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Techniques and Incentives for Encouraging Affordable Housing

This page provides a broad overview of techniques and incentives available to local governments in Washington State to encourage the construction of new affordable housing.

It is part of MRSC's series on Affordable Housing.



Overview

Local governments can encourage the development of affordable housing through a variety of regulatory and non-regulatory techniques. This page reviews some techniques being used in Washington State and around the United States, including functional density bonuses, design standards, parking standards, reduced infrastructure fees, and use of pre-approved plans.  

The level of complexity to implement these techniques along with their effect on housing affordability varies. If combined in a way that is appropriate to the specific community and housing market, these incentives will likely result in an effective approach to help local governments make housing easier to build and potentially more affordable.  


Density Bonuses 

Incentives can be a driver for action by private sector housing developers. Density bonuses can be used to achieve certain common goods — such as preserving common open space, building public amenities, or another public benefit — in exchange for the capacity to build more square footage/ housing units than normally permitted. Functional density bonuses often give a developer the ability to construct more units in exchange for providing a public benefit (e.g., affordable housing units). Developers can take advantage of the increased density to create more economic value for themselves while cities and towns benefit from the addition of more affordable housing units. 

This image shows how a density bonus might work on a proposed, four-story building.

AH_Density-Bonus

A density bonus program should be designed to provide enough of an incentive so that the desired public benefit is achieved. In some cases, a development code contains an impressive set of density bonuses that look good on paper but don’t offer enough incentives to entice a developer. In other cases, a density bonus may be too generous to a developer, resulting in too much of a benefit to the private sector and fueling potential public resentment at what may be viewed as a “give-away.” For these reasons, it is important for a local government to: 

  • Learn from other communities that have implemented a successful density bonus program,
  • Talk with local developers to determine what they would need to use such a program, and 
  • Communicate with the public about the rationale for a density bonus program. 

It should be noted that the usefulness of this tool is often limited to areas with strong real estate markets where there is a demand for new construction at a price that can subsidize the desired public goods incentivized by the density bonuses. 

Sample City Regulations Using Density Bonus to Encourage, Not Require, Affordable Housing 

  • Bellingham Municipal Code Ch. 20.27 — Creates a demonstration program that offers a 50% density bonus if 100% of units are “provided and retained as permanently affordable owner-occupied homes.” 
  • Kirkland Municipal Code Ch. 112 — All developments with over four units and located in certain zones must provide some affordable units. Bonus units as an incentive are an option in zones where affordable units are not required. Off-site provision of units or cash payments in lieu of affordable units are options under certain circumstances.
  • Marysville Municipal Code Ch. 22C.090 — Residential density bonus incentives available for permanently restricted, low-income rental units and low-income senior rental units. Also available for mobile home space for mobile homes displaced from closed mobile parks.
  • Poulsbo Municipal Code Sec. 18.70.070(B) — A small-city example of an affordable, low-income housing incentives program.
  • Redmond Zoning Code Ch. 21.20 — Includes affordable senior housing bonus program; all programs are subject to an affordable housing agreement.
  • Seattle Housing Rule 01-2015 — Outlines the conditions by which affordable housing shall be provided to satisfy requirements for bonus non-residential floor area
  • Shoreline Municipal Code Sec. 20.40.230 — Example of a simple density bonus code

Sample County Regulations Using Density Bonus to Encourage, Not Require, Affordable Housing

  • King County Affordable Housing Incentive Program — Includes development incentives such as credit enhancement, density bonus program, fee waivers, and surplus property for affordable housing and other public benefits. Code 21A.34 offers density bonuses ranging from 1-1.5 bonus units per benefit unit. For 100% affordable projects, the density allows 200% above the base.
  • Pierce County Code Ch. 18A.65 — Offers expedited permit processing for all projects with low-income, affordable units. Financial and regulatory incentives that are available (subject to criteria) include expedited permit processing, fee waivers, bonus units, and alternative development standards. County assumes shared equity when units increase in value, which is recaptured at time of sale to fund price reductions for additional units.
  • San Juan County Code Sec. 18.60.260 — Offers restrictive use easement to operators of affordable housing while Code Sec. 18.30.200 (D) offers a density bonus specifically for the density district of Doe Bay Hamlet Activity Center.

