Portland voters changed a city rule in 2020 intending to force the creation of more affordable housing, but local experts argue it inadvertently stymied the development of any large housing projects in the city.

Now, Portland housing advocates want to see the city axe or alter that rule that requires new developments to make some of the units affordable for those earning less than area median income.

“Only three projects have been done with a total of fewer than 200 units in the five years since that ordinance took effect,” said Jonathan Culley, managing partner at Redfern Properties, a multifamily housing developer in Portland.

Portland’s inclusionary zoning rule requires developers of housing projects with 10 or more units to set aside 25 percent of the units as affordable housing. The units must be affordable to people earning up to 80 percent of area median income, which the Department of Housing and Urban Development sets annually.

In Portland, 80 percent of area median income for one person is $72,700, or $83,100 for two people and $93,500 for a three-person household.

While the rule appears to promote the creation of more affordable housing, it has instead made Portland less appealing to developers, many of whom have taken their business elsewhere or focused on smaller projects. This accidental effect doesn’t help the state meet its goal of adding as many 84,300 units by 2030 to fight a statewide housing shortage.

Portland’s rule would require a developer building a 100-unit project in Portland to ensure 25 of the homes are affordable for residents earning up to 80 percent area median income. If they can’t, the developer must pay a fee of $182,830 per unit, which goes into Portland’s Housing Trust Fund, according to the city’s website. That would total a fee of nearly $4.6 million for the 25 units.

“We do rental apartments, and so we would never pay the fee-in-lieu because it would be far too expensive,” Culley said.

High-end housing developers are more likely to pay the fee instead of creating the affordable units because they’re better able to pass the expense on to their residents, said Eamonn Dundon, advocacy director for the Portland Region Chamber of Commerce.

Developments that are smaller than 10 units, subsidized by MaineHousing or approved before the rule change took effect are exempt from the inclusionary zoning requirements, according to Dundon.

The rule was enacted by referendum vote in November 2020, which also means city officials can’t alter it for five years. But this was not the first time Portland had inclusionary zoning.

In 2015, Portland city councilors approved an inclusionary zoning ordinance that required 10 percent of new multi-family housing to be set aside for people making up to 100 percent of area median income. That lasted until 2020 when voters upped the rule to what it is today.

The initial version of inclusionary zoning ostensibly didn’t prevent housing development in Portland, but didn’t spur a marked influx of affordable units, Culley said.

Since the change took effect, only two projects totalling 119 units that had to comply with the rules have launched, according to Dundon, who has been collecting data on Portland housing projects dating back to 2014.

Meanwhile, Dundon knows of four more large housing projects totaling 324 units that have been scrapped since the uptick in inclusionary zoning. More projects may be stalled because developers are waiting to see if building costs or interest rates fall, or if Portland changes its inclusionary zoning rules.

“It’s an impossible thing to quantify, but we know that people are holding back in hopes that there will be changes to the policy to make more developments feasible,” Dundon said.

Culley said his development company has projects totaling more than 800 units that are “stuck unless there’s a material change to the inclusionary zoning requirements,” Culley said.  

Councilor Pious Ali said Portland “regularly reviews policies like inclusionary zoning to ensure they are meeting their intended goals,” but did not comment on whether a review of the ordinance has been scheduled for later this year.

“Conversations about housing affordability and the effectiveness of our current tools are ongoing,” said Ali, who is also chair of the council’s housing and economic development committee. “Any updates or evaluations would be part of a broader, public process involving community input and council deliberation.”

City leaders are not actively considering any proposed amendments to Portland’s inclusionary zoning law, according to Jessica Grondin, spokesperson for the city.

Even if developers want to create workforce housing, Culley said external factors like high interest rates and the rising cost of materials and labor have driven up the cost to build. When that happens, property developers need to increase rental or sale prices in order to turn a profit and secure financing from banks and investors needed to make the project happen.

If a certain number of units need to be priced at a point that people making less than area median income can afford, that increases the likelihood of a developer losing money.

“A developer needs to be able to clear certain profitability thresholds to secure financing and if they can’t do that, they’re either going to pass that cost off to the consumer or they’re not going to build, and I think we’ve seen that play out in Portland,” Dundon said.

To avoid losing money to the city’s inclusionary zoning restrictions, Culley said he’s seeing developers take their projects elsewhere. This is reflected in the Greater Portland Council of Governments housing database, which shows Scarborough, Biddeford and Westbrook permitted more than 460 units combined in 2024, while Portland permitted slightly more than 200 in the same year.

“We have unrelenting demand for housing in the Greater Portland region and people who are going to put skin in the game to develop housing are going to follow the path of least resistance,” Dundon said.

Portland’s burdensome inclusionary zoning requirements have also incentivized developers to build smaller developments, as the rule only applies to projects with 10 or more units, Culley said.

While any additional housing helps the region’s gaping housing shortage, it slows the region’s progress on its goal of adding at least 76,4000 units by 2030 to make up for historic underproduction and account for expected population growth.

“We’ve definitely seen a lot of nine-unit projects,” Culley said. “We’re trying to do 200-unit projects because that’s how we’re going to solve our housing crisis. We’re not going to solve it with buildings of three, six or nine units.”

Instead of inclusionary zoning, Culley said he would like to see the city promote new affordable housing by offering more tax credits for low income units and investing in social housing, which would be government-owned.

Additionally, cities shouldn’t shy away from welcoming market-rate housing, Culley said, as research shows increasing housing supply leads to lower rent prices across the board.

“The biggest beneficiaries of Portland’s inclusionary zoning policy are the landlords because with no new production there’s limited competition, so they can be more selective and take the maximum allowed rent increases from their tenants.”

Dundon said he wouldn’t cut Portland’s inclusionary zoning rules altogether, but he would like to see it either revert to its previous requirements, or have the city offer subsidies to make it possible for developers to create affordable units.

“Inclusionary zoning can have a place in ensuring that neighborhoods aren’t segregated by income and we have dynamic communities, but that ideal only happens if housing actually gets built,” Dundon said.