cross subsidies: overview

What are cross-subsidies?

Nonprofit or mission-driven for-profit developers who build mixed-income developments can use profits from the sale or rental of market-rate homes to subsidize the costs of the affordable ones. Cross subsidies are not subsidies in the traditional sense -- people often think of subsidies as public financing. Cross subsidies use income from market-rate units to help finance affordable housing. Technically, developers and property owners do not directly finance the affordable units; they merely make the overall development more financially feasible by incorporating the market rate units, and therefore less reliant on public subsidies. The term "cross subsidies" relays the concept that mixed-income developments can use the market to effectively subsidize the financing gap created by selling or renting housing at below-market rates.

Depending upon the ratio of market-rate to affordable units and the strength of the market, many of these deals may still require some direct or indirect public subsidies. An example of a cross subsidized development would be a development project with  market-rate condominium units and affordable for-sale or rental units that uses the profits from the sale of the market rate condominiums to fill the financing gap that is created by selling or renting the affordable units below their market value.

Cross subsidies work best when there is healthy demand for the market-rate units. A declining housing market with significantly lower sale prices and rents makes the use of cross-subsidies more challenging. For cross-subsidies to be effective in this context, they may need to be combined with other approaches.  Making publicly owned land available for little or no cost, or increasing the allowable density of a development - often an incentive used in inclusionary zoning programs - may provide greater opportunities for profits on the market rate units that can offset the costs of affordable 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 other markets, the development of market-rate rental units may do little to close the financing gap on the affordable units. Determining the right ration of affordable to market-rate units and the right incentives for each market requires a thorough understanding of the market and real estate development fundamentals.

What problems does this policy solve?

As the federal funding available for affordable housing has declined in recent years, communities and developers have sought more cost-effective and market-based strategies for increasing the supply of affordable homes. The inclusion of market-rate units within a mixed-income development or community can make the development more financially feasible and less reliant on public subsidy through cross-subsidization.

Mixed-income housing also helps de-concentrate poverty as well. The high-density, high-crime public housing of the past has been viewed as a failed experiment in public policy. Mixed-income housing is seen as a more effective technique for integrating affordable housing within communities and creating more opportunities for low- and moderate- income residents to be successful. Mixed-income development can also be a vital part of neighborhood revitalization efforts, by spurring market-rate development and promoting racial and economic integration.
Solutions in Action

Timberlawn Crescent, North Bethesda MD -- photo courtesy of Housing Opportunities Commission of Montgomery County

Timberlawn Crescent
, in North Bethesda, Maryland is a mixed-income development providing 107 rental townhomes, as well as a community center, day care and outdoor recreation areas. Sixty percent of the units are affordable to low- and moderate-income residents and 40 percent are market-rate.

Developed by the Housing Opportunities Commission of Montgomery County in 1991, Timberlawn Crescent uses a cross-subsidy from the market-rate units to help reduce the rents on more affordable units within the development. A strong rental market, combined with low land acquisition costs, tax-exempt financing, a property tax exemption and a state subsidy for the most affordable units, has helped make the development successful.

Learn more about using cross-subsidies to support mixed-income communities

Go back to learn about other policies that capitalize on market activity