M EMORANDUM. Attachment 7. Steve Buckley and Margot Ernst, City of Walnut Creek. Darin Smith and Michael Nimon, EPS

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1 Attachment 7 M EMORANDUM To: From: Subject: Steve Buckley and Margot Ernst, City of Walnut Creek Darin Smith and Michael Nimon, EPS Affordable Housing Fee Update Considerations; EPS # Date: March 23, 2016 This memorandum is prepared by Economic & Planning Systems, Inc. (EPS) for the City of Walnut Creek as part of the review of the City s affordable housing policies and an affordable housing fee update. It summarizes the analysis designed to inform the optimal affordable housing fee level. This analysis builds on the maximum nexus-based affordable housing fee estimates completed by EPS and is designed to supplement those studies. Jurisdictions often charge fees below the maximum nexus level to avoid over-burdening new development (causing financial feasibility issues) and/or to remain competitive or on a par with peer and neighboring cities. Feasibility considerations in this analysis combine the following two approaches: Housing fee survey. EPS conducted a survey of housing mitigation fees imposed in other comparable jurisdictions in the Bay Area. The data includes the current fees by land use, implementation considerations, inclusionary requirements, and date of adoption. Financial feasibility analysis. EPS developed illustrative pro formas for several land uses to evaluate the financial impact of affordable housing fees on project feasibility. This analysis assesses the extent to which the maximum impact fees may reduce a typical project s financial returns to inform a fee threshold at which development economics may be supported. In addition to these considerations, this analysis also suggests updates to the City s affordable housing ordinance to ensure the City s affordable housing policy goals are internally consistent and appropriately implemented.

2 Affordable Housing Fee Update Considerations Page 2 Key Findings Housing Fee Survey Findings 1. An excessive financial burden on desired new development could thwart the City s other policy goals (economic development, housing production, etc.). Affordable housing fees charged by other Bay Area jurisdictions vary significantly based on a wide range of factors, including community priority and associated housing goals, the cost of subsidizing construction of affordable units, land values, and development costs, among other reasons. Jurisdictions often seek to charge fees similar to those in their general market area, to minimize the extent to which the fees may create a competitive disadvantage for attracting new development activity. 2. Walnut Creek s current affordable housing fees fall within the range charged by comparable jurisdictions. The City s residential affordable housing fees fall within the middle of the range, whereas commercial linkage fee levels vary relative to other jurisdictions fees. Specifically, existing office fees fall on the low side of comparable range, while lodging, retail, and auto dealer fees exceed comparable city average. The light industrial/service commercial category falls within the middle of the comparable city range. 3. The maximum nexus-based affordable housing fees substantially exceed the range currently imposed by comparable cities for all uses and results in the fee level that would not support new development. These fees are estimated at up to $104,700 per $1.25 million for-sale unit or up to $61,200 per 3-bedroom rental unit. These estimates significantly exceed the average in other comparable cities, estimated in the $15,000 to $16,000 per unit range. For commercial uses, maximum nexus-based fees of over $100 per square foot significantly exceed the average range of between $2 and $10 per square foot. Financial Feasibility Analysis 4. The fee increases should be considered in the context of the overall cost burden for new development. Affordable housing fees comprise one of many developer costs, including development impact fees, utility fees, school district fees, special district fees, plan check and planning fees, and others. The tested affordable housing fee increase should be considered as part of the overall cost burden for new development. Specifically, although this analysis assumes the cost increase will be available to fund affordable housing, the City will ultimately use discretion to determine the most appropriate allocation of funding to the extent the cost burden is increased for any of the fees within the City s control. 5. Limited fee increases are likely to be supported with minimal adverse impact on development feasibility in Walnut Creek. EPS tested increases of 33 to 60 percent on residential uses (from $15 per square foot today up to $22) and 100 percent on commercial uses (from $5 per square foot to $10). Although these fee increases reduce development feasibility marginally, they are not likely to significantly deter new development. Specifically, because these few extra dollars per square foot are a small percentage of overall development costs, most projects are likely to yield financial returns similar to those achievable under the City s current fee structure.

