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The Affordability Challenge

Inclusionary Housing and Community Land Trusts in a Federal System

Richard P. Voith and Susan M. Wachter

May 2012, English

Richard P. Voith and Susan M. Wachter discuss the relationship between building durable affordable housing and land value capture, using inclusionary housing requirements and community land trusts (CLTs) in the United States and Britain as examples. In the United States, municipalities are facing a trade-off in their efforts to keep housing affordable for their constituents. Because cities rely on property tax collections to fund local public education and services, they need to boost home values. Yet this fiscal strategy runs into direct conflict with their objective of keeping housing prices low. Over the past 35 years, New Jersey and Massachusetts have adopted inclusionary housing programs to deal with this problem. Municipalities may grant developers density bonuses, reduce parking requirements, waive (or reduce) fees or taxes, allow reduced unit size or the use of alternative materials, and/or expedite review and approval processes. In exchange for these special treatments, developers are required to build a certain number of affordable-housing units and to sell them to qualified low-income households at below-market value. The ability to capture the value generated by a flexible zoning scheme is a precondition for the successful implementation of inclusionary housing requirements. The major problem of inclusionary housing is that many of the units will eventually return to the market rate when the beneficiaries sell their homes after the expiration of the required affordability period.

Unlike inclusionary housing, CLTs can provide affordable housing into perpetuity. In principle, a CLT should be able to capture future land value increments by leasing to its members the land on which their homes are built. The members own the buildings, but not the land. Housing trusts in Britain even limit tenure to renting and thus are the sole claimants of all capital gains of their properties. The higher the housing price appreciation is, the more affordable the housing units are for low-income households. To achieve this affordability goal, the resale formula that a CLT adopts in pricing the transfer of its homes from one eligible party to another is critical. If a large part of the capital gains will benefit homeowners or be used to subsidize maintenance costs, the captured value may not be enough to keep units affordable in the long run.

This paper was presented at the Lincoln Institute’s annual Land Policy Conference in 2011 and is Chapter 11 of the book Value Capture and Land Policies.