Adequate staffing is essential to an inclusionary housing program’s ability to maintain long-term affordability of inclusionary units. PolicyLink described one extreme case where inadequate staffing led to a permanent loss of affordable units:*
“There have been a small number of well-publicized cases where understaffed local governments have literally lost track of affordable units after requiring developers to produce them.
Beginning in the late 1970s, the California Coastal Commission began requiring developers in coastal Orange County to make 25 to 35 percent of any new housing affordable to low- or moderate-income buyers. These state-mandated units were entrusted to the Orange County Housing Authority for administrative oversight. However, the program provided no funding for monitoring and oversight, and by the early 1980s, the housing authority was responsible for over 800 such units.
The workload became so burdensome that housing authority staff were unable to dedicate the time necessary to identify new buyers and began regularly releasing units from restrictions rather than exercise its option to purchase the units at an affordable price. By 1983, the housing authority had released 132 units from restrictions and only purchased 22 units.
The authority board voted to terminate the program and release the remaining units. The state intervened and assigned responsibility to another agency, which experienced similar problems and released an additional 25 units. It was only when the state provided grant funding to a third administrative entity (nearly 20 years after the first units were sold) that monitoring and enforcement received real attention. By then, however, the damage was done and a judge ruled that many of the remaining deed restrictions were unenforceable because enforcement had been so mismanaged.”
There are a variety of market responses to inclusionary housing policies. In some cases, developers must reduce their profits in the short term. Under some special circumstances—such as in highly desirable and fast-growing housing markets—housing prices may increase. In most cases, however, land values will drop in the long term and developer profits will return to normal.
In theory, an overly burdensome inclusionary housing program could push land prices so low that property owners choose not to sell and development slows. While there is no evidence of this occurring to a significant degree under a real program example, this risk may nonetheless exist. As a result, cities may want to avoid this outcome by offering developers incentives to offset their costs.
In addition, it is important to consider the fact that at any given level of economic impact for a particular inclusionary housing program, there is a choice. Your city can (1) have a lower affordable housing requirement with few or no incentives or (2) a higher requirement with offsetting incentives. The higher requirement may allow the program to produce more affordable units.
However, incentives don’t come without their own costs. The most useful and sought after one, a density bonus, can nullify the legitimacy of area plans with considerable public input for example. Reductions in open space or parking requirements can reduce make projects less acceptable to neighborhoods reducing support for the program
It is important for cities to be aware of market conditions when they set their inclusionary housing requirements, both for the entire city and for various neighborhoods.
Most cities do not adjust their inclusionary requirements at a neighborhood level. For cities without wide variations in neighborhood market conditions, this may be appropriate because incentives and inclusionary requirements automatically compensate for differences in market conditions. For example, it may be more expensive to build in high-cost neighborhood, but a density bonus is worth more in neighborhoods where home prices or rents are higher.
Some cities, however, have responded to concern about the impact of inclusionary requirements in certain sensitive neighborhoods by varying their requirements or incentives by neighborhood. This is called geographic tiering.
Rather than vary the requirements by neighborhood, some cities vary their requirements based on construction type. These are generally places where local market conditions make higher-density construction economically marginal enough that affordable housing requirements can become a barrier to development.
The decision to vary affordable housing requirements by neighborhood or construction type should typically be made based on the findings of an economic feasibility study. In general, a city may want to pursue these varying requirements if the feasibility study showed that citywide supportable requirements would have an adverse impact on the feasibility of otherwise desirable development in certain areas.
Under the right circumstances, off-site production with in-lieu fees or linkage fees can result in more affordable homes than on-site production. However, increased production is not automatic.
Effective use of fees relies a number of key resources, which are not necessarily available in every community. These include:
- The availability of other locally controlled financing sources to leverage inclusionary housing funds,
- The capacity of public agency staff, the availability of local nonprofit or private partners with affordable housing development experience, and
- The availability of land for development of affordable housing.
Even when all these elements are present, successful off-site strategies require careful attention to unit locations in order to achieve some level of economic integration or fair housing outcomes.
Yes: Inclusionary program administrators often value the flexibility that in-lieu fees or linkage fees can offer. Fee revenue can be used to produce units that are outside the operating parameters of the inclusionary housing program, such as lower AMI units, special needs housing, homeless housing, or transitional housing. This can be invaluable to the community especially if other funding sources are limited.
Fee revenue can also be used to balance the outcomes. For example, if the program is primarily producing affordable for-sale units, the fees can be used to produce affordable rental housing. Or if development is concentrated in one area, the fees can be used to provide affordable housing in areas where no development is occurring. Fees can also be used to pay for capital improvements or to preserve affordability of existing properties.
There are three major best practices for setting a linkage or housing impact fee:
- Base the fee on the findings of a nexus study. A linkage or housing development impact fee is intended to mitigate the impact of a given development on the community. For example, a new retail project would be expected to generate a certain number of lower-wage jobs which impacts the housing market by creating a predictable increase in demand for lower cost housing. It is important that the city establish the fee based on the measurable contribution of a likely project to the overall need for affordable housing. A nexus study can make that connection and can also be a means for establishing legal defensibility of the fee. A nexus study will establish a maximum fee that is consistent with the housing need created by new development of various types. Keep in mind that the nexus study should not be confused with the feasibility study, which focuses on whether a fee or other requirement will be financially feasible for developers.)
- Consider a performance option for residential projects. Even for primarily fee programs, the city can offer developers the option of providing units on site in lieu of paying the fee. An on-site or off-site performance option might appeal to certain developers who want to closely and publicly associate with the provision of the affordable housing that their project generates.
- Phase in the fee over time. Any new fee will add to the cost of development. A sudden increase in costs could be difficult to absorb. Phasing a new fee in stages over a two or three years will allow time for land prices to adjust appropriately without unduly impacting projects that are in the development pipeline
Real estate markets are constantly changing. While inclusionary housing programs are often flexible and adaptable, they can’t respond to each and every change in the market. Some communities have increased their inclusionary requirements during housing booms and reduced them or waived them entirely when their markets crashed. However, it is in general difficult for cities to time the market and adjust their inclusionary requirements every time their housing markets change.
A few cities temporarily repealed their inclusionary requirements during the most recent downturn in order to avoid over-burdening projects during a fragile period. But most programs did not feel that this was necessary.* While it is far more difficult for projects to support housing requirements during a downturn, most projects wouldn’t move forward in these times even without affordable housing requirements. Waiving requirements temporarily does little to promote development, but it risks missing the opportunity to produce affordable units when the market unpredictably returns.
It is possible that these temporary waivers helped speed up the market recovery in these cities, but it did so by permanently exempting certain projects that would have been built slightly later without the waiver.
When the market is soft, cities don’t waive fire codes or other zoning requirements, even though they too could help some projects pencil out sooner. Instead, they wait for the market to recover because these are appropriate minimum standards. If housing requirements are modest enough that they are not economic barriers to development most of the time, there should be no need to adjust them for market cycles. On the other hand, if a community experienced a permanent change, like the loss of a major employer that changed the likelihood that rising housing prices will ever again be a challenge, then certainly adjustments to affordable housing requirements would be appropriate. Some communities plan on comprehensive reviews of their policies every 5 years including an analysis of whether inclusionary requirements remain appropriate given longer term economic trends.
