Do Municipalities Use Cost-Benefit Analysis for Incentive Zoning?

Cities have used various mechanisms to provide public amenities. One of them is Incentive Zoning, a system of bonuses (e.g., density increases or expedited review) offered to a developer in return for a public amenity (e.g., affordable housing, open space, or green buildings). Incentive zoning uses market forces rather than command and control regulation. It has provided many amenities over the years, such as public spaces, pedestrian-friendly streetscapes, affordable housing, and, more recently, green buildings. However it can be tricky to balance community benefits and developer incentives, and it has been a challenge for many local governments to calculate the proper ratio of incentive to amenity.

In "Zoning Incentives: Exploring a Market-Based Land Use Planning Tool," (Journal of American Planning Association, Vol.89, No.1), George C. Homsy and Ki Eun Kang explore whether governments produced cost-benefit analyses when incentive zoning programs were created or updated and what kind of amenities they have sought. They interviewed 14 planners working in 15 counties or municipalities with incentive zoning and surveyed 328 municipalities.

Local Governments Adopt Incentive Zoning, With Nuances

The survey results showed that nearly 41 percent of local government respondents reported adopting incentive zoning. The most common bonus offered to developers was additional density (76 percent), and about one-third of respondents said they offered additional height. They also found that most communities did not conduct a cost-benefit analysis to help them understand how to best employ incentive zoning.

However, there was a variation between cities of different sizes — half of the larger places (above the sample mean population size of 49,622) did the analysis, whereas less than one-fourth of smaller places did so.

Using cost-benefit analysis seemed to be effective as places with cost-benefit analyses saw developers using incentive zoning more often: 71 percent usage in places with a cost-benefit analysis versus 61 percent in places without.

Table 4. Cross-tabulations of cost-benefit analysis

Local Autonomy Shapes Incentive Zoning Practices

The level of local autonomy and public participation also affected whether municipalities deployed cost-benefit analysis or not. Municipalities with greater local autonomy from their state were less likely to adopt incentive zoning. This is because many communities report adopting incentive zoning to overcome state restrictions that limit what local governments could ask regarding the provision of desired public amenities by developers. In addition, the effectiveness of public participation positively correlated to the adoption of incentive zoning.

One barrier to local governments conducting cost-benefit analysis is the complexity of the undertaking. Local governments need someone on staff or a consultant to do a complex study of real estate, land value, and other market factors. Therefore, some communities muddle through to have a better sense of incentive-to-amenity ratio, for instance, by observing the projects that developers would do without the bonuses or testing the water in discussions with the development community.

The study affirms the importance of having a cost-benefit analysis in developing incentive zoning even though relatively fewer communities have adopted it. Further research that examines existing cost-benefit analyses could be a rich data source for communities trying to incorporate the analyses into their incentive zoning practices.

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