cross subsidies: overview » introduction » facilitate use

Cross subsidies are not a policy, per se.  They are more the outcome of allowing or requiring affordable housing to be combined with market-rate housing, thereby making the overall development more financially feasible. This concept is at the heart of numerous affordable housing programs, a few of which are outlined here.  While there are obvious financial advantages for a community employing cross-subsidies, in that these developments may require fewer public subsidies, many communities support mixing affordable and market-rate housing because they believe it to be more sustainable and fair.

Erin Place, Eagan MN -- Photo courtesy of LHB, Inc.
Click on the links below to read about various approaches for using additional subsidies to make cross-subsidies work:

The 80/20 program allows tax-exempt bonds to finance the construction of developments comprised of at least 20 percent affordable units

HOPE VI or other public housing funding can cover demolition and basic infrastructure costs

Using similar cross subsidies in other contexts, such as those typically adopted in inclusionary zoning programs

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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.

Other pages in this section:

How do cross-subsidies support mixed-income communities?
Under certain market conditions, the profits associated with market-rate units can be great enough to subsidize development of affordable homes.

Residents--Mercy HousingWhat are the benefits of mixed-income communities?
The benefits of mixed-income communities extend beyond the increased availability of affordable homes.

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to view other resources on cross-subsidies

The 80/20 Program

Under the federally authorized 80/20 program, tax-exempt private activity bonds are issued to provide reduced-cost financing for rental development. In exchange for this preferential financing, developers agree to reserve at least 20 percent of the units for families with incomes below 50 percent of the area median income. Those affordable units are further financed through low-income housing tax credits, and, in strong markets, by cross-subsidies from the market-rate units. (In weaker markets, 80/20 deals are either not done, or done only with some additional subsidy for the affordable units.)

In 2002, New York City introduced a variant on the 80/20 program in which city-controlled funds are used to bring 30 percent of the units down to levels affordable to moderate income families. The result is a 50/30/20 structure, in which 50 percent of the units are rented at market, 30 percent are affordable to middle-income households (earning between 81 and 175 percent of AMI) and the remaining 20 percent are affordable to families with incomes below 50 percent of AMI.

Solutions in Action
Legacy Partners of Hollywood, California is in the process of erecting a 375-unit, mixed-income, mixed-use development in Hollywood which is expected to cost more than $260 million. The development will use an "80-20" structure in which 20 percent of units are affordable to households earning less than 50 percent of area median income and the remaining 80 percent rent at market rates. The Los Angeles Community Redevelopment Agency issued tax-exempt bonds to finance a low-interest mortgage. The tax-exempt bonds allow the development to leverage additional equity through the 4 percent Low-Income Housing Tax Credit. The relatively high rents for the market-rate units in the Los Angeles market, combined with the bonds and tax credits, make it financially possible to offer below-market rents on 20 percent of its units. [1]

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HOPE VI and other Public Housing Financing

Many of the more recent examples of cross-subsidies involve HOPE VI, a federal program that provides large grants to help public housing authorities redevelop distressed public housing. The HOPE VI program has emphasized that redeveloped communities should target housing to families with a mix of incomes -- including moderate-income families as well as families paying market rents or purchasing market-rate homes -- and many HOPE VI sites have succeeded in achieving this goal.

By providing free or low-cost land and covering demolition and infrastructure expenses, HOPE VI grants help make it possible for the market-rate component of these developments (for-sale in some cases and rental in others) to generate profits that can provide a revenue source to cross-subsidize affordable units within the same development. Among the many prominent examples of mixed-income HOPE VI developments are Centennial Place in Atlanta, Georgia; Park Du Valle in Louisville, Kentucky; the Townhomes on Capitol Hill in Washington, D.C. (pictured at right) ; and the massive Chicago Plan for Transformation, which is replacing some of the most challenging high-rise public housing in the country with smaller, mixed-income communities.