For programs with in-lieu fees or housing development impact fees, frequent review and adjustment is important. Many cities have written specific dollar amounts into their ordinances for these fees. Over time, a fixed fee will drop relative to inflation and relative to the cost of providing affordable housing. Some communities have managed to keep their fees up to date by having their council annually approve a change to the fee calculation. However, because this is a controversial issue, these annual approvals can be challenging. In response, a number of communities have indexed their fees to allow for regular increases (and potentially decreases) in response to changing market conditions. For example, San Francisco increases its in-lieu fee schedule annually based on the change in the Engineering News Record Construction Cost Index for San Francisco. Other cities tie fee increases to changes in the Consumer Price Index or a local housing price index.
When considering in-lieu fees, it is important to decide if a city wants to always allow developers the option to pay the fee or restrict its use to some developers. Some cities allow an in-lieu fee by right, while others require developers to demonstrate either some net benefit to the city, or a substantial hardship.
Generally, whatever method cities use to arrive at a fee level, they should apply that single fee level to all projects of the same type. Many cities will have different fee levels for rental and ownership projects. Some cities adjust their in-lieu fees based on the size of the development. These cities typically offer a lower fee for smaller projects. Cities often do this because they want to simplify the management of their program by discouraging a pattern where market rate buildings have only one or two affordable units. Also, the economics of smaller developments may be more marginal and a lower in-lieu fee could help make them feasible.
The answer, of course, depends on what level of stewardship you expect your staff to implement and monitor. However, there are some trends. A 2007 staffing report by NeighborWorks American and NCB Capital Impact found staffing levels ranged from less than 100 units per employee to more than 500 units. A more recent review of staffing levels for programs participating in a multi-year grant to improve their capacity to steward resale-restricted units found that programs with efficient and effective stewardship had one full-time staff person for every 150-200 units. These programs also all used HomeKeeper, a CRM designed for the implementation and monitoring of resale-restricted homeownership programs.
An increasingly popular alternative to inclusionary housing programs is to charge a housing development impact fee on new residential development to pay for affordable housing. Typically, fee revenue is deposited in a housing trust fund and used to facilitate construction of additional units for low- and moderate-income households or to achieve other affordable housing goals.
There are some advantages to housing impact fees. In many states that prohibit mandatory inclusionary housing programs, it is permissible to charge fees. Additionally, housing development impact fees have the same advantages as in-lieu fees: they offer flexibility and can be used to leverage other sources of funding, like Federal Low Income Housing Tax Credits. They also face some of the same challenges. For example it is important to make sure the money is not spent primarily in low-income neighborhoods.
To enact a housing development impact fee, cities must first conduct a nexus study that shows the relationship between new housing or jobs and the need for affordable housing. While a nexus study documents the maximum legal fee, a second study, called a feasibility study shows what fee levels will not adversely impact development.
The legal environment is different in every state and it changes rapidly. It is important to consult with an attorney to fully understand if housing development impact fees are permitted in your jurisdiction.
Most programs require homeowners to occupy the unit as their primary residence. This is often defined as living in the unit most of the year. For example, many jurisdictions have a clause such as “The Owner shall be considered as occupying the Home if the Owner is living in the unit for at least ten (10) months out of each calendar year.”
Programs typically allow homeowners to request permission to rent their homes for limited periods of time if they meet certain conditions. For example, the homeowner could receive this permission if she:
- Temporarily relocates to attend school
- Has been called for military service
- Has experienced temporary financial hardship
- Wants to volunteer, travel, or work at another location for an extended period of time
- Needs to seek specialized medical care for an extended period of time
- Is not able to sell the home at the restricted price after a good faith marketing effort of more than a certain number of days (e.g., 180 days)
Many programs let homeowners rent a bedroom in their home without receiving any permission from the jurisdiction. Other programs allow homeowners to rent their homes for any reason, but for a short duration. In this case, it is still important for programs to have a form for owners to fill out so they can track who is living in the house.
Additionally, some jurisdictions have set limits on the rental price to ensure affordability and prevent any windfall for the owner. This is more common in very high-cost communities or resort locations where potential windfalls are quite large. In other communities, allowing homeowners who meet the exception criteria to possibly earn some modest windfall might be preferable to the administrative burden of verifying that sublease rents are affordable.
Finally, some programs have different standards depending on how long a homeowner has lived in a home. For example, a new homeowner might not be allowed to rent out their home at all, but a long-term resident might be given more latitude.
Cities often set affordability levels higher for ownership units than for rental units. For programs with a single income targeting requirement, 23 percent of programs set the maximum income at 81 percent of AMI or above for homeownership developments, compared to 11 percent of programs for rental developments. This pattern is consistent for programs targeting multiple income groups, which tend to have a higher percentage allocation in extremely low- and very low-income levels (50 percent of AMI or below) for rental units than for homeownership units. Data source: Wang and Balachandran (2021)
This policy is often dictated by market prices. For example, a household earning 80 percent of AMI may be able to afford the rental price for a median priced one-bedroom apartment, but cannot comfortably afford to buy a home. Pricing ownership units at 80 or even 120 percent of AMI meets this need. However, inclusionary rental apartments with their price set to be affordable for a household earning 100% of median income would often be the same price, or even more expensive, than regular apartments for rent in the area, so they aren’t necessarily serving a critical housing need
On the other hand, ownership units typically cost developers relatively more to produce. While it would be possible to require that developers price ownership units so that they serve the same income group that is being served in rental housing, this would have a greater impact on financial feasibility for ownership projects. Many cities have determined that allowing developers of ownership units to serve a higher-income group can reduce the burden of the program on ownership projects while still serving a real affordable-housing need.
Some jurisdictions struggle to prevent illegal renting of inclusionary homeownership units. While none describe this as a major problem, some indicated that they were not able to completely eliminate it.
To address this problem, some jurisdictions send out annual occupancy verification forms and closely monitor those that are not returned. Montgomery County, Maryland, for example, works with its code enforcement division to inspect homes that raise this type of red flag. San Mateo, California, conducts an annual review of tax records to see where property tax information is being sent. Some programs also make it easy for neighbors to report illegal occupancy of inclusionary units by circulating program contact information.
It is not uncommon for cities to have a problem where their smaller units rent for close to market rate. This is largely the result of the unrealistic assumptions set forth in the federal income guidelines, which determine affordability levels. For example based on 2013 federal guidelines for Seattle, Washington, an affordable studio (at 80 percent AMI) could rent for up to $1,127, while a two-bedroom apartment could rent for $1,450. There is relatively little difference in price for very different apartments.
In response to this challenge, cities can adjust their rental formulas to require lower prices for smaller units. For example, if a two-bedroom unit is priced to be affordable to someone making 80 percent of AMI, a studio could be priced affordable to someone making 60 percent of AMI.
When developments below a given unit size are exempt from inclusionary regulations, some communities may experience a “one-under syndrome.” This refers to an increase in proposals falling just under (or one unit under) the inclusionary limit. For example, a developer may submit multiple four-unit subdivision proposals for contiguous lots that, absent the inclusionary zoning requirement, would have been brought as a larger single proposal.
The city of Denver, Colorado, which applies its inclusionary zoning regulations to developments with 30 or more units, addresses this by clearly defining in its inclusionary zoning ordinance the terms “Applicant” and “At one location,” as follows:
“Applicant means any person, firm, partnership, association, joint venture, corporation, or any other entity or combination of entities, or affiliated entities and any transferee of all or part of the real property at one location, which after this article takes effect develops a total of thirty (30) or more new for sale dwelling units at one location in Denver.
At one location means all real property of the applicant if:
- The properties are contiguous at any point;
- The properties are separated only by a public or private right-of-way or utility corridor right-of-way, at any point; or
- The properties are separated only by other real property of the applicant which is not subject to this article at the time of any building permit, site plan, development or subdivision application by the applicant.”
