Development Subsidy How it works & when to use it Based on "Why Market Context Matters" Rock Advisory Partners
The Basic Problem
Sometimes it costs more to build than what the market will pay.
Cost to Build Reasonable Profit $$$ HIGH Cost to Build + Reasonable Profit THE GAP $ LOWER Market Value (also known as Fair Market Value)
When Is a Project Feasible?
When what it costs equals what the market will pay. Sometimes public funding (subsidy) is necessary to fill the gap.
IF Cost to Build Reasonable Profit Cost to Build + Reasonable Profit = Market Value Market Value (Fair Market Value) THE GAP PUBLIC SUBSIDY + Public Subsidy THEN Feasible!
When Should Government Use It?
Housing
When you want a specific type of housing in a specific place
Income
Serving clearly defined income bands
No market
And the private market can't deliver it on its own
Caution
Caution
If the real constraint is approvals, utilities, land, or uncertainty — not feasibility — then subsidy won't solve the problem.
Diagnosis first, then tools.
Two Kinds of Subsidy
Development Subsidy Closes the gap when the cost to build & operate exceeds what market rents or prices will support. → Helps the PROJECT pencil out Renter & Buyer Subsidy Closes the gap when fair market prices exceed what households can afford at ~30% of income. → Helps the HOUSEHOLD afford the home Both essential — but they solve different problems
The Bottom Line
"Build More &
Subsidize Better"
Build more
Build more
Works at the regional & citywide scale when the market can respond.
Subsidize better
Subsidize better
Works at the neighborhood & household scale where the market can't reach.
Powerful when used precisely, wasteful when applied indiscriminately.
Start with diagnosis. Not imitation.
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