Subject
title
Inclusionary Zoning Research Presentation and Moderately Priced Dwelling Unit (MPDU) Program
end
Department
Housing and Community Development
Recommendation
Staff recommend that the Mayor and Council read the graduate researcher’s report (Attachment 1), receive the presentation, discuss, and provide direction on a comprehensive update of City Code Chapter 13.5 (Moderately Priced Housing).
The following feedback is requested from the Mayor and Council to guide next steps:
1. Should the city continue to have an inclusionary zoning program?
2. Should staff explore methods of funding inclusionary zoning units?
3. Should staff explore a payment-in-lieu option?
4. Should staff explore ways to target lower household incomes?
Discussion
Background
The Moderately Priced Dwelling Unit (MPDU) program requires developments with 20 units or more to set aside 15% of the units for moderate-income households. This policy is the source of almost all new income-restricted affordable housing in the city. However, it also impacts market-rate development. Many components in the current ordinance have been identified in the Rockville 2040 Comprehensive Plan and by staff as outdated, unclear, or not in the best interest of the program’s goals or overall city objectives. By examining the existing program from the ground up, reviewing academic research, and identifying national best practices, Rockville can create the strongest possible inclusionary zoning (IZ) policy, which is the commonly used name for policies like City Code Chapter 13.5 (Moderately Priced Housing), which governs the MPDU program. Staff are currently in the initial research phase for a comprehensive update to Chapter 13.5.
Summary of Findings
The attached research paper by graduate researcher Colin Maloney, Master of Public Policy candidate at the University of Maryland, College Park, highlights the various designs, production outcomes, and tradeoffs associated with IZ policies.
• Need: A significant number of households in Rockville suffer from being housing cost burdened. The need seems to be for those with the lowest incomes.
• Local Landscape: Since its adoption in 1990, the City of Rockville’s MPDU program has produced 992 rental and 472 for-sale MPDUs. From 2000 to 2024, the program produced an average of 40 rental and 19 for-sale MPDUs annually. For-sale MPDU production peaked in 2003 with 149 units sold. Between 2011 and 2019, zero for-sale MPDUs were sold. Rental MPDU production peaked in 2015 with 224 rental MPDUs added. The net total is slightly lower with 883 rental units and 447 for-sale units. Projects currently under construction in Rockville are expected to add 164 MPDUs.
• Program Design: In a national survey of IZ programs, the average set-aside requirement for programs with on-site options was 16 percent. Most programs targeted low-income households with annual incomes between 50 and 80 percent of the AMI-87 percent of rental programs and 75 percent of for-sale programs. The survey also found that 93 percent of programs have affordability requirements that last longer than 30 years. Most IZ programs also offered some kind of incentive to reduce the financial impact of providing inclusionary units. The most popular incentives included density bonuses (57 percent), other zoning variances (24 percent), fee reductions/waivers (17 percent), and expedited permitting (13 percent).
• Effectiveness: Program outcomes are highly dependent on local economic and housing market conditions and the specific state and local regulatory frameworks, but research has found that the factors associated with inclusionary unit production are: strong housing markets, mandatory program participation, incentives for developers, clear and predicable program guidelines, and flexible compliance options.
• Benefits and Drawbacks: The top benefits of an IZ program are: 1) affordable housing production and 2) economic integration and upward mobility by providing low- and moderate-income households with access to the same housing and neighborhood resources as those who can afford to pay the non-subsidized price. However, IZ programs may also result in 1) increased costs for market-rate housing, as builders effectively cross-subsidize IZ units with the prices of market-rate units, and 2) less overall housing development, if IZ requirements make projects more financially difficult.
Chapter 13.5 Rewrite
Staff intend to begin research and engagement for the Chapter 13.5 rewrite in earnest after completing the comprehensive update to City Code Chapter 18 (Landlord and Tenant Relations) in Spring 2026. Engagement will include conversations and roundtables with MPDU residents (renters and homeowners), developers, and the wider community. Prior to Spring 2026, staff hope to engage another graduate researcher to build off of the initial paper to further hone in on strategies and recommendations, based on the Mayor and Council’s feedback. The Housing Needs Assessment will also be able to offer further insights into the city’s housing market and what types of policy changes may best meet the goals of the Chapter 13.5 rewrite.
The goals of the Chapter 13.5 rewrite are currently as follows:
• Identify the strengths and weaknesses of the existing MPDU program.
• Understand findings from academic research and national best practices.
• Design an inclusionary zoning policy that will best serve Rockville residents by creating new affordable housing and providing economic diversity while minimizing cost impacts on market-rate renters and homebuyers.
Feedback
The following feedback is requested from the Mayor and Council to guide next steps:
1. Should the city continue to have an inclusionary zoning program?
A ground-up review of the existing Moderately Priced Dwelling Unit (MPDU) program necessitates asking the fundamental question of whether the program is still the direction that is best aligned with the city’s objectives, especially given recent research demonstrating the costs to market-rate tenants and potential impacts on new housing construction.
At the same time, the MPDU program has resulted in the vast majority of the city’s new affordable housing, especially its affordable for-sale housing. Since its adoption in 1990, the program has produced 992 rental and 472 for-sale MPDUs. It has also ensured that as the city grows, homes in new developments are available to households with a range of incomes, although the city’s low- and moderate-income rental housing continues to be largely located in Town Center and along Rockville Pike, rather than distributed throughout the city and integrated in areas with higher average incomes.