Inclusionary housing programs create affordable homeownership opportunities in three distinct ways:
- On-site homeownership units. When developers produce for-sale projects, most inclusionary housing programs require developers of ownership projects to provide affordable ownership units.
- Homebuyer assistance loan programs. Many cities directly operate purchase-assistance loan programs that make gap funding available to income-qualified homebuyers. These programs are sometimes called down-payment assistance, even though the levels of public subsidy often exceed what would be typical for a down payment.
- Nonprofit homeownership projects. Many inclusionary housing programs invest a portion of revenue from in-lieu fees or housing development impact fees in homeownership development projects sponsored by local nonprofit housing developers. These projects might be new construction of affordable homes or renovations of existing housing homes.
There is evidence that pre-purchase homebuyer education and can help prevent foreclosures and other financial problems for first-time homebuyers. It is common for inclusionary housing programs to require homebuyer education for homebuyers prior to purchasing a program home.
Most inclusionary programs, however, do not specify who pays for the homebuyer education. In practice, this payer can be the municipality, the home buyer, or the developer. Developers marketing larger projects will often choose to help underwrite these classes even where they are not strictly required to do so. Free homebuyer classes are sometimes available from HUD-certified counseling agencies. Where classes require participants to pay a fee, the fees are generally not prohibitive for families that are otherwise in a position to buy a home.
Requirements for classes, even if they are free, can pose an additional barrier to marketing homes. For this reason, cities with inclusionary housing policies should consider providing funding to expand the availability of free classes—if they are not currently freely available—in convenient locations throughout the city. However, it may not make sense to specify this requirement in ordinance as the need for this kind of subsidy will likely change over time.
It depends: Off-site production can be a valuable tool for cities if it is done right. Offsite units can be constructed by the developer of the market-rate project that generates the requirement, by another private developer or by a nonprofit partner. In addition, a number of cities offer developers the option of donating land to the city or an approved partner which facilitates offsite production without requiring the market-rate developer to actively participate in the affordable project.
|Ensures access to high-opportunity neighborhoods||Can be more cost efficient (i.e., can often produce more total units)|
|Is easier to enforce design quality||Can leverage other affordable housing subsidies to produce additional units or serve lower-income residents.|
|Has low risk of ongoing maintenance problems||Can design and operate properties to meet the needs of the local population (family units, amenities, social services, etc.)|
|Provides integration in the same building, which can be symbolically important and help build public support|
|Can be difficult to monitor scattered units||May concentrate affordable units in lower-income areas|
|May produce fewer family sized units||May produce lower-quality buildings|
|May not be economically feasible for all project types||May lead to lower-quality long-term maintenance|
|Is harder to incorporate very low-income or special-needs residents||Presents risks of “double dipping,” whereby developers reduce their costs by relying on scarce affordable housing subsidies|
Both mortgage lenders and cities have an interest in ensuring that a relevant city department receives notice when owners of inclusionary homes default on their mortgages. With adequate notice, the program can often help a homeowner to refinance or find a buyer rather than proceeding through foreclosure. However, it is difficult for mortgage servicers to reliably provide this notice even when it is required of them.
While there is no single widespread best practice to remedy this situation, some common responses include:
- Record a second lien in order to improve the chance of receiving notice of default. In California and several other states, state law ensures that junior lien holders are notified when a homeowner defaults on a first mortgage. A growing number of California jurisdictions have taken to recording “Performance Deeds of Trust” or “Excess Proceeds Deeds of Trust” in addition to deed restrictions/covenants specifically because they are more likely to receive notice of default if there is a recorded deed of trust.
- Require mortgage holders to enter into separate agreements which require notice or have refused to fully subordinate their covenants to the first mortgage. In states where junior lien holders are not reliably notified of defaults, some programs have pursued this option. For example, a program agrees to release a unit from resale restrictions only if it has received prior notification of a default and been given an opportunity to cure. Fannie Mae guidelines explicitly allow this kind of requirement as long as the lender certifies that they have the capacity to provide notice when required. Currently FHA prohibits this approach and requires that FHA-insured homes be released from restrictions in foreclosure without any conditions. This approach has become far less practical in recent years as it has become much harder to find lenders willing to underwrite price-restricted homeowners.
- Monitor title reports or newspaper notices of foreclosure proceedings for evidence of foreclosures. Some communities, recognizing the limitations on their ability to require notice, choose this option instead. This approach requires more staff time than the other alternatives and may involve other costs. It also generally identifies problems at the last moment before a foreclosure.
It may also be a good idea to contract with an outside agency (e.g., housing counseling agency, realtor, or local Community Land Trust) to provide a set of administrative and outreach services related to preventing foreclosures. These may include:
- Contacting owners of all MPDU homes (IHO and Large Scale Developments), notifying them of approved waivers, and encouraging them to reach out for assistance if they experience difficulty selling their affordable unit.
- Monitoring (through the MLS or otherwise) the sales of any MPDU homes and offering assistance to listing realtors.
- When necessary and appropriate, making recommendations to the department when waivers are approved to enable subletting or unrestricted sales of a MPDU.
- Evaluating the feasibility of financing purchase of unsold MPDU homes by a nonprofit organization for temporary or permanent use as affordable rental housing.
- Tracking any foreclosures that do occur and providing brief reports every six months that identify the cause or causes of each foreclosure that has occurred, along with recommendations for changes to policies or procedures which could help prevent further foreclosures in the MPDU stock.
Some of the most compelling arguments for the need to ensure permanent affordability have come from analyses of federally-subsidized rental units (e.g. Project Based Rental Assistance).
According to an analysis by the National Low Income Housing Coalition (NLIHC), nearly half a million of the nation’s 1.4 million federally assisted rental units are at risk of leaving the affordable stock because of “owners opting out of the program, maturation of the assisted mortgages, or failure of the property under HUD’s standards.” NLIHC advocates for the need to preserve these existing units, pointing to research that indicates that it cost 40 percent less to preserve an existing affordable unit than to build a new one.
At the same time, if one goal of an inclusionary housing program is to create economic integration, we can only hope to maintain that economic diversity if we preserve the affordable housing units over a very long time. Inclusionary housing produces new housing relatively slowly, over time as communities grow. Inclusionary housing programs can build up sizable portfolios of homes in every part of the community, but if units are only maintained as affordable for relatively short periods of time, the most desirable locations are likely to remain out of reach for lower-income residents.
While this is not common practice, several jurisdictions have programs that allow for or even encourage local housing authorities or nonprofits to purchase some inclusionary units.
For example, in Montgomery County, Maryland the public housing authority, called the Housing Opportunities Commission (HOC), has the option to purchase up to one third of all inclusionary units. The agency can offer approved nonprofits a 21-day period to opt to purchase any new units before they are offered to homeowners. The HOC has purchased more than 1,500 units in 188 subdivisions (out of more than 10,000 inclusionary units produced in the county) using a range of housing programs, including Section 8, Low Income Housing Tax Credits, and state rental funds. As a result of this partnership, Montgomery County has generally served a much higher share of low- and very low-income residents relative to other inclusionary housing programs across the country.
Nothing lasts forever, but many cities attempt to structure their inclusionary housing policies to preserve the affordable homes for as long as possible. Many argue that if inclusionary housing programs are to create and preserve mixed-income communities, long-term restrictions are necessary for the program to have a lasting impact. If homes expire out of the program after a few decades, the program can never really address the need for affordable housing.
Ownership programs typically record deed restrictions or covenants that limit sale or rental of a regulated unit only to approved low-income (or moderate-income) households. In some communities, these covenants are structured to run ‘in perpetuity.’ In others, they have a fixed term, generally somewhere between 30 and 99 years.
