Mixed-income housing is a type of development that serves households at various income levels. Mixed-income housing developments use income from market-rate units to provide affordable housing opportunities to low- and moderate-income families, thereby reducing the need for public funds to subsidize affordable housing. This is a form of cross subsidization in which revenue from higher-priced units is used to subsidize lower-priced units.
Mixed-income housing is not a policy, per se. It is more the outcome of allowing or requiring affordable housing to be combined with market-rate housing through cross subsidies, thereby making the development of affordable units more financially feasible. This concept is at the heart of numerous affordable housing programs, and while there are obvious financial advantages for a community employing cross-subsidies, many communities also support mixing affordable and market-rate housing because they believe it to be more sustainable and fair. The term “cross subsidies” relays the concept that mixed-income developments can use the market to effectively subsidize part or all of the financing gap created by selling or renting housing at below-market rates.
Nonprofit or mission-driven for-profit developers who build mixed-income developments can use profits from the sale or rent of market-rate homes to cross-subsidize the costs of the affordable ones. The cross subsidies do not support the development costs of the building, but rather support the difference between the reduced rents for the affordable units and the standard rent for the market-rate units. Cross subsidies are not subsidies in the traditional sense—people often think of housing subsidies as federal, state or local government subsidy programs. Technically, with mixed-income housing, developers and property owners do not directly finance the affordable units with a subsidy generated from the market-rate units. Rather, the development of below-market-rate units is more financially feasible when market rate units are included in the project to increase the revenue. As a result, these developments can be less reliant on public subsidies.
Mixed-income developments work best when there is healthy demand for the market-rate units. Depending upon the ratio of market-rate to affordable units and the strength of the market, many of these deals may still require some direct or indirect public subsidies. An example of a mixed-income development would be a development project with market-rate condominium units and affordable for-sale or rental units that uses the profits from the sale of the market-rate condominiums to fill the financing gap created by selling or renting the affordable units below their market value.
In areas with very high market rents, mixed-income developments can work without significant public subsidies or with only a modest public subsidy. In other markets, the development of market-rate rental units may do little to close the financing gap on the affordable units. Determining the right ratio of affordable to market-rate units and the right incentives for each market requires a thorough understanding of the market and real-estate development fundamentals.
Communities can achieve mixed-income housing in a broader range of markets by combining cross subsidization with other strategies to create innovative hybrid models. Donated land, low-cost financing or density bonuses can be used in weaker markets to make cross subsidies work more effectively. Whether in a strong or weak market, many jurisdictions choose to support mixed-income communities because they believe they give greater support to the longevity of the project and serve a broader public purpose.
Federal Financing Options for Mixed-Income Housing
The Federal 80/20 Program: allows tax-exempt bonds to finance the construction of developments comprising at least 20 percent affordable units
Under the federally authorized 80/20 program, tax-exempt private activity bonds are issued to provide reduced-cost financing for rental development. In exchange for this preferential financing, developers agree to reserve at least 20 percent of the units for families with incomes below 50 percent of the area median income. Those affordable units are further financed through LIHTC, and, in strong markets, by cross subsidies from the market-rate units. In weaker markets, 80/20 deals require additional subsidy for the affordable units.
HOPE VI and other Public Housing Financing: can cover demolition and basic infrastructure costs
Many examples of cross-subsidized mixed-income housing developments involved HOPE VI, a federal program that provided large grants to help public housing authorities redevelop distressed public housing. HOPE VI was started in the early 1990s after a congressional report from the National Commission on Severely Distressed Public Housing developed a National Action plan to address the nearly 86,000 units of severely distressed public housing units.
The HOPE VI program emphasized that redeveloped communities should target housing to families with a mix of incomes, including moderate-income families as well as families paying market rents or purchasing market-rate homes. HOPE VI grants provided free or low-cost land and covered demolition and infrastructure expenses, which made it possible for the market-rate component of these developments (for sale in some cases and rental in others) to generate profits to provide a revenue source to cross-subsidize affordable units within the same development.
Among the many prominent examples of mixed-income HOPE VI developments are Centennial Place in Atlanta; Park DuValle in Louisville, Ky.; the Townhomes on Capitol Hill in Washington, D.C.; and the massive Chicago Plan for Transformation, which replaced some of the most challenged high-rise public housing in the country with smaller, mixed-income communities. Over the years, Congress has zeroed out funding for HOPE VI and it was effectively ended in 2010.
In May 2009, HUD introduced the Choice Neighborhoods Initiative as part of the federal government’s Fiscal Year 2010 Budget Request. The initiative, which began issuing grants in 2011, is intended to expand and build upon the HOPE VI program and address the lessons learned from HOPE VI. In addition to supporting the redevelopment of distressed public housing projects, Choice Neighborhoods funds comprehensive community revitalization efforts that incorporate early childhood education, family economic self-sufficiency, green building and energy-efficiency components. The initiative also targets privately owned properties assisted by HUD in addition to conventional public housing properties owned by the agency. Choice Neighborhoods funding supports development of mixed-income communities by both the public and private sector, as compared to HOPE VI, which was open only to public housing units.
The Rental Assistance Demonstration (RAD) was started in 2013 to give public housing authorities a tool to preserve and improve distressed public housing properties and address the nationwide backlog of deferred maintenance of public housing. RAD allows local housing agencies to seek private financing to rehabilitate units that are otherwise at risk of being lost from the affordable housing inventory. In RAD, units move to a Section 8 platform with a long-term contract that, by law, must be renewed. This ensures that the units remain permanently affordable to low-income households. HOPE VI, Choice Neighborhoods and RAD were all designed to move away from the high-rise model of housing toward the integration of mixed-income housing.
Other Approaches to Mixed-Income Housing
While many of the recent affordable developments with a cross-subsidy component have involved housing authorities, similar approaches could be adopted in other contexts. The key ingredient to making the market-rate component successful from a funding perspective is, essentially, free land and, in many cases, free infrastructure contributed by the city or county. Communities that wish to facilitate a mixed-income development with a market-rate component can achieve similar results outside of the public housing context by providing free or low-cost land and infrastructure.
Depending on the level of market rents, the contribution of land may free up a portion of the rents paid by market-rate tenants to provide a cross subsidy to lower the rents on the other units. To achieve a further mix of incomes, communities can layer Low-Income Housing Tax Credits (4 percent or 9 percent) onto the affordable units and public housing subsidies or project-based Section 8 vouchers onto a portion of the affordable units.
Another approach to the development of mixed-income housing is to provide a density bonus through a voluntary or mandatory inclusionary zoning policy that allows developers to sell or rent more market-rate units than otherwise permitted under existing zoning, thus generating profits that can be used to cross-subsidize more affordable units.
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