TO: Mayor
and City Council
FROM: City Staff
SUBJECT: Strategies to Increase the City’s Supply of
New Affordable Units
INTRODUCTION
This report discusses the Affordable Housing
Production Program and other policies and programs that the City Council may
want to consider updating so that annual affordable housing production better fulfills
the goals of Proposition R.
The City Council directed
staff to evaluate the Affordable Housing
Production Program and/or other City programs and policies, and suggest ways to
update these provisions to facilitate meeting the Proposition R
affordable housing goals (that 30% of all newly constructed multifamily housing
each year be affordable to low and moderate income households).
As a matter of law and
policy, the City of
DISCUSSION
Changes in the
realities of housing production and in
There are several
options involving revisions to the AHPP, zoning regulations, permit procedures and
other City policies that the City Council may discuss and consider. These options are categorized as follows:
1. Update the affordable housing fees
2. Make other adjustments to the affordable
housing fee
3. Increase the density bonus
4. Further reduce parking requirements
5. Waive, reduce or defer various permit fees
6. Broaden permit streamlining
7. Amend Proposition R
8. Require on-site affordable units
On
1) Increase the affordable housing fee to the highest supportable
level
(Option 1);
2) Eliminate the current affordable housing fee discounts (Option
2.a);
3) Incorporate an annual inflation adjustment to the affordable
housing fee (Option 2.c); and
4) Allow payment of the affordable housing fee for fractional units
(Option 2.d).
The two Commissions also reached a consensus that two other proposed options
should not be pursued:
1) City permit fees should not
be waived, reduced or deferred (Option 5); and
2) Broadened streamlining is not
endorsed at this time but, Council should revisit that option in the future
(Option 6).
Finally, the Commissions recommended that City Council should direct
staff to continue researching the legal feasibility of mandating some
affordable units (whether on-site or off-site) for all new multifamily
developments (Option 8).
The remaining options that the Commissions did not reach consensus are:
1) Adjust the fees to account for construction and land cost
inflation to time of use (Option 2.b);
2) Vary the fees by City subarea (Option 2.e);
3) Change the basis of fee imposition to a percent of sale price for
condominiums. (Option 2.f);
4) Require affordable housing
fee payment when obtaining building permit (Option 2.g);
5) Allow market rate multi-family developers to
purchase “credits” in affordable housing developments built by other parties
(Option 2.h);
6) Increase the density bonus (Option 3);
7) Further reduce parking requirements (Option
4); and
8) Amend
Proposition R (Option 7).
All of the options presented to the Housing Commission and Planning
Commission are explained below in further detail.
1. Update the Affordable
Housing Fee
Since the adoption
of the AHPP, most developers, and particularly developers of condominium projects,
have elected to pay the affordable housing fee rather than construct affordable
units on-site or off-site. These fees
are deposited into the City’s Housing Trust Fund and are then provided as
grants or loans to developers of affordable housing, who usually leverage City
funds with other financial resources.
Thus, the amount of the affordable housing fee bears a direct
relationship to the number of affordable units that can be constructed.
The current
housing fees have not been updated for several years. The fee applicable to apartments was first
established in July 1998 at $6.14 per square foot and has never been updated. The condominium fee was originally
established in July 1998 at $7.13 per square foot and was then updated in March
2000 to $11.01 per square foot. These
fees were established based on a study prepared by Hamilton, Rabinovitz &
Alschuler, Inc. (HR&A) that focused exclusively on the relationship between
the demand for goods and services created by households who occupy new
market-rate multifamily development in the City, the number of low-wage workers
needed to satisfy this demand, and the costs of producing the affordable
housing needed by these workers who reside in low-income households. The study established
the fee range per square foot that could be imposed on new market-rate multifamily
development to help finance the development of affordable housing needed to meet
the demand created by market-rate multifamily housing development. The calculation approach was thoroughly peer
reviewed, at the request of the City Council, and has received favorable
commentary in the professional literature.