3 Affordable Housing Fee Update Considerations Page 3 6. This development feasibility analysis is based on high-level prototypes for each land use and is not reflective of site-specific factors that could have significant implications on development decisions. A number of site specific factors, such as location, parcel size, accessibility, visibility, soil conditions, and height limits, can make development feasibility more challenging. In these cases, tested fee increase could have a substantial adverse impact on development feasibility. Housing Ordinance Review and Potential Revisions 7. The City may wish to adopt a nexus-based fee program for for-sale housing rather than maintaining the inclusionary zoning approach for for-sale housing and the fee-based program for rental housing and commercial development. This adjustment would promote methodological consistency among the City s various affordable housing requirements, and would also make payment of the fee the default for all projects rather than encouraging for-sale housing projects to build units on-site. Unit construction could still be allowed as an alternative means of complying with the fee requirements. 8. The City may wish to retain but amend its inclusionary ordinance requirement to yield more comparable results between the range of developer options. Presently, developers have a choice of meeting their inclusionary requirement by providing 6 percent very low income units, 7 percent low income units, or 10 percent moderate income units. Based on the funding gap estimate established in the nexus analysis, these options available to developers have variable costs, raising the probable outcome that developers will choose the option that has the least financial impact on their projects. By EPS s estimation, the lowest cost option is the 10 percent moderate income accommodation onsite. The options could be made more economically comparable by increasing the required percentage of moderate income units. 9. Several text changes may enhance the City s existing ordinances. These changes include clarifications to the upfront purpose statement and the requirement for the In-Lieu Fees not exceeding the average estimated cost of otherwise providing the units onsite in the City s Affordable Housing ordinance for residential development. Affordable Housing Fee Survey Methodology EPS conducted a survey of development impact and inclusionary housing fees in jurisdictions in the Bay Area comparable to Walnut Creek. These jurisdictions include several cities in the Bay Area where fees have been recently updated. While this survey is not a comprehensive review of all Bay Area fees (as some jurisdictions do not charge affordable housing fees), it is designed to provide an order of magnitude and variance for fees charged by jurisdictions comparable to Walnut Creek. This survey makes use of information collected by EPS as part of the Development Impact Fee Review and Competitiveness Assessment prepared for the City of Walnut Creek in January 2016 as well as other research for various clients over the past 12 months. Specific fees may vary at

4 Affordable Housing Fee Update Considerations Page 4 any time as fees are updated periodically. Where necessary, due to unique implementation factors, EPS has noted key assumption required for estimating the applicable fee. Development impact fees charged by comparable jurisdictions are shown in Table 1 with inclusionary requirements in these jurisdictions shown in Table 2. Results There is a wide range in fees charged by various Bay Area jurisdictions, as shown in Table 1. Walnut Creek s housing mitigation fees generally fall in the middle of the range of comparable Bay Area jurisdictions. However, Walnut Creek s fee of $15 per square foot is well below the maximum of $28 to $30 per square foot charged by Berkeley and San Carlos as well as fees charged in neighboring Pleasant Hill. Among other scenarios, the development feasibility analysis described below tests affordable housing fees in Walnut Creek at the $20 to $24 per square foot range, reflective of a 33 to 60 percent increase from the existing level. 1 This would make Walnut Creek s fee higher than most comparable cities in the survey but still below those with the highest fees. Walnut Creek has a flat commercial linkage fee of $5 per square foot, whereas many other jurisdictions vary their commercial linkage fee by land use (see Table 1). Existing office fees in Walnut Creek fall on the low side of the comparable city range where fees average $9.65 per square foot. This average is highly skewed by the Silicon Valley cities where office fees are typically higher. However, for lodging, retail, and auto dealers, Walnut Creek s existing fee appears to exceed comparable city average. Light industrial/service commercial is the only use where Walnut Creek s fees are close to the comparable city average. The maximum nexusbased fees fall well outside of the typical fee range. Implementation of the maximum fee would put Walnut Creek s commercial fee above all surveyed jurisdictions for all commercial land uses. For purposes of development feasibility analysis described below, EPS tested a commercial linkage fee of $10 per square foot for all commercial uses based on the input from City staff. This implies doubling of the existing fee and would be applied to a broader range of commercial uses relative to the existing fee. Specifically, hospitals are currently exempted from paying a commercial linkage fee in Walnut Creek as well as in most comparable cities. 2 Although the tested fee exceeds the average in other cities, the average is partially reflective of many jurisdictions choosing to lower their fees for commercial uses, as part of economic development and fiscal benefits goals associated with new growth. Inclusionary requirements imposed on for-sale development by comparable jurisdictions are shown in Table 2. Walnut Creek s existing inclusionary requirement of 6 percent for very low income units is on par with the average imposed by comparable jurisdictions. However, the City s inclusionary requirement of 7 percent for low income and 10 percent for moderate income units is generally below the respective averages imposed by comparable jurisdictions. 1 Although a fee of $22 per square foot is tested in this analysis, the feasibility analysis is designed for illustration purposes and is not expected to yield substantially different results from small changes (e.g. $2 per square foot) in either direction. 2 Although public hospitals are exempted from affordable housing fees, the treatment of private hospitals varies.

