The majority of inclusionary housing programs spell out specific requirements and apply them uniformly to all projects. A smaller number of programs leave some elements open to negotiation with developers on a project-by-project basis.

The advantage of negotiation is that it offers maximum flexibility, which could lead to more affordable homes being built. The disadvantage is that there is far less transparency—it can be hard to ensure that all developers are treated fairly and that public benefit goals are not compromised in the process of negotiation with developers who may be politically powerful.  Developers also complain that negotiated agreements are more time consuming and offer far less predictability which makes it much harder to negotiate lower land prices that anticipate the affordable housing requirements.

A number of communities have developed middle-ground policies that offer a simple and transparent set of requirements but also maintain flexibility to approve alternatives beyond the basic options.

Mammoth Lakes, California

Mammoth Lakes inclusionary housing ordinance provides specific formulas for determining a developer’s affordable housing obligations. It requires that developers satisfy these obligations through on-site production of new housing,  However, the ordinance also allows the town to approve alternative proposals in special cases where greater public benefit can be achieved. An alternative proposal might be a request for offsite development, land dedication, or payment of fees.

The town contracts with a local nonprofit agency, Mammoth Lakes Housing (MLH), to help developers create alternative proposals when appropriate. While MLH has no official authority to review these alternative proposals, the agency negotiates specific alternatives with developers. MLH has identified several situations where the town’s interests are better served by allowing developers to meet their obligations through land dedication or payment of in-lieu fees. In these cases, MLH worked with the developers to create and jointly present the proposals to the town for approval.

Pam Hennarty of MLH describes a deal, where it negotiated “a Development Agreement for a reduced number of on-site units with a large in-lieu payment. The development consisted of a rather large hotel, golf course, and some condominiums, which would not provide a suitable living environment for members of the workforce. It is situations such as this where flexibility really can provide a better quality of life for the potential residents”

Common Questions

Should developers be allowed to access public subsidies for affordable units required under the inclusionary program?

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.