The formula for
calculating the affordable housing fees was based primarily on the income and
spending patterns of households in new market-rate housing, the lower-wage
labor demand needed to support this spending, and the cost of constructing
multifamily housing affordable for those lower-wage workers who reside in
low-income households. A detailed
explanation of these factors is included in Attachment A. Since the adoption of the current affordable
housing fee for apartment and condominium developments, new household income
and spending and other data have become available, and the costs of
constructing, renting, and purchasing multifamily housing have all increased
significantly. A detailed explanation of
the changes in the data used to recalculate the affordable housing fees since
the last fee update is included in Attachment B.
Based upon the HR&A’s
study formula and current data detailed in Attachments A and B, and broadening
the labor demand analysis to also include moderate-income households (up to
100% x area median income {
2. Other Adjustments to the Affordable
Housing Fee Option
There are several
other refinements to the AHPP’s affordable housing fee that should be considered
to ensure that it constitutes an equivalent affordable housing obligation as on-site
or off-site construction.
a) Eliminate the affordable housing fee discounts. The fee discounts contained in the AHPP may
no longer be necessary. Currently, the
AHPP includes a twenty-five percent (25%) discount on fees imposed on developments
constructed on vacant land in residential zones, and fifty percent (50%)
discount for developments constructed on non-residential sites (that do not
already contain multifamily units). These
fee discounts were intended to help steer new multifamily development away from
underdeveloped sites in multifamily neighborhoods and toward commercial areas. Multifamily development activity since the
fee discounts were established has occurred primarily in the non-residential
areas of the City, particularly the downtown.
This trend likely reflects the higher densities allowed in the downtown
and not the fee discounts. Therefore,
the fee discounts no longer appear necessary or justified.
b) Adjust the fees to account for construction and land cost inflation
to time of use. Affordable housing fee
revenue is deposited in the City’s Housing Trust Fund and often takes a few
years to accumulate until sufficient funds are available to fund new affordable
housing. During this interim, the fee revenue
loses some of its purchasing power due to construction and other development
cost inflation including increased land costs.
The fee amount could be adjusted upward by an annual inflation factor
for the average time the funds remain in the account prior to expenditure. The inflation adjustment should, ideally, reflect
a combination of factors such as changes in construction costs, area median
income, and land value based on data that is readily available. The inflation factor formula may need to
account for any interest earnings the City receives on the deposit of such
funds.
c) Annual inflation adjustment. The AHPP provides for periodic
recalculation of the fees to account for changed housing market circumstances,
but this is not automatic and historically has not been performed
annually. The program could provide for
an automatic annual inflation adjustment to the base fee amounts between
periodic recalculations, just as the office development affordable housing fee is
adjusted. This would be in addition to
the inflation factor described above, which accounts for the time that the fee
revenues are held in the Housing Trust Fund.
Once again, the inflation factor should reflect a combination of factors
such as changes in construction costs, area median income, and land value based
on data that is readily available for calculating the annual adjustment.
d) Allow fees for fractional inclusionary units. For developers who elect to include units in
their developments, but application of the percentage requirement results in a
fraction of a unit, consider applying the fee formula to the fractional
unit. This would eliminate an on-site
production disincentive in situations where the affordable percentage
calculation results in a fraction of a unit that then must be rounded up to the
next integer and treated as a whole affordable housing unit. This would not diminish the affordable
housing requirement.
e) Vary the fees by City subarea.
Fees could be established for several subareas of the City, as defined
by housing market differences (e.g., average land values, rents and/or purchase
prices). As is current practice, the affordable
housing fee update considers such differences and then averages across them for
a City-wide apartment and condominium development fee per square foot. This averaging approach has the effect of
slightly under-pricing the fee in higher-cost areas of the City (e.g., north of
Wilshire) and slightly over-pricing the fee in lower-cost areas. Since the adoption of the AHPP, more market
rate units have been constructed in higher-priced or rapidly appreciating areas. To the extent that this continues to be the
case, the City may be losing fee revenue.
