Every inclusionary housing program changes over time. A few programs plan for regular evaluations. They collect data about program performance and feedback from homeowners, tenants, developers, realtors and others who interact with the program. These programs use this information to identify the biggest challenges and then refine their program guidelines to address these challenges. In some cases, changes to the inclusionary housing ordinance are necessary as well.
Monterey County, California
In Monterey County administrative guidelines for the inclusionary housing program require that “At least every five years beginning in 2007, the Housing and Redevelopment Office will prepare a complete evaluation of the Inclusionary Housing Program. This evaluation will include
- A summary of housing units produced
- The number of households assisted
- In-lieu fees collected and the use of those fees
- Recommendations for policy or ordinance revisions, etc.
The public will be asked to comment on the report either prior to or during its preparation and the final report will be presented to all appropriate review bodies.”
When Somerville’s ordinance was first written, the city’s non-profit developers did not have the capacity to build large quantities of affordable housing. As a result, while the ordinance allowed for in-lieu fees, it was a very punitive formula aimed at discouraging developers from taking this option.
As the city’s nonprofit developers built capacity, the city decided it would actually be beneficial to receive cash for the trust fund to allocate to nonprofit developers, who would be better equipped to build units that fit the needs of low- and moderate-income buyers, and often more efficiently.
At that time, the ordinance was revised so that the cash in-lieu option would place the same monetary burden on the developer as offering a unit on site, as opposed to a larger one. This has led several developers to take this option and has allowed the trust to allocate funds to nonprofit developers. Later, when the market was in decline, the city preferred developers to build units, because local nonprofits were having a harder time getting financing for large projects and the cash in-lieu amounts were not enough to offset these issues.
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.
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.