Equibuild: A Strategic Blueprint on Affordable Housing Development for Local Governments

In the wake of the pandemic, the role of local governments in housing development is more crucial than ever. Among the myriad challenges urban communities face, the pressing need for adequate housing across the income spectrum demands immediate attention. Harvard’s Joint Center on Housing Studies 2023 State of the Nation’s Housing report documented the precipitous decline in the supply of low-cost rental units and the growth of cost-burdened renter households to a record 21.6M. 

The rising cost of land, labor, and building materials has emerged as a key challenge for homebuilders and developers. The price of inputs to new residential construction has increased by 35 percent since the start of the pandemic. The high cost of home ownership is pricing out many potential buyers. In the period since the report was issued, interest rates have risen, as have the costs of labor and materials.

According to the Housing Count project by Builders Patch, in which they track and analyze the rental housing shortage across the country, there is a shortage of 4.5M units for Extremely Low-Income (ELI) and Very Low-Income (VLI) households, cumulatively. The National Association of Realtors (NAR) estimates that the US has a 5.5 million unit housing deficit overall and others put that figure as high as 7.3M. To close the gap, the U.S. housing market will need 1.7 million new homes on average each year until 2030. This is simply to meet population growth and close the housing deficit, let alone get ahead of it.

Local city and town governments play a pivotal role in shaping the destiny of communities. They set local development priorities, allocate funds for affordable housing developers, have regulatory and land use authority, and are often critical to deciding the most suitable partners for community development initiatives. It is high time for local governments to adopt a strategic viewpoint, recognizing their unique position and responsibility in fostering a healthy housing market that creates adequate supply. 

How can local governments develop affordable housing? Strategy, Strategy, Strategy

A local government strategy should be founded on key principles, implemented in a collective impact approach, create new strategy-specific tools, and repurpose existing components of the affordable housing development ecosystem. We have termed this approach the Equibuild Strategy and it's built on three  pillars that should undergird a local government strategy to combat housing undersupply:

• Equitable Investment Financing- Long-term, affordably priced construction or permanent equity financing sources that recycle and result in public ownership.
• Affordability by Design - State and local zoning, regulatory, land use, and tax assessment reforms or liberalization that enable house-scale multifamily development (missing middle housing).
• Income Inclusive - A focus on housing for all, encompassing a broader range of housing from 30% AMI  to 140% AMI to achieve mixed-income development that is more sustainable, requires less subsidy, and attracts more capital.

These strategic pillars work in tandem and act as force multipliers. Let's discuss each in turn. 

Equitable Investment Financing

Currently, communities are stuck with LIHTC as the primary source of capital to address affordable housing production. It is a top-down, national, one-size-fits-all financing tool that only builds one type of housing product.  Maintaining that status quo just isn't going to cut it. Local communities cannot truly take their destiny into their own hands as it relates to their housing markets without sources of financing that are locally controlled, provide "equity-like" financing, recycle, and result in public ownership.  It’s time for local communities to take the off-ramp from LIHTC and roll solutions of their own. That means using their municipal finance capabilities to create equity-like financing for housing development that can be deployed irrespective of whether the housing market is running hot or cold on profitability. 

A key element of this pillar is that local communities create financing tools and capital vehicles that result in community ownership.  Our current paradigm is essentially taxpayer-funded grants of equity to primarily the largest affordable housing developers. It’s deeply inequitable and no surprise that after 38 years of this, its limitations are laid bare.

When local governments invest taxpayer dollars into development projects, citizens should see a fair return on that investment via ownership. This transforms local governments from bystanders in the housing market to active players who wield significant influence over the housing market and shape its direction. Communities should develop investable legal constructs and policy mechanisms that help communities remove housing in disinvested neighborhoods from the speculative marketplace and place them in ownership structures that give communities control over land and housing resources.

In particular, that means promoting cooperative housing, community land trusts (CLTs), permanent real estate cooperatives (PRECs), and other shared ownership mechanisms for creating affordable and economically sustainable housing. These legal structures also permit workable approaches to environmental sustainability and real-world climate resilience to be more easily incorporated into development projects.  

Local communities should reorient the existing components of their housing development ecosystem to work with these new financing tools. Local housing authorities can operate as the local government’s developer, in addition to working with both for-profit and nonprofit developers. Land banks are a source of developable sites to begin creating an investable pipeline of projects. Tax increment funds can be deployed to leverage additional project support.  Land trusts and permanent real estate cooperatives can be used to implement income-inclusive affordability for new development and maintain that affordability for the long term. 

Affordability by Design

Affordability by design is critical because it not only addresses supply constraints but also promotes affordability and inclusivity. Through strategic reforms in zoning, regulations, land use, and tax assessment, local governments can unlock the potential of missing middle housing, thereby expanding housing options, promoting affordability, and fostering inclusive communities. 