Affordability terms applied to rental developments are a bit more complex. An investor might pay more for a property with rent restrictions that expire after 15 years than one with 99-year restrictions, but the difference might be slight. In other words, the length of affordability makes a big difference to the long-term impact of the program and, at most, a small difference to initial feasibility.
The best practice is to record fixed, but long-term restrictions (50 or 99 years, for example) and re-record them and ‘reset the clock’ each time a property is sold or redeveloped. For example, if a property is sold 20 years after initial development, a new restriction is recorded with a new 50-year term. If the restrictions last approximately as long as the useful life of the buildings, there is a high likelihood that affordability will be maintained over time.
For homeownership units, the affordability restrictions can be reset each time a unit is resold. Rental properties may not sell as frequently, but eventually they will be torn down and rebuilt and the jurisdiction would be in a position to require new affordable units at that point.
When homeowners are truly unable to sell their homes to income eligible buyers, many programs allow a “Right to Sell” provision so that owners are not trapped. Policies vary, but typically the home must be on the market for 90 to 180 days.
After a good faith effort, if they are unable to sell, the homeowners are generally allowed to sell the home to non-income qualified buyers. In some cases, this sale is allowed only at the affordable price. Other communities allow a market-rate resale but recapture any excess proceeds above what the seller would have received if they had sold at the affordable price.
Setting resale prices must balance the goal of preserving affordability and allowing homeowners to build equity. It is a good policy for cities to periodically reexamine their resale formulas. However, changing a resale formula has serious implications for the ability of the program to maintain long-term affordability and could impact marketing and financing and other elements of a program. Before changing the resale formula, cities should consider conducting an analysis that compares several alternative resale formulas side by side under several possible economic scenarios.
Permanent affordability is frequently the goal for inclusionary housing programs, and a number of communities record affordability restrictions that are perpetual and ‘run with the land.’ However, legal concerns are often cited as reasons not to adopt perpetual restrictions. For several jurisdictions, this problem is solved by simply changing the term used. Davidson, North Carolina, Chapel Hill, North Carolina, Burlington, Vermont, San Mateo, California, and Redmond, Washington all chose to define their affordability term as “the life of the building” or 99 years, rather than “in perpetuity.”
Another way that programs get around concerns about “perpetual affordability” for single-family homes is to adopt control periods of 30 or more years and require that these terms restart for the next homebuyer if the home is resold within the control period. The administrators of programs in Montgomery County, MD, Fairfax County, VA and San Mateo believe, plausibly, that this reset requirement will have the same impact as “perpetual” affordability requirements, because most homes tend to be sold within 30 years.
Fairfax County uses its preemptive option to purchase homes at the first sale of the home after the control period expires. The preemptive purchase option is another way to protect inclusionary housing units and to extend their affordability in perpetuity; however, the jurisdiction must purchase the home at market price and then subsidize it to make it affordable, which can be very expensive and therefore reduces the impact of the original subsidy.
Another approach is to require repayment of a portion of sales proceeds in excess of the affordable price when a home reaches the end of the affordability period and is sold on the open market. Montgomery County and Fairfax County capture half of these proceeds if the home sells after the completion of the 30-year affordability term. Jurisdictions in New Jersey capture 100 percent of the difference between the affordable price and market price, but this is calculated as the difference that existed at the time of initial sale. In other words, these communities capture 100 percent of the original affordability subsidy.
It can be challenging for cities to ensure that developers actually build the offsite inclusionary units that are promised. Unless the off-site units are completed before a Certificate of Occupancy is issued for the market-rate project, the city may have limited options for enforcement if a developer fails to fulfill its obligations.
For example, in Santa Monica, California in 2010, JSM construction failed to build a 52-unit affordable project that had been required as part of permitting market-rate rental projects that were completed and occupied. Santa Monica allowed JSM to move forward on the market-rate projects only after it proved that it had begun construction on the affordable project, but when the developer stopped construction and allowed a bank to foreclose on the affordable site it became clear that the cost to the developer of failing to comply was far less than the cost of creating the affordable homes.*
Some cities like West Hollywood, California address this kind of risk by requiring that off-site units be occupied before completion of market-rate projects. Boulder, Colorado instead allows developers one year to produce offsite units if they provide a bond or other financial guarantee to ensure that the units actually get built. If the affordable units are not produced within one year, the city can collect the original in-lieu fee plus a penalty of 8 percent.
Generally communities commission a nexus study to determine the extent to which new development (residential or commercial) contributes to the need for affordable housing. They use the results of this study to determine the exact dollar amount of any linkage or impact fee.
Residential linkage fees can either be a set price for each new home or can be calculated based on the square footage of the new home. On the lower end, Mountain View, California charges new residential development $10 a square foot, while Santa Monica, California charges approximately $28 a square foot. Berkeley, California charges $28,000 for each new market rate home to fund affordable housing.
Boston, Massachusetts has one of the oldest commercial linkage programs in the country. It charges new commercial development over $8 a square foot. From 1986-2000 Boston generated $45 million in linkage fees, which funded nearly 5,000 units.* Arlington County, Virginia also has a commercial linkage fee of $1.77 a square foot, which was expected to generate almost $14 million in revenue between fiscal year 2013 and 2016.
Commercial linkage fees often vary depending on the type of development (office, hotel, industrial). For example, Menlo Park, California charges almost $15 a square foot for office developments and just over $8 a square foot for industrial and other uses.
Some programs have acknowledged that they do not know exactly how many units they have produced in the past. Often the lack of data on housing production is the result of lax stewardship practices and inadequate systems for monitoring during the early years of the program. In addition, some programs manage portfolios of units with variable terms and affordability periods as a result of program requirements changing over time, which can complicate administrative and monitoring activities
Some jurisdictions have found it helpful to utilize specialized computer software to track not just their large and growing inclusionary portfolio, but also the varying affordability periods, resale restrictions, and regular notifications involved with the constituent properties. Staff at the cities of Cambridge, Massachusetts and San Mateo, California, for example, use HomeKeeper software to manage their for-sale portfolios. To monitor the city’s rental portfolio, Cambridge uses Emphasys software commonly used by housing authorities.
No: While higher density buildings can add value to a real estate project, these buildings cost more to build – sometimes much more. Even if the added income of having more on-site units is more than the cost to build higher, increasing the allowable density may not automatically add enough value to offset the cost of providing affordable housing. Many voluntary inclusionary housing programs rely on an increased density incentive to encourage developers to build affordable units. But the track record of these programs suggests that increased density alone is not enough of an incentive.
A Grounded Solutions Network (formerly Cornerstone Partnership) study of the voluntary incentive zoning program in Seattle, Washington, found that more than half of eligible projects forewent the bonus density and built only to the base height.* Opponents of the program claimed that this was evidence that the housing requirements were overly burdensome. However, a subsequent study concluded that many projects would not have built to the higher density even if it were available with no affordable housing requirement* mostly because of the dramatic increase in construction costs for steel frame high-rise buildings. While the bonus density was valuable, it was not valuable enough to offset the added construction cost in many cases. The result of Seattle’s voluntary program was that extremely profitable mid-rise projects were not required to contribute to affordable housing, while their less profitable high-rise neighbors were.
Condominium fees can increase substantially over time, making the overall costs of homeownership unsustainable for low- and moderate-income households. Rising condominium fees are a growing problem for many municipalities that are seeing their new for-sale inclusionary homes primarily built as condominiums, including Washington, DC, Fairfax County, and Cambridge.
