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Relaxed Exclusionary Zoning: The Impact On REI

Millionacres logo Millionacres 5/11/2021 Motley Fool Staff
Relaxed Exclusionary Zoning: The Impact On REI © Provided by The Motley Fool Relaxed Exclusionary Zoning: The Impact On REI

President Biden has been clear about many things, and his stance on exclusionary zoning is certainly one of them. His campaign website states, "Exclusionary zoning has for decades been strategically used to keep people of color and low-income families out of certain communities. As President, Biden will enact legislation requiring any state receiving federal dollars … to develop a strategy for inclusionary zoning.:

With a push toward a more inclusive zoning regime, President Biden is hoping to make housing more available and affordable than before. Further, inclusive zoning practices typically allow for higher densification and usages, which may have a positive impact on investors and developers.

What is exclusionary zoning?

First off, zoning is the way in which local jurisdictions manage and approve different types of real estate usages. Think of a traditional city, typically zoned for commercial usage downtown, residential neighborhoods, and an industrial area somewhere on the outskirts. This type of city planning is achieved by zoning particular lots or neighborhoods for the type of usage a city wants: residential low density, residential high density, commercial, tourism, agricultural, and industrial.

The downside of traditional zoning practices is that it tends to isolate single-family residential homes in one area, and more affordable rental and higher density units in other neighborhoods. This leads to the unintended consequence of having poorer residential units in one place. Further, the single-family home neighborhoods tend to be less affordable, creating a separation between "rich" and "poor" areas of a city.

This traditional zoning regime is “exclusionary” because in a single-family home neighborhood, it’s very difficult to build a higher density residential apartment that's affordable.

Exclusionary zoning simply refers to the local land-use rules that exclude certain housing types. There’s no reason a low-income housing cooperative shouldn’t be allowed in a residential neighborhood, but in many cases it is.

The impact of inclusionary zoning on investors

There are several key knock-on effects of relaxing zoning laws, which the Biden administration is currently pushing by giving more funding to cities that lax their zoning restrictions. Here are a few key points for investors to consider.

Upzoning: A logical way to fight against exclusionary zoning and housing affordability is upzoning. This is where local jurisdictions will upzone a particular area, allowing for more density. There are many examples of this already:

  • Minneapolis: In 2019, the city adopted an inclusionary zoning ordinance increasing a property's development capacity by at least 60%.
  • Oregon: In 2019, the state legalized upzoning by telling cities that they could no longer limit land use to just one single-family dwelling.
  • Seattle: Last year the city relaxed its zoning code in 27 transit-oriented areas.
  • Austin: The city council approved in 2019 an ordinance to allow more homes to be built on single-family zoned land.

For investors this means opportunities. In the past, you’d typically need specific zoning for a duplex, triplex, or fourplex. With upzoning, local regulators will relax zoning laws to allow for high density or increase the zoning levels upward of all current allowances.

Secondary units: Some zoning changes are underway to allow for further densification by enabling the construction of secondary dwelling units. This could include a coach house separate from the main building or a secondary unit in the lower level of a property. This could enable investors to add additional revenue streams to current assets that may not be zoned appropriately for secondary units.

Affordable housing: The Biden administration has been explicit about wanting more affordable housing and will be supporting initiatives and local governments to do so. For developers and investors who consider converting or building rental supply that is more affordable, there could be some additional incentives coming their way.

Multigenerational homes: According to media reports, Mayor Ras Baraka of Newark, New Jersey, has said his city plans to "take full advantage" of the federal dollars, including creating "solutions such as two- and three-family homes that can help to ensure intergenerational wealth-building for Black and brown families across the country."

There’s no doubt that there are many opportunities in the fight against exclusionary zoning. Look for less incentives for typical suburban single-family home construction and a bigger focus on smart densification and affordable housing options in the coming years.

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