Staff recommends that the city continue to have an IZ program. This recommendation is further explained in the following question.
2. Should staff explore methods of funding inclusionary zoning units?
If the goal is to achieve housing affordability across the income spectrum, then the city’s role is to encourage the construction of many homes in all shapes and sizes, as well as to ensure that there are income-restricted affordable homes for those whose incomes the market does not readily provide for. As discussed in previous work sessions, the creation of income-restricted affordable housing requires a subsidy. In most cases, subsidies are provided by the public sector, either in the form of tax credits, like the federal Low-Income Housing Tax Credit, or gap financing from local housing trust funds. However, in the case of an IZ program, the cost of the IZ units is ultimately paid by a narrow group of residents: the market-rate renters or homebuyers in the form of marginally higher home prices. Thus, the public policy question is whether subsidies for income-restricted affordable housing are best paid for through public subsidy or the narrower universe of market-rate renters and homebuyers in developments with IZ units, or some combination of the two.
One way to lessen the negative impacts of IZ requirements is to have a “funded” IZ program. The program is funded through a property tax abatement of a certain amount for a certain period of time. This is the design of IZ programs in places such as Portland, Oregon, and Baltimore, Maryland. The concept is gaining attention nationally, particularly as lawsuits move forward against localities with unfunded IZ programs.
Other jurisdictions allow for a payment-in-lieu option (more about this in Question 3 below). These payments are collected and leveraged as a public subsidy for income-restricted affordable housing.
Yet, it is important to consider that Rockville’s housing market exists within the context of Montgomery County’s housing market, and it is the county’s housing market that largely influences the market-rate rents in Rockville. For example, if a two-bedroom apartment commonly goes for $2,500 in similar areas of Montgomery County, a landlord in Rockville would not have a strong incentive to reduce rents to be much less in the city, even if they are saving money by not having to comply with an IZ requirement. To that end, it would be nearly impossible to ensure that landlords set market-rate home prices at a lower rate than they otherwise would with an IZ requirement in place.
Given this, staff recommends that the city creatively explore policies that lessen the cost burden of an IZ program on market-rate renters and homebuyers and balance the need to incentivize housing development.
3. Should staff explore a payment-in-lieu option?
Research shows that effective IZ programs provide flexible compliance options, which typically means an option to do a payment-in-lieu (PIL) of providing an actual IZ unit. The PIL is then typically added to the jurisdiction’s housing trust fund to be used for the creation of affordable units in other ways. However, setting the right amount for the PIL can be a difficult balance. If the PIL is not high enough, there won’t be enough funds to build an equivalent amount of affordable housing via other means, but if it’s too high, then it is not a realistic option for the developer. If it’s too low, the jurisdiction risks developers always choosing the PIL option rather than constructing IZ units.
Currently, instead of building the required number of MPDUs, a developer may offer to:
a. Build significantly more MPDUs at one or more other sites in the city.
b. Convey land in the city that is suitable in size, location, and physical condition for significantly more MPDUs.
c. Contribute to the Moderately Priced Housing Fund an amount that will produce significantly more MPDUs; or
d. Do any combination of these alternatives that will result in building significantly more MPDUs.
Staff recommends doing further analysis to explore a more flexible PIL option, while prioritizing the construction of income-restricted units.
4. Should staff explore ways to target lower household incomes?
The report’s housing gap analysis for renters reflects a severe shortage of units affordable to low-income households, particularly those earning less than 30 percent of the area median income (AMI). There are an estimated 2,389 renter households in Rockville with an income less than 30 percent AMI, yet there are only 1,065 units that would be affordable to this group within the city.
Another notable finding is the surplus of rental units for households making between 50 and 80 percent AMI. Rockville’s MPDU program and other programs designed to produce affordable housing, such as the Low-Income Housing Tax Credit program, contribute to the surplus of units. While acknowledging the contributions of these programs, research also points out that roughly a third of all new rental units are affordable to households earning 60 percent AMI in the Washington, D.C., and Baltimore metro area, the majority of which are market-rate.
As currently written, Chapter 13.5 allows for MPDUs to be set aside for households making anywhere between 30% to 120% AMI. The program sets no requirements for how many units must be set aside at any certain income level, making each MPDU agreement a negotiation between the city and the developers, each with opposed incentives for setting income levels. The city wants to receive the most deeply affordable housing possible, while the developers want to maximize incomes to therefore maximize rents and receive a smaller loss from the MPDUs.
When considering how to best design a program to serve current and ongoing housing needs, staff recommend investigating ways to achieve a greater number of MPDUs set aside for households earning between 30 and 50 percent AMI, as well as creating less flexible income-targeting requirements to lessen the amount of negotiation that goes into an MPDU agreement and thus providing more reliability in the city’s development process. The upcoming Housing Needs Assessment will be able to inform this work by providing additional data on what income groups have the least access to affordable housing.
Mayor and Council History
Housing is one of the Mayor and Council’s five focus areas. In June 2024, a high-level briefing was presented outlining the city's housing crisis and policy landscape. Later in 2024, there were three work sessions on the city’s housing strategies, during which staff recommended a comprehensive update to City Code Chapter 13.5 (Moderately Priced Housing) given the MPDU program’s impact on affordable and market-rate housing. This recommendation was endorsed by the Mayor and Council.
Next Steps
The feedback received from the Mayor and Council will inform additional research for the comprehensive update to City Code Chapter 13.5 (Moderately Priced Housing), alongside community input and findings from the upcoming housing needs assessment.