Local governments are using creative financing—and community outreach—to encourage development of mixed-income housing.

Over the past decade, mixed-income housing—a relatively new concept in affordable housing development—has been rising in popularity across the country, with progressive cities providing housing for lower-income residents alongside more affluent ones.

The concept is finding favor among for-profit and nonprofit developers alike, particularly in today’s tight lending market, because local governments offer a number of incentives, including low-interest financing tools, cash subsidies and grants, free or low-cost land, density bonuses, tax abatement programs, rehabilitation assistance, fast-tracking of plan reviews and permits, and reduced or waived fees.

Kelly Stewart Nichols, planning and policy manager at the Austin, Texas, Neighborhood Housing and Community Development department, suggests that local governments prefer mixed-income housing to segregation of low-income residents in 100 percent affordable projects, because “policy lessons have taught us that poverty concentration is not ideal.” She notes that many low-income renters are service workers whose jobs are essential to the community—restaurant staff, retail clerks, cashiers, daycare workers, hairdressers, maintenance technicians, and security guards—or disabled and retired people living on Social Security income.

In high-rent markets such as New York City, Los Angeles, and the District of Columbia, mixed-income projects allow teachers, police officers, firefighters, and other municipal workers to live in the neighborhoods where they work, says developer Mark Weinstein, who set aside 20 percent of Santee Court in downtown Los Angeles for workforce-affordable housing, because, he says, “it was the right thing to do.” Workforce housing, targeted to people earning 80 to 160 percent of area median income (AMI), is the most difficult category of affordable housing to finance because it does not qualify for tax credits.

Mixed-income neighborhoods and diversity are New York City traditions. To preserve and expand its affordable housing stock, the city implemented an inclusionary zoning ordinance in 2005, which requires developers of market-rate housing to set aside a certain percentage of their units as affordable dwellings or pay a fee into an affordable housing fund. In 2009, Mayor Michael Bloomberg set a goal of 160,000 affordable or workforce units to be created over five years and expanded inclusionary zoning to mid-rise buildings and the outer boroughs—Queens, the Bronx, Staten Island, and Brooklyn. “We’ve already done 130,000 units with two-and-a-half years to go [to reach the goal],” notes Gabriela Amabile, director of land use policy for New York City.

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Meta Housing received financial help from the city
of Tustin, California.

In exchange for affordable units, the city offers a range of incentives. For example, the city sold land to its development partners for $1 to build the first phase of Hunter’s Point South, a $350 million mixed-use complex slated to comprise 20,000 square feet (1,858 sq m) of retail space, a school, and 900 rental units, 75 percent of which will be affordable to low- to middle-income families earning between $32,000 and $130,000 annually. Rising on the East River waterfront in Long Island City in the borough of Queens, the project is being developed by locally based Phipps Houses, an affordable housing developer; Related Companies, a large for-profit developer; and Monadnock Construction. It qualifies for low-income housing tax credits, but the city closed the financing gap with capital subsidies and tax-exempt bond financing, according to RuthAnne Visnauskas, the city’s deputy commissioner for development.

Los Angeles’s general plan mandates inclusion of affordable housing in downtown redevelopment projects or payment of an in-lieu fee. But in 2009, after a developer contended that the city was effectively setting rents, violating the owner’s right to set initial rents under the Costa-Hawkins Rental Housing Act, a state appellate court struck down the mandate.

But California cities have another tool for creating inclusionary housing. The California Density Bonus Law requires new residential rental projects with ten or more units to make a minimum of 5 percent of units affordable to people earning 50 percent of AMI or less, or at least 10 percent of units affordable to those earning 80 percent of AMI, in exchange for a 20 percent density bonus. In addition, local governments can grant a maximal 35 percent density bonus for making 10 percent of units affordable at 120 percent of AMI or less in for-sale projects. Developers may pay an in-lieu fee into a housing trust fund, which adjusts annually based on land and construction costs. In San Diego, for example, that fee is $4.98 per gross square foot ($53.58 per gross sq m) of a project’s residential building area, according to Jeff W. Graham, vice president of redevelopment for the San Diego Centre City Development Corporation.

State and local governments offer attractive financing programs for mixed-income housing, because “[traditional] lenders have not yet bought into the concept,” says private developer John Huskey, president of Los Angeles–based Meta Housing Inc., which has five mixed-income projects underway in southern California. “You can set aside 5 percent to 20 percent market rate; however, it’s hard to do a 50/50 deal because the lending tools don’t exist to make it feasible,” says Walter Moreau, executive director of Foundation Communities, a nonprofit developer based in Austin, noting that the equity piece is hard for lenders to understand and structure with investors.

Both Moreau and Huskey have received substantial government funding. The city of Tustin required that affordable housing be included at Tustin Legacy, the Tustin Air Station redevelopment site in Orange County, Huskey notes. “Otherwise, there would not have been any [affordable housing] there,” he says. “Politically, this [Orange County] is high NIMBYism territory.” Rather than satisfy all the affordable housing requirements in for-sale, single-family dwellings, Huskey says for-profit, single-family residential developers provided land for Coventry Senior Apartments at a lower price, which leveraged the project. The company also secured low-income housing tax credits, which added value for investors, and $42.5 million in tax-exempt bond financing from the California Community Reinvestment Corporation (CCRC).

