Mixed Income Housing Bonus Is a Valuable Tool for Real Estate Development
Written by: Alan Nochumson
As newly constructed housing is being built in places that once contained decrepit structures or barren lots, longstanding residents in these developing neighborhoods are concerned that the new stock of housing will lead to increases in their own rent, property value, and real estate taxes which will force them to move out of the neighborhood many have lived in their entire life.
The challenge of revitalizing impoverished communities in a way that their existing residents can benefit has long troubling policymakers. However, the city of Philadelphia has recently revised the Philadelphia Zoning Code to create incentives that may prove to be a win-win for some real estate developers and residents alike.
Sections 14-702(2) through 14-702(4) of the Philadelphia Zoning Code establish a mixed-income housing bonus that provides “bonuses” for gross floor area, building height, and housing unit density if the property owner either agrees to designate at a certain portion of dwelling units as affordable under the Philadelphia Zoning Code or makes an in-lieu-of payment to the Philadelphia Housing Trust Fund.
What Is Affordable?
Currently, there are two levels of affordability under the mixed-income housing bonus— moderate-income and low income.
The Philadelphia Zoning Code requires that moderate-income rental units be occupied by households earning up to 60% of what is known as the area median income (AMI). A household is every person who lives or intends to live in the unit, regardless of age, dependency status, or relationship. The imputed household size to determine maximum monthly costs is 1.5 people per each bedroom in the unit and one person for studios and efficiencies.
In addition, the rental unit may not have total monthly costs (including rent and utility costs) that exceed 30% of gross monthly income for households earning up to 60% of the AMI, adjusted for household size, as reported by the U.S. Department of Housing and Urban Development (HUD) for the Philadelphia metropolitan statistical area.
As for moderate-income owner-occupied units, the maximum sale and resale price, during the term of affordability, calculated on the basis of a down payment of no more than 5% of the purchase price, a fixed-rate 30-year mortgage consistent with the average monthly rate published from time to time by Freddie Mac, and total monthly costs that do not exceed 30% of gross monthly income for households earning up to 80% of the AMI, adjusted for household size, for the Philadelphia metropolitan statistical area.
In contrast, low-income rental units must be occupied by households earning up to 50% of the AMI. The total monthly costs (including rent and utility costs) may not exceed 30% of gross monthly income for households earning up to 50% of the AMI, adjusted for household size, for the Philadelphia metropolitan statistical area.
As for low-income owner-occupied units, all the same requirements for moderate-income owner-occupied units apply other than that the household earning for low-income occupied-units can only be 70% of the AMI, adjusted for household size, for the Philadelphia metropolitan statistical area.
The AMI for the Philadelphia metropolitan statistical area, which covers five counties in Pennsylvania, four in New Jersey, and one each in Delaware and Maryland is $70,747.
In application, this would mean that the maximum total cost for a moderate-income studio apartment would be $1,061.21 and the maximum cost for a low-income studio apartment would be $884.10.
Furthermore, the period of affordability for the units must be for a term of not less than 50 years from the last certificate of occupancy issued for the units of the property upon its initial construction.
Sale of Moderate- and Low-Income Units
During the term of affordability, moderate-income owner-occupied and low-income owner-occupied units have a maximum sale and resale price. The price is calculated based on a down payment of no more than 5% of the purchase price and a fixed-rate 30-year mortgage. The rate must be consistent with the average monthly rate published by Freddie Mac.
As of Aug. 13, Freddie Mac’s average monthly rate for a 30-year fixed-rate mortgage is 2.96%.
For moderate-income owner-occupied units, the total monthly costs (including mortgage principal and interest, property taxes, property insurance, and condominium or homeowner association fees) may not exceed 30% of gross monthly income for households earning up to 80% of the AMI, adjusted for household size, as reported by HUD for the Philadelphia metropolitan statistical area.
Low-income owner-occupied units have identical restrictions with the exception that the household earnings have a maximum of 70% of the AMI.
The final restriction on the sale of moderate-income owner-occupied and low-income owner-occupied units is that the unit must be the principal residence of at least one individual who owned the unit during the period of affordability.
Make an In-Lieu-Of Payment
Real estate developers who would prefer to make a payment to the city of Philadelphia to receive the mixed-income bonus instead of including affordable housing units must sign an agreement with the city’s Department of Planning and Development (DPD) and make a payment to the city before the building permit may be issued.
Payment is calculated based upon the zoning district, category of bonus, and level of affordable housing being offered.
In an RM-2 through RM-4, RMX-1 through RMX-3, IRMX, and CMX-3 through CMX-5 zoning district, the payment equals the additional gross floor area (in square feet) earned through the bonus multiplied by $25 for the moderate-income bonus or by $30 for the low-income bonus.