5 Affordable Housing Fee Update Considerations Page 5 Development Feasibility Analysis Methodology EPS developed vertical development pro formas for a range of uses considered in the fee program as an illustrative tool for analyzing the financial feasibility of potential housing mitigation fee levels on different types of new development. These pro formas include the general costs of land, construction, and other development activities, as well as values or lease rates achieved by new development under current market conditions. Pro forma assumptions build on financial feasibility work for West Downtown Specific Plan completed by EPS in January 2015 but assume development could happen elsewhere in the City. EPS made several updates to the market information to reflect changes since the last draft of the analysis and to add hospitality, eating and drinking places, and light industrial/services categories not previously included in the West Downtown Specific Plan analysis. Results EPS compared developer/builder s return on investment estimates for each land use under the existing, maximum, and tested fee scenario. This comparison, summarized in Table 3, is designed to evaluate the impact of the fee on the overall development feasibility for each land use. The results are also illustrated in Figure 1. Figure 1 Developer Return on Investment Sensitivity Under Various Affordable Housing Fee Levels 20.0% 10.0% Development Feasibility Threshold 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% Existing Fee Maximum Fee Survey Based Fee

6 Affordable Housing Fee Update Considerations Page 6 Under current market conditions, all uses with the exception of office and light industrial/ commercial are estimated to be feasible under the existing fee of $15 per square foot for residential uses and $5 per square foot for commercial uses. 3 All uses become infeasible under the maximum nexus-based fees because the fees represent too high a proportion of total development costs and achievable developer return cannot support those added costs. However, with tested fees at $20 to $24 per square foot range for residential and $10 per square foot for commercial uses (an increase of 33 to 60 percent and 100 percent respectively), development feasibility of most land uses is only marginally reduced and is not likely to adversely affect new development in Walnut Creek. Specifically, projects are likely to yield financial returns similar to those achievable under the City s current fee structure leaving the basic feasibility of the Project largely unchanged. 4 Only hospitality appears to be potentially infeasible with the tested $10 per square foot fee out of the uses that are feasible under the current fee. Key Assumptions EPS utilized a number of assumptions to develop the financial feasibility analysis. These factors will change over time as the economy and real estate market conditions fluctuate. Key assumptions are described below. Land Values EPS based the land value estimates on recent land sales in Walnut Creek and surrounding jurisdictions. Land values are differentiated between residential and commercial designation with average residential land value assumed at $5.0 million per acre and average commercial land assumed at $2.7 million per acre. While the economics of each land use vary, this analysis assumes that all sites entitled for residential development generally compete for residential uses and all sites entitled for commercial development compete for commercial uses. This is a simplifying assumption as economics of any given development project will be heavily influenced by the underlying value of the property, which will at least partially reflect the value of existing zoning (e.g., a low-scale retail strip center that may be redeveloped for office space), the allowable land uses and densities under development regulations (e.g., residential vs. office vs. industrial), location and access attributes, and certainly the value and return expectations of the property owner. Revenues This analysis utilizes for-sale residential value estimates and a range of monthly rent assumptions based on EPS s previously conducted work in West Downtown Specific Plan, additional market research, and market data reported by Costar. Office rents are based on fullservice leases while retail, eating and drinking places, and light industrial/commercial rents are 3 Although office and light industrial/commercial uses are found to be infeasible in the current market given a range of generalized assumptions, some unique circumstances may make new development feasible, such as favorable location with rent premiums or low land value achieved by the developer. 4 This analysis assumes a return on investment (net revenue/total development cost) of at least 8.0% would need to be achieved to support development feasibility of vertical development. Return on development investment varies based on a range of factors such as risk perception, capital and real estate market conditions, building uses and scale, and other trends.

