What are cross-subsidies?
In strong housing markets, nonprofit or mission-driven for-profit developers who build affordable homes can use profits from the sale or rental of market-rate homes to subsidize the costs of affordable homes. For example, some developers have used the profits from market-rate condominium units to subsidize affordable condominium or rental units for working families within the same development.
This policy also has been used to create mixed-income developments comprised entirely of rental homes. In areas with very high market rents for non-luxury homes, such developments can work without significant public subsidies or with only a modest subsidy. In some markets, at certain times, however, the development of market-rate rental units is less profitable, leaving little profit available in most markets to subsidize the affordable units. In order to rectify this problem it is necessary to find a different method of promotion and subsidy.
To use cross-subsidies successfully in an all-rental context outside of very high rent areas, communities may need to combine cross-subsidies with other approaches, such as making publicly owned land available for little or no cost, or increasing the allowable density of a development to provide greater opportunities for profits that can help offset the costs of affordable homes.
What problems does this policy solve?
As the federal funding available for affordable housing has declined in recent years, communities and developers have looked at other strategies for increasing the supply of affordable homes. The inclusion of market-rate units within a mixed-income development or community can provide income that helps to reduce the amount of public subsidy required to build and operate affordable homes. Aside from providing a revenue stream, mixed-income housing has received much positive attention for its potential to revitalize neighborhoods, deconcentrate poverty, and promote racial and economic integration.
Where is this policy most applicable?
A development that uses cross-subsidies must earn enough profit from the market-rate units to be able to support the subsidy needed for the below-market units. Thus, without public subsidy, this model may only be feasible in strong markets with high market rents and/or home prices. When combined with other strategies, however, such as donated land, low-cost financing, or density bonuses, cross-subsidies can be utilized in a broader range of markets.
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