U.S. Affordable Housing Policy Could Learn from The Netherlands
What does the United States’ affordable housing policy have in common with Gouda, my favorite Dutch cheese? Aside from leaving a somewhat unpleasant smell, little else. Joking aside, the lack of affordable housing on both sides of the Atlantic is no laughing matter. As rents skyrocket in major urban centers, outrage at this issue has gained increased prominence among voters, prompting policy responses from political leaders that disincentivize the flow of equity into housing production. How can cities turn the tide? By thinking like developers.
While not immune from the crisis, the Netherlands knows a thing or two about affordable housing. Nearly a third of the population live in homes where rents are capped, commonly referred to as “social housing”. As the largest city and the proving ground for new approaches to old problems, it is no surprise that Amsterdam advances the Dutch social housing playbook considerably further. While visiting the city during my Marshall Memorial Fellowship experience, I learned that social housing comprises 53 percent of the city’s rental housing stock. Amsterdam also owns 85 percent of the city’s land area, making the city the area’s largest landlord. Further, Amsterdam continues to gain land area as it constructs new islands in Ijmeer, an inland lake targeted throughout history for reclamation projects.
If Amsterdam’s model sounds utopian, consider the reality that it takes about 10 years to secure a rent-controlled home in the city. No amount of expensive island building can address that level of demand/supply inequity. With home values up 63 percent in just the past five years, Amsterdam most definitely has its own affordability crisis. Is its approach to affordable-housing production flawed? Without a doubt. That said, subtle nuances make Amsterdam’s system powerful and potentially adaptable. Perhaps the most potent of these is the city’s approach to land ownership.
Although Amsterdam makes land available for development through competitive tenders and on an indefinite lease, as a landlord it has even greater influence over the programmatic use of development. This is fundamentally different than simply applying zoning codes to guide development; on land that it owns, the city calls the shots. While I am not suggesting that U.S. cities need to build islands full of affordable housing to address the crisis, they could potentially gain ground, literally and figuratively, in addressing housing affordability by retaining land ownership.
Too often, U.S. cities squander once-in-a-generation opportunities to redevelop sites they own, like former utility plants or decommissioned airports, by selling to a developer with the know-how to take on the task of remediation and redevelopment. The most many cities can then require is that 20 percent of the housing units created on the site be affordable, meaning that they can be rented at a maximum percentage of the area’s median income. Known as “inclusionary zoning,” this system has met but a small fraction of the demand for affordable housing. Bolder action is needed. Cities must leverage their land holdings to advance housing equity. Instead of incentivizing a developer to make just 20 percent of a housing scheme affordable, cities could grow that percentage to 100 percent by retaining land ownership, thus offsetting one of the main costs factoring into a developer’s return. This would help make affordable housing, with its lower rents, more viable for developers.
From the viewpoint of investors, paying the same amount annually for a city’s ground lease would lend certainty and assist in more accurately underwriting a prospective development. Further, real-estate taxes disappear, removing another major hurdle in making rent-controlled developments viable. Cities could offer higher rates for shorter lease terms, freeing up developers to select the term commensurate with their hold expectations, just as investors do already in selecting debt maturities that align with their business plans. Developers could further benefit from the leases being assignable, allowing them to sell their development to another investor that would then assume the ground lease.
While the dissolution of real-estate taxes would be felt by cities, this would be partially offset by the land-lease payments associated with the development. Further, these would be buffered by resets at the end of the lease term, which would bring the ground lease terms to current market rates. The real gain, however, would be the tremendous potential for the addition of new affordable housing units and the greater socioeconomic diversity and more equitable access to employment centers this housing would bring. If cities thought more like developers, the future could be one in which we actually address housing affordability, rather than lamenting increasing urban income inequality.
Jeffrey Jerden currently heads up the portfolio management group of Centennial Holding Company, an Atlanta-based private equity firm focused on investment in the U.S. rental housing sector. He received a Master’s in urban planning from Harvard University and got his start in real estate while working in valuation services at CB Richard Ellis (now known as CBRE). Jeff subsequently held posts at Trimont, then the loan servicing arm for Lehman Brothers, and KBS Realty Advisors, whose publicly traded REITs invest globally in office, office, hospitality, retail, and industrial real estate assets. He completed his A.B. in architectural history and international relations at Brown University.
The views expressed in GMF publications and commentary are the views of the author alone.