7 Affordable Housing Fee Update Considerations Page 7 based on a triple-net lease. Lodging revenues are based on typical room charges in central Contra Costa County hotels. Potential building sale values are determined by applying a capitalization rate to net operating income. Capitalization rates are based on the West Downtown Specific Plan analysis. EPS assumes a 3 percent cost of sale for for-sale residential uses. Development Costs EPS uses cost estimates that vary by land use and include direct building construction cost, parking/site improvement costs, indirect costs (including tenant improvements for commercial uses), and development contingency. Direct building construction cost estimates are based on EPS s prior work in West Downtown Specific Plan as well as other financial feasibility work. Parking costs reflect a range of parking options ranging from surface to structured spaces and are based on respective parking requirements for each land use. Indirect costs include general and administration, permitting/fees (including development impact fees with the exception of the affordable housing fee), architecture and engineering, legal, marketing, insurance, and financing costs. These costs are assumed at 40 percent of direct and parking costs with the exception of for-sale residential, where a 45 percent factor is applied to reflect additional warranty and insurance requirements imposed on for-sale uses. A 5 percent contingency is assumed across all product types to reflect a potential cost escalation risk or uncertainty associated with cost estimates in this analysis. In each scenario, the assumed housing mitigation fee is listed separately to illustrate the magnitude of cost change tested. Affordable Housing Ordinances Update The City s existing inclusionary housing ordinance (Ordinance 2095) was adopted in 2010 and requires that a for-sale housing development provide either 6 percent very low income units, 7 percent low income units, or 10 percent moderate income units. It is understood the City is considering amending its inclusionary ordinance to update some language and inclusionary requirements that link the City s affordable housing fee update and inclusionary requirement. The City also has a Commercial Linkage Fee Ordinance (Ordinance 2040) adopted in Below, EPS discusses some options for updating the existing ordinances. Replacing Inclusionary Requirement with a Fee-Based Requirement The City may choose to replace its existing inclusionary housing ordinance that applies to forsale housing with a nexus-based fee ordinance similar to that adopted for rental housing and commercial development. This approach would make all three programs consistent in their underlying logic and methodology, and would establish the payment of a fee as the default means of satisfying the City s affordable housing goals for new development. This approach may also have the benefit of underpinning the City s policies with a nexus study, rather than having the affordability requirements set simply as a matter of the City s police powers on land use regulation. If the City elects to pursue this approach, the existing ordinance and related municipal code section (Title 10, Chapter 2, Part III, Article 9) could be amended to incorporate similar language for for-sale housing as is already included for rental housing. As in that section, the code could clarify that provision of affordable units on- or off-site will be an allowable alternative means of compliance with the City s impact fee requirements for both for-sale and rental developments,

8 Affordable Housing Fee Update Considerations Page 8 and that the number and affordability level of such units must yield comparable value or benefit to the City as the payment of the impact fee. Retaining and Amending the Inclusionary Requirements Alternatively, the City may choose to update the affordable housing ordinances to yield more comparable results between the alternative options in the inclusionary requirements. The affordable housing nexus studies establish the cost to subsidize affordable units, called the funding gap. When the funding gap is applied to the City s current requirement, existing inclusionary options available to developers at their discretion do not appear to have equivalent costs, raising the probable outcome that developers will choose the option that has the least financial impact on their