Missing Middle Homes
May 01, 2023

"Missing Middle" Zoning Reform is Just A Start in Solving the Affordable Housing Crisis

Zoning reform that permits higher-density housing in existing neighborhoods is often heralded as a solution to the affordable housing crisis.  But in order for land use changes that permit smaller and more dense “missing middle” housing – attached homes of two to six, eight, or even 12 units – to deliver true affordability, they must be coupled with a greater array of policies, incentives and subsidies.  To ensure that land use and zoning reform achieves the outcome of providing affordable housing, a new missing middle affordable housing ecosystem needs to be constructed that includes but is not limited to zoning change.

Communities across the country are struggling to solve their housing affordability crisis -- and many increasingly turn to land use reform as a solution. It is one issue on which many affordable housing advocates and builders agree:  both cite land use regulations as barriers that limit housing supply and ultimately reduce affordability.  Requirements on lot and unit sizes, setbacks, parking, and building form increase the time and expense needed to develop and reduce the potential density of a site.  In response, localities and states – ranging from Louisville, Kentucky to Des Moines, Iowa as well as several states including Connecticut and California -- have loosened zoning restrictions to make it easier to build accessory dwelling units and/or missing middle housing.  Arlington County, Virginia serves as perhaps the most recent example when they voted to amend their zoning to accommodate more diverse housing types. Known as the Expanded Housing Options framework in Arlington, this zoning change allows by-right construction of duplexes, triplexes, and up to six units per parcel in neighborhoods previously limited to only single-family houses. 

Proponents of missing middle housing argue that delivering more smaller units will make the County’s housing more affordable while also unwinding some of the racist land use practices of the past.  They’re correct.  Greater supply will relieve pressure on housing costs and smaller units can be offered at a lower cost per square foot because land cost is distributed across more units. Opponents allege that missing middle housing does not solve Arlington’s affordable housing crisis.  They’re right, too.  Zoning change may lead to more small but significant increases in housing supply per a recent Urban Institute study, but has not yet as yet demonstrated that it can meet the needs of people earning 80 percent and below of the area median income.  

For zoning reform to be a meaningful affordable housing solution, it must be accompanied by financial and other incentives. Missing middle housing doesn’t escape the fundamental arithmetic that undergirds many of the affordable housing developments that National Housing Trust (NHT) and other mission-motivated developers have successfully created for decades, in which public subsidy is required to create a public good that is otherwise unserved by the private market.  For example, NHT developed Liberty Place Apartments, a 60-unit multifamily building in the heart of downtown Washington, DC and walking distance from the Capitol and abundant jobs. This “conventional” affordable housing project was only made feasible because of an allocation from DC’s $100 million Housing Production Trust Fund (HPTF) which provides critical gap financing that allows local affordable housing development projects to pencil. But that alone was not enough.  Low-Income Housing Tax Credits (LIHTC) provided a significant share of the equity, which was further augmented by an equity investment from Amazon’s Housing Equity Fund to defray high development costs in exchange for long-term leases to residents earning below 80% AMI.

While the two-to-12-unit missing middle housing opportunities are a far cry from the 60-unit Liberty Place, what is not different is the need for dedicated financing to make it truly affordable. Successful affordable housing developers, like NHT, are only able to develop and preserve affordable housing by tapping into the resources specifically dedicated to making it affordable. It would be naïve to think that missing middle housing wouldn’t similarly need dedicated financial resources to make it affordable. Of the three funding sources identified for Liberty Place – a local housing trust fund, LIHTC, and a private equity fund -- conceivably only one or two might be applicable to a smaller-scale development of the type that missing middle zoning permits, and that would require an intentional prioritization of such developments in funding awards.  Tax credits and other such programs were designed specifically for multlifamily housing developments. As they are already severely oversubscribed, expanding the universe of eligible properties would only increase the competition. The Housing Equity Fund is as-yet untested in its ability to support affordable homeownership opportunities in missing middle projects – but shows promise to do so for moderate-income households. The HPTF is perhaps the most malleable and adaptable solution that could be used to drive the cost of missing middle housing down, making it more affordable.   

Localities and states will need to creatively augment zoning changes with incentives that work for developers in order to bring down the cost of rent or ownership – just like they’re already doing to create traditional affordable housing developments. Tax abatements, expedited permitting, waiver of service fees, targeted down payment assistance, forgivable loans or outright grants, and more will be needed to offset the cost of construction. Some communities have begun to introduce programs to address this need. For example, California Housing Finance Agency offered grants of up to $40,000 for qualified low- and moderate-income owners to cover pre-development expenses (design, permits, impact fees, and more) associated with building ADUs. In Washington, a Multifamily Housing Tax Exemption waives property taxes for developments of four units or more (effectively driving down the cost for residents) and incentivizes the creation of units affordable to low- and moderate-income households.

The challenge to solve our affordable housing crisis is as great as ever – and zoning change to enable more ADUs and missing middle housing is a critical but incomplete part of the solution.  Localities and states will increasingly look for ways to bring additional incentives to the table for prospective developers of missing middle housing, and ensure that those public benefits deliver benefits for households in need without creating an undue burden.

Doing so will accelerate the growth in an emergent and much-needed new ecosystem for small-scale affordable housing that ensures that zoning change delivers on its promise to serve as a critical part of the affordable housing solution.

Danielle Arigoni
Danielle Arigoni

Managing Director for Policy and Solutions