The ‘A’ word: What do we mean when we say ‘affordable’ housing?

Public housing? Social housing? Below-market-rate? Do they all mean the same thing? Affordability has become a muddled term.

It’s the phrase guaranteed to garner applause in mayoral stump speeches. It’s listed at the top of voters’ concerns in surveys year after year. It’s the subject of a $20 billion bond Bay Area voters will decide on in November.

Affordable housing.

But what does the phrase actually mean?

The term is often used for any housing with rent or price restrictions — paying no more than 30% of your gross income toward housing is considered “affordable,” by federal standards.

But even within that definition, there are several types of affordable housing, and not all with the same requirements around income and rent.

When the money follows the project

Most funds to build affordable housing directly subsidize the building itself. Only renters with qualifying incomes may apply to the units.

Public housing

In some cases, the government develops and owns housing complexes it rents out at below-market rates. The units are controlled by local housing authorities, which are governed independently from the cities where they provide housing and primarily funded by the U.S. Department of Housing and Urban Development (HUD).

The 372-unit Lockwood Gardens in Oakland and the 300-unit Corde Terra apartments in San Jose are two examples of public housing built by local housing authorities.

Because of local housing authorities’ dependence on HUD for funding, some housing advocates say California should create its own public housing authority.

Last year, both chambers of the state legislature passed a bill to create a California Housing Authority, charged with building mixed-income social housing, where market-rate units would help subsidize low-income units, but it was vetoed by Gov. Gavin Newsom.

Privately held affordable housing

Most of California’s affordable housing is built today by private developers, both for-profit and nonprofit, which layer different sources of public subsidies together, including local bonds, state grants and federal tax credits to finance a project.

LIHTC-funded housing

For decades, the Low-Income Housing Tax Credit (LIHTC) program has been the most important source of funding for new construction of affordable housing in the United States. In California, it financed 433,921 units of low-income housing between 1990 and 2023.

The program, created in 1986 and funded to the tune of $10 billion per year, is meant to be a win-win: developers apply to the government for tax credits, which they transfer to corporations in exchange for an investment in their building. Corporations get lower taxes, and developers get around 70% of their development costs financed. The rest comes from various local programs.

But there are many more projects applying for this type of funding than can receive it. Of the 152 projects that applied for the tax credits in California last year, just 57 — 37.5% — got them.

Voters have passed local ballot measures to fund more affordable housing — Santa Clara County’s $950 million bond passed in 2016 and a $350 million bond passed in Oakland in 2022 — but most of these local funds are only gap funding measure for projects that still rely on the federal LIHTC program as their main source of funding.

For example, financing for the 90-unit Meridian Apartments in Sunnyvale included $38 million in federal tax credits, $12.8 million in state tax credits, plus land donated by the city of Sunnyvale. Units are intended for those making between 30% to 80% of the area median income, or between $38,750 and $102,300 for one person. One-bedroom apartments there range from $1,620 to $1,954.

Developers taking local public subsidies must also comply with a long list of requirements, such as energy-efficiency standards or higher wages for construction workers, which pushes up a projects’ cost. The average affordable unit in the Bay Area costs $817,000 to build, according to a study by the Bay Area Housing Finance Authority and the affordable housing finance company Enterprise.

The rent requirements for LIHTC units also don’t last forever: after 55 years, the building’s owner may do what they like.

Inclusionary housing

Many cities require market-rate developers to provide below-market-rate units.

San Jose’s “inclusionary zoning” ordinance is one example. Passed in 2021, it requires new market-rate housing developments of 10 or more units — whether for-sale or rental — to make 15% of all units “affordable.”

Including deeply affordable units reduces the number of units a developer must provide.

In a 100-unit building, for example, a developer might make 15 units affordable for households earning 60% of the area median income (a family of four in Santa Clara County making less than $110,600 would pay $2,765 for a three-bedroom). Or, the developer could make 10 of the units affordable to households earning no more than 30% of the area median income (a family of four making less than $55,300 would pay $1,382).

In lieu of including the units themselves, developers may also pay a tax to the city to build affordable housing.

Incentivized affordability

Sometimes, governments let developers build taller or denser buildings in exchange for making a portion of their units affordable.

The state’s density bonus law is one of these programs: the greater the number of income-restricted units, and the steeper the discount, the more a developer can add to a project’s density.

The builder’s remedy is another such law: developers can ignore local zoning laws in jurisdictions without a state-approved housing plan, so long as they rent out 20% of the units at levels affordable to “low-income renters” making 80% of the AMI — or 100% of the units to “moderate-income renters” making 80% to 120% of the AMI.

When the money follows the person: Section 8 Housing Vouchers

With a federally funded Section 8 housing vouchers, the renter is subsidized directly, rather than a project itself. Renters making below 50% of the area median income may apply for one of the housing assistance vouchers, though the wait list is long.

Once they secure a voucher, the renter goes out on the market and applies for a unit — whether it be public or private. Once accepted, the renter pays a share of their income toward rent, typically 30%, and the voucher covers the remainder.