Special Report: Multifamily Policy Watch

When Americans head to the polls in November, there’s at least one issue that most will agree on: The U.S. has a critical shortage of housing. Housing affordability will also be top of mind for many voters. According to the National Low Income Housing Coalition, no state has an adequate supply of affordable rental housing for the lowest-income renters. NLIHC’s recent report “The Gap 2024: A Shortage of Affordable Homes” finds that the lowest-income renters face a shortage of 7.3 million affordable and available rental homes.

NLIHC concludes that nearly three-quarters of extremely low-income renters are severely cost burdened, defined as households which spend more than half their incomes on rent.

Despite consensus regarding the urgency of the issue, finding solutions continues to be a challenge. Yet one aspect seems clear. The affordability crisis can’t be alleviated to any significant degree until the housing shortage is addressed. Staying abreast of new and changing policy on the local, state and federal levels is more important than ever.

Kitchen-table issue

As the affordable housing shortage is felt nationwide, the issue has taken on a higher profile in policy discussions all the way to Capitol Hill. In February 2024, the House of Representatives passed a $78 billion tax bill that includes measures to boost the federal Low-Income Housing Tax Credit Program, which encourages developers to build affordable housing under Section 42 of the Internal Revenue Code. Provisions in that legislation would create or preserve an additional 200,000 affordable units by the end of 2025.

“There were co-signers of the LIHTC enhancement bill on both sides of the aisle. That’s a good thing,” said David Leopold, senior vice president & head of affordable housing mortgage banking at Berkadia. “I think that housing policy and supporting housing affordability is less of a political issue than it’s ever been and more of a kitchen-table issue.”

Berkadia has been seeing an increased focus on affordability among capital allocators. This year, FHA exempted workforce housing preservation from the allocations cap for the first time. “That’s an interesting innovation,” said Leopold. “New dollars are being made available to stimulate development of deeply targeted, as well as more moderate-income, affordable housing.” He added that Fannie Mae, Freddie Mac and HUD are leaning in to provide liquidity and stability to the market.

There’s also some good policy news at the state and local levels. States are now permitted to allocate unspent Inflation Reduction Act dollars toward expanding the supply of affordable and workforce housing, a step that could make as much as $40 billion of additional funding available over the next couple of years.

The Live Local Act in Florida is designed to increase availability of affordable housing options by making it possible for more workers to live in the communities they serve. The Live Local Act’s funding and incentives include up to $811 million for affordable housing programs, three new property tax incentives, and a sales tax exemption for specified developments and land-use tools that facilitate affordable housing on commercial, industrial and mixed-use sites.

I think that housing policy and supporting housing affordability is less of a political issue than it’s ever been and more of a kitchen-table issue.

—David Leopold, senior vice president & head of affordable housing mortgage banking, Berkadia

Attracting investors

Another bright spot among the nation’s largest states is California’s Affordable Housing Bond Program. It gives for-profit and nonprofit developers access to tax-exempt bonds to finance low-income multifamily and senior housing projects. A qualified developer can finance a project at a lower interest rate compared to conventional financing because the interest paid to bondholders is exempt from federal income tax. The use of tax-exempt bonds also facilitates eligibility for the federal LIHTC program.

“We are keeping an eye on state tax exemptions that were created to assist in attracting investment in workforce and affordable housing,” said Daryl Carter, chairman & CEO of Avanath Capital Management. Partly because of a California tax exemption, Avanath was able to convert Baldwin Village, a 669-unit apartment community in Los Angeles, into dedicated workforce housing with 70 percent of the units available to residents earning between 60 and 80 percent of area median income. (See sidebar, “Golden State Voters Weigh Affordable Housing.”)

Massachusetts’ 40B program encourages a combination of increased density and affordability. “That’s been a long-term success, and we’re in a moment in time now where it’s tough to get construction financing,” Leopold said. “So new development has slowed. Even under some of those great examples like the 40B program, we’re not seeing as many housing starts as we need. And that’s certainly a concern.”

Golden State Voters Weigh Affordable Housing
This November, California may be considering multiple statewide and local measures that backers say would provide new resources for housing affordability. Here is the list compiled by the National Low Income Housing Coalition:
■ Assembly Constitutional Amendment 1 would lower the voter approval threshold for local and regional housing and infrastructure bonds from a two-thirds majority to 55 percent. Under the proposed 55 percent threshold, many housing bond measures that fell short of the two-thirds majority would have been enacted.
■ The Affordable Housing Bond Act of 2024 would authorize $10 billion in bond sales. Proceeds would finance programs to fund affordable rental housing and homeownership programs. Approval by the state legislature would place the measure on the November ballot.
■ Senate Constitutional Amendment 2 would repeal Article 34 of the state constitution, which requires local governments to receive voter approval for construction of publicly financed or publicly owned affordable housing projects. This provision limited affordable housing development in California in the mid-20th century and reinforced segregation.
■ The Bay Area Regional Affordable Housing Bond, a nine-county bond measure, would raise $10 billion to $20 billion to develop up to 45,000 affordable homes in the region.