Setting the fees at rates specific to their submarket areas would eliminate
this circumstance. The City Council
could also consider adopting a uniform fee based on a weighted average.
f) Change the basis of fee imposition to a percent of sale price for
condominiums. The current affordable
housing fee is imposed per gross square foot of new multifamily
development. This means that the fee has
a relatively larger impact on small developments and developments located in
lower-price areas compared with the impact on larger developments or developments
located in higher-price areas. One way
to minimize such effects, and allow the fee to move automatically in tandem
with changes in the real estate market, is to impose the fee as a percentage of
the sale price. For example, the updated
fee for a typical five-unit condominium development north of Wilshire Boulevard
is equivalent to about four and nine tenths percent (4.9%) of the average sale
price in that area.[1] This approach, however, would be more
complicated to administer and difficult to enforce.
g) Require affordable housing
fee payment when obtaining building permit.
Currently the affordable housing fee payment is not due until the
development is completed. The City uses
these fees to subsidize affordable units, and the ideal scenario is to have the
development of such units happen concurrently with the associated market-rate
units. Therefore, requiring developers
to pay the affordable housing fee at the time they obtain a building permit for
their market-rate units assists in achieving the concurrent development
scenario.
h) Allow market rate multi-family developers to purchase “credits” in
affordable housing developments built by other parties. Another option for meeting the affordable
housing obligation would be for developers to pay non-profit or for-profit
developers of affordable housing developments for some of the units in those developments
provided the payment is essential to completing the financing of the development
and complies with other elements of the AHPP.
This approach would be an alternative to paying an affordable housing fee
to the City, and could result in faster construction of affordable housing since
the payment would be used to complete the financing for a development already
under way. In addition to amending the
AHPP, such a credit system would require establishing new administrative
guidelines to ensure that the payment for credits is at least equal to the
amount of the otherwise applicable affordable housing fee, and that the payment
will result in relatively prompt construction that would not otherwise
result. All other requirements for
off-site affordable units, including type, size, location relative to the
market rate development, occupying household income and price restrictions,
would also apply. City monitoring of
such private transactions would be required.
This “credit” concept is a feature of the inclusionary housing ordinance
in
3. Increase the Density Bonus
Currently, if a
multifamily development satisfies its AHPP affordable housing obligation by including
affordable units on-site, other sections of the Zoning Code provide a minimum
density bonus of twenty-five percent (25%) above the underlying zoning standard
for that site. Until January 1st
of this year, the density bonus allowed in that instance was the same as that
mandated by State law, and was commonly referred to as the State density
bonus. To be eligible for this density
bonus a development had to have at least ten percent (10%) of the units
affordable to very low-income households or twenty percent (20%) of the units
affordable to low-income households, which are the same thresholds for the
affordable requirements in the AHPP.
The density bonus now
mandated under State law that became effective January 1st provides for
a sliding scale of density bonus depending on the percentage of affordable
units included in a development. The
density bonus sliding scale ranges from a minimum of twenty percent (20%) to a maximum
of thirty-five percent (35%). However,
the minimum eligibility criteria for the new density bonus have been relaxed. A multifamily development that includes only
five percent (5%) of the units affordable to very low-income households (lowered
from the previous 10% requirement), ten percent (10%) of the units affordable
to low-income households (lowered from the previous 20% requirement), or ten
percent (10%) affordable to moderate-income households in a condominium development,
is now eligible for a minimum twenty percent (20%) density bonus (lowered from
the previous 25% density bonus). State
law now allows a maximum density bonus of thirty-five percent (35%) to a
development that dedicates either eleven percent (11%) of its units to very
low-income households; twenty percent (20%) to low-income households; or
twenty-five percent (25%) of the units in a condominium development to
moderate-income households.
The State law
revision also requires that between one and three “incentives or concessions”
must be provided to a developer, depending upon the percentage of affordable
units included in the development.
It appears that
the City’s zoning regulations may need to be amended to be consistent with
the new State density bonus law, and this increased density bonus (from 25% to
35%) for meeting the AHPP requirements may provide a sufficient incentive for
more inclusion of affordable units in developments, rather than payment of an affordable
housing fee. Planning staff is preparing a more detailed analysis
of the implications of this State law on current City requirements for future Council
consideration.