projects (see Table 4). The fees calculated in this study range between $10,200 and $19,500 per for-sale unit, depending on whether the standard is 10 percent moderate income units (yielding the bottom of the fee range) or 6 percent very low income units (yielding the top of the fee range). This suggests that developers would be inclined to provide the 10 percent moderate units, as the overall cost to subsidize those units is lower and the resulting profitability of the overall project is higher than if the developer provides fewer but more costly low or very low income units. One alternative would be to update the inclusionary requirement based on the updated fee level for for-sale units by size. As an example, the $22 per square foot fee tested above would result in housing fee revenue of about $2.2 million for a 100-unit market-rate for-sale project with 1,000-square foot units. The funding gap analysis indicates that this $2.2 million revenue would be able to subsidize the production of 7 very low income units, 12 low income units, or 22 moderate income units, and the City may update the inclusionary requirements to reflect these ratios (rather than the 6 percent very low, 7 percent low, and 10 percent moderate options currently available). For comparison purposes, the existing $15 fee would subsidize 5 very low income units, 8 low income units, or 15 moderate income units using the same methodology. Of note, however, is that the comparison of fees and subsidized units can vary significantly based on the size of the units paying the fee, as shown in Table 5. While the City could calculate these fees relative to unit equivalencies uniquely for each proposed project using the funding gap analysis provided by EPS, it may be administratively preferable to simply set an equivalency ratio that applies to all projects and units regardless of their size. To the extent the housing ordinance is amended, EPS also suggests an upfront statement defining the key objectives of the requirements. For example, EPS suggests revision of the language in Section Article D requiring the In-Lieu Fees shall not exceed the average estimated cost of otherwise providing the required Inclusionary Units affordable to a Very Low Income Household, a Low Income Household or a Moderate Income Household, as applicable This language could be enhanced to make it easier to require more than the bottom of the range calculated in Table 4 under the current terms of the inclusionary ordinance. As an alternative, this language should be either taken out or a word net should be added to the estimated net cost of otherwise providing, referencing the funding gap. Additional language augmentations should be considered for the City s Commercial Linkage Fee Ordinance.

9 Affordable Housing Fee Update Considerations Page 9 Caveats Feasibility tests are not provided for the hospital, recreation and entertainment, and automotive dealer uses because development economics for these uses vary significantly based on a wide range of factors. Financial feasibility pro formas are developed for illustration purposes to characterize the relative impact of the affordable housing fee increase. These pro formas are not specific to any particular project or location within the City and are based on common prototypes and densities for each land use. Development conditions can fluctuate based on a range of factors, such as density, parking and design, location within the City, soil and other site conditions, size, and scale, a mix of uses, and many others. Given a number of uncertainties associated with these factors, any given development project could have somewhat different financial performance from those estimated in this analysis. Given the policy level nature of this analysis, site-specific circumstances are not considered. The City is currently considering an update in its other development impact fees as well as implementing subarea fees in West Downtown Specific Plan. This feasibility analysis assumes all development impact fee increases will fund affordable housing. However, it is likely that the overall cost increase will need to be balanced among a range of citywide priorities, such as transportation, capital facilities, parks, and other infrastructure needs. This analysis converts tourist use from a per-square foot to a per-room basis based on an average hotel room assumption of 700 square feet.