Program administrators can set the initial affordable home price low enough to offset high initial condominium fees but, increases in these fees over time for new amenities or building repairs, can in some cases rival mortgage payments on below-market-rate units, leading to high overall housing costs, potential default, or homeowners being forced to sell their units.
Two promising solutions emerged through the research:
- Keep condo fees manageable through proper initial pricing that also anticipates a rise in condo fees over time. Shortly after Washington DC adopted its inclusionary housing program in 2007, there were several cases where high homeowners’ association (HOA) and condo fees were compromising the overall affordability of affordable homeownership units created through a separate city program. This prompted the city to survey condo fees citywide to compare its cost assumptions about fees in its affordable homeownership program to prevailing practice. Having discovered that its fee assumptions were too low, the city lowered its standard affordable inclusionary home price in 2012 by 11 percent to better reflect prevailing condo fees in the monthly cost of the home and provide room for fees to rise over time.
- Require that condo fees be proportional to the lower home values of inclusionary ownership units. Not all states authorize localities to require lower HOA or condominium fees for lower-value properties, but some do. The city of Cambridge takes advantage of this legal permission. It requires that developers and HOAs assess fees based on the reduced value of the inclusionary home to ensure that owners of affordable units are not paying fees as high as market-rate owners. Fee increases must also be proportional. Staff works to proactively address concerns about ad valorum assessments from condominium associations by educating them about what the owners of the affordable condominiums are giving up by agreeing to restricted resale prices.
When considering whether to adopt or revise an inclusionary housing policy, local government agencies often retain an economic consultant to prepare a feasibility study. This study evaluates the economic tradeoffs of requiring a certain percentage of affordable units in new residential or mixed-use projects.
Feasibility studies help policymakers assure that new policies and programs are economically sound and will not deter development, while still delivering the types of new affordable units needed by the local community.
Feasibility studies are different than nexus studies, which are a similar type of analysis often used by local jurisdictions to establish residential or commercial linkage fees to fund housing programs. A feasibility study determines how a new inclusionary policy would affect market-rate housing development costs and profits. A nexus study quantifies the new demand for affordable housing that is generated by new commercial or market-rate housing development.
If the pricing criteria are generally stated, then jurisdictions could review the criteria every three years when evaluating program performance. But if the program publishes an annual cap or guidelines, then the figures should be evaluated annually to adjust AMI figures and interest rates.
This is an example of generally stated criteria: “The price must be affordable so that a household of (# of BR + 1) earning 65 percent of area median income with a 3 percent down payment will pay no more than 33 percent of its monthly income toward a 30-year fixed-rate mortgage at (30-year fixed-rate + 1 percent) including property taxes, HOA dues, and insurance of $100/month.
While every study differs based on the needs and market conditions of the specific area, in general they follow a similar outline:
- Introduction and Policy Context – A description of the purpose and scope of the study.
- Background Economic Trends and Market Conditions – An in-depth analysis of the local economy and the market conditions affecting residential development.
- Economic Analysis of Hypothetical Development Project – Based on prevailing economic conditions and using assumptions from the market analysis, an economic feasibility analysis uses development pro formas to test the economic impact of varying inclusionary requirement on hypothetical development projects or prototypes. This process of modeling how inclusionary requirements might affect the bottom line profitability of market rate residential development should include a sensitivity analysis. In the sensitivity analysis, assumptions from the market analysis loan interest rates, for example, are dialed to their highest and lowest reasonable levels to examine how sensitive the final estimates of profitability are to variations in cost and revenue assumptions.
- Findings and Recommendations – This section builds on findings from the financial feasibility analysis. It includes conclusions about the likely effect of requiring various percentages of affordable units at varying affordability levels in combination with certain types of developer incentives.
Many communities draft their inclusionary housing ordinance to include a formula for establishing the initial price for affordable homeownership units. Getting the details of this initial pricing formula right is very important to the long-term success of the program, but it can be hard to anticipate all of the factors at the outset.
For this reason, some inclusionary ordinances generally state that the homes must be priced at an affordable rate for the target income group, and more detailed language is included in the program guidelines or administrative manual. These guidelines might include things like the mortgage financing assumptions that go into the formula. This approach may make it easier for program administrators to adopt revisions to the pricing formula over time.
They should. One common problem is that it’s difficult to qualifying eligible buyers for homeownership units. In some cases, this is the result of problems in the initial pricing formula. If units are priced too high for the target income group, buyers who are below the income cutoff may have trouble qualifying for a mortgage. On the other hand, if units are priced too low, they impose a greater cost on developers with no increase in social benefit.
While developers have an obvious interest in advocating for higher prices, units that are slow to sell impact their bottom line. Developers and their sales and marketing partners will often have a much clearer sense than public policymakers about how best to balance these concerns.
A linkage fee is intended to mitigate the impact of a given development on the community. That’s why it is important that the fee be established based on the measurable contribution of a likely project to the overall need for affordable housing.
A nexus study is the established methodology for making that connection. The nexus study should focus on likely residential and commercial project types in the targeted higher-growth neighborhoods. The study will establish a maximum fee that would be consistent with the housing need created by new development of various types, but the city could choose to set the fee at a lower level if the maximum allowable fee would negatively impact development.
An inclusionary housing program will not be successful if developers will not develop any housing as a result of some portion of the ordinance. That being said, it is not uncommon for developers to initially claim that the program will make it impossible to do business. Grounded Solutions Network has developed an inclusionary housing calculator that will help you evaluate your pricing requirements within the other constraints of the ordinance. Go to IZ Calculator ->
There are a number of options for states that do not allow cities to use rental inclusionary zoning. This situation usually arises because the legislature or a court has decided that inclusionary zoning is a form of rent control.
In some states—including Arizona, Colorado, Idaho, Indiana, Kansas, Texas, Tennessee, and Wisconsin—local governments are prohibited from adopting at least some form of mandatory inclusionary housing (for ownership housing, rental housing, or both). In some cases, the court has determined that the state statute limiting local rent control preempts mandatory local inclusionary housing requirements for rental housing. Many states—including Alabama, Arkansas, Georgia, Illinois, Iowa, Kentucky, Michigan, Mississippi, Missouri, and New Mexico, North Carolina, South Carolina, North Dakota, South Dakota, Oklahoma, Texas, Utah, and Washington—also have state statutes prohibiting local rent control but there has not been litigation regarding whether that statute preempts inclusionary housing requirements for rental housing. The specifics are different in all states so it is important to check with local attorneys, but there are a number of strategies that other jurisdictions have used so new rental housing development will contribute to affordable housing.
Charging Impact Fees
Many cities have adopted an affordable housing impact fee. Impact fees require that rental developers contribute money to an affordable housing trust fund. The size of the impact fee can vary dramatically, from under $1 a square foot to over $20 a square foot depending on local conditions. (Some jurisdictions charge a set price per unit, rather than per square foot.)
Before this can be done, a nexus study must be conducted.
Impact fees work well in areas with high home prices because the nexus study shows a strong connection. Cities with lower housing costs will only be able to legally justify a more modest impact fee level.
Some cities have set the impact fee as the default requirement and allowed developers to choose to provide rental units as an alternative. Because the default option is paying the fee and developers are choosing to provide the units, it may be more likely to withstand a legal challenge. When implementing the impact fee, it is a good practice to offer developers flexibility as well as incentives to participate. This will both make development more likely to happen and also reduce the likelihood of a successful court challenge.
In some states, it is possible to require affordable units when developers voluntarily enter into Development Agreements – generally as a result of receiving some specific public benefits.
Partnering with Housing Authorities or Nonprofits
States generally allow housing authorities, local governments, or nonprofits to operate affordable rental developments, even where rent control is forbidden. It may be possible to partner with these groups to ensure that all development contributes to affordable housing.