Inclusionary Zoning

Inclusionary zoning (IZ) refers to municipal and county planning ordinances that require a given share of new construction to be affordable by people with low to moderate incomes.

Inclusionary housing programs in Washington State must offer density bonuses or other incentives to offset the developer's project costs and “compensate” for the requirement to provide affordable units. This approach enlists private sector help in contributing to the affordable housing supply and reducing segregation of affordable and market-rate housing.

Sample In-State Regulations Requiring Provision of Affordable Housing

The samples below require developers provide affordable housing in areas within designated inclusionary zones.

  • Federal Way Zoning Code Sec. 19.110.010 — Multi-family projects over 25 units must provide affordable units and may then build bonus units. Single-family developments have the option of reduced lot size in exchange for affordable units if built in identified zoning areas.
  • Kirkland Municipal Code Ch. 112 — All developments with over four units and located in certain zones must provide some affordable units.  Off-site provision of units or cash payments in lieu of affordable units are options, under certain circumstances.
  • Redmond Zoning Code Ch. 21.20 — Affordable housing is defined by up to 80% median income; housing developments over 10 units in specified planning areas must provide affordable units and may then build bonus units. Off-site provision of units or cash payments in lieu of affordable units and dimensional modifications are options. All programs are subject to an affordable housing agreement.

Sample Out-of-State Regulations Requiring Provision of Affordable Housing

Resources for Inclusionary Zoning


Partnerships with Nonprofit Housing Developers/Public Housing Authorities

Nonprofit housing developers and public housing authorities (PHA) create and maintain many affordable housing units throughout Washington State and the Unites States. PHAs are federally recognized public entities that focus on providing and advocating for housing for low-income households, while nonprofit housing developers can offer a wider scope of services. Both types of organizations have independent governing boards and can often gain access to funding sources not available to a city or county. These organizations usually have staff with expertise solely devoted to solving affordable housing problems and producing new housing units. Oftentimes, nonprofit housing developers and PHA's can do their work more effectively in cooperation with local government. As a result, it is important for both sides to reach out to one another and explore potential partnerships when applicable.

Resources for PHA/Local Government Partnerships

Examples of PHA/Local Government Partnerships


Permit Streamlining

Having a clear and consistently applied permit review process is of benefit to everyone, whether you are an applicant, local citizen, or government staff person. Many communities have taken steps to streamline their development review processes to make them more efficient while still requiring projects to meet all applicable zoning and development standards. Some communities have focused these expedited processes on projects that address key community priorities, such as affordable housing.

Why is a streamlined development review process so important? Shorter permit processing times will save applicants time, which can translate into significant money savings when there are costs associated with holding property until it is put to productive use. While permit streaming will not by itself create more affordable housing, the achieved cost savings may be enough to give the financial “green light” to allow an affordable housing developer to proceed with a development project. A development project receiving any type of incentive should be required to maintain a pre-determined level of affordability for an established number of years (via a covenant or similar mechanism that “runs with the land”).

Examples of streamlined permitting processes (includes expedited permitting code provisions that apply to more than just affordable housing) include:


Reduction/Waiver of Fees

Several communities have adopted exemptions, waivers, or a reductions of charges normally assessed to residential development in exchange for the construction of affordable housing. Examples of this approach includes impact fee waivers/exemption/reductions, discounted building or planning fees, or reduced sewer and water connections fees. While some community members may feel it is unfair to provide a financial break to a select type of housing development, fee reductions and waivers are a powerful tool for those local governments looking to encourage construction of new affordable housing

Application Fee Waivers and Reductions

While usually not as large as impact fees or utility connection fees, reduced or waived fees for submitting a development project application will reduce the costs for an affordable housing developer. Examples of local governments that offer such fee waivers or reductions include:

Impact Fee Waivers and Exemptions

Impact fee waivers/exemption/reductions for low-income housing are authorized under RCW 82.02.060(2) and (3), subject to conditions. Subsection (2) states that exempted impact fees must be repaid from public funds other than impact fee accounts, while subsection (3) has less stringent repayment standards but imposes more requirements on which low-income housing qualifies for a partial or full exemption.

