As the popularity of inclusionary zoning for affordable housing has grown, so has the number of cities and counties who have a stake in affordable homeownership problems. Experts in those programs, however, warn that they are fraught with dangers and require extensive monitoring to ensure that units remain affordable.

The bottom line, say program experts, is that getting the affordable for-sale unit built and occupied is only about two-thirds of the work. Maintaining affordability for the prescribed term is the final third — and agencies that do not take adequate legal steps to preserve affordability, allocate enough money for administration and acquire expertise are almost certain to encounter programs.

"The homeownership programs are incredibly administration intensive, and probably more work than most cities anticipate," said Barbara Kautz, an attorney with Goldfarb & Lipman in Oakland who has advised numerous local government officials on the issues. "The agency that's most likely to run into problems is one that doesn't do any monitoring."

Inclusionary zoning is only one method for a city or county to provide affordable, for-sale housing. Local governments also employ other policies, but nearly all have the same potential pitfalls.

Horror stories abound. In Santa Barbara County, an internal audit released earlier this year found dozens of instances in which the buyer of a price-restricted house was not living in the unit and often was renting it out. The audit also uncovered more than 30 instances in which the buyer also purchased other property, which was not specifically prohibited but called into question the buyers' eligibility. In Huntington Beach, homeowners sued the city because they contended resale price restrictions were illegal. In the City of San Mateo, the owner of an affordable unit sold the house at market price and reaped a substantial windfall before the city even realized what had happened. In Monterey County, buyers of affordable units put county supervisors in an awkward position by arguing that the county was preventing hardworking buyers from building equity needed to purchase market-rate housing.

"We found that about 75% of the people were in compliance with their covenants, and about 25% were not," Santa Barbara County Auditor-Controller Robert Geis said.
Anecdotes suggest that none of these situations is unique.

"You're going to get these real-life scenarios that hit you in the face. We probably get a couple new scenarios every year," said Sandy Council, who administers San Mateo's program. "There are a lot of details that don't seem apparent up front."

In a paper on inclusionary housing ordinances prepared for the League of California Cities' Institute for Local Government, attorney Bill Higgins wrote: "The potential factual situations here are endless. What happens if the owner dies and their heirs do not qualify to live in the unit? What if they do qualify? Does it make a difference whether a person has lived in a unit for two years, 10 years, or 20 years in terms of the percentage of appreciation they realize? What if the owner wants to rent the property out? What if the owner added a bedroom to the unit? Or built a pool? What if the owner failed to properly maintain the unit?

"These and 100 questions like them will keep staff and real estate attorneys working as long as the program exists. No policy can be designed to address all of these concerns. Indeed, these answers will vary from community to community depending on the underlying political goals of the program. Nevertheless, it is helpful to think through some of these issues in advance and design administrative procedures accordingly," Higgins wrote.

About 170 cities and counties now employ inclusionary zoning as a means of providing affordable units — even though developers generally oppose it and the state Department of Housing and Community Development (at least for now) frowns on it. Most inclusionary policies require 10% to 20% of new units to be available to very low-, low- or moderate-income households. Units typically have affordability covenants for at least 30 years that require resale only to qualified buyers and at restricted prices.
Studies conflict on the effectiveness of inclusionary zoning. Proponents argue that it is one of the few ways in which local governments can ensure that affordable units actually get built without major public subsidy. Opponents contend inclusionary policies simply shift the subsidy burden to buyers of new market-rate homes.

Whether it is utilizing inclusionary zoning or other policies, a city or county will need to decide up front the purpose of the program. You cannot have both wealth-creation and long-term affordability, said Tom Casey, who runs the HomeBricks program for nonprofit developer Bridge Housing. For example, in San Francisco the goal is solely to provide affordable housing; thus, resale restrictions are very tight, Casey explained. But in the Napa County city of American Canyon, local officials are eager to attract first-time buyers. So in American Canyon, the city and the buyer share price appreciation, said Casey, whose organization administers the city's program.

Both approaches have drawbacks. In the San Francisco model, the affordable unit buyer may never build enough equity to acquire a market-rate unit and may not have incentive to maintain the affordable unit. In the American Canyon model, a level of affordability is lost with every resale, so the city has to put money into the program continually to keep units affordable.

In a paper called "Ensuring Continued Affordability In Homeownership Programs," Kautz and Polly Marshall, another Goldfarb & Lipman attorney, wrote of four required elements:

"First, the agency must ensure that the developer actually constructs the units. Second, the deed restrictions and other documents guaranteeing affordability must be recorded in ways that are recognizable to lenders and title companies. Third, decision-makers and homeowners must clearly understand the restrictions so that they are not surprised at the time of resale. Last, the agency must have adequate staff or make other provisions to monitor the units, to identify programs at an early date, and to take legal action when needed."

In San Mateo, the city subsidized construction of a below-market-rate housing development but set up no real system for follow-up. City officials mistakenly thought the hard work was done, Council said. When one of the units went on the market one year later, the city began to exercise its right of first refusal to acquire the property. But that turned into a cumbersome process. So the city set up an administrative system. The city controls the buyer-selection process and maintains the waiting list. One real estate broker who understands the city's affordability restrictions is involved in all sales. City staff members have authority to make deals so that there are no delays waiting for a City Council meeting. And city staff members have developed expertise.

Recording the right documents is key to protecting the public agency's interest, Kautz said. Title officers often do not understand or simply ignore resale price restrictions, so Kautz and others advise recording deeds of trust, which are instruments that everyone in the industry recognizes. These documents help ensure that a public agency learns ahead of time when something is happening with a property and has time to exercise the agency's rights.

"Selective amnesia" appears to be a common affliction among buyers of affordable units, especially in hot real estate markets. People take out second mortgages based on the market-rate value of the home, or they attempt to sell their unit at market price. When confronted with restrictions on home equity loans or resale price, the owner will protest that they were never told. Kautz said she has dealt with about 20 cases in which the second mortgage (or "junior lien") exceeded the restricted value of the unit.

For this reason, Kautz advises agencies to prepare disclosures that explain terms of resale restriction, promissory notes and deeds of trust in plain language. If the buyer is not fluent in English, the disclosure may need to be in a different language. Some agencies do extensive homebuyer education upfront, and applications to purchase often specify resale restrictions. Casey, of HomeBricks, suggests letting buyers take home disclosure notices so that buyers do not have to make decisions at the time of closing. Some agencies have taken to videotaping buyers when restrictions are explained and documents signed.

Ongoing monitoring even when nothing appears to be happening with a property is essential, Kautz added. Some agencies do this themselves, some contract with a county housing authority, and some hire a nonprofit housing corporation such as HomeBricks. A few private management companies are starting to specialize in this area, and U.S. Communities Compliance Services (part of a joint powers authority sponsored by the League of California Cities and the California State Association of Counties) provides monitoring and reporting assistance.

Monitoring often involves reviewing county assessor's and recorder's records, and verifying owner-occupancy. Some monitoring may be informal, such as asking questions if a for-sale sign goes up and "windshield surveys" to check on home maintenance. There is no such thing as a self-monitoring affordable housing program, Kautz warns.

Barbara Kautz, Goldfarb & Lipman, (510) 836-6336
Tom Casey, HomeBricks, (415) 989-1111.
Sandy Council, City of San Mateo, (650) 522-7223.
Robert Geis, Santa Barbara County auditor-controller, (805) 568-2100.
Institute for Local Government Housing Resource Center:
U.S. Communities Housing Compliance Services: