Achieving Lasting Affordability through Inclusionary Housing

Inclusionary housing policies are local land use policies that link approvals for market-rate housing to the creation of affordable homes for low- and moderate-income households. The primary goals of inclusionary housing programs are to expand the supply of affordable housing and promote social and economic integration. The ability to not only produce affordable homes, but also to ensure their long-term affordability, is critical for meeting the housing needs of the lower-income families and individuals that inclusionary housing programs aim to serve. Even as inclusionary housing programs have become more prevalent, there is a lack of information on successful strategies for facilitating lasting affordability.

This paper analyzes a set of 20 inclusionary housing programs to highlight how long affordability periods, strong legal mechanisms, carefully designed resale formulas, dedicated program stewardship, and strategic partnerships can help preserve affordable homes produced through inclusionary housing programs for multiple generations. In addition, this research describes initial findings from a first-of-its-kind, national directory of local inclusionary housing programs.

Inclusionary housing policies can be found today in nearly 500 local jurisdictions across 27 states and Washington, DC, according to the national inventory compiled for this report. A sizeable share of inclusionary housing programs requires long-term affordability periods. For the 307 programs for which affordability period data was available:

• • Eighty-four percent of homeownership inclusionary housing programs, and 80 percent of rental programs require units to remain affordable for at least 30 years; and

• • One-third of inclusionary housing programs require 99-year or perpetual affordability for rental and/or for-sale housing.

The case study analysis of 20 programs provides additional insights on the evolution of affordability terms over time, and the mechanisms needed to ensure the lasting affordability of inclusionary units. As inclusionary housing programs have matured, local jurisdiction typically lengthened, rather than shortened, affordability periods. In addition, almost all of the programs studied that have less than perpetual affordability periods restart their affordability terms whenever a property is resold within the control period. This requirement is helping to achieve lasting affordability in places that have not adopted “perpetual” affordability periods for legal or political reasons.

But as the 20 case study programs revealed, achieving lasting affordability requires more than simply setting long affordability periods. Strong legal mechanisms, carefully designed resale restrictions, pre-purchase and post-purchase stewardship practices, and strategic partnerships are important for ensuring that inclusionary properties continue to be sold or rented at affordable prices, and are not lost due to illegal sales, foreclosure, or lax rental management practices.

Key legal mechanisms help jurisdictions stay notified of illegal sales, improper refinancing, over-encumbrance with second loans, and defaults that could jeopardize the continued availability of inclusionary homes. These mechanisms include not only deed covenants, but also deeds of trust, the preemptive right to purchase, the right to cure a foreclosure, the right to purchase a home entering foreclosure, and requirements of notice of default or delinquency.

Resale formulas are being designed to balance the goals of ensuring lasting affordability for subsequent homeowners and promoting wealth-building among homeowners. The most popular resale formula used by case study jurisdictions ties the resale price to the growth in area median income (AMI) over time. But other approaches were reported, including fixed-percentage, appraisal-based, and mortgage-based resale formulas, as well as hybrids of two or more of these approaches.

Monitoring and stewardship activities are critically important for ensuring lasting affordability of inclusionary housing units. Effective stewardship of a program’s homeownership inclusionary portfolio includes preparing homebuyers for the responsibilities of homeownership, helping owners avoid pitfalls such as delinquencies or foreclosure, monitoring resale and refinancing activities, encouraging and enabling ongoing investment in property maintenance and repair, and staying in regular communication with homeowners. Effective stewardship of a rental inclusionary portfolio includes regular oversight over the leasing and tenant selection process. In some case study programs, this administration involved regular review and training of property managers, while others used in-house management of a centralized waiting list and tenant selection process.

Despite the acknowledged importance of stewardship, most jurisdictions report having insufficient resources for comprehensive stewardship and many have not adequately planned for long-term monitoring and stewardship of inclusionary housing units. In addition, while many best practices exist for stewardship activities on the homeownership side, there is a need for more guidance on how best to monitor and steward rental units. As rental units become a growing share of the inclusionary housing inventory, local jurisdictions are looking for guidance on the trade-offs between managing rental in-house and partnering with property managers and/or other outside organizations.

Third-party partnerships with nonprofit organizations, such as community land trusts, for-profit administrative agents, local housing authorities, and nonprofit housing developers enable many inclusionary housing programs to improve their stewardship and oversight of for-sale and rental inclusionary units. These partnerships will be key to ensuring lasting affordability of inclusionary housing units where financial resources or staff capacity is low.

This research marks an important advance in the knowledge of the landscape of inclusionary housing programs. Future research is needed to rigorously evaluate which models work best for fostering lasting affordability of affordable homes produced through inclusionary housing programs. In addition, there is more that needs to be understood about the necessary monitoring and stewardship activities associated with rental housing created through inclusionary housing programs. Finally, as inclusionary housing becomes a more common means by which affordable housing is created in communities across the country, there is a general need for better understanding of the program characteristics that are associated with successful programs, particularly in different legal, economic, and political climates. The case study analyses and the national directory of inclusionary housing programs developed for this research mark an important first step in the data collection efforts needed to conduct more evaluative research of inclusionary housing programs.