the inclusion of income-controlled housing units). This incentive works well in cases where a
community is focused on building lower cost housing without providing substantial cash incentives
to developers. In other words, the density bonus provides a developer with an incentive to create units
at deeper levels of affordability, in exchange for the ability to build more market rate units.
The key concept of the density bonus is to entice the developer to build affordable units at deeper
levels of affordability, while at the same time offering an incentive for the developer to regain lost
value from the creation of the affordable units by supplementing with market rate units. Within the
model that RKG produced, it is possible to adjust the density bonus to test the implications on the
financial feasibility of the project. Density bonus units tend to have greater importance on smaller
projects which, from a financial perspective, may not be viable without the addition of market rate
units above by-right thresholds.
For the purposes of this analysis, RKG tested how many bonus density units would be required to
make the financial return of the proposed inclusionary policy equal to the by-right scenario for each
tested development program.
Cash Payment/Payment in Lieu
As a method to capture the full value of affordable units that do not get built under the inclusionary
ordinance, RKG created the financial feasibility model to include a cash payment amount for fractional
units. The cash payment amount is applied to fractional units which result from applying the
appropriate inclusionary percentage across Tier’s One, Two, and Three. The modeled scenarios do not
round any of the units, rather it prescribes each full unit be built, and any fractional piece be captured
by a cash payment. This protects the developers from having to incur a cost greater than the policy
requires, as having to build a full affordable unit for a fractional calculation (i.e., 0.5 units) will have a
greater financial impact than a cash contribution equal to the fractional value of the net value
difference between a market rate unit and an income-controlled unit.
Within the model there is an affordable unit and cash payment calculator which determines both the
number of affordable units and potential payments in lieu based on the assumptions made in the
model. The model also calculates the dollar value of the payment in lieu of an affordable unit using
either: Total Residential Development Cost Limits ($200,000); construction hard costs, or the value gap
approach.
As part of the modeling process, three options were explored regarding the value of the cash payment
amount for fractional units. The first option was a generic fee of $200,000 per unit. The second option
was to use the construction hard costs for developing the affordable unit. The construction hard costs
can be defined as the cost of construction for the actual unit, which excludes the price of the land.
Utilizing this cost method enables the city to match the cost of building the unit with payment amount
requested.
The third approach towards determining the payment amount is to utilize the “value gap” approach.
The value gap is the difference between the value of a market rate unit and that of an affordable unit.
The value of a rental unit is determined by the net operating income and the capitalization rate; for an