4. Further Reduce Parking Requirements
Another incentive
to consider for developments that include affordable units is a reduced parking
space requirement. The City zoning
regulations currently allow a reduced parking requirement, but only for each
affordable unit. However, multifamily developments
also have a parking requirement regarding guest spaces, and the current zoning
regulations do not allow for this requirement to be reduced when affordable
units are included in the development. The
new State density bonus law discussed above mandates that developments qualifying
for the density bonus must also be granted a reduced parking requirement. Again, it appears that the City’s zoning
regulations may require amendment to be consistent with the new State density
bonus law. Because the cost of parking,
most often in subterranean levels in
5. Reduce, Defer or Waive Various
Permit Fees and Taxes
There are various
fees and taxes associated with multifamily housing development involving
planning and zoning applications, building permits, utility and sewer hook-ups
and parks and recreation fees. These
fees pay for City services provided in reviewing planning applications,
building plans, construction inspections, and other services. These fees amount to tens of thousands of
dollars for small developments and hundreds of thousands of dollars for larger
developments. Developers typically have
to pay these fees and taxes out of the equity contribution to the development,
because payment is required prior to the time a construction loan can be
obtained, and these costs are not always reimbursable from the construction
loan.
One incentive to
consider would be to reduce, defer or waive such fees and taxes on a
proportional basis to reduce the cost to the developer of providing affordable
units in their developments or constructing them off-site. The AHPP already provides for a waiver of the
Condominium Tax and the Park and Recreational Facilities Tax for constructed
affordable units. A similar approach
could be applied to planning permit fees, building permit fees and other public
works-related fees. Alternatively, these
fees could be reduced by some percentage, or payment could be deferred to
issuance of the certificate of occupancy, rather than at issuance of the
building permit. Although such a policy
would reduce the cost for those developments containing affordable units, the
City services represented by these fees would still have to be provided, and
the loss of revenue from these fees could create a budget problem and
ultimately affect staff availability for these functions.
6. Broadened Permit Streamlining
The time required
to complete the City’s permit processes also adds to the cost of development,
and any time savings for developments that include affordable units might serve
as an effective incentive. Currently the
AHPP provides that developments which include affordable units are to receive
priority plan check review (i.e., building permit process). However, a development begins at the planning
application stage and ends at the completion of construction. Another incentive to consider involves permit
streamlining for the planning approval process (and any appeals involving a
public hearing) and priority construction inspections. The entitlement process, plan check process
and the construction inspection process all take time that adds to the cost of
development. To the extent that a development
timeline can be reduced, there are cost savings to a developer that may
mitigate some of the cost of providing affordable units.
7. Amend Proposition R
Proposition R
requires that thirty percent (30%) of all new
multifamily housing on an annual basis
be affordable to low and moderate income households. Proposition R could be amended to allow
existing units that are rehabilitated and dedicated as affordable (via recorded
covenants) to count toward the thirty percent goal. For example, the City uses a portion of its
housing trust funds to subsidize the acquisition and rehabilitation of units by
the nonprofit housing community. This
effort does not count toward the achievement of Proposition R goals, even
though the number of affordable units is increased by this activity. Dedication of existing units furthers the
goals of preserving and creating affordable housing, whether undertaken by
nonprofit or market-rate developers.
Proposition R could also be amended so that the thirty percent requirement
must be achieved over a multi-year average, rather than the current annual
basis. For example, some years the
percentage of affordable units created on an annual basis may significantly
exceed the thirty percent requirement (as in the 1990’s), while more recently,
production has been below the thirty percent requirement. However, on an aggregate basis to date,
actual affordable housing production has exceeded the Proposition R mandate,
achieving an affordable housing rate of approximately forty percent (40%). Therefore, allowing the thirty percent standard
to be met using a multi-year average would level the year-to-year highs and
lows associated with real estate market cycles and financial packaging for
affordable developments, and may provide a more rational basis for evaluating
the results of the City’s overall affordable housing programs. Since Proposition R is a City Charter
provision, any amendment would require a vote and majority approval by the
City’s residents.