Boulder, Colorado requires that new rental developments provide affordable rental units on site or offsite, but the homes are owned by the local housing authority or similar agency so they are exempt from the state prohibition. The City of Boulder purchases the unit from the developer at an affordable price, and then sells or gives it to the Housing Authority or similar agency. Rental developments also have the option of providing a cash payment or dedicating land to the city.
If the unit pricing is set appropriately and units are adequately marketed, selling them should not be a problem. But if there is some dramatic economic shift during development or pricing is not appropriately set initially, it can be difficult and sometimes impossible for developers to find income-eligible buyers.
The Regional Housing Alliance of La Plata County, Colorado, which offers developers an in-lieu fee option as part of its ordinance, has built into its inclusionary housing regulations a clause that allows deed-restricted inclusionary units that have not sold at the specified below-market price after 120 days to revert to market price if the developer is willing to pay the specified cash in-lieu fee instead.
Jurisdictions facing this issue may need to revisit their pricing requirements; it could be that the initial pricing is too high to be affordable to low-income buyers. Similarly, they may need to evaluate the marketing efforts and assist developers in reaching the communities the housing was intended to target.
No: Several communities have adopted inclusionary policies through methods other than zoning code amendments. This may be by resolution of municipal council or executive order of the mayor, for example. The decision to adopt inclusionary housing as an ordinance or through resolution should be based on the following:
- If the inclusionary program is to be of limited duration and impact (e.g. applied only to select developments or areas), then a resolution may be appropriate.
- If the inclusionary program is of extended duration and universal impact, then it should be adopted through ordinance.
While adopting a policy as an ordinance can be a cumbersome process, it is less subject to changes due to near-term political shifts and changing priorities of municipal officials. It also provides certainty to developers because the regulations are codified as law with defined requirements and application.
Boston, Massachusetts is one example of an inclusionary development policy that has been adopted by executive order. The policy was first adopted through an executive order of the mayor in the year 2000, requiring a 10 percent affordability component in any residential project of 10 or more units that is financed by or developed on property owned by the city or the Boston Redevelopment Authority (BRA), or where zoning relief is requested. The city is currently in the process of amending their zoning code to incorporate inclusionary zoning to (1) increase developer certainty in its implementation and application and (2) make it a permanent ordinance rather than an executive order that is easily changed by political shifts.
Buying a home can be stressful, and buying a resale-restricted home adds another layer of complication. The key to ensuring buyers understand resale restrictions is to provide multiple opportunities and various modes of conveying the information. Many programs:
- Have clear written information, including examples of the resale formula available to all buyers.
- Offer some in-person homebuyer education that includes a review of the restrictions and how they work.
- Require that buyers meet with an attorney prior to closing to review the program restrictions and associated legal documents. Some even go so far as to identify the reviewing attorney in the legal document itself so that there can be no confusion down the road that homeowner was well informed at the time of initial purchase.
No. There is no single “right” or “best” way to create an inclusionary housing policy, but there are clear best practices. The details of the policy should be tailored to the specific needs of a particular municipality, the ecosystem of other housing and service programs available, and current market conditions. That said, inclusionary housing has been used to create affordable housing since the 1970s, and there are important lessons that have been learned.
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.
One way to manage a large applicant pool is to hold a lottery. Programs will often publish an application to collect limited information to screen out obviously in-eligible applicants, and then hold a lottery to sort those applicants before they ask for detailed information and begin a thorough screening process. This reduces the screening burden on staff while at the same time reduces the amount of work applicants need to do if they are not going to be considered for a unit in the end because of a lack of availability.
Grounded Solutions Network conducted a survey to find out which banks were lending to their member organizations. View Survey.
As we saw before the foreclosure crisis, lending and underwriting requirements can become lax with time. Just because a lender approves a loan amount does not mean that the homebuyer can afford the associated payment. To protect against inconsistent or loose borrowing criteria, many programs maintain internal underwriting policies that often dictate more conservative underwriting for things like housing cost and/or debt-to-income ratios.
Grounded Solutions Network has published a two-page handout for lenders outlining the benefits of loaning to CLT homebuyers. View Handout
Yes, it is possible to change your formula if you decide it is not working – whether that’s because it is not adequately maintaining affordability, it is not providing homeowners with an opportunity to build wealth, or it is too cumbersome or problematic for program staff to explain and implement.
If you do change your formula, the new formula can only be put into effect at resale or for new units brought into the program. This means moving forward you’ll have two formulas to administer, so this is not a decision that should be taken lightly, and adequate research and planning should go into any decision to change.
The answer to this question depends largely on how you track your data and therefore how easy is it to evaluate your performance. Programs that use HomeKeeper to manage their resale-restricted units can monitor program performance annually. Programs that don’t use a system that allows for on-going performance evaluation should manually evaluate performance at least every five years.
No, resale formulas provide the owner with a cap, or a maximum price for which they can sell their home, and are never a guarantee. Different types of formulas provide different protections in falling markets. For more information see the Affordable Pricing and Resale Formula video series ->
Much of the impetus for creating a resale-restricted affordable housing program has to do with hot housing markets, where housing is largely unaffordable to working families. So when creating a new program it is sometimes difficult to imagine a time when prices will not continue to rise. But as we saw with the market crash in 2008, prices can, and will fall again. Resale formulas can be written to identify what happens in the event the formula price is more than the market value at the time of resale. Standard language includes – “ the lesser of the formula price or the appraised value.” Some thought should be put into what comes after “or” in this example, so that both the program and the homeowner share in the loss if, and when markets fall.
Common methods for monitoring owner occupancy include:
- Send out self-certification letter that must be returned with the homeowner’s signature.
- Request third party verification such as a utility bill and/or a copy of a current driver’s license.
- Review local jurisdiction tax records to verify where the homeowner’s property tax bill is being sent.
- Some combination of these items.
Yes, some programs do have a policy to allow for exceptions from the owner-occupancy requirements. Common exceptions include temporary work relocation, medical treatment, caring for a sick/aging family member, and education.
During the real estate crash, some programs also granted exceptions for people who had to relocate for work but who could not sell because real estate values had fallen so significantly and they owed more than their resale price.
If programs do allow for exceptions to this requirement, it is important to have a written policy outlining the process to grant such exceptions.
Programs that file a performance deed of trust or a request for notice should receive notice if a homeowner is attempting to refinance without contacting program staff.
Yes: When housing prices rise, we all pay the price, but one group – owners of developable land and developers of real estate – receive the profit. Inclusionary housing programs recapture some share of the increase in land values to help the people who are most negatively impacted. Developers and property owners should certainly not be alone in addressing the need, but it is sometimes fair to expect them to bear some of the burden since they often receive financial benefits from rising housing costs. Inclusionary housing only ever provides a small share any community’s affordable housing opportunities. The vast majority of affordable housing is directly subsidized by taxpayers through federal, state and local government programs.
Yes: But we aren’t likely to build enough housing to solve the affordable housing problem in growing regions.
While it is clear that the high cost of housing is the result of building less housing than necessary to accommodate a growing population, the reasons for this under-building are complex. Many argue that planning and zoning regulations are overly burdensome and result in less housing production and higher housing costs. But while it is easy to oppose costly restrictions, each of our zoning and planning rules has been imposed for specific reasons. It is difficult to imagine voters in most cities removing rules that protect existing neighborhood character, ensure health and safety in new housing or limit the parking and traffic impact of new development.
It makes sense to do everything within reason to reduce unnecessary regulatory burden on housing developers, but even sensible and popular limits on land use and building quality are likely to mean that we build less housing than our high-growth regions need. This in turn means that we will need proactive affordable housing strategies for the foreseeable future.
