Middle-Income Rental Housing Requires Partnerships
Middle Income Rental Housing Requires Partnerships

By Ed Finkel |



8 minute read

Developers are doing their best to stay on pace with rising costs and improve affordability.

Middle-income Americans, typically defined as households earning between 80% and 120% of Area Median Income (AMI) by the U.S. Department of Housing and Urban Development, have been finding housing purchases considerably more strenuous. According to the National Association of Realtors, the median-priced, existing single-family home price rose to $382,000 in March 2021, up from $274,600 in 2019.

Along with the recent spikes in interest rates, this has meant first-time homebuyers are having a challenging time obtaining a home—and this, in turn, has shone a spotlight on the prospects for boosting the supply of middle-income rental housing. But that’s not so simple either, according to developers, who say they typically need creative solutions of one kind or another to make it work for their bottom lines. But that isn’t so simple, either, because such developments are ineligible for most programs aimed at affordable housing.

Bristol Development Group, a Franklin, Tenn.-based firm that’s built around 10,000 units across the southeastern U.S., doesn’t necessarily play in markets with sky-high land costs like California or New York—and yet, building middle-income housing without subsidies can be prohibitive, says CEO Bryan Jacobs.

“A 2-by-4 is a 2-by-4 is a 2-by-4, no matter if you’re putting in Formica or quartz countertops, or if you’re putting in linoleum for flooring, or vinyl flooring, or vinyl plank, or even wood,” he says. “It’s hard to make something fit into that box if you’re paying market for all the things that you need to do.… It comes down to the structure of the investor and the developer—what kind of return are they requiring for their funds, to go in and take the risk?”

Municipalities, whether at the city or county level, need to put politics aside and be proactive, Jacobs says. Renters are at risk of stretching their budget to afford a manageable commute to work in many metropolitan areas; or they decide to move further out into the exurbs, which he notes has become a more realistic option given the shift toward remote work in the past few years.

“Even in the context of somebody who’s remote three days and goes into the office two days, they may be more willing to make an hour drive,” he says. “They have a better overall place to live in terms of space that they can afford in a suburb or exurb. That has certainly helped.”

Florida, where Bristol has done a fair amount of building, recently passed legislation that developments incorporating at least 20% workforce housing cannot be denied zoning, which clears the hurdle of NIMBY (Not In My Back Yard) opposition to apartments in certain areas, Jacobs says. “That kind of incentive can help,” he says. “It’s not mandatory.”

Building middle-income housing in a high cost-of-living area like Southern California presents an even steeper dilemma, especially after decades of zoning codes that gave preference to single-family housing, dating to a time when land was considerably cheaper and more plentiful, says Andrew Malick, Founder and Principal of San Diego-based Malick Infill Development.

“The issue is the cost of land, and the cost of construction,” he says. “Those have gone up significantly in this last [economic] cycle to the point where, even if you do have a streamlined entitlement process, and you’re not spending a bunch of money upfront doing community meetings, it’s expensive to build and buy the land.”

Given the challenging interest rate environment, Malick has focused on two mechanisms to boost affordability: downsizing units, taking the typical one-bedroom from 750 to 550 feet; and searching for sites nearer to public transit so that parking spaces become less critical. “I’ve tried to claim the moniker of ‘San Diego’s Transit-Oriented Developer,’” he says. “Where can you rent somebody an apartment without a parking space? It has to be adjacent to transit, or in a walkable neighborhood where they can get to a job, or school, without the need of a car.”

Ultimately, to solve the middle-income housing crunch, Malick believes that the market needs more units built. “There is a place in some markets where inclusionary housing policy is the right way to build, but ultimately it is a distraction from the overall problem, which is that we don’t have enough homes,” he says.

The State of California’s density bonus programs, which allow developers to enhance density up to 50%, have been a beneficial incentive to pay for units to be built, legislation that Malick not only has leveraged but also helped to write, he says. He’s currently involved in a public-private partnership centered around a 99-year ground lease for part of an underutilized trolley station parking lot on which his company plans to build between 40 and 50 homes.

But while he’s gained some “elasticity” on the land price, Malick says, developments on public land face prevailing wage and project labor agreement requirements. “It’s the political reality in our state—that’s what the public believes is important,” he says. “In San Diego, one of our challenges is, we are not, traditionally, a strong union town. We’re in this interesting paradigm shift where the prevailing wage labor market is going to need to grow, to fulfill these larger public-private partnership projects.”

