The City of Salinas may be at the cutting edge of the inclusionary housing policy. The Salinas City Council just reviewed one of the currently "hot" housing issues – how to manage the public agency’s equity share in for-sale units – and has adopted a subsidy recapture approach, becoming one of the first cities to formally incorporate this approach into its inclusionary housing ordinance.
The public agency’s equity share is the gap between the market price and the actual selling price to a lower income household. Typically, agencies recapture the equity by restricting the price at which the unit could subsequently be sold.
The agency passes its equity stake from household to household to assure that the original unit remains affordable over time. There are variances, such as providing a sliding scale to share in the unit’s appreciation: the longer the household stays in the unit, the greater share of appreciation they realize.
The primary advantage of this "unit recapture" approach is the continued affordability of the for-sale unit. Critics of this approach, however, argue that this arrangement is little more than a complex lease agreement. Participants do not enjoy the benefits of their investment. Nor are they likely to move up in the housing market. The system also encourages family to remain in the unit even when their needs have changed.
As a result of these criticisms, some are advocating for a "subsidy recapture" approach. Here, the original buyer sells the inclusionary units at a fair market price. The agency’s equity acts as a loan against the fair market price (a low interest rate, such as 3 percent, is often charged). When the unit is sold, the agency realizes the subsidy (including interest) plus a share of the unit’s appreciation in cash. Thus, owners are more likely to enjoy in the benefits of their investment and be able to afford their next home.
Critics of the subsidy recapture approach note that the system places the agency on a treadmill, forcing it to replace units as fast as they are sold on the open market. Supporters note that the unit actually stays a part of the agency’s housing stock (albeit no longer affordable) and that in cashing out the equity stake, the agency can be more responsive to overarching affordable housing needs.
Indeed, the subsidy recapture approach is very similar to what is required under the new Density Bonus Law, which requires local agencies to reinvest their realized equity within three years.
Salinas’ adoption of the subsidy recapture approach will be closely watched by other agencies. Years from now, it will be interesting to pour over the data to determine which approach was the most productive. But California’s housing crisis does not afford the opportunity for long-term introspection.
Housing Resource Center Resources:
The following resources are available on the Inclusionary Housing page of the Housing Resource Center.