Entitlement Conditions

What Are Affordable Housing Requirements?

In more affluent and expensive housing markets, it is often common that a local jurisdiction will have affordable housing requirements when you are planning a new project.  The objective is to have new development assist with the creation of affordable housing for the lower income families.

The more common methods of meeting these affordability requirements are through “inclusionary” housing or “in lieu” fees.  With in lieu fees, the local jurisdiction is essentially collecting fees for each home that is built in the new development and then administering affordable home construction outside of the development. With inclusionary housing, the project entitlements might require that the 5 – 10% of the total units are offered at an affordable home price, which means that the homebuilder will be selling homes at less than the market prices.

So how are affordable home prices calculated?  The home prices and homeowner housing costs are typically based on the area median income (AMI) in a market.  Homes can be priced based on various levels of income, with such levels typically called “Moderate” (up to 120% of AMI), “Low” (80% of AMI), and “Very Low” (60% of AMI).  The affordable home price is then calculated based on homeowner costs being no greater than 30 – 35% of the AMI income level.  These homeowner costs would include mortgage payments (principle and interest), property taxes, insurance, utilities, and HOA dues.

As a quick example, let’s assume that the AMI for a market is $70,000.  If the affordable requirement was to sell homes to the “Low” income level, the maximum income would be $56,000 (80% of AMI).  Assuming that housing costs would be no more than 30% of this $56,000 income, the monthly housing budget would be $1,400.  The factors of down payments and interest rates then have an influence into these calculations.  Quite often a specialized affordability consultant will help with these calculations and the development of an affordable housing program.

As always, please share your comments and questions with us below.

John Kaye has over 30 years experience within the land development and homebuilding industries, having held senior management positions with The Irvine Company, Koll Real Estate Group, and Brookfield Homes. As a developer, John has overseen the land acquisition, entitlements, and development of master planned communities, residential tracts, urban infill sites, and land assemblages. His experience and skill sets include land acquisition, land brokerage, project management, market analysis, finance, and strategic planning.

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