In an RM-1, CMX-1, CMX-2, or CMX-2.5 zoning district, the payment amount is the greater of the lot area (in square feet) multiplied by $20 for the moderate-income bonus or by $24 for the low-income bonus and (ii) the number of additional dwelling units earned through the bonus multiplied by $25,000 for the moderate-income bonus and by $30,000 for the low-income bonus.
Floor Area Bonus
In order to be eligible for any floor area bonuses, the property must be located in the residential multi-family districts (RM-2 through RM-4), residential mixed-use districts (RMX-1 through RMX-3) industrial residential mixed-use district (IRMX), and community and center city commercial mixed-use districts (CMX-3 through CMX-5).
Properties situated within the East Callowhill Overlay District (/ECO) and Central Delaware Riverfront Overlay District (/CDO), are also eligible for floor area bonuses. In the /ECO overlay, the property must be a minimum of three acres in size.
Each zoning district has a maximum floor area bonus which can be achieved.
Below is a chart of the zoning districts and the corresponding floor area bonuses for moderate-income and low-income housing.
Height bonuses are more stringent for properties located in either the /ECO or the /CDO.
Within the /CDO, properties bounded by 2nd Street, Spring Garden Street, 9th Street, Callowhill Street, 7th Street, Willow Street, American Street, and Noble Street have a maximum height of 65 feet for all lots in the area.
However, lots in the area bounded by 2nd Street, Noble Street, American Street, Willow Street, 7th Street, and Callowhill Street may be up to 100 feet in height. Properties in the /CDO and /ECO which include moderate-income housing can receive an additional building height of up to 48 feet.
Properties in the /CDO and /ECO which include Low-Income housing can receive an additional building height of up to 60 feet.
Alternatively, a property can benefit from a height bonus if at least 3 residential dwelling units are built in an RM-1, CMX-1, CMX-2, or CMX-2.5 zoning district.
In these zoning districts, the base height limit is 38 feet. Real estate developers can gain an additional 7 feet if they include either moderate-income or low-income housing. The chart below provides a summary of the building height bonus.
Housing Unit Density Bonus
In order to be eligible for any housing unit density bonuses, the property must be in an RM-1, CMX-1, CMX-2, or CMX-2.5 zoning district.
Properties that include moderate-income can receive up to 25% increase in units and properties which include low income can receive up to a 50% increase in units.
How to Apply
To apply for the mixed-income housing bonus, the property owner must first obtain a zoning permit from the city’s Department of Licenses and Inspection (L&I).
Before applying for the zoning permit, the property owner must submit a completed mixed-income housing zoning bonus applicant acknowledgment form to the city’s Department of Planning and Development (DPD).
In the completed form, the property owner acknowledges the requirements which must be met by the property owner in connection with the mixed-income housing bonus.
After the completed form is signed by a representative from DPD, the property owner will submit the completed form along with the zoning permit application to L&I.
How to obtain the building permit for the real estate development project depends upon whether the property owner intends to build affordable dwelling units or make a payment in lieu thereof.
If the property owner intends on building affordable units, when the property owner submits the building permit application to L&I, the property owner must also provide an affordable building plan, a draft of the recordable instrument in the form of a restrictive covenant in favor of the city committing to the requirements of the mixed-income housing bonus, and a statement of compliance issued by DPD for any requirements DPD imposes to secure and monitor the property owner’s satisfaction of these governmental requirements.
The affordable building plan must specify the quality, quantity, placement, design, and phasing of the development of each affordable unit and acknowledge penalties for nonconformance.
If the property owner intends on making a payment in lieu of building affordable units, when the property owner submits the building permit application to L&I, the property owner must also include with the building permit application a copy of the fully executed written agreement entered into between DPD and the property owner committing the property owner to make payment in consideration for obtaining the mixed-income housing bonus and a copy of the deposited check tendered by the property owner to the Philadelphia Housing Trust Fund in the amount set forth in the written agreement.
Whether developers choose to make a payment to the city or include affordable payment, it is clear the mixed-income housing bonus is a great tool because it gives low- and moderate-income households the opportunity to benefit from the real estate development in their neighborhoods. While not the only solution to the problem, it is a step toward more equitable housing policies.
Mixed-income housing has significant benefits for residents in the neighborhood as well. It allows children to attend better-resourced neighborhood schools, creates more job opportunities, and vacant lots are transformed into quality affordable housing. Utilizing the mixed-income bonus not only provides financial benefits to real estate developers, but it also gives them the opportunity to improve the city we all love.
—Clementa Amazan, an associate at Nochumson P.C., assisted with preparing this article.
Reprinted with permission from the June 9, 2020 edition of The Legal Intelligencer © 2019 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, email@example.com, or visit www.almreprints.com.