And, while any increase in the supply of housing helps address the problem, it is easy to underestimate just how much more we would need to build before we got to the point that we didn’t also need affordable housing programs. San Francisco’s chief economist estimated that the city would need to build more than 100,000 new housing units before the additional supply would reduce the market rent citywide to a level that was affordable to lower-income residents. That is more new housing than has been built in San Francisco since the 1920s.
An economic feasibility study conducted by a qualified real estate economist can provide local policymakers with a clearer sense of how inclusionary housing requirements will impact the profitability of local development projects and the price that developers can pay for developable land. The economist will research local prices and rents as well as the key factors driving the cost of building. The economist will use this information to assess whether or not proposed affordable housing requirements would make typical projects infeasible. Any kind of feasibility study is necessarily somewhat imperfect, but the goal is to give policymakers a general sense of the likely impact of proposed housing requirements and incentives on land prices and development profits. Ultimately, a detailed feasibility study is the only way to address legitimate concerns about whether affordable housing requirements could do more harm than good.
Read more about conducting an economic feasibility analysis here.
Yes: But probably not enough. It might stand to reason that development of housing—any kind of housing—would lead to lower housing prices. In most urban areas, however, the opposite occurs. Construction of new housing impacts the price or rent of existing housing in two different ways simultaneously. As the basic notion of supply and demand suggests, the addition of new units in a given housing market will inevitably put some downward pressure on the cost of existing units. But in regional housing markets, the units that become less expensive may be far out on the suburban fringe, far from jobs and opportunity.
At a more local level, new development often creates upward pressure on housing costs because new housing is primarily built for higher-income residents. A 2015 study commissioned by the Wall Street Journal found that 82 percent of new rental housing in the US was luxury housing.* Not only do the new units have higher rents, but the new higher-income residents spend money in ways that create demand for more lower-wage workers in an area; this, in turn, creates more demand for housing in the area and ultimately raises housing costs.
Modest price increases in a region can translate into very acute increases in specific neighborhoods. The lower costs resulting from increased supply may be apparent only at the suburban fringe of the region, while new luxury housing may cause dramatic upswings in the price of residential real estate in central neighborhoods.
No: Rents and home prices are set by a market. When a city imposes inclusionary housing requirements, it may increase a developer’s costs. But developers can’t really pass those costs onto home buyers or tenants because new units must still be competitively priced in the overall market. Instead, over time, land prices will fall to absorb the cost of the inclusionary housing requirements. Any incentives offered by a community would reduce the degree of land price reductions. Both theoretical and empirical economic research supports the conclusion that in the short term the costs associated with affordable housing requirements are born by developers and in the longer run they are passed on to land owners.
Possibly: There is some evidence that it is possible to set affordable housing requirements so high that they cause developers not to build or landowners not to sell. If this happens it can result in reduced supply of housing and ultimately higher housing prices. However, the data suggests that programs that provide incentives and flexibility can successfully require significant affordable housing without any impact on market supply or prices.
There seems to be agreement that inclusionary programs could theoretically diminish the supply of housing and therefore increase prices, but there is no agreement about how often this happens or how significant the impact is. A study by the libertarian Reason Foundation concluded that the production rate of market-rate homes fell following the adoption of inclusionary housing policies in Southern California.*
Basolo and Calavita* critiqued this study, pointing out that jurisdictions are most likely to adopt inclusionary housing policy toward the peak of the economic cycle, weakening the argument that inclusionary housing causes production to fall. A follow-up study by researchers at the University of California Los Angeles carefully compared the data for communities with and without inclusionary housing in Southern California. That study concluded that the adoption of inclusionary policies had no impact on the overall rate of production.*
The most rigorous study to date was conducted by researchers at the Furman Center at New York University,* who studied inclusionary programs in the Boston and San Francisco metropolitan areas. In the towns around Boston, inclusionary requirements modestly decreased the rate of housing production relative to nearby towns, and slightly raised the market price of residential real estate. In the San Francisco area, however, inclusionary programs had no impact on production or prices, suggesting that it is possible to develop inclusionary programs that don’t impact market prices. These same programs were also able to create more affordable units than their counterparts in the Boston area.
Probably not: Inclusionary housing relies on market growth to produce new affordable housing resources; it is not likely to be successful in communities that are not experiencing or anticipating growth. But inclusionary may not make sense for every growing community.
Smaller communities, in particular, sometimes lack the capacity to effectively administer inclusionary programs. Outsourcing and multi-jurisdiction collaborations could make smaller programs easier to administer by bringing together units from many local programs. But communities that produce very few units may find that the burden of administration outweighs the benefits of an inclusionary housing program.
Inclusionary housing may not be suitable in every type of housing market, but it can work in more places than many people realize. Inclusionary programs are tools for sharing the benefits of rising real estate values and, as a result, they are generally found in communities where prices are actually rising. In many parts of the United States, land prices are already very low, and rents and sales prices often would be too low to support affordable housing requirements even if the land were free. In these environments, policies that impose net costs on developers are unlikely to succeed (though some communities nonetheless require affordable housing in exchange for public subsidies).
The communities where rising housing prices are a real and growing problem are quite diverse and plenty, and are not high-growth central cities like Seattle. In California, one third of inclusionary programs are located in small towns or rural areas. Wiener and Bandy* studied these smaller-town inclusionary programs and found that many were motivated by the influx of commuters or second homebuyers entering previously isolated housing markets. They described what happened when developers began building high-end homes for commuters in Ripon, California. As Ripon very quickly became one of the San Joaquin Valley’s most expensive communities, local residents became increasingly concerned about housing costs. Ripon’s leaders set a goal that 10 percent of all new housing would be affordable. As Wiener and Bandy* describe:
The willingness of small jurisdictions, especially small cities, to overcome local politics and take bold and decisive action to adopt inclusionary housing programs is often a derivative of scale. People know their neighbors. They directly feel the shortage of affordable housing. They know where the few remaining parcels of developable land are located. They know that the character of their communities is changing. And, they have access to their elected officials who work in the same work places, shop in the same stores, and send their kids to the same schools.
While inclusionary policies are clearly relevant in a very wide range of communities, the appropriate requirements can be very different from one market to another. In communities where higher density development is not practical, higher affordable housing requirements may not always be feasible but lower requirements may nonetheless be effective. San Clemente, California requires only 4 percent of new units to be affordable, but produced more than 600 affordable homes between 1999 and 2006.* Wiener and Bandy* also found that many smaller jurisdictions relied heavily on in-lieu fees and some set fees at very modest levels.
Smaller communities with inclusionary housing programs must address unique considerations, such as limited staff capacity and costs of administration. Outsourcing and multi-jurisdiction collaborations can make smaller programs easier to implement, but there are some localities where the benefits of an inclusionary housing policy will not adequately offset its costs.
Probably Not: Inclusionary housing is only ever one among several tools that cities deploy to address the dire need for more affordable housing and the full set of policies is not enough to meet the full need in most cities. But that is no reason not to do all that we can. Denver City Council member Robin Kniech says “no one ever says we shouldn’t pave the roads just because we can’t fill every pothole.”
While inclusionary housing is only one tool in the toolbox, it’s an important one. Nationwide, 258 inclusionary housing programs reported creating about 110,000 affordable homes. Also, 123 programs, some of which overlap with the 258 programs reporting units, reported collecting $1.76 billion in fees to use for affordable housing.
