Envision a ladder, narrow at the top and wide at the base.
The rungs on the ladder represent different levels of affordable housing.
At the bottom, where incomes are the lowest, the need is the broadest. At the top, where the wealthiest of the world reside, the need is smallest.
In the housing lexicon these rungs are based on the area median income, or AMI.
The bottom rung is set at 30% of AMI, which describes where those with the lowest incomes fall.
The next step is 50%, then onwards through 140%. Anything above 140% percent is considered “market-rate” housing, with the narrowest and highest rung on the ladder being multi-million-dollar homes.
To put some numbers to these rungs we will look at the 2020 Kaua‘i AMI for a family of four. According to federal data, the average family of four on Kaua‘i earns $97,100 per year. HUD (U.S. Department of Housing and Urban Development) suggests that no more than 30% of a household’s income should be used for housing, and bases its affordability levels on this. Based on this, a three-bedroom rental is affordable at $2,525 per month, and a three-bedroom house is affordable for $565,700. To put this into perspective, the median sales price of a Kaua‘i home was $813,750 in July.
To afford the average house on Kaua‘i, a family of four needs to make well over $135,940. This gap between median income and median home price is what drives the concept of inclusionary housing.
Inclusionary-housing laws are common around the country and work on basic principles: if a developer builds market-rate housing, the community should require that some part of that development is affordable to households at a variety of income levels. On Kaua‘i, Ordinance 860 went into effect in 2008 and requires that any development with 10 or more units includes 30% that are affordable.
While the law was passed with good intentions, good intentions do not always result in good laws. The unintended consequence of the ordinance was that it stifled all non-subsidized housing development (development has continued since then, but they were permitted before the ordinance went into effect).
When a developer is forced to sell 30% of homes in a project at a loss, not only does it increase the cost of the market-rate units, but construction financing becomes difficult due to the high financial risk and nearly non-existent profit margin.
Rather than taking the risk, developers just don’t build. Developers, administrators and elected officials have been discussing amending Ordinance 860 for at least six years. The most-recent proposals in Bill 2774 have great intentions, but it includes changes that may have some unintended consequences.
There are four major changes: 1) reducing affordable housing from 140% of AMI down to 120% of AMI; 2) the exemption of the town cores of Lihu‘e, Koloa and Kalaheo; 3) the 30% inclusionary requirement; and 4) the 50-year resale restriction.
Hawai‘i is one of the few places in the country where affordable housing includes housing between 120-140% of AMI. There are two main reasons for this. One is that our AMI is very low compared to home prices, meaning even families making 140% of AMI cannot afford the average house here on Kaua‘i. The second is that the cost to build in Hawai‘i is considerably higher than it is in most of the country.
As proposed, Bill 2774 recommends removing homes between 120%-140% of AMI as affordable. A home priced between $735,400 and $791,900 is not affordable to most people, but by removing this income range it forces developers to sell units at a lower price to meet the inclusionary requirement.
While this may sound positive, unless developers can afford to make a project pencil out, nothing will be built. Exempting the town cores from all inclusionary requirements may sound like a bad idea at first, and the most recent amendment to require that all housing in the urban cores of Lihu‘e, Koloa and Kalaheo be under 120% of AMI sounds like the perfect solution. However, it is very difficult to build in the urban core. Land is typically more expensive, infrastructure can be more costly and, due to site constraints, construction costs are usually much higher.
The unintended consequence of building at only 120% AMI and below in the urban cores is that nothing will be built. On the other hand, unrestricted housing in the urban core will help build necessary infrastructure for all kinds of projects, add more rungs to the housing ladder, create less traffic, and encourage the urban renewal that makes town cores vibrant.
The 30% inclusionary requirement is probably the most stifling part of Ordinance 860. If we look at Bill 2774 as a whole, the urban-core exemption would work well by partnering it with a reduction of inclusionary requirements to 20% (outside the Visitor Destination Area, VDA). In combination, this would provide for market-rate, higher-density housing in the urban cores, some affordable and market-rate housing outside the VDA, and more-affordable housing inside the VDA to offset the impact of the high-end housing that is typically built there.
Finally, changing the “Duration of Restriction” for affordable-home ownership from 20 years to 50 years has some significant and unintended consequences. In the past, resale housing has been sold with 10-year restrictions. This is clearly too short. Home-buyers have been known to strip the subsidized equity and reap significant profits. However, if the restrictions extend much more than 20 years, the marketability of homes becomes difficult and the financing of the properties becomes highly restricted. Keep in mind that this is not for subsidized rental housing, which has restrictions extending up to 62 years.
These changes should not be considered as separate items. They impact each other. If one rung of the housing ladder is missing, it becomes more difficult to ascend. Currently on Kaua‘i, we have low-cost home-ownership created through self-help or owner-builder construction, or we have high-end homes built by professional contractors charging $300-$750 per square foot.
What lies between the income extremes, termed the “Gap Group” or the “Missing Middle” (80%-140% of AMI), is largely a result of our current inclusionary housing ordinance. We need to consider how all of these pieces fit together to create a complete housing ladder. If all the pieces fit together, inclusionary-housing ordinances can help create a healthy and thriving housing market with a variety of housing options available to people of all incomes. •••
Milo Spindt is executive director of the Kaua‘i Housing Development Corporation, a nonprofit, affordable-housing development company. Previously, he served Kaua‘i as its representative and then chairperson on the Hawai‘i Housing Finance and Development Corporation board, and on the Hawai‘i Public Housing Authority board. He has been a licensed real estate agent since 2001, practicing in Hawai‘i, Nevada and Washington.