One Way to “Benefit” the “Community”? Bring Back the LUIG

In a recent post, I pushed back on the idea that developers should be tasked with—and we might even say taxed with—the obligation to set aside brand new homes in multifamily projects as below-market-rate. (In Asheville, city leaders are calling this a “community benefits” program.)

Following others, I even suggested that such an idea might be “neoliberal” (not a good thing!). But most importantly, I indicated that a growing body of research shows that mandating below-market-homes without subsidizing them is, more often than not, a recipe for exacerbating, not solving, housing scarcity. And as California YIMBY points out, what you end up with is effectively a tax on middle-class renters. The whole thing lets wealthier homeowners (especially those that can afford single-family homes) off of the hook entirely.

But this doesn’t mean that housing affordability isn’t important. We can, of course, make housing more affordable by increasing the number of infill homes in our high-demand neighborhoods, and by allowing for more diversity of housing type. But in a dire housing crisis, it makes sense to desire some newly built construction to be set aside as below-market rate too.¹

The problem is that homebuilding is expensive. So the question is: how do we pay for it?

When Pushing for Below-Market-Rate Housing Makes Sense

Shane Phillips, the prolific housing researcher at UCLA who we like to quote quite a bit over here, says the key to making these “community benefits” schemes—they are sometimes called “inclusionary zoning” or “value capture”—work without stifling production is to make such programs voluntary.²

This idea of a “voluntary” affordable housing program requires some explanation, and as is the case with a lot of the discussion around affordability programs, lines that appear clearly drawn at first glance can end up being a little bit fuzzy.

First it’s important to note that if a program is voluntary, then by definition that means that if someone wants to build homes in a certain place, they should be able to do so whether or not they include below-market rent homes. This also means that in order for a voluntary “community benefits” program to be viable—that is, for there to be anyone to want to volunteer—there must be some kind of reward for opting in.

We don’t know the details of the “community benefits” scheme being discussed by Asheville’s leaders, but we do know that the reward is intended to be “by right” permitting, or in other words, the developer doesn’t have to get approval from city council just to build some homes. But that doesn’t really count as a reward, as it violates the rule above. The assumption is that in a really actually voluntary approach, by-right permitting should not be dependent on opting in.

So in an actual voluntary approach, the reward might look like a “density bonus.” This is when a building gets to be taller and/or include more homes, even more then the land use code would ordinarily allow, in exchange for making some of those homes below market rate.

But as I mentioned before, talking about density bonuses can actually be a little confusing. Is it “voluntary” if in a high-demand part of a city, infill housing needs to be taller or denser than is ordinarily allowed in order for the developer to be able to recoup land costs?

(One funny thing about Asheville’s density bonuses: they’re underutilized because of a ridiculous city rule that says any development with more than forty-nine homes can’t be permitted “by right,” even if it follows every other rule on the books! We’re hoping that this will change soon.)

I want to set aside density bonuses for now, and just say that I think whether they are good or bad is heavily context sensitive. Instead, I want to pivot to another way to talk about “inclusionary zoning” schemes, and that is not to ask whether they are voluntary or not, but rather to ask whether or not they are funded. (Our friends at Pro-Housing Pittsburgh, for example, discuss these policies in terms of whether or not they are funded.)

A funded “inclusionary zoning” program is most likely going to be a voluntary one, but it turns out that Portland Oregon recently changed its program to be both mandatory and yet fully-funded!

Told you this could get fuzzy.

In any case, we might think of a funded program as the gold standard if we believe that market-rate housing and below market rate housing are both “community benefits” and we don’t want to pit these things against each other. The way that a funded (and voluntary) scheme for affordable housing works is simple: a developer sets aside a certain number of homes in a proposed building to be deed-restricted at a below market rate, and in turn the cost of doing so—the difference between the market rate and the below market one—is covered by the program.

One thing this does is that it means that taxpayers (property owners), rather than builders, bear the costs of providing below market rate homes. This is a good thing. As suggested above, when builders bear the costs ultimately that cost is passed onto renters. And as I’ve noted elsewhere, I think property taxes are good and that it only makes sense for the people who receive windfall capital gains (that is, increased home values) because of housing scarcity to pay for the problems caused by such asset inflation.³

Asheville’s Land Use Incentive Grant (LUIG)

So what if I told you that Asheville already has a voluntary, funded program like this? It’s called the Land Use Incentive Grant, or LUIG, and it’s been around for more than ten years.

According to a Mountain Xpress article about the program from 2022, nearly 300 homes have been deed-restricted as a result of the LUIG.

Briefly, here’s how it works. A developer planning a large multifamily project can volunteer to set aside twenty percent of the proposed homes as income restricted at below-market rents. In exchange, the project will receive property tax abatements for a period of time when the project is completed. The details of the program mean that the amounts of time and the amounts of money can vary. There are also some perks offered for things like being located near transit.

A nerdy digression:

A property tax abatement means that the development will get their property tax bill reduced. A cool thing about the LUIG is that the baseline for the development’s tax burden is whatever that location is currently paying. Even if it’s a great application with lots of perks, the developer can never get an abatement so large that the taxes on that land will decrease, in other words.

This means a couple of things: first, the LUIG incentivizes the development of underdeveloped land, and it disincentivizes the demolition of existing functional property.

And second, it makes the whole thing a little more palatable to taxpayers, I think. There are no immediate or unanticipated costs in the short term, and it isn’t going to create any sort of dip in revenue. Some people bristle at the idea of “borrowing from the future,” which is what a tax abatement is. But I think on balance it’s more effective than simply asking homeowners to foot the bill up front in a subsidy to get below-market-rate homes built. I also suspect there are benefits to getting the development built that might redound to the city in the longterm—for example, more homes means more residents buying things and paying sales tax, and more money for local businesses, etc. In this sense, a program like the LUIG might be thought of as an investment. (Needless to say, it’s also probably cheaper to get more affordable homes built now than to deal with social problems like housing insecurity in the future.)

Here’s the bad news: LUIG is temporarily on pause.

I won’t go into the whole story, but City Council had a bit of a scare after some well-meaning but half-baked analysis of the program’s outcomes was reported. Rather than make tweaks to it, they decided to pause LUIG applications altogether. The gist of the analysis was that by only requiring rents to be lowered slightly in those income-restricted homes that the program was effectively creating, families and individuals with greater needs were being excluded from those homes.

I don’t want to argue here that LUIG was perfect, although it may very well be that the program should be thought of as one tool among many. Its detractors from last winter appeared to want to it to do it all; they wanted it to fund all sorts of levels of affordability, and it may just be that something like expanding Asheville’s Housing Trust Fund makes more sense for reaching the kinds of families that LUIG might be less suited for.

On the other hand, I do believe that in an ideal world, Asheville would be acting much more aggressively to allow and incentivize more unsubsidized (market-rate, that is) residential infill in downtown and in our core, high-demand neighborhoods, and this might mean that subsidies could eventually be better targeted more exclusively towards lower income brackets.

In any case, I still think LUIG is an important model.

Requiring builders to provide “community benefits” doesn’t work if our goal is housing for ALL kinds of working Ashevilleans. It didn’t work in Seattle. Or Pittsburgh. And it didn’t work in Portland until the city realized that its program had to be full funded. Now their program actually looks a little bit like our LUIG.⁴