What For-Profit Affordable Housing Looks like in LA (Part 2 & 3)
How ED 1 Works, and What we can Learn from it
This is the second and third part of a three-part series I originally wrote back in January, exploring the phenomenon of for-profit developers building affordable housing in LA. PRI’s Free Cities Center originally published all three pieces (Part 1, Part 2, and Part 3) - thanks to them for reaching out and working with me on the concept. Republished here with permission
How ED 1 Stacks Housing Reform
In the first part of this series, I reviewed the one bright spot in Los Angeles’ efforts to increase housing supply and reduce housing costs – the success of for-profit developers in building homes under the city’s Executive Directive 1, which reduced barriers to building affording housing. In this piece, I’ll look at the specifics of how ED 1 succeeded.
Considering three categories (inadequate zoning, high costs and slow approvals), we can see how ED 1 has catalyzed a mini-building boom. What made the pathway so appealing was the ability to combine multiple reforms that addressed each of these specific barriers to homebuilding.
The first is obvious: ED 1 gives new housing a predictable timeline for approval, something unique and invaluable in Los Angeles. Developers have also expressed confidence that units offered below market rates will rent out very quickly once constructed given how much demand there is for lower-cost units.
But these projects have other advantages. Based on recent research, land-use expert Joseph Cohen May estimates that at least 85% of the proposed projects also benefit from one of two key zoning reforms: 1) the California state density bonus; or 2) LA City’s Transit-Oriented-Communities (TOC) program. While these programs are slightly different, they both share a common feature: they give developers a “density bonus” to construct more units on a lot than they usually would be able to under existing restrictive zoning codes.
California’s state density bonus is the more popular option for ED 1 projects due to AB 2345, a 2021 law that allowed 100% affordable projects to include unlimited density and three extra stories of height. These projects were feasible because the original version of ED 1 allowed flexibility in pairing ED 1 with these density bonus incentives. The added density and efficient use of land allow projects to spread out their fixed costs, even though units will rent below market rate. This allowance for more density is the most critical piece of making these new projects feasible for for-profit developers, according to several affordable-housing developers I interviewed.
These laws have been on the books for several years, so why are projects suddenly coming online now?
Another layer to ED 1 has contributed to the building boom: relief from parking requirements that are often one of the most expensive line items in new housing. By some estimates, structured parking in Los Angeles can cost up to $55,000 per space. In 2022, California passed AB 2097, which allowed housing developments within a half-mile of a transit stop to have total flexibility in the number of parking spots provided. This opened up the potential for housing to be built at a much lower cost than before, and most ED 1 projects are opting for this flexibility. Many ED 1 projects are fully parking-free, significantly reducing the cost.
To illustrate this in a specific project, look at 1412 N Mariposa Ave., an ED1 project located in the city’s East Hollywood neighborhood. An Urbanize LA article describes the project as “a new six-story, approximately 20,000-square-foot building which would feature 73 studio apartments in a building without on-site parking.” Based on public information, the developer PAX Urban Partners has previously built market-rate and mixed-income housing.
So why, in this case, do they plan to offer 100% below market rate units? First, zoning reforms allow a taller, bigger and denser building than would typically be allowed. RD2-1XL zoning would limit development to two stories and three to four units. But by using the California’s density bonus law, the building grew to five stories and included 73 studio apartments.
Second, the building is taking advantage of parking reform to forgo the extra cost of building a parking garage, providing zero on-site parking spots. This arrangement may not work in all neighborhoods and for all potential residents, but in this context, it makes practical sense. The proposed building is in East Hollywood, one of LA’s densest neighborhoods. It is a 10-minute walk from a major metro stop on LA’s B line – putting most of downtown Los Angeles and central Hollywood a 25-minute or less train ride away.
Given the building’s studio units, it makes sense to bet that younger, economically-minded residents would be more than willing to live without a dedicated parking space in an area that’s close to jobs and entertainment. And, of course, with ED 1 streamlining, the builder is counting on a quick approval process, opening up a business model where revenue can be realized much sooner.
Many other projects follow this same playbook. 2528 E 1st Street in Boyle Heights will provide 51 apartments in a four-story building on a commercial lot without providing any on-site parking. Down the street, 2330 E 3rd Street, is a four-story, 53-unit project being built on a vacant low-density residential lot without any on-site parking. In Vermont Knolls in South LA, 7313 S. Figueroa Street has a seven-story, 145-unit project built on a commercial lot without providing any on-street parking. Reducing these parking requirement is resulting in a building boom.