Examples of local governments that offer impact fees exemptions include:

Reduced Infrastructure Connection Charges

Infrastructure connection fees are used to cover the cost related to connecting a new development to a public utility system, such as public water and sewer. Such fees are usually based on the real costs of extending a physical connection (i.e., a pipe) to the development and are assessed on a per-unit basis, based on the type of development (for example, single-family or multi-family housing). These connection fees should not be confused with impact fees, which are not utility connection-oriented and only apply to capital facilities relating to transportation, parks and recreation, public schools, and fire protection.

Infrastructure connection fees can often be a significant cost for developers. For example, in 2020, the Port Orchard Municipal Code 13.04.025 notes the following connection fees: $5,945 for a public water connection, $5,157 for a public sewer line connection, and $3,597 for a wastewater treatment facility fee per residential unit (either detached home or apartment unit). This totals to $14,699 per unit, plus an additional $1,000-$2,000 in installation and materials costs. Such fees may serve as an impediment for affordable housing developers in cases where the connection fees contribute to a project not being able to “pencil out” financially on the development’s pro forma.

Because high connection fees may discourage construction of an affordable housing development, some municipalities waive or offer reduced connection fees for these developments. Any local government that might consider reduced connection fees should establish clear eligibility criteria, such as a threshold level of affordability (e.g., less than 50% of the Median Family Income), a minimum number or percentage of units that must be affordable, and the time period within which these units must remain at the set affordability level.

Examples of local governments with reduced infrastructure fees includes:

  • Kirkland Zoning Code Sec. 112.20 — Kirkland is an example of a community that uses several different types of fee waivers and exemptions. The code includes dimensional standards modification as well as reduced fees for road and/or park impact, and eligible planning, building, plumbing, mechanical, and electrical permits.
  • Pierce County Municipal Code 18A.65.040 — Offers financial incentives, including the waiver of infrastructure fees, for the construction of affordable units. (e.g., If 20% of units are affordable to low-income households, the development is exempt from park impact fees).
  • Port Townsend Municipal Code 13.03.110 — Allows for deferral payment of system development charges for water and sewer for low-income housing.

Surplus Public Land 

Washington State law was amended in 2018 to allow local government to dispose of surplus government property at a discount for affordable housing projects. Local governments have traditionally been required to receive fair market value for the sale of surplus properties but 3SHB 2382 enables state agencies and local governments to dispose of surplus property at no or low cost to developers who are then required to construct permanently affordable housing at that site. Allowing the sale of surplus property at a discounted rate is expected to open more land for the development of affordable housing. In 2017, the King County Assessor identified more than 300 county-owned properties that are larger than 20,000 sf and located within a quarter mile of transit. In 2018, Pierce County conducted a similar inventory of public lands for the South Sound Housing Affordability Partnership.


Design Standards 

Many local governments require a design review process to ensure that new development fits a desired visual aesthetic of a community or neighborhood. Such standards serve an important purpose in encouraging a design treatment that will likely make a housing development more compatible with nearby buildings, potentially causing neighbors to be more accepting of it. Having a well-designed building is especially important for affordable housing sites due to the prejudice against these sites as being poorly designed and shoddily built.

RedmondYMCA_SteveB

Photo Credit: Steve Butler

Design review is sometimes criticized because it can add extra time to the development application and review process, particularly when the process involves a citizen-led design review board or committee. Some cities and towns have tailored their design reviews for certain types of developments to make construction faster, easier, and less costly. See Olympia’s white paper on Design Guidelines for tiny home, townhouse, duplex, triplex, and fourplex construction, which includes examples of how a variety of municipalities approach design guidelines. Pre-approved plans may be another solution to speeding up the review process. 

lakeview-by-duncan-haas

Photo Credit: Duncan Haas, Low Income Housing Institute

Sample Codes with Design Standards and Guidelines for Smaller Scale Developments


Reducing Parking Standards 

Parking requirements can be a major factor in determining the affordability of a real estate development project. For housing projects requiring surface parking, that parking often occupies land that could otherwise be used to add more income-producing housing units. Conversely, structured parking allows for the efficient use of land but significantly adds to a new development’s construction cost, which gets passed on in the rental rate or sales price of each housing unit. While reducing parking requirements alone won’t by itself result in production of more dwelling units affordable to less than 80% of low- and moderate-income households, it will help reduce what might otherwise be viewed as unnecessary development costs.

