Moderate- and Middle-Income Housing Policy in California: An Overview
Introduction
This program and policy overview aims to help readers understand where moderate- and middle-income housing fits into current California housing framework by providing information on state and local moderate-income housing programs and policies. We considered any program that includes support for those between 80-120% of the area median income (AMI) as a moderate-income[1] housing program. An official category set by the California Department of Housing and Community Development (HCD), 80-120% AMI is used across state programs[2] and by local governments, which set their own limits within and above the 80-120% band.
We cannot advance moderate-income housing in California without first understanding what support exists. This overview does not aim to judge the effectiveness or worthiness of these programs. It simply provides an overview of moderate-income housing policy in California to create a shared and baseline understanding.
[1] CCB’s linked report on middle-income demographics refers to the 80-120% AMI bands as “lower-middle-income.” This overview will use the term “moderate-income” to remain consistent with the formal definition used for California’s housing programs. See the accompanying report for an explanation of language used. The use of different terminologies is one of the challenges with moderate/middle income housing.
[2] Source California Department of Housing and Community Development
State Programs
There are 46 different state funding programs for housing. Of those 46, 14 (30%) support middle-income Californians,[3] though there are some key differences across the programs, most significantly whether they are supply- or demand-side interventions. Supply-side interventions support developers to build housing more affordable, demand side interventions help middle-income people acquire housing.[4]
The five biggest programs that serve middle-income Californians, according to 2022 budget allocations, are (in order), are the First Mortgage Programs, California Mortgage Relief Program, CA Dream for All, Infill Infrastructure Grant Program and Cal Vet Home Loans.[5] The biggest programs geared towards demand are the First Mortgage Programs through the California Housing Finance Agency (CalHFA), which includes both government loans (such as the CalHFA FHA Loan Program and CalPLUS FHA Loan Program) and conventional loans (such as the CalHFA Conventional Loan Program). The biggest program geared towards builders is the Infill Infrastructure Grant Program that aims to promote infill housing development through financial assistance that facilitates the development of affordable and mixed-income housing.
Table 1: California Housing Finance Programs by Income Levels Served
Number of Programs
Income Restriction
32
Up to 80%
5
Up to 120%
5
Up to 150%
4
No Limit
[3] Meaning income restrictions are up to 120%, up to 150%, or have no income restrictions.
[4] Of the 14 programs that support middle-income Californians, six support builders, and six support buyers. The remaining two programs are homelessness services, which do not fall under the “builder” or “buyer” categorization.
[5] The housing programs listed are current, active housing programs within the CalHCD and CalHFA departments. Other housing programs listed are nested within other state departments, including health and human services and higher education. These housing programs are not an exhaustive list of all state housing programs. 2022 budget allocations were extracted from the 2023-2024 California State Budget, an analysis from the Legislative Analyst’s Office on the 2022-2023 state spending plan for housing, and press releases from organizations.
State Policies
Regional Housing Needs Assessment (RHNA)
The Regional Housing Needs Assessment (RHNA) is the process through which California plans for housing needs and future growth across the state. The RHNA process starts with HCD determining how many units, at various affordability levels, are necessary for California’s regions to build in 8-year cycles.[6] These numbers are then communicated to each region’s “councils of governments” (COG) for discussion and to develop a methodology to allocate across the region’s cities. These COGs must then allocate those housing mandates to local governments through a multi-step process, first by submitting the allocation methodology to HCD for review, and then developing a RHNA Plan.
Once a local jurisdiction receives its RHNA allocation, it must then update its general plan and zoning to demonstrate how it will accommodate the units assigned within each income category.[7] The RHNA process identifies each jurisdiction’s responsibility for planning for housing divided into four income categories including: very-low-income (<50% AMI), low-income (50-80% AMI), moderate-income (80-120% AMI) and above-moderate-income (>120% AMI).[8] Since its inception, the RHNA process has included the moderate-income category. California provides some funding to assist local jurisdictions.
