Solving the affordable housing crisis: Incentivize small and midsized developers to fill Indy's vacant lot inventory with missing middle housing

Indianapolis is facing a severe shortage of affordable housing. Specifically, there is an ongoing undersupply of new construction affordable housing in Indianapolis' Black neighborhoods. This diminishes the competitiveness of these neighborhoods to attract and retain population and become communities of choice with density and vitality. This circumstance persists despite the existence of a cadre of local, small and mid-sized Black developers and a large number of residential lots.

In fact, the single largest category of opportunity sites for affordable housing in Indianapolis neighborhoods is publicly and privately held residential lots. Single-family homes use more land per home than other housing types. Building multiple units on a given lot is the most direct way to reduce development costs and increase growth opportunities, because it spreads the cost of development across multiple units. A simple numerical example illustrates how redeveloping existing single-family lots with more compact housing types improves affordability and financial viability. Two typical single-family lots in Indianapolis are large enough to accommodate three side-by-side townhomes or a three-story, six-unit condominium building. Based on prevailing construction costs and with optimized financing terms, a developer could profitably build three new townhomes or build six two-bedroom condos. The financial implications are clear; adding more units to single lots reduces their per-unit costs and increases their margin. Reducing design costs and barriers to the creation of these small unit count projects is therefore critical to support developer growth.

However, four areas of disincentive exist:

First, there is an overreliance of the Indianapolis affordable housing ecosystem on Low Income Housing Tax Credits (LIHTC) to produce affordable housing, with only two allocations per round going to Indianapolis and often these going to the same group of developers.

Second, there is no small unit project affordable housing gap financing (2-25 units). Because the public-private inventory of vacant lots is in neighborhoods with significant appraisal gaps, it requires development subsidies that are difficult for developers to obtain and deploy for smaller projects.

Third, small lot design under the current regulatory and zoning scheme constrains developers to 1:1 replacement of single-family units, capping revenue and growth opportunity.

And lastly, there is a lack of financing and equity accessible to small and mid-sized minority-owned developers to move forward projects and respond to this market opportunity.

The result of these disincentives is an inequitable development playing field that eliminates opportunity for real estate for-profit and nonprofit housing producers to create new affordable housing supply. In addition, it results in the acceleration of decline and displacement, and diminished regional competitiveness of Indianapolis’ disinvested neighborhoods.

By addressing the above factors, the number of Black developers creating affordable and market rate housing in Indianapolis will be increased, which in turn will increase housing supply and reduce the number of Black low mod-income households forced to rent/buy unaffordable housing. By infusing capital, lowering barriers and risk, LISC can position more Black developers to build their balance sheets, compete in the affordable housing sphere and create more affordable housing in Black neighborhoods. 

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Dr. David Hampton, Executive Director

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