Once policymakers have determined the income group or groups that they hope to serve through a program, they generally incorporate those goals into the program in two distinct ways. First they set income eligibility standards and second they set affordable rents or prices.
Inclusionary programs generally require that affordable units are both occupied by and affordable to residents in a given income category. Generally there is a maximum income cutoff expressed as a share of the area median income (AMI).
For example, a program might require tenants to earn less than 60 percent of AMI. In general, rents are set so that a family earning 60 percent of AMI would pay no more than 30 percent of their income. Some programs will use 33 percent or 35 percent for this calculation.
HUD’s Income Statistics
The U.S. Department of Housing and Urban Development (HUD) publishes the area median income for each metropolitan statistical area (MSA) in the country. While inclusionary programs aren’t regulated by HUD, most rely on HUD’s income numbers for comparability with other housing programs.
HUD publishes a different AMI for each household size. Five-person households generally earn much more than one-person households. A program that targeted 60 percent of AMI would require a five-person household to earn less than the five-person median; and a one-person household to earn less than the one-person median. So, the eligibility cutoff is a different dollar number for each different household size.
While income eligibility is generally based on the household size, rent is generally based on the unit size.
Setting a rent based on each family’s economic situation might be ideal in some sense, but it is not practical for property owners who would have no way to effectively budget. Instead, inclusionary programs establish maximum rent levels based on the number of bedrooms in a unit and allow property owners to charge those rents to any income-eligible tenant. The rent may be set assuming that a two-bedroom apartment will be occupied by a three-person household, however, the actual tenant household may include two-four people.
In addition, while the rent may be set assuming a household earning 60 percent of median income, the actual resident is likely to earn less.
Fairfax has a voluntary incentive program called a proffer, which aims to produce low- and moderate-income housing. Rather than use a single formula for all unit sizes, the city opted to make smaller units more affordable. Their rationale was that exactly following HUD’s pricing guidelines would not have worked well in their market. A single formula would have set prices such that larger, two or three bedroom inclusionary apartments were less expensive than equivalent unregulated apartments, but studios and one-bedrooms would actually be priced higher than similar market-rate apartments in town. The solution: they calculate affordable prices based on HUD’s guidelines and use this price for three-bedroom apartments. However, to ensure that smaller units are priced below market rates, they multiply the price by 70 percent for studios, 80 percent for one bedrooms and 90 percent for two bedrooms.