Lessons from ED1
So what lessons can we draw from what Los Angeles has seen with Executive Directive 1, the city’s effort to streamline regulations for affordable-housing projects?
First, people passionate about making housing more affordable in their cities and neighborhoods should see the market as their friend, not their enemy. Research has long shown that adding new market-rate housing can drive down market rents in all neighborhoods, including low-income neighborhoods. But the evidence from ED 1 goes a step further. New housing can improve affordability by freeing up existing housing – and expand the overall housing stock without government subsidy.
This calls into question the conventional wisdom among California policymakers that market-rate and affordable housing are two different market segments and that new affordable housing needs subsidies to be viable. This is seen in California’s Regional Housing Needs Assessments (RHNA) process. RHNA sets targets for cities to produce housing at all levels of the housing market and asks cities to adopt new land-use rules to facilitate the production of those homes.
However, cities frequently complain that they will fail to produce affordable housing unless the state provides additional billions in funding. ED 1, however, shows that this is false. Whatever the merits of new public financing, cities could spur far more housing at all income levels if they reform their land-use rules and allow the market to work.
The second lesson for housing advocates is that incremental reforms are not in vain. There has been much consternation that the most ambitious and transformative reforms to land-use regulation have failed. This has led some commentators, like Christian Britschgi recently at Reason magazine, to label housing reform in California as a failure, especially as some of the most celebrated reforms have failed to produce new units.
Housing advocacy has failed to achieve all of its promises, but ED 1 shows how a series of incremental reforms can work together to unleash dramatic positive change when a certain tipping point is reached. Housing advocates should balance the desire to see change come quickly and boldly with the reality that, often, incremental change is the only pathway available. They can rest assured that the housing markets can dramatically improve from gradual changes.
The third lesson is policymakers cannot be content with the success of ED 1. They must continue to build upon it. While 10,000 homes built below market rate is a significant success, the city needs more housing than that. The good news is ED 1’s success came through policies that advanced three core objectives: zoning reform, reduced regulatory costs and speedier approval, all of which can be work together to boost housing supply.
There are plenty of other zoning reforms that cities can embrace to unlock market activity. A simple place to start is to strengthen the Transit Oriented Communities (TOC) program by widening the scope of land covered and the generosity of the bonuses given. California can also enhance the density bonus law and give developers more flexible incentives, as it did in 2023. One model both the state and city can look to is San Diego’s “complete communities,” which allows mixed-income projects around transit to have unlimited height and density.
Many policies can further reduce costs and reduce timelines. Los Angeles Mayor Karen Bass has already asked city staff to investigate how streamlining can expand to include mixed-income projects. Such a reform would open even more land to development, especially in wealthier areas with higher land values where ED 1 projects have yet to produce enough units.
Los Angeles can also further reform its building code. In some of the city’s densest neighborhoods, buildings are prohibited from using wood-based structures meaning costlier materials are used instead. Los Angeles can also quickly implement single-stair reform, which will allow buildings between four and six stories to have only one staircase. Once implemented, this reform will open up more parcels to development at a lower cost. And, of course, Los Angeles should reduce the impact fees that disproportionately force new housing to pay for infrastructure that often goes far beyond a project’s direct impact on public services.
The last lesson is the most profound: the intersection between market forces and policymaking can lead to outcomes that no one expects. These can be negative unintended consequences, such as when a poorly designed tax measure locks up the housing market. But it can also have positive outcomes. When Los Angeles Mayor Karen Bass issued ED 1 at the beginning of her term, it was applauded, but mainly as a symbolic gesture. Still, few housing observers anticipated the scale of development that would emerge in response. Only when many homebuilders figured out that different housing reforms could stack on top of each other did the volume of new housing explode.
This should leave us humbled. Modern cities are arguably the most significant achievement of human civilization, but unlike many other contemporary achievements, cities are not a top-down, planned phenomenon. The core of a city’s power lies with the millions of people who come together in bottom-up cooperation, often through market transactions.
Los Angeles County alone includes 2.4 million parcels, each unique. Los Angeles’ experts, planners and policymakers should be less confident that they can control what housing is built and at what price. It is possible that many ED 1 projects will not make a profit, but the current policy framework came together in a way that made builders willing to take chances. Planning rules should continually promote cooperation with the market rather than take an adversarial posture. That is the only viable pathway out of our crisis.