When housing developers take on a new project, they are often tasked with implementing affordable housing mandates into their development. Affordable housing mandates are placing undue pressure on developers by forcing them to include affordable housing units in their projects to their detriment. As construction of low-income housing has become an increasing priority for many communities, local governments are seeking ways to place the burden of such construction on the backs of developers.
Seen as a blow to developers, the U.S. Supreme Court recently decided not to review the California Supreme Court case of Building Industry Association v. City of San Jose. In that case, the Building Industry Association sought relief from the court from a city ordinance that required all housing developments with over 20 units to include a percentage of low-income units.
Affordable housing mandates are becoming more prevalent across the country as cities attempt to force the requirements into private housing developments. The mandates are burdensome in that they force the developer to sell a portion (typically between 10 – 20%) of the project at a discounted price well below market value. This can be bad for developers and homebuyers because some of the cost will have to be recovered from the remaining 85% of the units. Depending on the type of development, the mandate could also drive down home prices if higher-end homes are required to be mixed in with low-income units.
As demand for affordable housing becomes a priority across the United States, especially in major metropolitan areas, some municipalities that have little in the budget allotted for subsidized housing are shifting the responsibility to meet the demand to private developers. Many cities are now utilizing ordinances that require new developments to include an affordable housing component. When the developer applies for a project permit, they are told they have to comply with the requirement or their project may not get approved.
Developers who work in areas that have affordable housing requirements need to engage with local lawmakers to ensure that the ordinance benefits the city, the landowner, and the developer. Working with city officials early in the process can help shape how the affordable housing rules are drafted; and can be the difference between completion of a profitable development and a project that never gains any traction. Many times, it is important information provided by concerned stakeholders that creates a policy that will work for all involved.
Navigating through Affordable Housing Mandates
Because local communities have goals on affordable housing that they want to meet and alienating the builder will not get them closer to their goal, most are open to a modification or alternate solution that works well for all involved parties. By working with council members, local leaders, and city planners, a developer can most likely find a solution that will allow their project to move forward while still helping to address the community’s need for affordable housing.
Many city councils have ordinances that allow developers to pay a fee in lieu of a developer incorporating affordable housing into its project. A local ordinance often defines the amount of the fee, which can be tied to various factors, including using standard housing metrics or a variable percentage based on market value. The fee in lieu of building affordable housing units often presents a win-win situation since developers can calculate the fee when creating a project budget and the municipality reserves funds that it can use for the good of the community in its discretion.
Another possible solution to working with affordable housing requirements is to work with another developer that specializes in constructing affordable housing. Affordable housing builders often are aware of and have access to government funding, tax credits, and lines of credit that can help reduce the cost of the overall project, which can make a nominally profitable or unprofitable project profitable.
Finally, a developer can work with the municipality to construct the affordable housing units on a different location. Under this approach, the developer can to complete its project per their original plans, while still meeting the affordable unit mandate. The municipality will also benefit from the development of two housing projects.
Although affordable housing mandates are often viewed by developers as a burden, working with local governments to help them meet their goals on low-income housing can be a beneficial endeavor for all parties. Communication with the local government and an open mind to alternative solutions are the keys to success when dealing with affordable housing requirements. It is important that a developer is aware or works with somebody that is aware of the applicable affordable housing laws in each city where the developer intends to build early in the process, so a solution can be identified early in the process and when possible, the solution can be factored into the developer’s assessment of a project. Failure to know and understand applicable affordable housing requirements can result in lost time, lost profits, and a failed project.