HCD lays out specific requirements for what qualifies a site as suitable for low- and very-low-income RHNA (30 units per acre in a jurisdiction in a metropolitan county, 20 units per acre in a suburban jurisdiction, etc.). The requirements are not as strict for moderate-income RHNA. Passed in 2020, AB-725 (Wicks) specifies that 25% of the moderate-income allocation must be on parcels zoned for quadplexes or greater. Otherwise, jurisdictions have relatively free reign to determine what qualifies a site as suitable for moderate-income RHNA.
Table 2. RHNA 5th Cycle Permitting [9]
Very Low
20.7%
Low
30.9%
Moderate
56.1%
Above Moderate
144.1%
California
Region
State Density Bonus
Enacted in 1979 and expanded multiple times throughout the years, California’s Density Bonus Law (DBL) (Gov. Code §§65915 – 65918) allows developers to increase a project’s number of units above the local maximum density if the developer reserves a certain percentage of units for low- and moderate-income households (e.g., developers reserve 10% of the total units for rent or sale to lower-income households and receive a density bonus). A sliding scale determines the density bonus amount, based on: 1) the percentage of units set aside as affordable, and 2) the income category of those affordable units.[10] DBL is a state mandate, meaning a developer who meets the requirement is entitled to the density bonus as a matter of right.
Some of the DBL applies to moderate-income households. A project is eligible for a 5% density bonus if 10% of units are sold to persons and families of moderate income. This goes up to a 50% density bonus if 44% of the units are moderate-income units. A project is eligible for a density bonus if 100% of housing units are restricted to a combination of very low-, lower- and moderate-income residents, with a maximum of 20% for moderate income residents. While local governments are mandated to comply with the state DBL, some jurisdictions have passed additional local density bonus ordinances.[11]
Property Tax Welfare Exemption
The Property Tax Welfare Exemption, commonly known as the “welfare tax exemption” or “welfare exemption,” allows the state to exempt eligible properties from property taxes, primarily among nonprofits that restrict tenancy to low-income households. The funds saved from the property tax exemption are to be used to maintain the affordability of the housing, or to reduce rents for low-income households (<80% AMI). In 2022, Assembly Bill 1206 amended the Property Tax Welfare Exemption so that a unit can continue to be treated as “occupied by a lower income household” when the income of occupants increases up to 140% AMI if the owner is a community land trust (CLT).
Accessory Dwelling Units
The California HOME Act (SB9 - Atkins) enables homeowners to split their lot and build up to four homes on a single-family parcel that fit very specific requirements. While SB9 sets a standard that all localities must follow, it gives local governments a lot of flexibility in their enabling legislation. For example, jurisdictions can pass design standards or affordability requirements. San Diego passed an ADU Bonus program, which allows additional units to be built in return for affordability restrictions.[12]
[6] See California Department of Housing and Community Development’s RHNA page for a full explanation.
[7] Source: Association of Bay Area Governments
[8] Source: City of San Jose
[9] See California Department of Housing and Community Development for more information.
[10] Source: Southern California Association of Governments
[11] Grounded Solutions Network provides a great database of Inclusionary Programs.
[12] An additional unit can be built if the ADU is moderate-income, deed-restricted for 15 years and an additional unit can be built in the ADU is low-income, deed-restricted for 10 years. See for City of San Diego more details.
Local Programs
Inclusionary Zoning
Inclusionary zoning policies create affordable housing by requiring or encouraging developers to include a certain percentage of affordable units as part of a development. California expressly allows municipalities to pass mandatory inclusionary zoning policies, with some limitations through AB 1505. In California, inclusionary zoning is a local policy that works within a state policy and legal framework. Inclusive of counties, California has 22% of the country's inclusionary zoning policies.[13] Of the 158 programs in the state of California, 136 (86%) serve some or all of the 80 – 120% AMI band.[14] Programs that serve >80% are primarily mandatory and mixed tenure (renting and owning), with some exceptions.