Rent control-adjacent

By most accounts, the biggest challenge to housing affordability is posed by policies that limit investment in new housing or make it harder to preserve existing stock. “Rent control and stabilization policies may have a short-term benefit for existing tenants, but I think there’s near-universal agreement that the long-term economic outcomes will be detrimental to the supply-and-demand imbalance,” said Leopold.

One recent regulatory move doesn’t fall into the category of rent control, but according to critics, its impact will be similar. In April 2024, HUD issued its annual income determination for LIHTC community residents, which critics contend will make it more difficult for some residents and investors to participate in the program. The new methodology calculates year-over-year increases in income eligibility thresholds for LIHTC and other HUD programs.

A coalition that includes such organizations as the National Multifamily Housing Council, the National Apartment Association, the National Association of Home Builders, the Council for Affordable and Rural Housing and the Mortgage Bankers Association has raised concerns that the new methodology will curtail LIHTC sponsors’ capacity to recover costs through rents. The coalition suggests that the move constitutes rent control by another name.

In the short term, more resources should be dedicated to the Section 8 Housing Choice Voucher Program to expand the coverage to the millions of families currently on the waiting list.

—Ben Harrold, manager of public policy, National Apartment Association

“Our country must prioritize sustainable policy solutions to reverse the current housing shortage. In the long term, this has to include policies that incentivize new development,” said Ben Harrold, NAA’s manager of public policy. “In the short term, more resources should be dedicated to the Section 8 Housing Choice Voucher Program to expand the coverage to the millions of families currently on the waiting list for a voucher and to streamline the leasing process so that rental housing providers have the support they need from government officials when participating in the program.”

According to Harrold, the Choice in Affordable Housing Act (S. 32 and H.R. 4606) would increase the program’s funding and effectiveness by incentivizing more rental operators to use vouchers. “We are optimistic that policymakers and the public are increasingly aware that our housing affordability challenges are driven by decades of underproduction and undersupply,” he said.

We are optimistic that policymakers and the general public are increasingly aware that our housing affordability problems are driven by decades of underproduction and undersupply.

—Ben Harrold, NAA

Getting into the zone

The conversation around zoning reform as a way to alleviate the housing shortage has become considerably more active in the last few years. One of zoning’s original purposes was to keep potentially hazardous land uses, such as manufacturing, at a distance from residential neighborhoods. “Since then, we’ve had a hundred years of primarily single-family detached zoning in this country,” said Nicholas Julian, senior program manager for land use at the National Association of Home Builders. “Once zoning became the law of the land, we saw the rise of urban sprawl, suburbanization and heavy reliance on the automobile.” Zoning reform proponents are calling for different types of housing sizes and densities where only single-family detached zoning is allowed.

Despite NIMBY obstacles, the conversation is proliferating across the country. California’s Roadmap Home 2030 is a state policy framework that aims to end homelessness, create needed affordable homes, stabilize low-income renters and close racial equity gaps in housing within a decade. Roadmap Home 2030 recommends allowing increases in height and density for mixed-income and affordable housing in resource-rich neighborhoods that offer residents the best shot at economic mobility. Currently, local zoning rules do not allow this type of housing, so targeted zoning changes would be needed.

Inclusionary incentives

Key proposals would allow sponsors to build duplexes, triplexes and up to eight-unit multifamily structures in areas that are currently single-family zoned. “There’s a lot wrapped into zoning and land-use policy, and just changing the density allowed isn’t that silver bullet,” said Julian.

Density is the big topic, yet tucked inside zoning or land-use policy are other issues that affect the feasibility of producing affordable housing. Policies pertaining to issues that impact design, such as setbacks and floor-area ratios and design controls, are also critical to the input costs of creating housing.
Inclusionary housing development fees also keep project sponsors up at night. Incentives aren’t always available when market-rate units subsidize affordable units. NAHB opposes fees charged by local governments to cover the cost of public works projects or other capital expenditures. “We understand that cities have issues with funding, especially now, and this is seen as a low-hanging fruit for raising that capital,” Julian said. “But we see it as an unfair tax.”

There’s a lot wrapped into zoning and land-use policy, and just changing the density allowed isn’t that silver bullet.

