶¹.

Hypothetical Example

Imagine a city has a standard zoning regulation that permits a maximum Floor Area Ratio (FAR) of 5.0 for commercial buildings in a specific district. However, the city's master plan includes a goal to increase green space and public access in dense urban areas. To encourage this, the city implements an incentive zoning program.

A real estate development company plans to build a new office tower in this district. Under the standard zoning, their proposed 100,000 square foot lot would allow for a 500,000 square foot building ($100,000 \text{ sq ft lot} \times 5.0 \text{ FAR} = 500,000 \text{ sq ft}$).

Under the incentive zoning program, the city offers a bonus FAR of 1.0 if the developer dedicates 15% of the ground floor area to a publicly accessible plaza with seating and landscaping.

The developer calculates that constructing and maintaining the public plaza will cost an estimated $2 million. However, with the bonus FAR, they could build an additional 100,000 square feet of office space ($100,000 \text{ sq ft lot} \times 1.0 \text{ bonus FAR} = 100,000 \text{ sq ft}$). If the market value of office space in that area is $500 per square foot, the additional space could generate $50 million in revenue.

Given the potential revenue increase of $50 million for an additional cost of $2 million, the developer is incentivized to include the public plaza. The city gains a valuable public space without direct public expenditure, and the developer achieves a larger, more profitable project.

Practical Applications

Incentive zoning finds practical applications across various facets of urban planning and real estate development, serving as a dynamic tool for municipalities to shape growth.

• Affordable Housing: One of the most common applications is to stimulate the creation of affordable housing units. Cities offer developers increased density bonuses, allowing them to build more market-rate units in exchange for including a certain percentage of affordable units on-site or contributing to an affordable housing fund⁵⁸, ⁵⁹, ⁶⁰. For example, San Francisco's Affordable Housing Bonus Program (AHBP) offers incentives like increased density and height to projects that provide 30% or more affordable housing units⁵⁶, ⁵⁷. Similarly, Seattle's Mandatory Housing Affordability (MHA) program requires developers to either include affordable units or pay into a fund, in exchange for allowing slightly larger or taller buildings⁵², ⁵³, ⁵⁴, ⁵⁵.
• Public Open Spaces: Incentive zoning is also widely used to create or enhance public spaces, such as plazas, parks, and greenways, within private developments⁴⁹, ⁵⁰, ⁵¹. This was a primary driver for New York City's early adoption of incentive zoning in the 1960s⁴⁷, ⁴⁸.
• Community Amenities and Infrastructure: Beyond housing and open space, incentive zoning can encourage developers to provide other community amenities, like public parking facilities, childcare centers, or even contribute to public transit improvements⁴⁴, ⁴⁵, ⁴⁶.
• Historic Preservation: In some instances, incentive zoning has been used to incentivize the preservation or adaptive reuse of historic buildings, offering development bonuses on other parts of a property in exchange for maintaining a historic structure⁴², ⁴³.
• Mixed-Use Development and Urban Renewal: It can also be applied to encourage mixed-use development or to stimulate investment in areas designated for urban renewal, aligning private projects with broader city-wide master plan objectives⁴⁰, ⁴¹.

These applications highlight how incentive zoning acts as a flexible mechanism to achieve diverse public benefits, reflecting a collaborative approach to land use policy.

Limitations and Criticisms

Despite its potential benefits, incentive zoning faces several limitations and criticisms. A primary concern is the potential for it to be perceived as a "giveaway" to developers, where the value of the incentives granted outweighs the public benefit received³⁸, ³⁹. This can lead to accusations of "zoning for sale" or a lack of transparency in the bargaining process³⁷. Critics argue that if not carefully structured, incentive zoning can lead to an inequitable distribution of benefits, concentrating amenities in certain areas while neglecting others³⁶.

Another criticism revolves around the complexity it adds to the real estate development process. The negotiation and approval of incentive zoning agreements can be time-consuming and challenging for both developers and municipalities, potentially hindering development rather than encouraging it³³, ³⁴, ³⁵. There's also the risk that the public amenities provided might not be well-aligned with actual community needs or may not be adequately maintained over time³⁰, ³¹, ³². For example, early criticisms of New York City's public plazas created through incentive zoning noted that some were intentionally made uninviting or remained underused²⁹.

Furthermore, incentive zoning's effectiveness is often contingent on a strong real estate market and existing demand for development that exceeds baseline zoning allowances²⁷, ²⁸. In areas with little development pressure, the incentives offered might not be sufficient to motivate developers to provide the desired public goods²⁶. There are also concerns that incentive zoning, if misapplied, could lead to adverse impacts on host neighborhoods, such as increased density or traffic, without fully mitigating these negative externalities²⁵. Legal challenges can arise if incentive zoning is seen as "contract zoning," where a municipality improperly bargains away its regulatory power²³, ²⁴.

Incentive Zoning vs. Inclusionary Zoning

Incentive zoning and inclusionary zoning are both land use planning tools used by municipalities to achieve public benefits, particularly in the realm of affordable housing, but they differ fundamentally in their approach.

Incentive zoning is a voluntary system where developers are offered "bonuses" or exemptions from standard zoning regulations in exchange for providing specific public amenities or addressing community goals²⁰, ²¹, ²². The developer chooses whether to participate based on the economic viability of the incentive. For instance, a developer might be allowed to build a taller building (an incentive) if they include a public plaza or a certain number of affordable housing units (the public benefit)¹⁸, ¹⁹. The aim is to create a win-win scenario where the developer gains additional development rights, and the community receives a desired amenity without direct public expenditure¹⁶, ¹⁷.

Inclusionary zoning, on the other hand, is typically a mandatory policy that requires developers of new residential projects to set aside a certain percentage of units as affordable housing¹⁵. While often mandatory, inclusionary zoning programs frequently offer incentives, such as density bonuses or fee waivers, to offset the costs of providing the affordable units¹³, ¹⁴. Thus, while incentive zoning is fundamentally opt-in, inclusionary zoning is often a requirement, though it may be supported by incentive structures. The core distinction lies in the obligatory nature of the affordable housing component.

FAQs

What types of public benefits can be obtained through incentive zoning?

Incentive zoning can secure various public benefits, including affordable housing units, public parks and plazas, community facilities, childcare centers, public art installations, and contributions to transportation infrastructure¹⁰, ¹¹, ¹².

Is incentive zoning mandatory for developers?

No, incentive zoning is typically a voluntary program. Developers choose to participate if the offered incentives, such as increased density or height allowances, provide a sufficient economic advantage that outweighs the cost of providing the public benefit⁸, ⁹.

How does incentive zoning help address housing affordability?

By offering incentives like density bonuses, incentive zoning encourages developers to include affordable housing units within their projects. This helps to increase the overall supply of housing, including units accessible to lower-income households, without direct public subsidy⁶, ⁷.

What are the potential downsides of incentive zoning for a community?

Potential downsides include the risk of incentives being disproportionate to the public benefit, leading to perceived "giveaways" to developers. There can also be concerns about the equitable distribution of benefits across a city, increased development complexity, and the quality or maintenance of the provided amenities³, ⁴, ⁵.

How does incentive zoning differ from traditional zoning?

Traditional zoning primarily focuses on regulating land use, building height, and density through a set of fixed rules to separate incompatible uses and manage development. Incentive zoning, by contrast, is a more flexible approach that offers deviations from these fixed rules in exchange for developers providing specific community amenities or public goods¹, ².