The way you design your program can make a difference in how many units it produces. While the average production rate across all programs is 27 units per year, excluding programs that have produced zero units, average production rate for the country’s top 20 programs is 235 units per year—almost 10 times greater (Wang and Balachandran, 2021). The most productive programs share certain features: they are mandatory, offer incentives, allow developers flexibility with multiple options for compliance, and require long-term affordability.
While inclusionary housing programs directly impact the cost of development, they indirectly impact the price of developable land. When we increase the costs that developers face, we necessarily lower the amount that they are willing to pay for land. Understanding how these requirements impact land values is vital for designing policies that appropriately allow communities to share in the benefits of new construction without stifling development.
The term “residual land value” refers to the idea that landowners end up capturing whatever is left over after the other costs of development. When the cost of construction rises, it might hurt developer profits in the short term, but higher costs will then cause all developers to bid less for development sites. As land prices fall (or rise more slowly), developer profits tend to return to “normal” levels.
When a city requires developers to provide affordable housing, they are likely to earn less than they would have if they had been able to sell or rent the affected units at market value. This forgone revenue represents the “opportunity cost” of complying with the affordable housing requirements. It is fairly easy to calculate this “cost” for any given mix of affordable housing units and, if these requirements are predictable in advance, they should roughly translate into corresponding reductions in land value over the longer term.
Most inclusionary housing programs don’t simply impose costs; rather, they also attempt to offset those costs (at least, in part) with various incentives for the developers. The most common incentive is the right to build increased density (e.g., building taller buildings, building more units in place of providing parking, etc.). When developers can build more units, the extra income can offset the costs of providing affordable units, and the result will be a smaller (if any) reduction in land value.
But incentives frequently don’t fully offset the cost of providing affordable housing. In these cases, there is a real net cost which exerts downward pressure on land prices. If the net cost is small relative to land values, and if it is applied consistently and predictably, landowners will have little choice but to accept reduced prices. But, if the net cost is too great, landowners may choose not to sell their properties, and the result will be that the program prevents development that would otherwise have happened. Inclusionary housing programs have to work hard to understand land markets in order to avoid this situation.
Land values don’t change overnight, and some communities have carefully phased in inclusionary requirements with the expectation that developers, when they can see changes coming, will be able to negotiate appropriate concessions from landowners before they commit to projects that will be impacted by the new requirements. Similarly, some program designs are likely to have a clearer and more predictable impact on land prices than others. More universal, widespread, and stable rules may translate into land price reductions more directly than complex and changing requirements with many alternatives.
Mostly landowners. There is general agreement among economists that much of the cost of impact fees on new development are ultimately born by landowners who have to accept lower prices for their land from developers who now face a new expense.
Most of the research on impact fees is focused on fees to finance public services or infrastructure. The economics of these fees are slightly different because they are seen as funding services that the buyers of homes would value. There are empirical studies showing impact fees resulting in higher home prices and other studies showing fees driving down land prices instead. Researchers debate whether any home price increases are the direct result of the fees or the indirect result of increased demand driven by the infrastructure improvements that the fees finance.
A 2003 review* of 27 academic papers on the topic concluded that where buyers and developers have other options:
“the cost of the impact fee is pushed backward to sellers of land … and sellers must reduce the sale price of land in such scenarios.”
Yes: Since the mid-1980s, a broad consensus among scholars and urban planners has emerged in support of the idea that housing policy should encourage the creation of more mixed-income communities. In one example, the Pew Charitable Trust’s Economic Mobility Project followed 5,000 families to determine whether children moved up or down the income ladder relative to their parents. Surprisingly, the study found that differences in the poverty rate in the neighborhood where children grew up strongly predicted their economic mobility as adults, even more strongly than differences in their parent’s education level, occupation, or other family characteristics.*
It is easy to see that children who live in distressed communities face tougher odds, but what we haven’t been able to prove before is whether families whose kids would face significant obstacles in any event, choose to live in distressed neighborhoods or whether it is something about the places themselves that negatively affects the kids.
A 2015 study from Harvard University* has added very strong new evidence to support the conclusion that the places themselves matter. Economists studied children who moved from “worse” to “better” neighborhoods and found that kids who grew up in better neighborhoods earned more as adults when compared to kids who didn’t move or who moved to a worse neighborhood. And the effect grew over time. The younger kids were when they moved, the greater the gains. This research suggests that housing policies encouraging greater economic integration will lead to better economic outcomes for lower-income children.
Yes: HUD’s Affirmatively Furthering Fair Housing (AFFH) rule requires jurisdictions that receive federal housing funds to proactively plan for overcoming racial segregation. Decades of experience with fair housing enforcement has shown that removing discrimination in the leasing and sale of homes is generally not enough to overcome racial segregation. Inclusionary housing has been one of the most successful strategies that communities have used to ensure economic and racial integration of higher opportunity neighborhoods.
Yes: In some cases in-lieu fees collected from developers are invested in offsite affordable housing projects that also use federal housing programs like the Low Income Housing Tax Credit program. In some communities, developers are able to apply for federal funding for onsite affordable units also. However, inclusionary programs have to offer clear guidelines to ensure that public funds are used to expand the number of affordable housing units or to serve more lower-income residents than would otherwise be served by the inclusionary units.
The growing trend of inclusionary housing programs has meant that local governments are increasingly creating preferences for local residents or employees in their applicant selection criteria. But these types of preferences can violate fair housing laws, even when that is not the intent of the policy.
In order to ensure there is no discriminatory impact of such a policy and to reduce other legal challenges around freedom of movement, jurisdictions should consider the following guidelines:
- Residency preferences should not include a duration of residency (i.e. a minimum of X months or years)
- Residency preferences should be as broad as possible, such as extending beyond the jurisdiction
- Residency preferences should include alternatives such as “live and/or work” requirements, rather than just a residency requirement
Fair housing will likely be an issue with residency preferences if the jurisdiction is more white than its surrounding region. In those instances, city’s might consider expanding the residency preference outside the jurisdiction and use a partial preference approach, in which a percentage of the units are set aside for local residents, and the balance of units are available to anyone.* Because of the high potential for local preferences to lead to fair housing violations, it is essential that jurisdictions consult an attorney with fair housing experience before adopting a local preference.
Not necessarily: Many policymakers pursued mixed-income housing policies in the hope that social interactions between lower-income and higher-income residents would lead to better access to jobs or other resources for lower-income residents. The research clearly suggests that these hopes are not realistic. The Urban Institute reviewed dozens of studies of housing programs that promoted mixed-income communities and found little evidence of any meaningful social interaction between lower-income and higher-income neighbors in mixed-income developments. It also found no evidence that lower-income residents reliably benefitted from the employment connections or other “social capital” of their higher-income neighbors.* Even among members of the same income and racial groups, this kind of social interaction among neighbors appears to be rarer than is often imagined.
Yes: In historically disinvested communities and communities of color, new market-rate housing can help trigger gentrification and ultimately displacement of long time lower-income populations. Inclusionary projects, particularly those with a sizable share of permanently affordable housing units, can help ensure that new development helps to stabilize rather than displace the existing community. Researchers at UC Berkeley found that development of new affordable housing was significantly associated with lower levels of displacement in gentrifying neighborhoods.*
New market-rate development tends to occur in high-opportunity areas from which people of color have been systematically excluded and are often unable to afford. In communities with stronger housing markets, inclusionary housing is an effective tool to provide affordable homes in high-opportunity areas. But in communities with less strong housing markets, it may not be financially feasible for developers to include affordable units in new market-rate development.
This article describes some approaches that communities can take to craft an effective inclusionary housing program early in the market cycle, or in mixed markets where one neighborhood varies dramatically in rent levels from the next.