10 Table 1 Affordable Housing Fee Comparison* Walnut Creek Housing Mitigation Nexus and Fee Study; EPS # Item Year Adopted/ Updated Residential For-Sale Unit Fee Rental Unit Fee (assumes 1,300 sf unit) (assumes 1,000 sf unit) Per Sq.Ft. Per Unit Per Sq.Ft. Per Unit Inclusionary Requirement (See table 2 for details) Commercial (per Sq.Ft.) Year Adopted/ Updated Lodging Hospitals (3) Retail (5) Office Light Industrial/ Service Comm. Rec. & Entertai nment Auto Dealers Walnut Creek (Existing) (1) 2010 $15 $19,500 $15.00 $15,000 6% - 10% 2005 $5.00 NA $5.00 $5.00 $5.00 $5.00 $5.00 Mountain View (2) (4) 2015 $18 $24,000 $17.00 $17,000 10% 2015 $2.68 NA $2.68 $25.00 $25.00 $2.68 $2.68 San Mateo 2015 $11.67 $15,170 $15.17 $15,170 10% (proposed) $5.00 NA $2.50 $15.00 NA NA $2.50 Dublin (6) 2014 $12.53 $16,285 $16.28 $16, % 2014 $0.43 NA $1.02 $1.27 $0.49 $0.49 $1.02 Concord 2010 $3.88 $5,043 $5.04 $5,043 6% - 10% NA NA NA NA NA NA NA NA Redwood City (7) 2015 $25 $32,500 $25.00 $25, % 2015 $5.00 NA $5.00 $20.00 $5.00 NA $5.00 Pleasant Hill 2005 $20.80 $27,035 $27.04 $27,035 5% - 10% NA NA NA NA NA NA NA NA Petaluma 2011 $4.12 $5,355 $5.36 $5,355 15% 2015 $3.78 NA $3.78 $2.23 $2.23 $3.78 $2.23 Napa (8) 2012 $2.20 $2,860 $3.75 $3,750 17% - 20% 2012 $1.40 NA $0.80 $1.00 $0.50 $0.80 $0.50 Santa Rosa 2012 $15.38 $20,000 $6.28 $6,276 15% NA NA NA NA NA NA NA NA Berkeley(9) 2014 $30.57 $27,513 $28.00 $28,000 20% 2014 $4.50 NA $1.00 $4.50 $2.25 $2.25 $1.00 Hayward 2014 $4.00 $5,200 $3.24 $3, % - 10% NA NA NA NA NA NA NA NA Fremont (10) 2015 $11.00 $14,300 $19.50 $19, % - 4.5% NA NA NA NA NA NA NA NA San Carlos 2010 $20.59 $26,767 $28.27 $28,270 15% NA NA NA NA NA NA NA NA Livermore 2013 $11.65 $15,145 NA NA 10% - 15% 2013 $1.17 NA $1.19 $0.76 $0.24 NA $0.24 Average $12 $16,128 $15 $15,379 $2.88 $2.25 $9.65 $5.10 $3.23 $2.49 Low $2.20 $2,860 $3.24 $3, % - 4.5% $0.43 NA $0.80 $0.76 $0.24 NA NA High $30.57 $32,500 $28.27 $28,270 20% $5.00 NA $5.00 $25.00 $25.00 NA NA *Note: this fee survey assumes an average project size of 100 residential units or 100,000 square feet of commercial space, with average unit sizes as follows: 1,300 Sq.Ft. (Residential For-Sale), 1,000 Sq.Ft. (Residential Rental), 1,000 Sq.Ft. (Commercial). (1) First 1,000 sf commercial exempt from fees (2) First 10,000 sf charged reduced in-lieu fee of $12.50 (office) and $1.34 (commercial) (3) Assumes public hospitals (4) Based on the charge of 3% of the sale price; this analysis assumes an average sale price of $800,000 per unit. (5) Includes eating and drinking. (6) Buildings under 20,000 sf are exempt (7) Apartments and Condominiums are charged at the reduced rate of $20.00/sf (8) Napa has proposed fee increases that are set to be adopted after Council direction in March. Updated fees are currently proposed at $10.50/sf (Residential) and up to $9.00/sf Commercial. (9) Inclusionary housing fee on for-sale units is only applicable to condominium sales. Therefore, an average unit size of 900 sf and sale price of $600,000 have been used to estimate fee. (10) Fremont has scheduled fee increases to take place in the next year, starting in July 2016 fees will increase to $14.25/sf (for-sale) and $22.75 (rental). Economic & Planning Systems, Inc. 3/16/2016 P:\151000s\151080WalnutCreekNexus\Data\FeeComparison\WC_Affordability_Comparison2.xlsx