Meta Housing purchased a total of $31 million in tax-exempt bonds to finance the NoHo Senior Arts Colony in L.A.’s North Hollywood Arts District, a $42 million, 126-unit mixed-use project, with 20 percent of the units affordable. Featuring creative amenities for artistically inclined seniors, the project includes an art studio and a 76-seat theater that will house a resident production company.

The company is also developing the 200-unit mixed-use, mixed-income Long Beach Senior Arts Colony. Designed as a transit-oriented development (TOD), the project is funded with nearly $26 million from government programs designed to revitalize communities with social and environmental considerations. Funding includes Proposition 1C TOD and infill infrastructure grants made possible with federal stimulus funding through the state Department of Housing and Community Development, as well as funding from CCRC, the Long Beach Economic Development Corporation, locally based affordable-housing lender Century Housing, and Wells Fargo bank.

The city of Los Angeles also bought land and will lease it to Meta Housing at a low rate for senior projects at 5555 Hollywood Boulevard and Chinatown Metro Apartments, which gave the company $5 million in leverage: the land provided downpayment funding needed to secure construction loans.

In addition to low-income housing tax credits, Moreau’s organization received $2 million in general obligation (GO) bonds from the city of Austin’s $55 million Affordable Housing Fund to build M Station, a 150-unit, super-green TOD with 10 percent of units priced at market rate. “This project would not have been possible without city assistance,” Moreau says. “Every project needs city support and other things the city weighs in on. Having city backing is pretty crucial to selling tax credits.”

“These [types of projects] won’t happen without public participation,” says D. Carter MacNichol, principal at Portland, Oregon–based Shiels Obletz Johnsen, a for-profit consulting and development firm, noting that mixed-income projects involve multiple layers of financing and require public financial support. “City sponsorship also gives the banks confidence,” he says, pointing out that banks are required to invest in the community, but do not like being in these deals alone. His firm has done three mixed-income, mixed-use projects in Portland, two of which have grocery stores on the ground level. The other one has a public library.

Diane McIver, president of Austin-based DMA Development Company LLC, a private, for-profit developer, received $2 million from the city and a favorable land price for Wildflower Terrace at Mueller, a $25 million, 301-unit senior development with 30 market-rate units and 5,500 square feet (511 sq m) of retail space on the Mueller Airport redevelopment site in Austin. “We’re in economic doldrums, yet were able to both secure investors and get funded due to the incredible support of the city,” she says, noting that Mayor Lee Leffingwell went to many meetings to ensure that both her project and M Station received tax credits.

State statutes prohibit inclusionary housing mandates in Texas and Oregon, so Austin and Portland created tools to generate mixed-income housing. “The best tool we have is tax increment [TIF] financing,” says Daniel Ledezma, director of equity policy and communications for the city of Portland, noting the city has invested $50 million in affordable housing over the last five years. “If a developer applies for TIF, 30 percent of a project must be affordable,” he says. Some amount of affordability also is required for TODs.

Austin’s S.M.A.R.T. (Safe, Mixed-income, Accessible, Reasonably priced, Transit-oriented) Housing Program offers developers a schedule of incentives based on the level of affordable housing provided. The city provides additional density and height variance, or floor/area ratio, to encourage provision of affordable housing and other community benefits, such as parking, open space, and streetscapes. Developers of TODs are expected to set aside 25 percent of units as affordable or pay an in-lieu fee into the city’s housing fund. Over the last five years, the city’s affordable housing policies have generated 3,000 units.

MacNichol, of Shiels Obletz Johnsen, also stresses the importance of securing the neighborhood’s blessing. The process starts with multiple meetings to assure residents that the project will be of high quality, well maintained, and safe. “We do criminal background checks [for prospective renters] and manage and maintain our buildings intensely,” he says. “We’re able to sell our buildings at top dollar because they look brand new.” The Belmont Dairy, an 85-unit mixed-use project with 66 apartments for low-income renters, cost $42 million to build eight years ago and sold a couple of months ago for $55 million, he notes.

Moreau points out that a condition for obtaining low-income housing tax credits for M Station was that all neighborhood community associations had to be on board. “People had a lot of questions,” he says. “We’re local, so people could visit our other properties and see how well maintained they are. After many meetings, all five associations ended up supporting the project.”

“We think mixed-income housing works well with the right incentives, subsidies, and execution,” says Percy Vaz, chief executive officer of Los Angeles–based AMCAL Multi-Housing Inc., a developer of rental and for-sale affordable and market-rate housing. “It benefits all vested parties.” In 2008 his company completed a 544-unit, mixed-use, mixed-income complex in Los Angeles’s Lincoln Heights redevelopment zone that includes both for-sale and rental housing, 10,000 square feet (929 sq m) of retail space, and a child care center. “We did not experience any resistance from market-rate buyers.”

Similarly, the Housing Authority of Portland partnered with locally based developer Gerding Edlen Development on a mixed-income complex that includes a 132-unit affordable apartment building owned and operated by the agency, and condominium towers with a grocery store on the ground level, which were developed and sold by the developer. Michael Andrews, director of development and community revitalization at the housing authority, notes that initially the developer was concerned about the affordable component affecting the marketability of the condominiums, but the condos sold out before the real estate market crashed, despite prices that were as high as $1 million.

Huskey says he hopes traditional lenders will accept this concept, much as they did mixed-use development a decade ago. “We’re demonstrating that you can get market rents alongside affordable housing,” he says. “Our experience over the last eight years belies the myth that the same set of rules doesn’t apply.”