—Nicholas Julian, senior program manager for land use, National Association of Home Builders

NAA’s Harrold cites a trend among some state and local governments to prioritize housing when revising zoning and land-use policy. In an early example from 2018, Minneapolis eliminated single-family-only zoning to promote greater flexibility in meeting the city’s growing demand for housing (see sidebar, “Minneapolis: Rezoning in Progress”). Other cities have since followed suit and relaxed strict zoning codes.

There has also been an increasing recognition that parking minimums are counterproductive to affordability. Many cities across the country require a minimum number of parking spaces, based on such factors as building size, type and density. However, Harrold noted, “these requirements are often poorly aligned with the community’s actual need for parking and end up adding a massive additional cost to the project, which in turn artificially increases the cost of housing.” 

At the federal level, lawmakers are interested in encouraging state and local governments to take a hard look at their zoning regulations and providing them with the resources to change outdated restrictions. The Yes In My Backyard (YIMBY) Act (S.1688 and H.R. 3507), for example, would incentivize local governments to reduce discriminatory land-use policies by means of higher-density development, eased height restrictions, accessory dwelling units, prefabricated construction, transit-oriented development and other tactics. “These would all help ease the rising cost of housing,” said Harrold.

Minneapolis: Rezoning in Progress
Every 10 years, Minneapolis produces a comprehensive plan to guide the city’s goals, policies and priorities for the decade to come. When the latest version, Minneapolis 2040, was approved by the city in late 2018, the far-reaching framework made it the largest U.S. city to eliminate single-family zoning. Minneapolis Mayor Jacob Frey has credited the plan with helping expand the city’s affordable housing stock and keeping rents affordable.
The plan also includes a variety of steps designed to encourage multifamily development, such as:
■ expanding zones eligible for housing
■ allowing the highest-level housing density in and near downtown
■ permitting multifamily housing and density on public transit routes
■ changing off-street parking requirements for new developments
But the long legal battle over the plan is a reminder of the hurdles that can arise over efforts to remake development policy. Smart Growth Minneapolis, a nonprofit group, challenged the plan in court, contending that its lack of an environmental review violated the Minneapolis Environmental Rights Act. In September 2023, a Hennepin County District Court judge enjoined the city from implementing the plan’s zoning provisions and ordered the city to revert to the new plan’s predecessor, Minneapolis 2030.
Then in May 2024, the state Court of Appeals reversed that decision and allowed the city to put the new plan’s zoning guidelines back in place. A three-judge panel said that the lower court had improperly placed the burden on the city to demonstrate that an environmental review of the plan was unnecessary. Instead, the judges wrote, the burden was on the plaintiffs to show that a study is needed under state law.
The court agreed with the city’s contention that reverting to the Minneapolis 2030 framework would not necessarily be better for the environment than the new plan. And the judges said that the injunction caused the city undue hardship by forcing it out of compliance with the Minnesota Land Planning Act.
Just a week after the Court of Appeals ruling, Minnesota lawmakers took a major step that has apparently resolved the controversy. An omnibus budget package approved by the state legislature includes a bill exempting regional plans that increase housing density—such as Minneapolis 2040—from environmental review. Supported by both the Sierra Club and state planning agencies, the compromise legislation applies only to the seven-county Minneapolis metropolitan region.

Changing regulations

The Urban Land Institute and Smart Growth America are pushing for form-based codes—land development regulations centered on physical form, rather than on separation of uses. Proponents say that zoning updates can address the housing shortage, incentivize low-carbon development, create more walkable places and prepare for the effects of climate change.

“Form-based codes restore choice to communities and can move us beyond the inflexibility that has led to the housing crisis caused by traditional zoning,” said Matthew Norris, senior director with the ULI Building Healthy Places Initiative. ULI is promoting five distinct zoning approaches that some cities and towns are already using, in cooperation with local government leaders, community members, real estate developers and other stakeholders.

These include the creation of new zoning policies. Buffalo, N.Y., for example, is promoting walkability and eliminating minimum parking requirements. Also, by-right zoning allows projects that comply with certain standards to obtain approvals and building permits through streamlined administrative processes. For example, Denver is allowing lower parking ratios by right for affordable housing, and Boston is adopting net-zero carbon standards by strengthening low-carbon building requirements.

Form-based codes restore choice to communities and can move us beyond the inflexibility that has led to the housing crisis caused by traditional zoning.

—Matthew Norris, senior director, ULI Building Healthy Places Initiative

Green comes of age 

Much has changed in the more than two decades since the U.S. Green Building Council launched the LEED (Leadership in Energy and Environmental Design) rating system in 1998. Many elements of the green building movement that started out as voluntary improvements have evolved into local, state or government policy.