In light of the sharp reductions in HOPE VI funding in recent years, many housing authorities have started to do HOPE VI-like projects by borrowing against their expected revenue stream from the public housing capital fund -- one of two major federal funding streams for public housing. Capital fund financing gives housing authorities access to financing for the major capital investments needed to demolish distressed public housing developments and rebuild smaller, mixed-income developments, but does not replace the
component of the HOPE VI grant used for social services.
Solutions in Action
Townhomes on Capitol Hill
Photo courtesy of District of Columbia Housing Authority

The Townhomes on Capitol Hill, in Washington, D.C., is a mixed-income limited equity cooperative developed through the HOPE VI program. It consists of 147 units, 134 of which are affordable to residents earning less than 115 percent of AMI, and 13 of which are market-rate. Income from the market-rate homes cross-subsidizes the below-market homes, enabling the cooperative to operate without ongoing public funding. [2]

Visit the Gallery to learn more about the Townhomes on Capitol Hill.

The social services component is important to help maximize residents' opportunities for self-sufficiency, as well as to provide amenities that attract middle-income families to ensure a successful mixed-income development. By combining HUD's family self-sufficiency program -- a well-designed program that helps low-income families build assets and make progress toward self-sufficiency and homeownership -- with services provided by other community partners, housing authorities can ensure the provision of many of the same services that would have been provided with a HOPE VI grant.

In May 2009, HUD introduced the Choice Neighborhoods Initiative as part of the federal government�s Fiscal Year 2010 Budget Request. The Choice Neighborhoods Initiative is intended to expand and build upon the HOPE VI program. In addition to supporting the redevelopment of distressed public housing projects, Choice Neighborhoods is envisioned to fund comprehensive community revitalization efforts that incorporate early childhood education, family economic self-sufficiency, green building and energy efficiency components. The Initiative will also target privately-owned properties assisted by HUD in addition to conventional public housing properties owned by the agency.

The initiative includes a request for $250 million in the FY 2010 budget, which is a $130 million increase over the HOPE VI budget for 2009. Although this funding has not been appropriated yet, Choice Neighborhoods could provide substantial funding to support development of mixed-income communities in both the public and private sector. It is unclear whether Choice Neighborhoods will replace HOPE VI or act as a complementary program or how much funding from either program will be used to support mixed-income developments in the future.

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Other Contexts

While many of the recent affordable developments with a cross-subsidy component have involved housing authorities, similar approaches could be adopted in other contexts. The key ingredient to making the market-rate component of a HOPE VI or HOPE VI-like project successful from a funding perspective is, essentially, free land and, in many cases, free infrastructure contributed by the city or county. Communities that wish to facilitate a mixed-income development with a market-rate component can achieve similar results outside of the public housing context by providing free or low-cost land and infrastructure.

Depending on the level of market rents, the contribution of land may free up a portion of the rents paid by market-rate tenants to provide a cross-subsidy to lower the rents on the other units. To achieve a further mix of incomes, communities can layer Low-Income Housing Tax Credits (4 percent or 9 percent) onto the affordable units, and public housing subsidies or project-based Section 8 vouchers onto a portion of the affordable units.

Over the last few years, however, the market for tax credits has not been particularly strong, which may make this a less effective means of promoting mixed-income housing at this time. Click here to learn more about the challenges of using Low-Income Housing Tax Credits for Mixed-Income Developments.

Another approach is to provide a density bonus through a voluntary or mandatory inclusionary zoning policy that allows developers to sell or rent more market-rate units than otherwise permitted, thus generating profits that can be used to cross-subsidize more affordable units.

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Solutions in Action

Photo courtesy of ULI Development Case Studies

Chatham Square, in Alexandria, Virginia is a mixed-income development located just blocks from the riverfront in the wealthy historic district of Old Town. Using HOPE VI funds and Low-Income Housing Tax Credits, the former 100-unit public housing complex was redeveloped in a partnership between the Alexandria Redevelopment and Housing Authority (ARHA) and the for-profit developer EYA.

Chatham Square now contains 100 high-end market-rate townhomes and 52 units of public housing, the facades of which are indistinguishable from one another and match the architectural style of the surrounding community.

Visit the Gallery to learn more about Chatham Square.

[1] Mixed-Income Goes Hollywood. April 2007. By Bendix Anderson. Affordable Housing Finance.

[2] The Future of Limited Equity Cooperatives [PDF]. 2007. By Kristin Perkins. Cornell Real Estate Review.