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”
While inclusionary housing programs directly impact the cost of development, they indirectly impact the price of developable land. When we increase the costs that developers face, we necessarily lower the amount that they are willing to pay for land. Understanding how these requirements impact land values is vital for designing policies that appropriately allow communities to share in the benefits of new construction without stifling development.
The term “residual land value” refers to the idea that landowners end up capturing whatever is left over after the other costs of development. When the cost of construction rises, it might hurt developer profits in the short term, but higher costs will then cause all developers to bid less for development sites. As land prices fall (or rise more slowly), developer profits tend to return to “normal” levels.
When a city requires developers to provide affordable housing, they are likely to earn less than they would have if they had been able to sell or rent the affected units at market value. This forgone revenue represents the “opportunity cost” of complying with the affordable housing requirements. It is fairly easy to calculate this “cost” for any given mix of affordable housing units and, if these requirements are predictable in advance, they should roughly translate into corresponding reductions in land value over the longer term.
Most inclusionary housing programs don’t simply impose costs; rather, they also attempt to offset those costs (at least, in part) with various incentives for the developers. The most common incentive is the right to build increased density (e.g., building taller buildings, building more units in place of providing parking, etc.). When developers can build more units, the extra income can offset the costs of providing affordable units, and the result will be a smaller (if any) reduction in land value.
But incentives frequently don’t fully offset the cost of providing affordable housing. In these cases, there is a real net cost which exerts downward pressure on land prices. If the net cost is small relative to land values, and if it is applied consistently and predictably, landowners will have little choice but to accept reduced prices. But, if the net cost is too great, landowners may choose not to sell their properties, and the result will be that the program prevents development that would otherwise have happened. Inclusionary housing programs have to work hard to understand land markets in order to avoid this situation.
Land values don’t change overnight, and some communities have carefully phased in inclusionary requirements with the expectation that developers, when they can see changes coming, will be able to negotiate appropriate concessions from landowners before they commit to projects that will be impacted by the new requirements. Similarly, some program designs are likely to have a clearer and more predictable impact on land prices than others. More universal, widespread, and stable rules may translate into land price reductions more directly than complex and changing requirements with many alternatives.
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.