How to Get More Bang for the Affordable Housing Buck

I spend a lot of time on this blog talking about affordability, but in a very broad sense: Mainly, how to keep costs down by providing enough housing to meet demand, and how to reduce household costs by eliminating the need for car ownership (or car dependence, at least). This is in contrast to the work done by most affordable housing advocates, who tend to focus on funding and policies that promote the construction of new, subsidized affordable housing for those with limited incomes. Unfortunately, this often seems like a battle in which you need to pick a side, and the pro-market and pro-subsidy folks don't always see eye to eye. This tension was at the heart of my recent post about San Francisco's bleak future.

So with that in mind, I've been making an effort over the last few months to "cross the aisle" and deal more directly with affordability in the narrower, subsidy-oriented sense of the word. That resulted in a five-part series at Urban One's blog on how to increase the supply of income-restricted affordable housing. It's just a beginning, but I'm hoping that it can bridge some of the gap between the role of the market and the role of government regulation and get a real conversation started.

The series focuses specifically on the density bonus, which is a program written into California law, but readers will find many of the lessons applicable across the country. Basically, the density bonus law says that if you set aside a share of your new building for affordable housing, you can build a bit bigger than zoning currently allows—this is different from inclusionary zoning, which requires that you set aside a share of your units as affordable but does not guarantee any additional density, height, incentives, etc. Looking through the lens of the density bonus, I explored several ways to increase the supply of affordable housing at minimal public cost, and broke the series down into four separate proposals. I summarize each idea briefly below, but I recommend following the links below to read the whole article associated with each proposal.

PROPOSAL 1: Reduce thresholds to improve program participation

There are two key concepts behind this proposal. First, affordable units built through the density bonus program come at no cost to the city, so every developer that doesn't participate in the program is a pure loss from the city's perspective. Second, data shows that many developers are either not participating at all, or aren't taking full advantage of the program. I look at how lowering the threshold for participation—while it would reduce the number of affordable units provided in each new project—could actually increase the number of affordable and  market-rate units built each year by increasing the number of developers that take advantage of the program. It's the old idea of "50 percent of something is better than 100 percent of nothing."

Table illustrating how reducing the amount of units provided per project can actually increase the amount of market-rate and affordable units provided each year, all at no cost to the city.

PROPOSAL 2: Fill funding gaps in density bonus project budgets with public sector funds, when necessary, to maximize private investment

Many cities, Los Angeles included, have less money for affordable housing than they did in the past. As a result, they need to make the most of what little they dospend on subsidized housing, and filling gaps in density bonus projects may be one of the most efficient ways to spend those dollars. Rather than spending $100K or more per unit to directly subsidize affordable housing construction, cities can help developers fill relatively modest gaps in project funding to push them over the edge for their "go/no-go" decision on participating in the density bonus. As with proposal 1 this funding assistance can be tied to clawback mechanisms for highly successful developments, and may be able to create affordable homes at a cost of $50,000 or less. Increased density bonus participation also means more market-rate units, which helps mitigate the growth of affordable housing costs in the future.

Public funding for affordable housing has been on the decline in Los Angeles and in cities throughout the country. New ideas are needed for how to create new affordable homes with limited public resources.

PROPOSAL 3: Capture value of increased development potential in upzoned neighborhoods

This proposal takes a look at two case studies in Los Angeles where newly transit-accessible neighborhoods—Cornfield Arroyo Seco and the Exposition Corridor—have been upzoned to allow for new development, and how those neighborhoods are using zoning tools to capture the value created by the increase in development potential. While not strictly related to the density bonus, this policy falls in the same class of "private investment for public benefit," and the specific plans for each of these communities focus heavily on the provision of affordable housing.

The new zoning dramatically increases the value of many parcels in these neighborhoods, but claws back that value for reinvestment in the local community by requiring a suite of "public benefits" for any developers that hope to take full advantage of the new development potential. This kind of plan is dependent on upzoning and so it can't be applied universally, but where rail and other infrastructure investments encourage rezoning of specific neighborhoods, it's an effective tool for retaining that value within the community.

PROPOSAL 4: Create an alternate fee-based density bonus program; use these funds to subsidize units in less expensive market-rate buildings

This idea is the most exciting to me, as it involves thinking about affordable housing in a completely different way. Right now all of our affordable housing comes from new construction, which is extremely expensive on a per-unit basis (especially when so much of the market is oriented toward more affluent tenants), and it's virtually all privately-owned, so that after 55 years the covenant runs out and the units go back to being market rate. At the same time, we have hundreds of thousands of existing rental units in Los Angeles, many of which are in great shape and can be acquired at much less cost than new construction.

The median asking price for multifamily units in Los Angeles is about $220,000, while new units typically cost upwards of $300K-$350K each.

Enabling an in-lieu fee system—rather than requiring on-site affordable housing in new density bonus projects—could help fund acquisition of these existing buildings while simultaneously increasing the supply of market-rate rental units. Development of new units is absolutely essential to long-term, broad-based affordability, but once those units are built there's no particular reason they need to be owned and operated for a profit. Acquiring them for management by a non-profit removes this profit motive from the equation, funneling revenues into a fund that allows a share of each building to be set aside as affordable. It also means that the buildings become permanent assets for the city and its residents, with a sustainable source of revenue that can be consistently used to fund future acquisitions—in other words, it's self-propagating.

An acquisition-based affordable housing strategy opens up a lot of opportunities that I haven't heard discussed in the past, so I'm excited to do more work in this realm and explore the possibilities. So again, read the whole article and let me know what you think!

Links for each article in the five-part series can be found below.

Part 1 Part 2 Part 3 | Part 4 | Part 5