Malick also has turned to mass timber as a construction frame, which can be used for taller buildings than prefabricated materials and be put into place much faster than steel or concrete—12 stories can be constructed in 14 months as opposed to 28, he estimates. “Speed of delivery is an important part of the equation. How fast can you get the stuff to market, and be working on the next project?”

Middle-income housing does not have a truly dependable, steady funding source similar to those for lower-income housing, says Sean Rawson, Co-Founder and Head of Acquisitions and Development for Waterford Property Company, based in Newport Beach, Calif., which has a portfolio of 6,500 units throughout the state.

About half of California households earning between 60% and 120% AMI spend more than 35% of their monthly income on rent, but finding creative solutions is not easy; and in Los Angeles County, for example, 60% to 120% AMI translates to $56,000 to $98,000 per year, Rawson says.

“Who is that? These are key, integral folks in our communities—schoolteachers, public safety employees, police, fire, paramedics, civil servants, medical technicians and nurses. Then folks in the service industry—folks we interact with on a daily basis who are working throughout our communities,” he says. “They’re housing-burdened, which has led to longer commutes, and a lower quality-of-life, because folks who are working in our communities are being priced out.”

Waterford worked in partnership with the City of Anaheim in financing the acquisition of three large projects totaling 1,000 units near both Angel Stadium and Disneyland. Service employees for both facilities making between $60,000 and $90,000 per year were being priced out of the market, but the city agreed to provide property tax abatements in exchange for deed-restricting the communities to 60% to 120% AMI.

“We saw a huge influx of those folks who had moved away, moving back into the community because now they could afford to live there” as the lowered property taxes held down rents, Rawson says. “It was interesting to see it play out in the data.”

Overall, Waterford has built 4,000 units in similar fashion, resulting in an average savings of approximately $800 per month in rent. “To a household making $56,000 to $98,000 per year, that’s significant savings,” he says. “It’s scalable because it was done via acquisition, whereas traditional affordable housing can take anywhere from four to five years from the time-to-start, to lease-up.”

The City of Long Beach has helped this process along for Waterford and other developers by rezoning a portion of the city for expedited development aimed at workforce housing, Rawson says. But unless policymakers are committed to finding such creative solutions—absent the political will—it’s very dicey, he says.

“We don’t have the financing tools that we have in the traditional affordable space,” Rawson says. “This comes back to, the capital markets are the capital markets. It’s challenging, with where construction costs are, to provide true middle-income housing without some financial incentive or program like that, that helps cushion the economics.… You need a dedicated funding source like property tax abatements to make it work.”


Ed Finkel is a freelancer writer for units Magazine.



California Statewide Communities Development Authority

About 7,700 households who fell between 60% and 120% of Area Median Income (AMI) availed themselves of a temporary program run by the California Statewide Communities Development Authority (CSCDA) that issued about $4.7 billion in tax-exempt bonds to acquire and convert about 30 properties throughout the state, restricting rent increases as rents in the state rose by double-digits between late 2020 and early 2022.

“The projects are located in areas where rents are high, relative to Area Median Income, and where the cities had interest in participating,” says Jon Penkower, Managing Director of the CSCDA, which took advantage of historically low interest rates. “The families are saving $400, $600, $900 per month. Some were already living in some of these properties. They were rent-burdened, spending 40% to 60% of their income on rent. A lot of [residents] were city and county employees—teachers, first responders, health care workers—your true missing middle.”

The program was discontinued as interest rates rose dramatically last year, Penkower says, adding that the properties are not investments—they are turned over to the respective cities at the end of the financing period. “We issued tax-exempt bonds; that’s the only source of funding for these projects,” he says. “That’s because there are no true equity stakeholders, no private partnerships. They’re government-owned, and managed by third-party administrators.”

The CSCDA has heard “scores of stories” about residents who were able to stay in place, Penkower says. “A lot of people left California during the pandemic,” he says. “We’ve had testimonials of people packed up and ready to leave, to go to Texas or Pennsylvania, who were able to stay here. Our program was one unique way of trying to alleviate the burden on the middle-income residents.”