Casa del Sol, Palm Spring CA -- Photo courtesy of Washington Mutual

Under strong housing market conditions, the market-rate share of a mixed-income development can generate significantly more income than is necessary to cover costs for these units. These profits can fill the gap between income and expenses for the portion of units that are rented or sold at affordable (below-market) rates. This "pure" cross-subsidy model is likely to be viable only in strong markets, where rents and/or home prices are high enough to spin off profits to cross-subsidize the affordable units. Up until the recent downturn in home prices, there appeared to be a significant number of markets in which cross-subsidies could work when the market-rate units were for-sale, rather than for-rent, because sales prices were high relative to rents.

Given the decline in home prices in many markets, it is likely to be a while before this type of "pure" cross-subsidy strategy will work well again in a broad range of markets. Still, not all areas are equally affected by the national downturn in home prices, and the market remains strong in some communities. In addition, some communities will come out of the slump before others.

Cross-subsidies in a purely rental context are more difficult to implement because in much of the country there is little profit to be made in non-luxury market-rate rental housing, and there appears to be little interest in mixing luxury and affordable rental homes. However, in strong rental markets, mixed-income rental developments can generate cross-subsidies that reduce the subsidies needed to support more affordable homes. This works especially well with modest incentives, such as density bonuses and land donation.

Solutions in Action

The mixed-income planned community of Nava Ade, located in Santa Fe, New Mexico, uses cross-subsidies to make 35 percent of its 513 units affordable to families earning a maximum of 120 percent of the area median income. Though the development was supported entirely by private funds, the city of Santa Fe made the project possible by relaxing its no-growth policy to incorporate the land into the city limits so the development would have access to water and sewer services. The planning commission was willing to take this step because it supported the developer's goal of providing affordable housing opportunities for moderate-income families in a mixed-income environment. All of the community's homes are single-family, for-sale units containing three or four bedrooms. Designs are based primarily on the traditional southwestern adobe style, and all units include features and amenities usually associated with luxury homes. Demand for homes in Nava Ade has remained high since they first went on the market in 2001. [1]

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You are currently reading: How do cross-subsidies support mixed-income communities? Other pages in this section: How can jurisdictions facilitate the use of cross-subsidies to create mixed-income communities? By combining cross-subsidies with other incentives, communities have successfully used cross-subsidies in a wide array of markets. What are the benefits of mixed-income communities? The benefits of mixed-income communities extend beyond the increased availability of affordable homes. Click here to view other resources on cross-subsidies

[1] Mixed-Income Housing: Myth and Fact. [PDF]. 2003. By Deborah L. Myerson. Washington, DC: Urban Land Institute.