Abstract
California is home to many of the most unaffordable housing markets in United States and, if the cost of housing is included, has the highest percentage of people living in poverty. State and local governments have continuously put efforts into solving this problem. Inclusionary Housing is one land use policy tool that cities and counties in California and across the nation use to address their affordable housing shortage without dedicating any public funds. There is, however, controversy among housing developers, land use policy makers, housing advocates, and other stakeholders about the effectiveness of this tool. Despite this ongoing disagreement, hundreds of California municipalities continue to form Inclusionary Housing policies to increase their supply of affordable housing. This thesis aims to evaluate the effect of Inclusionary Housing on rental housing development by analyzing the impact of affordable housing units on market-rate units within mixed-income rental properties. I apply a mixed-methods approach to conduct this analysis. I use multivariate regression analysis to understand the relationship between affordable units and the average per square foot rent of market-rate units. To expand on the findings of the regression analysis, I conduct interviews with a selected group of property managers from a sample of mixed-income properties in Sacramento County. To form my dataset, I obtain a list of all mixed-income properties in Sacramento County from Sacramento Housing and Redevelopment Agency (SHRA). I use secondary data accessible online, through phone calls, or via in-person visits to properties to compile a list of fully market-rate properties comparable to these mixed-income properties. The regression analysis found that, everything else held constant, the existence of up to 43 percent affordable units within any property in Sacramento County has no negative impact on the average per square foot rent of market-rate units. However, 43 percent is the tipping point, and after that, every 10 percent increase in the number of affordable units leads to a 4¢ reduction in the per square foot rent of the market-rate units. Although this number seems minimal when multiplied by unit square footages and projected over a year, it can become a sizeable loss in the gross annual rental income of the property. The qualitative part of the research found that property managers do not endure any challenges in managing the property that are directly related to the existence of affordable units but the community, in general, perceives affordable housing as a negative externality that affects the demand for market-rate units in mixed-income properties. Based on these findings, I recommend that the California Department of Housing and Community Development (HCD) set a maximum threshold for Inclusionary Housing that any given jurisdiction can impose. Local governments should incorporate several options into their Inclusionary Housing policy, such as offering longer municipal fee deferral programs to projects subject to Inclusionary Housing requirements and granting by-right entitlements to projects that are zoning compliant and providing inclusionary units on site.