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Study Finds Changes to Inclusionary Housing Policy Increase Affordable Production

In an article in Housing Studies, Harnessing the Real Estate Market for Equitable Affordable Housing Provision: Insights from the City of Santa Monica, California,” researchers find that changes to Santa Monica’s inclusionary housing policy produced a 15% increase in inclusionary housing production in the city. The authors found that Santa Monica did better than Los Angeles and San Diego in increasing production of affordable housing when market-rate production increases, suggesting Santa Monica’s inclusionary housing policy is working more efficiently.

Inclusionary housing policies connect the development of affordable homes for low- and moderate-income households to market-rate developments, generally by requiring or rewarding developers to set aside a small portion of their units for households unable to afford market-rate housing. Such requirements and bonuses vary considerably across jurisdictions.

The City of Santa Monica first adopted its Affordable Housing Production Program (AHPP) in 1998, a program substantially altered by the 2010 Land Use and Circulation Element (LUCE). Santa Monica’s inclusionary housing program has a mixture of mandatory and optional elements. All developers have an affordable housing obligation. For small projects, developers can satisfy the obligation by including affordable units onsite, developing affordable units at another location, paying in-lieu fees, or dedicating land to the city or to a non-profit developer. Developers of larger projects must provide onsite or offsite affordable units. They may also volunteer to opt into higher affordable-housing requirements that impose further restrictions on properties in exchange for greater height, density, and Floor Area Ratio (the ratio of a building’s total floor area to the size of the land on which it is built). AHPP aims to capture increases in land value that result from these allowances. Whereas with a density bonus, the developer is required to provide affordable housing equivalent to the value of the additional units gained from density increases, Santa Monica’s land-value-capture method connects affordable-housing requirements to an estimate of the increase in land value. Economic analyses performed during the planning phase determine the increase in land value from higher density, an analysis that informs the city’s decision about what level of community benefits to require.

The authors evaluated the program’s success since 2010. They collected data on market-rate and affordable housing construction in Santa Monica (2003-2017) and Los Angeles and San Diego (2009-2017); conducted interviews with 10 local city officials, academics, developers, and community advocates; and sent 85 questionnaires to residents of inclusionary-housing projects.

In the seven years prior to AHPP revisions, 85% of for-profit developers paid in-lieu fees. Since the 2010 revisions, only 55% of for-profit developers have opted to pay in-lieu fees instead of developing affordable housing. The authors observe that the persistently high percentage of developers paying in-lieu fees is due to the predominance of smaller projects: 83% of projects that paid in-lieu fees had 1 to 5 units. Regardless, the decline of in-lieu fees is likely an indicator of more affordable homes being build, since city policy makers reported that the in-lieu fees on their own are not sufficient to cover construction costs. Between 2003 and 2010, market-rate developers produced 223 affordable units and 1,106 market-rate units. Between 2010 and 2017, they produced 259 affordable units and 974 market-rate units. The authors found a positive correlation between affordable housing production and the presence of the 2010 LUCE requirements, even after taking account of variation in housing demand, the cost of credit finance, housing prices and rents, land prices, and construction costs. Interviewees suggested that faster approval times, removal of paying in-lieu fees as an option for higher bonuses and required economic feasibility studies were critical in increasing affordable housing production.

The authors compared housing outputs from the Santa Monica program with outputs in Los Angeles and San Diego (which also have inclusionary-housing programs), finding that the trend in Santa Monica affordable housing production is notably different from that in Los Angeles and San Diego. While in the latter cities the production of affordable housing units is fairly level between 2009 and 2017, in San Diego affordable housing production rises and falls with the construction of market-rate units.

Questionnaires sent to residents of inclusionary housing projects found that residents were highly satisfied with the services in their neighborhoods, including access to schools and parks. Sixty percent of market-rate occupants were not aware of affordable units within their buildings. Among residents living in affordable units, 90% reported never having experienced bias in their buildings.

The article can be found here: https://bit.ly/3fnm5EM

For more on inclusionary housing policies, see p. 6-12 of the 2020 Advocates’ Guide.