Friendly Financing for Voluntary Inclusionary Zoning

by | Jun 4, 2015

That’s a mouthful!  I’ll try and unpack this into morsel sized bites…

The idea:

Unfortunately, the State of Oregon outlaws inclusionary zoning policies, which would allow cities to require new residential developments over a certain size to include a small percentage of affordable homes.

But what if socially conscious investors provided relatively inexpensive financing for new developments in exchange for the voluntary provision of a specified percentage of permanently affordable homes?  Such funding could help developers who want to produce affordable homes within larger developments to do so – even without a zoning requirement.

How it could work:

Investors would make simple interest loans for terms that might range from 18 months (construction financing) to 5 years (land banking).  If the developer meets the specified affordability target, investors would receive interest income and achieve the social benefit of creating permanently affordable homes in what otherwise would be entirely market rate developments.  If the developer fails to achieve the affordability target (ie. sells all the homes for market rate), investors would get their interest plus a predetermined percentage of developer profits.  The intent wouldn’t be for this to ever happen; it’s just a way to ensure the developer wouldn’t use the low interest funds and not follow through with their part of the deal.

Interest rates would be more than investors might otherwise receive from traditional conservative investments (ie. CDs), but less than they’d get for ‘hard money’ lending.  A middle ground might be 5% interest for 1st position loans or 6% for 2nd position loans (subordinate to a construction loan).  Loans could be secured by real property.  Investors would need to either be accredited or friends & family of the developer to comply with security regulations.  Direct public offerings, allowed through recent crowdfunding legislation, might also be an option.

Savings from lower financing costs alone would likely be insufficient to meet affordability targets.  So it would be incumbent on the developer to supplement with some combination of (1) cross-subsidization from market units within the development (which is equivalent to the developer donating back in a portion of their fee) and (2) public resources available in the local community (ie. impact fee waivers, limited tax abatements, tax increment funding…).  For this proposal to be compelling, it would be important for it to achieve affordability with fewer public resources per-unit than would otherwise be required.

Would investors go for this?

I don’t know, but I suspect quite a few would.  There are lots of people with money reluctantly invested in stocks & bonds who would rather have it elsewhere.  This model would afford them a more local and tangible way to place their funds, where they’d both earn a reasonable interest return and contribute towards the creation of permanently affordable housing in their community.

Would developers go for this?

Once again, I’m not sure.  But I’d give it a whirl for projects big enough to support some cross-subsidization and with sufficiently high project financing costs that reduced interest rates would yield real project cost savings.

Real life prospects:

This model is most likely to work for developers who are already inclined to include affordable homes within their developments and are looking for a way to make this more financially feasible.  For me, the project size threshold for this to work would be about 15 homes.  Based on numbers I’ve been running for two new communities Orange Splot now has in the design phase, I think we could likely get at least 2 permanently affordable homes within a 15-home development and at least 3 permanently affordable homes within a (separate) ~20-home development.  Friendly construction financing, as described above, would be very helpful in being able to achieve affordability within each of these developments that would otherwise be entirely market-rate.

Separately, I’m aware of 1-2 other properties for which friendly acquisition financing would mean we could get new, similarly-sized, projects into the pipeline – each with an inclusionary zoning commitment.


If you’re an investor out there with interest in this model, let me know.  Perhaps we can team up on some projects.  And if you’re another developer who’d like to explore the idea of using friendly financing to get affordability into your projects, I’d love to collaborate to work out the details.  One way or another, I hope we can link up socially conscious investors with developers as we wait (and push) for rule changes at the state level to allow inclusionary zoning into our affordable housing toolbox.