Cities That Build Get Paid: Innovation Fund Act Rewards Local Governments for Increasing Housing Supply

If you’re a busy person in your 30s or 40s, you know the housing market is brutal. Whether you’re trying to buy your first place, find a decent rental, or just stay put, the cost of housing is eating up more and more of your paycheck. The Innovation Fund Act aims to tackle this by setting up a competitive grant program run by the Department of Housing and Urban Development (HUD) to reward local governments that actually manage to increase their housing supply.

This isn't just a handout; it's a cash incentive for reform. The bill authorizes $200 million annually, adjusted for inflation, from 2027 through 2031. Grants will range from a minimum of $250,000 up to $10 million, and they go only to cities, counties, and tribal entities that the Secretary of HUD determines have shown “objective improvement in housing supply growth.” This means if your local government has been serious about cutting red tape and getting more homes built, they get a shot at this money. The Secretary must publish the exact methodology for determining this improvement 90 days before the funding notice is released, which is a key detail for transparency.

The Pay-to-Build Playbook

What kind of housing are we talking about? The bill focuses on “attainable housing,” which is defined pretty broadly: housing serving households earning up to 120% of the Area Median Income (AMI). For many working professionals and middle-class families, this is exactly the segment of the market where supply is tightest. The application process requires local governments to submit hard data showing the characteristics of the housing they’ve added over the last three years, including what income levels that housing serves.

Crucially, the bill spells out exactly what kind of local reforms HUD wants to see. These are the kinds of changes that actually impact the cost and speed of construction. We’re talking about eliminating restrictions against accessory dwelling units (ADUs—think backyard cottages), revising or eliminating off-street parking requirements (a massive cost driver for new construction), and allowing increased density by changing things like minimum lot sizes or building height limits. If your city is willing to allow a triplex where only a single-family home was permitted before, they’re in the running for a grant.

Where the Money Goes

If a city or county wins a grant, they get a lot of flexibility on how to spend it. The funds can be used for a wide range of community development activities already authorized under existing law (like the Community Development Block Grant program) or even for transportation projects. This flexibility means the money could go toward fixing up a park, improving water infrastructure, or building a new transit station—all things that support the new, denser housing the city built to win the grant in the first place.

This broad use, however, is where the fine print matters. While the primary goal is to reward housing growth, the funds could potentially be used for activities only loosely related to the housing push itself. Local officials will need to demonstrate how the use of the grant “addresses a community need or advances an objective” in their existing housing and community development plans. The Secretary also has the discretion to prioritize entities that show “innovative policies,” which means the places that are really thinking outside the box on reducing construction costs will get first consideration.

The Local Control Line

One of the most important provisions is a clear rule of construction: this Act does not authorize the Secretary to mandate, supersede, or preempt any local zoning or land use policy. This is the bill’s way of saying, “We will reward you handsomely if you choose to reform your zoning, but we can’t force you to.” For local jurisdictions that prefer to maintain restrictive, low-density zoning, this bill offers no benefit, and they won't be eligible for the funds.

This approach is a smart way to incentivize change without triggering the political firestorm that federal mandates often create. The challenge, of course, is that the definition of “objective improvement in housing supply growth” rests solely with the Secretary, and that methodology needs to be clear and robust. If it’s too vague, it leaves the door open for political maneuvering. Overall, the Innovation Fund Act is a clear signal from the federal level: if you want help funding your local priorities, you need to prove you’re doing your part to fix the housing crisis by building more homes.