Affordable housing is an essential component of any community. It enables young professionals who work in the area to live close to their workplace, increasing productivity and making them more likely to stay with the company longer.
It also makes it easier for those who are older and retired or who have families with children to live close to their jobs or schools, avoiding long commutes every day.
Developers are constantly creating communities to meet market demands, but is it their responsibility to provide affordable housing?
In this article, we’ll look at whether developers are required to build affordable housing when they build new developments:
Here’s Why Developers Have to Provide Affordable Housing:
Developers are required by law in some states to provide affordable housing, but regulations differ from state to state. In some jurisdictions, developers can’t get building permits unless they include a certain number of lower-income units. This is commonly known as inclusionary zoning.
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How Exactly Is Affordable Housing Defined for Developers?
For a home to be considered affordable by HUD or the U.S. Department of Housing and Urban Development, a family must spend no more than 30% of its gross income on housing.
Developers have no choice but to build affordable housing in these cases if they want to build anything at all. This is commonly known as inclusionary zoning.
In other states, developers can avoid building affordable housing by paying a fee. These fees are frequently used to fund other types of affordable housing projects or programs in the area.
While they may be higher than what it would cost developers to build these units, they still allow developers to avoid providing them themselves.
Here are some of the types of Affordable Housing:
Low-Income Housing Tax Credit Buildings
The federal government has a Low-Income Housing Tax Credit program that subsidizes the construction and upkeep of rental properties aimed at lower-income people.
The tax credit reduces the federal income tax that developers and investors have to pay by one dollar for every dollar they spend on building or fixing up rental homes for low- and middle-income people.
Developers can use this money to offset costs and make rental properties more financially feasible.
Project-Based Section 8 Housing
Project-Based Section 8 Housing is a housing program that provides rent subsidies to low-income renters, who then pay their rent to private landlords.
HUD administers the housing program. The rent subsidy is based on the tenant’s income and family size, not the rent charged by the landlord.
The subsidy can help tenants afford apartments in communities with higher rents than what they could afford without assistance.
Assisted Living Housing
Assisted living housing is a type of housing that caters to senior citizens who need help with daily activities like eating, bathing, and dressing.
Assisted living facilities can be public or private and are often located in neighborhoods where people can easily access other services, such as grocery stores, pharmacies, and hospitals.
USDA Housing Rural Development
The USDA Housing Rural Development Program helps low-income rural families find affordable housing.
The program provides grants and loans to develop new rental housing, acquire existing properties, and rehabilitate existing homes.
In addition, the program helps people buy a home with a down payment assistance grant or a loan.
How Do Developers Make Money From Affordable Housing?
Developers make money from affordable housing like they make money from other types of housing.
A developer can build a market-rate apartment building and charge monthly rents that are as high or higher than the construction cost, allowing them to profit from the project.
Developers can also take advantage of programs that offer tax credits or other incentives for building affordable housing.
These incentives allow developers to reduce their costs and therefore charge lower rents to tenants in exchange for compliance with certain requirements set out by local governments.
What Incentives Are There for Developers to Build Affordable Housing?
There are several incentives for developers to build affordable housing.
For many developers, building luxury apartments is more profitable than affordable ones, but some tax breaks can help offset the cost of building affordable housing.
Tax credits are a valuable resource that allows developers and investors to reduce their taxable income by investing in affordable housing projects.
This means they can keep more money in their pockets while still making it possible for them to build affordable housing.
Density Bonuses for Affordable Housing
Some municipalities waive or reduce normal density caps for new developments to encourage the construction of more affordable housing.
This is a popular incentive among cities because it doesn’t cost them anything.
With more units, developers’ returns can increase, incentivizing them to take on more investment risk.
Real estate investors and developers will occasionally buy land with no immediate plans for development.
These builders can save a lot of money by buying sites at bargain prices and waiting until there is enough demand in the area to justify building on those lots at market rates.
Government Loans with Low Interest
Developers can qualify for low-interest loans from the government, which can help developers finance the construction of affordable housing without taking out high-interest loans from private lenders.
This also means that developers can keep more money in their pockets while still making it possible for them to build affordable housing.
Are Developers Generally Interested in Building Affordable Housing?
In general, developers are interested in building affordable housing.
There are several reasons for this:
- They’re required to do so by law.
- There’s money to be made in developing affordable properties. For example, subsidized government loans and grants mean developers can profit from these units without raising the rent or selling them at market rates.
- There’s demand for such properties from low-income residents and below-market housing advocates who want more equitable communities and cities.
In reality, many jurisdictions have slowly adopted ordinances requiring developers to build affordable housing as part of their projects. In some states, developers even have the option to pay a fine instead of building affordable housing.
However, with increasing pressure from non-profit organizations and individuals on local governments demanding better options for low-income families looking for stable homes within their communities, we may soon see more cities following suit with stricter policies requiring all new developments to include some affordable components within their plans.