11 Table 2 Inclusionary Requirement Comparison Walnut Creek Housing Mitigation Nexus and Fee Study; EPS # Inclusionary Requirement: Residential For-Sale Item Very Low Low Moderate Total Walnut Creek (option 1) 10% 10% Walnut Creek (option 2) 7% 7% Walnut Creek (option 3) 6% 6% Berkeley 20% 20% Cloverdale 15% 15% Colma 4% 8% 8% 20% Concord (Option 1) 10% 10% Concord (Option 2) 6% 6% Daly City 20% 20% Dublin 5% 7.5% 12.5% Dublin (Owner) 5% 7.5% 12.5% Fremont (MF) 3.5% 3.5% Fremont (SF) 4.5% 4.5% Hayward (MF) 7.5% 7.5% Hayward (SF) 10% 10% Livermore (Downtown Specific) 10% 10% Livermore (General Plan) 15% 15% Mountain View (Option 1) 10% 10% Mountain View (Option 2) 10% 10% Petaluma 15% 15% Pittsburg (all others option 1) 20% 20% Pittsburg (all others option 2) 6% 9% 15% Pittsburg (low density option 1) 20% 20% Pittsburg (low density option 2) 6% 9% 15% Pleasant Hill (Option 1) 10% 10% Pleasant Hill (Option 2) 5% 5% Pleasant Hill (Secondary) 20% 20% Pleasant Hill (Senior) 25% 25% Pleasanton (MF) 15% 15% Pleasanton (SF) 20% 20% Redwood City (MF) (Option 1) 12.5% 12.5% Redwood City (MF) (Option 2) 10% 10% Redwood City (SF) 15% 15% Richmond (option 1) 17% 17% Richmond (option 2) 15% 15% Richmond (option 3) 10% 10% Richmond (option 4) 6.25% 6.25% 13% San Bruno 6% 9% 15% San Carlos 5% 10% 15% San Francisco 12% 12% San Leandro 6% 9% 15% San Mateo 10% 10% Santa Rosa 15% 15% South San Francisco 8% 12% 20% Sunnyvale 12.5% 12.5% Unincorporated Contra Costa County 3% 12% 15% Union City 1.5% 13.5% 15% Average (1) 7.8% 13.6% 13.7% 14% (1) Only captures isolated inclusionary requirement; excludes those with a combination across various affordability levels. Sources: Various City documents in selected Bay Area jurisdictions; interviews with City Staff; Economic and Planning Systems, Inc. Economic & Planning Systems, Inc. 3/16/2016 P:\151000s\151080WalnutCreekNexus\Data\FeeComparison\WC_Affordability_Comparison2.xlsx

12 Table 3 Development Return Sensitivity Summary Walnut Creek Housing Mitigation Nexus and Fee Study; EPS # Item For-Sale Condos Residential Rental Apartments Lodging Retail Commercial Eating and Drinking Office Light Industrial/ Commercial Units unit sq.ft. unit sq.ft. room sq.ft. sq.ft. sq.ft. sq.ft. Revenue Monthly Rent/ADR na na $3,520 $3.20 $230 $2.75 $3.25 $3.33 $2.00 Cap Rate na na 5.0% 5.0% 7.0% 6.0% 6.0% 6.5% 7.0% Sale Price/Capitalized Value (1) $572,000 $520 $561,000 $510 $250,000 $500 $590 $410 $310 Development Cost Land Value $55,000 $50 $55,000 $50 $17,000 $24 $24 $24 $24 Direct Construction Cost $253,000 $230 $253,000 $230 $140,000 $180 $210 $180 $180 Site Work/Parking Cost (2) $30,000 $27 $30,000 $27 $3,150 $100 $133 $88 $8 Indirect Cost (3) $127,400 $116 $113,200 $103 $57,260 $112 $137 $107 $75 Contingency (4) $20,520 $19 $19,810 $18 $10,021 $20 $24 $19 $13 Existing Affordable Housing Fee $16,500 $15 $16,500 $15 $3,500 $5 $5 $5 $5 Total Development Cost $502,420 $457 $487,510 $443 $230,931 $441 $534 $422 $305 Return on Cost 13.9% 15.1% 8.3% 13.4% 10.5% -3.0% 1.5% Maximum Fee Scenario Maximum Nexus-Based Affordable Housing Fee $53,600 $49 $58,900 $54 $149,100 $243 $694 $197 $167 Total Development Cost $539,520 $490 $529,910 $482 $376,531 $679 $1,223 $614 $467 Return on Cost 6.0% 5.9% -33.6% -26.3% -51.8% -33.3% -33.7% Survey-Based Fee Scenario Survey-Based Optimized