It is the most important word in real estate today, and no, it’s not “location.”
Increasingly, real estate insiders and government policymakers are recognizing that if no one can afford housing, we are all in a lot of trouble. “Affordability” has become a crisis sparked by restrictive zoning, underbuilding, stagnating wages and spiraling home prices, with more and more government officials and housing advocates clamoring for solutions that will allow low- and middle-income families to get into homeownership.
The University of California at Berkeley’s Terner Center for Housing Innovation last week released a new analysis highlighting the benefits and pitfalls of a somewhat radical new model to create middle-income housing in California, using entities called joint power authorities (JPAs), which allow cities to leverage cheap capital and tax exemptions in creating a specific kind of affordable housing.
While the process is complex, the idea is that developers or investors sell their properties or land to a city, which then holds that property affordable to middle-class families—those making 50% to 120% of area median income (AMI). At the conclusion of a designated period, the city can put the property back on the market, keep it affordable or transfer it to a developer.
The idea, according to the Berkeley researchers, is to help lift renters who are on the cusp of homeownership out of an increasingly ugly cycle of cost-burdens and rent increases without burdening taxpayers, as the subsidy is created without depending on scarce grants or other public funding (though the city does lose the property from its tax rolls, at least temporarily).
“The emergent California JPA model offers an alternative path for using property tax exemptions by taking advantage of existing statutory authorities that have not historically been used for housing,” the researchers wrote.
A handful of other states offer tax incentives directly to developers, according to the report, which can also help create affordable housing without depending on federal funding, though local governments are not as directly involved as in the JPA model. If JPA projects are eventually sold on the unrestricted market, the city’s entire tax base benefits from the equity.
Though these types of programs are somewhat in the infant stages, the researchers posit that the approach could fill a neglected niche between very low-income restricted affordable housing and prohibitively expensive market rate rentals.
“Applying expansive affordability requirements (e.g., requiring a greater share of affordable units or deeper levels of affordability) can disincentivize developers from pursuing the tax exemption altogether, meaning no new affordable units get built,” they argued. “Weaker affordability requirements could result in valuable tax dollars being spent on projects that aren’t providing enough public benefit.”
Hitting that sweet spot could allow more families to plan and save to potentially purchase a home, as rent increases for these apartments can only go up with AMI. Researchers also say that the program potentially allows “smaller and potentially more diverse real estate companies” to get involved with projects, as the city can provide technical and legal assistance in the process.
Looking at two case studies, the report found that a JPA project in the city of Hayward offered up to a 13.1% discount on rentals, achieving 90% occupancy in a 309-unit apartment building. Another project in Sacramento is expected to finish construction in 2025, offering a projected 17% discount, with 358 units total.
Despite this momentum, the researchers note some concerns and questions around the JPA model, including competition between cities, enforcing affordability requirements, ownership and administration of projects (the JPA is both responsible for oversight and the only entity with ownership interest in a project, creating potential conflicts), high fees and lack of true affordability for lower-income families.
But they add that many of these issues have near-term solutions, and the potential to add housing for a middle-income demographic that has been especially hard-hit by unaffordable housing in recent years means that the model is worth pursuing—in California and potentially beyond.
“The JPA model holds tremendous promise and is likely to continue to scale across both as an acquisition and preservation tool, and potentially as a tool for spurring new construction,” they conclude.
Jesse Williams is RISMedia’s associate online editor. Email him your real estate news to jwilliams@rismedia.com.
