Below Market Rate Requirements in a Down Market: What Have We Learned From The Great Recession?

Numerous California cities and counties impose “below market rate” (BMR) inclusionary requirements on residential builders. The stated purpose of such ordinances is to increase the supply of affordable housing by adding price-restricted units to market-rate projects. This paper examines the effects of BMR requirements on residential development in weak real estate markets. We review relevant literature, conduct case studies of seven California communities, and interview California builders. Irrespective of boom or bust, there is no published evidence that California BMR requirements reduce total housing production, but the mix of housing may be affected, shifting the balance towards multifamily over single family housing in communities with such measures, the price level at the upper end of the market may increase, and price level and unit size at the low end may decrease. We find that the recent weakening of the housing market indeed places strain on many of the state’s BMR programs, as the price gap between market rate and income-restricted housing has narrowed and the sale of BMR homes, which carry resale restrictions, is more difficult. Builders express concern that aggressive BMR programs might slow recovery in the residential construction sector. As jurisdictions adjust to market realities, smart practices include (1) flexibility of BMR requirements in the face of weak demand and falling prices, in terms of number of units, affordability levels, or use and resale restrictions; (2) substitute compliance alternatives, such as off-site development and in-lieu payments; and (3) good faith negotiation among jurisdictions and builders, marked by cooperation and consideration of macroeconomic circumstances