The graph below is from the Victoria Transport Policy Institute's (VTPI) 2020 report Parking Requirement Impacts on Housing Affordability.

AH_Parking-Graph_618x402

Graph courtesy of the Victoria Transport Policy Institute

The VTPI found that when included as part of a new multi-family building in 2020, parking decks cost an average of approximately $18,000/parking space. This cost increases substantially if the parking is located underground.

Fortunately, there are multiple ways to reduce development-related parking costs, including reducing parking space requirements, lowering the dimensional requirements of parking spaces (Note: reduced standards should not result in parking spaces so small as to be rendered unusable by most vehicles), allowing tandem spaces, and encouraging the unbundling of parking and rent. Residents of small-unit affordable housing may not need the same amount of parking as other types of housing. For example, microhousing developments have demonstrated a reduced rate of car ownership. Other types of developments may be located in walkable areas served by good transit service, thereby appealing to a car-free or “single car ownership” demographic, which reduces the need for on-site parking. Requiring more parking spots than are needed for an affordable housing project does not make sense and will unnecessarily increase the development costs of such housing, leading the developer to decide that it is not financially worthwhile to pursue it. 

It should be acknowledged that some community members may not like a reduction in parking requirements, which they may perceive as having a negative impact on the availability of on-street parking. There are a few approaches, however, that can be used to mitigate this concern. For example, some micro-apartments in the Puget Sound have a requirement that all automobile-owning tenants must pay for and use an on-site parking spot, while tenants without cars don’t have to pay for parking (if they sign an affidavit stating they do not own a car). Monitoring and enforcement of such on-site parking use by tenants is also an essential part of such an arrangement. 

Sample Codes with Different Parking Standards for Affordable and Smaller-Unit Housing Developments


Pre-Approved Building Plans

The project-related steps involved in designing a housing development project and having those individual designs approved by a local government take a lot of time, which has cost implications for the developer and architect. To achieve efficiency and cost savings, some municipalities are opening the door to having architects prepare design plans that have been pre-approved for construction. This is an approach that might also be well-suited to units that can be factory built off-site, such as modular housing and tiny homes.

It can be difficult for municipalities to set up and administer a pre-approved plans program: A local government must find an architect who can create a variety of pre-approved plans that are compatible with neighborhood character and meet local market demands. The jurisdiction then needs to find a way to encourage builders to use those pre-approved plans instead of their own designs. In 2020, Seattle launched its ADUniverse program to facilitate the building of new accessory dwelling units in the city. It featured 10 different pre-approved models on the website, each from a different architecture studio. 

Below is an example from the City of Encinitas (CA) pre-approved accessory dwelling unit program, which offers free, publicly available plans to encourage construction of smaller living units.

ADU_PreApproved ADU_Floor plan

Images courtesy of the City of Encinitis

The benefit of pre-approved plans is that planning staff are already familiar with the documents, which can significantly speed up the development review process. This shortened review time will result in cost savings to the developer since each month saved is a month in which the developer does not have to pay construction loan debt service and is time that can be used to construct and bring the housing unit(s) to market faster.

Resources Related to Pre-Approved Plans


Recommended Resources

Below are additional topic pages in MRSC’s series on Affordable Housing:

  • Affordable Housing Funding Sources — Provides an overview of funding sources that cities and counties can use to provide or incentivize the development of affordable housing.
  • Background about Affordable Housing — Looks at issues to consider when developing an affordable housing plan.
  • Types of Affordable Housing— Offers an introduction to different housing types and models that are generally considered affordable, as well as specialized construction approaches that can lower the cost of building new housing. 

And below are related topic pages:


Last Modified: April 28, 2021