Table 3: CA Local Inclusionary Zoning Programs
Number of CA Moderate Income Programs
Income Restriction
113
Mandatory
Voluntary rental development and mandatory for-sale development
3
20
Voluntary
Table 4: CA Local Inclusionary Zoning Programs by Development Type
Ownership Only
13
Rental Only
4
Number of CA Moderate Income Programs
Income Restriction
119
Both Ownership & Rental
What is the Difference Between Inclusionary Zoning and a Density Bonus?
Inclusionary zoning and density bonuses are similar but different. Inclusionary zoning policies create affordable housing by requiring developers to include a certain percentage of affordable units in their projects. Mandatory policies require developers to meet certain affordability requirements (e.g., a minimum of 25% affordable housing units for new developments) or pay into a local fund dedicated to affordable housing for units not built onsite to reach the affordable threshold. By contrast, under voluntary policies, developers receive certain incentives in exchange for providing affordable housing onsite by choice. One common incentive is a density bonus, which allows developers to build more units than would ordinarily be allowed by zoning codes, in exchange for providing a certain amount of affordable housing units.
Generally the threshold for affordable units corresponds to the level of affordability provided by onsite units – that is to say that the required percentage of units for extremely low and low income units is less than those that would be required were moderate income units to be built onsite. Density bonuses are often offered in both voluntary and mandatory policies and certain local inclusionary policies can trigger by-right state-level density bonuses.
Inclusionary zoning programs can support a diversity of tenure, including rental and homeownership. Of all California programs, 86% support both rental and ownership, 10% support ownership only, and 4% support rental only.[15] Many cities have condominium projects taking advantage of inclusionary zoning that are targeted towards moderate-income households.[16]
Local Funding Programs
Some local governments have local affordable housing trusts funds, some of which will fund projects serving residents above 80% AMI. For example, Santa Cruz has an Affordable Housing Trust Fund (AHTF) to create and preserve affordable housing for extremely-low-income, lower-income and moderate-income households. Up to 20% of AHTF funds can be used to support moderate-income housing.[17] Berkeley also has a Housing Trust Fund, through which developers can apply for multiple funding sources with different requirements through a single application process.[18]
At times, these affordable housing trust funds are connected to inclusionary zoning programs. By law, cities must allow an in-lieu fee, under which developers are allowed to pay a fee rather than build the inclusionary dwellings that would otherwise be required. The funds from these in-lieu fees sometimes go into various forms of affordable housing trust funds.
Joint Power Authority
Joint Powers Authority (JPA), is a new tool that allows cities and a JPA to jointly issue bonds and hold property with the goal of providing affordable housing to moderate-income households.[19] The first JPA In California was formed in Santa Rosa in 2019. Through this model, a city and JPA will jointly agree to purchase a property or finance a new project. The JPA will issue a tax-exempt bond and use its property tax exemption to finance the purchase. Fifteen years after the acquisition, the city can pay off outstanding debt and take ownership of the project from the JPA and choose what to do with the property. Cities and counties do, however, end up forgoing property tax revenue.[20]
Additional Policies
California has a growing number of state and local policies that aim to boost the production of moderate-income housing for Californians – from longstanding ones RHNA to newer policies like enabling ADU legislation and JPAs. Not all may be represented in this primer. Future editions of this primer will continue to expand as the programs that support moderate-income housing expand as well, with more detail and nuance.
Did we miss anything? Let us know.
[13] Source: Inclusionary Housing Map and Program Database Grounded Solutions Network. See: Grounded Solutions Network.
[14] Source: Inclusionary Housing Map and Program Database Grounded Solutions Network
[15] Source: Inclusionary Housing Map and Program Database Grounded Solutions Network
[16] Source: California Community Builders
[17] Source: City of Santa Cruz, CA
[18] Source: City of Berkeley, CA
[19] Ben Metcalf, Sarah Karlinsky, & David Gracia. (2022). Terner Center for Housing Innovation. The ABCs of JPAs California’s new tool for creating middle-income housing. https://ternercenter.berkeley.edu/wp-content/uploads/2022/06/SPUR_The_ABCs_of_JPAs.pdf
[20] Source: Matt Schifrin and Isabel Contreras, “California Scheming,” Forbes, December 21, 2021