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
The majority of inclusionary housing programs offer developers options to comply with requirements other than providing the affordable units on-site. A 2021 study found that the most commonly offered alternative compliance options are paying a fee (49% of the surveyed programs across the nation) and building off-site affordable units (42%). Less commonly offered options are donating land for use for affordable housing (21%), preserving/rehabilitating regulated affordable units (13%), and purchasing/renovating unregulated affordable units (11%). (Wang and Balachandran, 2021).
Whether to offer alternative compliance options is often a controversial decision. People who oppose compliance alternatives often worry that fees or off-site units will provide less value to the community than on-site mixed-income development. This is a risk; in fact, many communities have a history of setting in-lieu fees too low. However, alternative compliance options can also be mutually beneficial when correctly designed.
Some people assume that requiring affordable units to be built “on-site” with market-rate units is the best way to advance racial equity. If a primary policy goal is to ensure that affordable units are built in high-opportunity neighborhoods from which people of color have been historically excluded, on-site development is by far the most straightforward way to achieve that goal.
However, residents of color might deem it a higher priority goal to build and/or preserve affordable housing in historic neighborhoods of color that are on the cusp of being gentrified, to help limit potential displacement. Providing developers with alternative ways to comply can help achieve that goal. In addition, allowing compliance alternatives generally results in affordable units being built by a nonprofit developer, who may be more willing to include family-sized units that may better meet the needs of households of color (as in Petaluma, CA).
Washington, District of Columbia
Washington, DC’s Inclusionary Zoning Program intentionally prohibits alternative compliance. The District determined that, while they have many different sources of funding for affordable housing, such as their Housing Production Trust Fund, they had few tools to ensure that affordable units are built in the high-opportunity neighborhoods where most market-rate development is occurring.
Minneapolis’s Inclusionary Housing Policy permits several compliance alternatives, including payment of in-lieu fees. Fees are placed in the city’s Affordable Housing Trust Fund. The Trust Fund guidelines state that the City encourages and financially supports the production and preservation of affordable housing in all areas of the City, including “to improve housing stability for current residents, support and improve existing community assets, revitalize, and help prevent involuntary displacement.”
In summary, there is no one “right” answer to the question of whether to allow alternatives like in-lieu fees and offsite construction – the correct choice will depend upon your community’s needs and your local government’s ability to quantify and enforce rational, meaningful alternatives.
Direct Off-site Development
The market-rate developer builds a 100 percent affordable project on another site, either adjacent to the market-rate project or in an entirely different location. Continue reading
The market-rate developer partners with a nonprofit organization (that has experience building affordable housing) to build a 100 percent affordable project. Continue reading
The market-rate developer donates land to the city or a designated nonprofit organization capable of building the necessary affordable housing units in an appropriate location. Continue reading
Most cities offer developers a menu of alternative ways to satisfy their affordable housing requirements. Continue reading
|Additional Subsidy Needed?
Off-Site Production Approaches
While off-site production provides important flexibility for developers, it can be a challenge to ensure that off-site units are of comparable quality to the market-rate units and are built in appropriate locations.
Generally, cities take one of three approaches to off-site production:
- Require or strongly encourage developers to build units on site. This is the best option for cities that do not have the capacity to manage a more complex system, or that are strongly committed to mixed-income housing. It is also the simplest to administer.
- Allow developers to build offsite, but in the vicinity of the market rate project. This option ensures that neighborhoods are integrated, but gives developers more freedom. Some cities use pre-set planning areas, while others use a pre-set distance (e.g. one mile).
- Allow developers to build affordable housing at a location of their choice. For cities that want to maximize production or where economic differences between neighborhoods are not significant, it is possible to allow the developers to build in alternative neighborhoods. If this is allowed, cities should strongly consider requiring more units or units at lower affordability.
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
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.
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.