Implemented at its best, this pillar is a whole of government response with multiple reinforcing components. State and local governments should revisit zoning regulations to remove barriers hindering the development of missing middle housing. This can and should involve revising zoning codes to allow for greater housing density, mixed-use developments, and missing middle-design standards. However, that can be a long-term process and direct revision isn’t always feasible with reasonable effort. When it’s not, near-term liberalization should be the goal, leaning into discretionary authorities to the maximum extent possible. Local governments must stop rendering missing middle housing design regulatorily infeasible.

Streamlining regulatory processes and reducing bureaucratic hurdles are essential steps in facilitating the development of affordable housing. State and local governments should expedite permitting procedures, waive unnecessary fees, and provide incentives for developers willing to invest in missing middle housing projects, such as prioritizing strategic infill development and focusing on revitalizing existing neighborhoods.

Reassessing property tax structures to reflect the value of land rather than improvements can incentivize denser development and enhance the utility of land trusts to maintain affordability. The goal is a slew of complementary reforms that reduce or eliminate barriers to missing middle housing development.  

Income Inclusivity

Our current paradigm of affordable housing development is built on a foundation of income exclusivity on both ends. We target affordable housing to households earning 80% of AMI or less, resulting in projects that face hurdles in long-term viability, lack appeal for developers and lenders, and require higher levels of subsidy. On the investment side, we prioritize the investment capital of high-net-worth investors and largely prevent small investors from participating in development projects.  We need to be more income-inclusive in terms of who we benefit from housing investment and who we allow to invest in housing. 

On the development side, communities should widen the aperture on who benefits from affordable housing development. We should address a broader range of incomes from 30%-140% of AMI.  A more income-inclusive approach has multiple benefits communities want to accrue:

• reduces reliance on single-sourced subsidies, 
• enables the use of missing middle housing unit designs more aligned with the needs of neighborhoods 
• Creates project opportunities more attractive to developers (for and non-profit) and lenders
• Enables mixed-income projects that are more sustainable, can cross-subsidize internally, and need less subsidy
• Supports healthy income diversity within neighborhoods
• Supports long-term gentle densification strategies

The standard capital pathway of conventional development in disinvested neighborhoods often results in economic disruption. Capital investment coming from developers and lenders who live and work outside communities often operates as though resident desires and needs are irrelevant to their projects (except when residents complain). The investment structures we operate favor those with accumulated capital and largely overlook every single person in a non-affluent community. 

Creating and facilitating new investment constructs and platforms isn’t just do-gooder, la la land stuff, it’s necessary infrastructure that creates new pathways for capital to flow. Cooperative strategies enable neighborhood groups and residents to create investable entities to finance unconventional construction or renovation projects that banks and institutional lenders, who prefer strong cash-flow operations, largely won’t touch. 

Federal rules once barred small investors with net worth less than $1 million or incomes less than $200,000 a year from participating in development projects; that changed in 2015. Concurrently, some states have enacted laws allowing small investors to put their money into local developments. Before that change, 90% of the residents in a community couldn’t make direct investments in a real estate project. That is now possible in an increasing number of states. Investment policies such as intrastate crowdfunding, limited offering exemptions, REITs, and direct investments in local projects, combined with cooperative ownership and shared equity structures, are the pathway to investible, equitable financing structures that put the destiny of communities into the hands of the people who live there, instead of prioritizing the needs of distant investors. Establishing a regime that enables cooperative ownership and shared equity structures to accumulate capital puts communities in the game in a way that they are almost completely shut out of now. 

The Way Forward

In the battle against housing undersupply, clarity and action are paramount. At Consept, we understand that the time for studies and plans has passed – what's needed now is a concrete strategy and decisive steps forward. Our role is to guide local governments through the creation and implementation of actionable affordable housing strategies, igniting real change on the ground.

We kickstart the process with a rapid assessment of the local housing landscape, diving into existing plans, and analyzing key data on demand, supply, and affordability. Armed with this insight, we tailor our Equibuild Strategy to fit the specific challenges and opportunities of each community. Through dynamic exchanges and strategic dialogues with key constituents within the housing ecosystem, we ensure that our action plans resonate with the diverse needs and perspectives of stakeholders.

Consept doesn't just stop at strategy– we're here to help local governments marshal their municipal financing capabilities, engage existing housing resources such as CDCs, Public Housing Authorities (PHAs), and land trusts, and explore investable shared ownership structures. Together, we'll navigate regulatory reforms to unlock the potential of missing middle housing and prioritize affordability by design.

By fostering ongoing collaboration and knowledge exchange, Consept helps local governments to take a proactive stance against housing undersupply. We equip them with the strategy and alignment of resources needed to sustain progress and expand successful initiatives over the long term. Through our Equibuild Strategy, we're paving the way for inclusive, vibrant communities where safe, affordable housing is accessible to all residents.