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.
