Affordability has long been a serious issue within the Los Angeles housing market. Now, as the COVID-19 pandemic continues to cause uncertainty within the real estate industry, the demand for affordable housing is only set to grow as more people seek out new living arrangements.
In recent years there have been several proposed solutions to spark the development of more affordable housing options in Greater Los Angeles. These include new statewide legislation, the creation of opportunity zone tax benefits and — perhaps the most promising solution of all — a wave of multi-family and mixed-use commercial real estate development in the area.
Let’s take a closer look at the proposed and enacted solutions to build more affordable housing in L.A. that have the potential to make a difference in the lives of many in our community.
The California State Legislature continues to consider new measures aimed at tackling the state’s affordable housing crisis. Two bills taking effect on January 1, 2021 expanded an existing density bonus law and loosened restrictions on the development of accessory dwelling units.
The California State Density Bonus Law was first adopted in 1976. It encourages developers to include a certain percentage of affordable housing units within their residential projects in exchange for a density bonus. The law has seen several amendments over the years.
We have detailed two of the more prominent updates to the Density Bonus Law below.
Density bonuses, when combined with other initiatives, have proven to be an effective way to encourage the development of affordable housing across the state of California.
You can view the latest version of the law on the California State Legislature’s website.
Accessory Dwelling Units (ADUs) are small residences that share a single-family lot with a larger, primary dwelling. While ADUs have existed in the U.S. for decades, local governments have more recently enacted legislation to make them easier to build for homeowners.
In October 2019, Gov. Gavin Newsom signed Assembly Bill 68 (AB 68) into law. The bill allows homeowners to build a junior accessory dwelling unit (JADU) on their property in addition to an ADU. This means homeowners can legally have an ADU and a JADU on the same property.
While ADUs and JADUs alone aren’t enough to overcome the affordable housing crisis, proponents of AB 68 hope it will help open up affordable rental units elsewhere. They allow the homeowner to generate income while providing affordable housing for those in need.
You can learn more about ADUs in this PDF handbook from the State of California.
Congress established opportunity zones in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low income urban and rural communities nationwide. Once a community obtains opportunity zone certification, then investors can put their capital to work financing new projects and enterprises in exchange for capital gains tax advantages.
For example, if you were to hold a million dollar capital gain and you invest it into an opportunity zone development project, usually you would get a 3x return on that. Your proceeds should be about three million dollars. In this example of an opportunity zone investment held for 10 years, your gain from your gain is 100% tax free. If you continue to do that in perpetuity, you can make a large sum of money and create generational wealth that you can pass along to your family.
According to the National Multifamily Housing Council, “tax incentives available to opportunity zone investments have the potential to unleash significant production of multi-family housing.”
You can read more about the benefits of investing in opportunity zones in our related blog post.
The best way to help end the affordable housing crisis in Los Angeles is to supply more affordable housing. One of the most effective ways of doing that is through the development of multi-family commercial real estate, defined as residential properties with five or more units. There are a number of tax benefits that encourage investment in multi-family housing.
Some of the more common types of multi-family commercial real estate include high-rise apartments, mid-rise apartments, garden apartments and mixed-use residential space. These types of development projects provide a more affordable way of living for many residents.
Investing in affordable housing is a win-win solution for investors and the community. You can learn more about the benefits of investing in multi-family real estate in our related blog post.
Beach City Capital aims to provide affordable multifamily housing along the high-demand, high-barrier to entry coastal communities of Los Angeles. We design our communities from the ground up to maximize living, leisure and working spaces for our residents. In addition, our team of real estate experts can help you maximize your investment and earn valuable tax benefits.