A small number of fee first programs require payment of fees but also offer developers the alternative of building on-site units in lieu of paying the required fee. In these cases, the programs are almost identical to traditional inclusionary housing programs but they are designed around a different legal rational.
San Francisco, California
In 2009, when California courts ruled that inclusionary housing violated a state ban on rent control, cities like San Francisco faced a difficult choice. The state’s rent control ban explicitly allowed voluntary agreements where developers agreed to long-term rent restrictions in exchange for public investment or benefits, like a density bonus.
Rather than convert to a voluntary program, San Francisco revised its inclusionary ordinance in 2010 to be a fee first program. Developers faced a mandatory linkage fee but had the option to avoid the fee by providing on-site units. While the fee is mandatory for all projects, the on-site option is only available to developments that also receive the kind of benefit that would qualify them for exemption from the rent control law.
Before this change, San Francisco strongly favored on-site production, and even though the revised approach was built around fees, they continue to strongly encourage on-site production whenever possible. Based on the findings of a nexus study, they set the fee at a level equivalent to 20 percent of a project’s housing units, but the onsite production requirement is only 12 percent for most projects.* Even though the legal requirement is the payment of a fee, the city’s data shows that more than 80 percent of recently completed projects have provided units on site.
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.
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
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.