Affordable Housing Fee $24,200 $22 $24,200 $22 $7,000 $10.00 $10.00 $10.00 $10.00 Total Development Cost $510,120 $464 $495,210 $450 $234,431 $446 $539 $427 $310 Return on Investment 12.1% 13.3% 6.6% 12.1% 9.5% -4.1% -0.1% (1) Rounded; assumes 30% in expenses for apartments and office, 5% for retail and light industrial, and 70% for lodging uses. Vacancy rate of 30% is assumed for lodging and 5% for all other uses. For-sale condo value subtracts the cost of sale of 3%. (2) Based on the space standard of 1.5 per unit for residential (podium parking), 0.9 per room for hospitality (surface parking), 4 per 1,000 sq.ft. for retail (garage parking), 13.3 per 1,000 for eating and drinking (garage/podium/surface combination), 3.5 per 1,000 for office (garage), and 2.22 per 1,000 for light industrial/commercial (surface parking). (3) Assumed at 40% of direct and parking cost for all uses except for-sale residential and includes tenant improvements for commercial uses and development impact fees except the affordable housing fee. For-sale residential cost is assumed at 45% due to higher insurance and warranty coverage. (4) Assumed at 5% of direct and indirect cost. Economic & Planning Systems, Inc. 3/23/2016 P:\151000s\151080WalnutCreekNexus\Model\151080Feasibility2

13 Table 4 Housing In-Lieu Fee Calculations Walnut Creek Housing Mitigation Nexus and Fee Study; EPS # Item Affordable Units Per 100 Market- Rate Units (1) Affordability Gap per Affordable Unit (2) Per 100 Market- Rate Units Total In Lieu Fee Supported Per Market-Rate Unit Per Sq.Ft. (3) (A) (B) (C = A * B) (D = C / 100) (E) Affordable For Sale Very Low Income 6.0 $324,400 $1,946,400 $19,464 $15 Low Income 7.0 $190,300 $1,332,100 $13,321 $10 Moderate Income 10.0 $101,550 $1,015,500 $10,155 $8 Per Unit Fee Range $10,155 - $19,464 $8 - $15 Affordable Rental Very Low Income 6.0 $324,400 $1,946,400 $19,464 $15 Low Income 10.0 $190,300 $1,903,000 $19,030 $15 Per Unit Fee Range $19,030 - $19,464 $15 (1) Per the City's inclusionary housing Ordinance (2) See Tables 2 and 3. EPS has assumed the City would use the in-lieu fees to fund affordable rental units because the subsidy to construct these units is lower than for-sale for every income-category. (3) An average unit size of 1,300 sq.ft. is assumed. Sources: City of Walnut Creek, Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. 3/23/2016 P:\151000s\151080WalnutCreekNexus\Model\151080Nexus_for sale_031616

14 Table 5 Housing Fee Inclusionary Equivalent Calculations on For-Sale Units* Walnut Creek Housing Mitigation Nexus and Fee Study; EPS # Average For-Sale Unit Size (sq.ft.) Item 1,000 1,500 2,000 2,500 Housing Fee Revenue (100 units) $2,200,000 $3,300,000 $4,400,000 $5,500,000 Very Low Income (1) 6.8% 10.2% 13.6% 17.0% Low Income (2) 11.6% 17.3% 23.1% 28.9% Moderate Income (3) 21.7% 32.5% 43.3% 54.2% *Note: assumes a $22 per square foot fee level. (1) Assumes a funding gap of $324,400 per unit based on the nexus analysis for rental units. (2) Assumes a funding gap of $190,300 per unit based on the nexus analysis for rental units. (3) Assumes a funding gap of $101,550 per unit based on the nexus analysis for rental units. Sources: City of Walnut Creek, Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. 3/23/2016 P:\151000s\151080WalnutCreekNexus\Model\151080Nexus_for sale_031616