One approach, widely used in the United States, is for a municipality to leverage its regulatory power in order to incentivize private sector investment in a designated urban regeneration area through the offer of a density bonus. A density bonus is an incentive-based tool that permits a developer to increase the maximum allowable development on a site in exchange for either funds or in-kind support for specified public policy goals. This tool works best in cities in which market demand is strong and land availability limited, or for projects or sites in which the developer’s financial incentives outweigh alternative development options. Density bonuses have been used to promote, among other policy goals, environmental conservation, public spaces, and production of additional units of low-income (or “social”) housing.
The density bonus program was introduced in New York City in 1961. It granted developers the right to build three additional square feet of construction in return for every one square foot of public space improvement they carried out at the street level within their property (usually a setback to create a plaza or the development of an arcade). This density bonus was later revised to 10 square feet for every square foot of public space improvement, up to a certain upper threshold for such a construction bonus. This program was responsible for the development of over 500 privately built public spaces in Manhattan over three decades. São Paulo, Brazil, had a similar program called outorga onerosa, which gives property owners an as-of-right construction bonus of up to 20 percent of their existing development if they make a predetermined cash contribution to a city-wide general purpose infrastructure improvement fund.
This tool’s usefulness is limited to robust market environments in which a project’s developer can “afford” the additional cost of incorporating subsidized housing units. Nonetheless, an advantage of deploying this tool is to encourage creation of a mixed-income community. For example, it allows a municipality to stimulate construction of a public good (in this case, additional affordable low-income residential units) without having to spend precious capital funds.