California has incubated and exported previous green initiatives, and it also leads the way in the U.S. zero-carbon movement. In December 2022, Los Angeles became California’s 69th city to require all new buildings to be all-electric (with exceptions for emergency equipment and commercial cooking).

New York state, where buildings account for 32 percent of greenhouse gas emissions, is another zero-carbon trendsetter. Beginning in 2026, the All-Electric Building Act will restrict fossil fuel hookups in new homes and buildings up to eight stories. This law will require most new buildings in the state to use electric heat and appliances; requirements for larger buildings will be phased in by 2029.

Another consequential example is New York City’s Local Law 97. The groundbreaking measure requires most buildings larger than 25,000 square feet to meet new energy efficiency and greenhouse gas emissions limits starting in 2024, with stricter limits taking effect in 2030. The goal is to reduce emissions from the city’s largest buildings 40 percent by 2030 to reach net zero by 2050. The law also established an advisory board and working groups to help the city meet its aggressive goals.

New York City took further steps with Local Law 154, which took effect in January 2024 and phases out the use of fossil fuels in new-construction buildings of less than seven stories. The regulations for taller buildings will be phased in by mid-2027. Local Law 154 also sets limits on carbon dioxide emissions that prohibit fossil fuel systems in gut renovations as well as in new buildings.

“Gas bans and electrification is a pretty hot issue right now for our members,” said NAHB’s Julian. “Also, we’re starting to see zoning reform efforts being challenged on the basis of environmental review and environmental preservation.” That form of NIMBY-ism reflects opposition to density, yet Julian observes that it raises a paradoxical question: “How can a plan that is upzoning your communities be less environmentally friendly than the current system?” Certainly, it puts planners, city council members and city staff in a challenging spot.

How can a plan that is upzoning your communities be less environmentally friendly than the
current system?

—Nicholas Julian, NAHB

Transitioning to green

“There has been a growing focus on improving buildings’ energy efficiency, decreasing their carbon footprints and transitioning to renewable energy sources,” said NAA’s Harrold. The intensified focus on improving energy efficiency and expanding renewable energy use are well intentioned, Harrold says, yet he contends that they also represent a massive strain on the development and operation of rental housing. “Naturally occurring affordable housing tends to be older and less energy efficient,” he said. Mandatory retrofits bring massive costs that small owners can’t cover.

According to Harrold, these requirements often lead to increased rents and disruption to residents, who must be relocated during upgrades. NAA’s view is that unless local, state or federal government provides grants or tax credits for sustainability measures, the transition to green buildings will strain the multifamily industry’s financial health.

Developers, owners and operators do have new tools under the Inflation Reduction Act. Whether building ground-up projects, substantially reconstructing properties or rehabilitating them, they may now be eligible for tax incentives and other tools that will help cut energy costs and make buildings more efficient, more climate resilient and less carbon intensive.

For example, if an underutilized commercial building is converted into a 100-unit affordable multifamily building, the property may be eligible to participate in the ENERGY STAR multifamily new construction program. It could also be certified as a zero-energy-ready home under the Zero Energy Ready Home Program requirements. If the reconstruction and rehabilitation meet prevailing wage requirements, the contractor could receive as much as $5,000 per unit in credits—or as much as $500,000 for a 100-unit building. 

Under the Home Efficiency Rebates program, if a building owner with a majority low-income tenancy installs an ENERGY STAR-certified window and high-efficiency electric heat pump water heater in at least 100 units, the project could be eligible for a per-unit rebate of $8,000 or as much as 80 percent of the project cost, depending on the level of energy savings.

Any kind of policy that includes mandatory retrofits or appliance upgrades will have massive costs associated with the upgrade that cannot be covered by small rental owners.

—Ben Harrold, NAA

Over the finish line

Like many in the apartment industry, Avanath is on board with sustainability-related policies because they help reduce operating costs and are better for residents, for the company and for the environment. “Investors are increasingly searching for opportunities that address sustainability, so it is advisable for policymakers to pursue legislation that fosters social and environmental responsibility,” said Carter.

He suggests that affordable apartment developers and operators take a multi-pronged approach. In addition to promoting state, local and national policies that foster development, they must get creative with the resources at their disposal.

Strategies include exploring local government grants; collaborating with real estate service providers and public capital sources (e.g., Fannie Mae and local housing authorities) to finance projects and preserve affordability; and working with corporations that have a stake in the projects for their local employee base.

“Pursuing public-private partnerships in a variety of ways has helped tremendously to streamline our affordable housing projects,” said Carter. “Thinking outside the box in this way can help push much-needed affordable housing projects over the finish line.”

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