This policy brief presents four ideas for improving the flexibility of inclusionary housing and expanding the menu of options available to developers – while at the same time promoting mixed-income neighborhoods. View Policy Brief
No single policy design will work for the economics of every development. But public agencies are also generally not able to negotiate a unique commitment from each project. A key struggle in designing an inclusionary housing policy is in balancing the need for ongoing consistency and predictability against the need to be flexible to respond to the differing market conditions facing different projects.
A joint report published in 2005 by the Non-Profit Housing Association of Northern California and the Northern California Homebuilders Association cited flexibility in implementation as a key to success in inclusionary housing programs.* A statewide survey of California inclusionary housing programs found that jurisdictions that offered more options for compliance were successfully producing a greater number of affordable units.*
There is a large amount of variation among jurisdictions in how much flexibility programs offer to developers. Some jurisdictions provide a menu of inclusionary options from which the developer may choose. Some jurisdictions define several options within legislation and specify the parameters of each alternative. The choice is made by the developer; neither staff nor elected/appointed decision makers have any role in the decision. This menu approach, where staff and decision makers have little discretion on inclusionary alternatives, is typical of larger jurisdictions.
New York, New York and San Francisco, California
In both New York and San Francisco developers subject to inclusionary requirements choose from a clear menu of alternatives, informing city staff and decision makers of their choice as part of the development application. When there is a desire to change requirements, or add alternative ways of meeting these requirements, it is done through legislation at either a citywide or area-specific level rather than on a project-by-project basis.
In many smaller communities, the city council, planning commission, or equivalent decision makers make the final decision on how a particular development project meets inclusionary requirements. Often in these smaller jurisdictions, the council can ultimately approve any means of meeting inclusionary requirements, even if it is not on any menu or approved list.
A few communities actively encourage developers to utilize other housing subsidies to help offset the cost of building required affordable units. This position seems to be more common in communities with a surplus of affordable housing funds. Many communities, however, face an acute need for affordable housing and high demand for scarce affordable housing subsidy funds. These cities will generally prohibit developers from ‘double counting’ units (i.e. using other affordable housing programs to subsidize units that are required by the inclusionary housing program) because these affordable housing funds are limited. To the extent that inclusionary developers are using public affordable housing funds to offset their costs, the program is not producing additional affordable housing beyond what would have been provided in any event.
Many cities adopt policies somewhere in the middle, allowing some affordable housing funds to be utilized but prohibiting others. In general, cities are more cautious about using funds that are highly limited. For example, many cities will allow developers to utilize tax abatements but prohibit the same projects from applying for housing grant funds. A second general guideline is that access to external funding should be balanced against the burdens required or requested of the developer. If cities wish to maintain their inclusionary policies, yet the inclusionary rules make development extremely difficult, they will often err on the side of allowing more external subsidies to be used.
Use of the Federal Low Income Housing Tax Credit (LIHTC) program can be more complicated in part because there are two different types of LIHTC. The so-called 9 percent credits provide a large share of the cost of eligible projects and as a result they are in very high demand and limited supply. The 4 percent credits provide relatively less subsidy and require relatively more investment from local sources and private debt, and as a result they are in less demand. An inclusionary project that accessed 9 percent credits might be ‘taking them away’ from another local affordable housing project while the same project could use the four percent credits without affecting other eligible local projects. For this reason there has been a trend for inclusionary housing programs to allow developers to use 4 percent but not 9 percent credits either in on-site or off-site projects.
San Francisco, California uses its tax credits to achieve deeper affordability. Generally, the city does not allow developments to use any subsidies (local, state or federal). However subsidies can be used, with written permission, to deepen the affordability of a unit beyond the level required by the program. Additionally, if 20 percent of their units are affordable to people making 50 percent of AMI, the four percent tax credit can be used. The percentage increases to 25 percent for off-site production.