2023 Outlook for Affordable Housing
How state governments are supporting the development of affordable housing
By Diane De Felice
Finding a solution for a shortage of affordable housing should technically be simple—build more. But it hasn’t happened despite decades of handwringing with communities resisting development, especially affordable housing. Electees and developers are left to wrestle over different methods to tackle the issue, including a recent commitment to dedicated funding and penalties for agencies who stall development.
Why has housing affordability reached a breaking point?
According to the Pew Research Center, in 2020, 46% of American renters were “cost burdened” spending 30% or more of their income on housing. In the last five years, rent has gone up 21% in the West (18% nationally).
Behind these numbers is simple economics, not enough development due to zoning laws, challenging environmental regulations and high costs.
How states are tackling affordability
California
Projects face multiple levels of discretionary review that typically delay, add significant cost or squash development entirely. In 1982, the Housing Accountability Act (HAA) was enacted as an attempt to limit local control, but it lacked sufficient teeth to motivate change.
In response, California’s Comeback Plan earmarked $10.3 billion for housing, including a comprehensive affordability strategy, new laws and accountability measures. This year’s budget invests an additional $3.3 billion for affordable housing production and homeownership.
Voters also took matters into their own hands. In Los Angeles County, a “mansion tax” (Measure ULA) approved a higher transfer tax fee for properties over $5 million, and higher fees if above $10 million. Proponents expect this will fund about 26,000 affordable units over the next decade, equating to about $900 million annually in housing and homelessness prevention subsidies.
Colorado
For the first time, Colorado is putting real money into affordable housing. In addition to new local mandates requiring a percentage of affordable units in new for-rent and for-sale projects, this challenges developers to think creatively in financing projects. During the 2022 legislative session, Colorado allocated over $400 million from the American Rescue Plan Act (ARPA) to affordable housing. Colorado voters also approved Proposition 123, a measure that will direct an estimated $300 million annually to affordable housing by rewriting certain tax laws.
The $400 million in ARPA funds were broken up into several bills creating both grant and loan funds supporting a variety of affordable housing types. Following California’s lead, Colorado created the Colorado Workforce Housing Trust Authority via SB22-232, a new public entity with authority to issue bonds, as well as finance affordable housing in the 80-120% area median income range.
Proposition 123 earmarks 2% of currently collected income tax revenues (estimated to be ~$300 million in 2023) for affordable housing. Funds are allocated to different programs, some administered by the Department of Local Affairs and others by the Colorado Housing and Finance Authority.
State interventions
California
California has gone steps further than funding along to give more “teeth” to existing laws such as the HAA, density bonuses and streamlining permitting to allow rezoning for housing.
In a series of concentrated actions including the Housing Crisis Act (SB 330) California has attempted to chip away at affordability issues. The act creates a pre-application process that freezes local zoning and planning regulations for a period of time after submission of an application.
“Builders Remedy” of SB330, really sinks its teeth into agencies stalling development applications by imposing a penalty on the agency’s ability to deny a project with an affordable housing component if the agency fails to adopt their “housing element” plans or are not compliant with state housing goals.
Similarly, amendments to the density bonus law force agencies to provide a density bonus of more units if affordability requirements are met, and require the granting of additional incentives and concessions to make the project financially viable.
SB6 and AB2011 were recently passed, targeting rezoning of existing commercial or retail use sites to permit residential development.
Looking ahead, the legislature proposed a measure to allow by-right development of subsidized affordable housing on land owned by religious and higher-educational institutions. The law would allow qualifying projects to avoid a CEQA challenge, a major source of cost and delays for affordable housing.
Colorado
Governor Polis’ overtures suggest he is tired of waiting for local governments to deliver on housing promises. In voter-approved Proposition 123, in order for cities to access certain funds, they must grow their affordable housing stock 3% yearly by 2027 and create a “fast-track approval process” allowing permits issuance within 90-120 days. Polis also signaled the state should take stronger action to remove local zoning barriers if they are preventing affordable housing development.
This affordability crisis deserves workable solutions, and while both states are recognizing the severity of the issue, providing both carrots and sticks, developers will need to be flexible with strategic approaches to keep projects on track.
Diane De Felice is a Land Use and Real Estate Shareholder at Brownstein Hyatt Farber Schreck. This column was written in collaboration with fellow Shareholder Caitlin Quander.