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
Many cities allow developers to build required affordable units on another site separate from their market-rate projects. In many cases, it can be less expensive for developers to create separate buildings where all of the units are affordable.
There are a number of reasons why this might be the case.
Sometimes builders can save money by building affordable units to a different (lower) standard. While there is a risk that this might involve substandard affordable units, there may be important savings even when the affordable units are built to a very high standard. For example, developers of high-rise luxury towers can often produce several nearby high-quality affordable units for what it would cost them to sell one of their luxury units at an affordable price.
Buildings with all affordable units are frequently eligible for tax advantages or subsidized financing. If a program allows developers to access these benefits, it is often possible to build many more affordable units off site for the cost associated with fewer units on site in a mixed-income building.
In spite of the potential efficiency, many communities choose not to allow offsite development because of the importance that they place on economic integration of affordable homes within mixed-income buildings. In other communities, off-site development is allowed but its potential negative consequences are addressed in two ways:
Increased requirement for off-site projects: If the off-site option lowers the cost of providing affordable units, communities sometimes require developers to share some of that benefit by providing more total units in off-site projects than what would have been required had the units been provided on site.
Off-site location limits: In addition, some communities require that off-site projects be located nearby the market-rate projects that generated the requirement. They limit the location of these projects to prevent developers from concentrating off-site projects in lower-income neighborhoods where land is less expensive and the need for affordable housing is lower.
Santa Monica, California
Santa Monica has one of California’s older inclusionary housing programs. It allows developers the option of providing units off site, but only when doing so will result in additional public benefit. Specifically, Santa Monica requires that builders provide 25 percent more affordable units in off-site projects than would have been required on site. To promote economic integration throughout the community, off-site projects must be located within a quarter mile of a market-rate project, though projects up to one mile away are allowed if they will not result in overly concentrated affordable housing.
San Diego, California
San Diego’s inclusionary housing program allows for developers to meet their affordability requirements through on-site affordability, payment of a fee, or off-site development. The off-site option is subject to administrative approval from the city’s planning director and the CEO of the San Diego Housing Commission. The city’s location preference for off-site development is within the same community planning area as the market-rate development. However, these units may also be located outside of the community planning area if the reviewing staff finds that two conditions are met:
- “The portion of the proposed development outside of the community planning area will assist in meeting the goal of providing economically balanced communities; and
- The portion of the proposed development outside of the community planning area will assist in meeting the goal of providing transit-oriented development.” (San Diego §142.1308.)
West Sacramento, California
West Sacramento allowed developers to acquire, rehabilitate existing market-rate units and convert them to deed restricted affordable prices to meet their inclusionary program requirements in redevelopment areas. (Redevelopment areas were subsequently eliminated by California.) The developers could either rehabilitate and preserve an equal number of units in the same plan area or twice as many units in another area of the city.
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.