8. Require On-Site
Affordable Units
Ordinance No. 1615
(City Council Series), the City’s Affordable Housing Production Ordinance that
preceded Ordinance No. 1918 (CCS) mandated that affordable housing units be
developed on-site with limited exception.
When Ordinance No. 1918 (CCS) was adopted, the City Council chose to
expand the options for compliance with the affordable housing obligation for
both policy and legal reasons. As
discussed below, the legal concerns have not changed appreciably since Ordinance
No. 1918’s adoption.
Legal Issues
A city’s authority
to adopt an affordable housing production program was most recently affirmed in
Home Builders Association of Northern California v. City of Napa. However, the specific requirements of these
programs may still be subject to judicial scrutiny. In considering possible amendments to the
AHPP, several potential legal issues have been raised. No doubt other issues will arise as the City
proceeds to evaluate and update its affordable housing production ordinance.
One issue concerns
the ability of a city to mandate on-site inclusionary rental units. The legal uncertainty regarding a city’s
ability to impose a mandatory on-site requirement has not changed substantially
since the City adopted its AHPP. More
specifically, as to apartments, the issue remains whether the Costa-Hawkins
Rental Housing Act (“Costa-Hawkins Act”) prevents a local authority from
controlling the rents on inclusionary housing units. While the Costa-Hawkins Act was certainly not
drafted with this purpose in mind, its broad language might be read to affect
this result. Moreover, efforts in the
State legislature to modify the law to eliminate this possibility have
failed. Also, the applicability and
utility of the Costa-Hawkins Act exception for contracts with developers is
unclear. Finally, it should be noted
that the City’s prior inclusionary ordinance, Ordinance No. 1615 (
The second issue
concerns nexus requirements. Current
case law continues to require a connection between any exaction imposed upon a
private developer and the impacts of that development, although the
relationship between means and ends does not have to be as thoroughly
established for legislatively imposed fees as for ad hoc, development-specific
fees.
For instance, in San
Remo Hotel v. City and County of San
Francisco (a case which challenged San Francisco’s residential hotel
conversion law), the California Supreme Court reiterated the necessity of a
connection between development mitigation fees and development impacts. While the Court held that the heightened
scrutiny established by the United States Supreme Court in Nolan v.
California Coastal Commission need not be met, development mitigation fees
must still bear a reasonable relationship in both intended use and amount with
the deleterious impacts of the development.
The Court stated that this requirement was both a matter of statutory
law and constitutional law.
In City of
Another issue
concerns the impact of the Ellis Act on inclusionary housing requirements. To the extent that the requirements are based
on the loss of existing housing stock removed pursuant to the Ellis Act, the
ordinance may be subject to challenge, based on the decision in Bullock v.
City and County of San Francisco. A
recent Court of Appeal decision reaffirmed the Bullock decision, Reidy
v. City and County of San Francisco.
However, since the
No budget or financial
impact is incurred as a result of action on this recommendation. Future budget or financial impact will be
identified and reported.
RECOMMENDATION
It is recommended that the City Council consider and
discuss the various affordable housing strategies outlined in this report including
the recommendations of the Housing and Planning Commissions, and provide
direction to staff to prepare applicable amendments to the Affordable Housing
Production Program and/or other City policies or programs, for subsequent
Council action.
Prepared by: Jeff Mathieu, Director, Resource Management Department
Ron Barefield, Acting Housing & Redevelopment Manager
Jim Kemper, Acting Housing Administrator
ATTACHMENTS
Attachment A: Overview of the HR&A’s Affordable Housing Impact Analysis Approach
Attachment B: Changes to Prior Application of the Affordable Housing Impact Calculation Approach
[1] Assumes the recalculated citywide average condominium affordable housing fee per square foot applied to a five-unit North of Wilshire condo project with average sale prices of $816,969 per unit (i.e., [$25.63/s.f. x 7,800 s.f.] / [$816,969 x 5 units] = 4.9%).