Meeting Minutes Inclusionary Housing Technical Advisory Committee June 30th, 2016 5:00-6:30 p.m. Room 305, City Hall Committee Members Dan Adams Jesse Blout Terence Cordero John Elberling Emily Johnstone Whitney Jones Lydia Tan Eric Tao The meeting was called to order at 5:06 p.m. by Ben Rosenfield, Controller. The TAC members were all present with the exception of Dan Adams Also present were the consultants from Blue Sky Consulting, various city staff and two members of the public - Fernando Marti and Rick Hall The minutes of the May 24, 2016 meeting were approved Ben Rosenfield, Controller, and Ted Egan, of the Controller's Office, reviewed the agenda. Mr. Egan reviewed a timeline of the consultant tasks between June 30, 2016 and the end of August. The next two TAC meetings are scheduled for Thursday, July 21st and Monday, August 22d The time and location for both remain the same: 5-6:30 p.m. in Conference Room 305 Rick Jacobus presented options for best practices to review and facilitated the group discussion. There was a presc.ntation from the Century Urban consultants on land residual analysis The group discussion, facilitated by Rick Jacobus, followed on land residual analysis, phasing, prototypes, geography, the 80/20, fees and density bonus and by-right. Public comment: There was public comment from Fernando Marti and Rick Hall. Mr. Marti's comments focused on phasing in response to questions about whether to start low, then, gradually build up over time. He expressed his opinion that he might disagree with "start low" but, yes, would phase in larger inclusionary over time, with predictability so that all are clear on the rules, and a "use it or lose it" clause so it doesn't become a game to get entitled or in EE before the next tier kicks in. He noted the goal is to get buildings with inclusionary units actually built. Mr. Marti also commented on 80/20 in regard to smaller units that have been built in the past and whether the report should consider what effect, if any, of having an inclusionary at 20% or higher would have for creating market incentives for 80/20's. He suggested looking at New
York, where 20% is common and whether this incentivizes 80/20's. Mr. Marti also commented on fees: the need to consider how to keep on site and fee options comparable. His comments on the density bonus and by-right focused on the effect of cutting entitlement time and whether adding "certainty" lowers risk and, as a result, the financing costs. Mr. Hall commented on the land residual and how much land prices can go down before there is a problem and how to measure when things are feasible. The meeting adjourned at 7:05 p.m.
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Present: committee (no DanAdams), Ben Rosenfeld, Ted Egan, Jeff Buckley, consultants, Emily Lesk OEWD, Kirstin Dischinger/Planning, Olson Lee & Kate Hartley /MOHCD, April Veneracion / Kim, Sunny Angulo / Peskin. Only public is Fernando and Rick Hall Consultant deadline is August, but Committee can continue to work beyond Rick Jacobus: best practices we should be looking at - 1. Income Targeting 2. Geographic difference (Boston just changed to geographic) 3. Typology difference 4. Tenure difference 5. How to respond to market changes a. Easy: indexing of fees b. Difficult: Automatic changes linked to economy, or notice & respond system (Jesse comment: what this means in terms of market signaling) Comments: 1. Emily?: look at issue with condos, impact of resale formula, HOA fees 2. Eric: look at other options, right now we have only on-site, off-site, in-lieu, which works best? Are there others we have not thought about? 3. Lydia: Are there cities that have a flexible formula (Rick: small jurisdictions have more flexibility, large jurisdictions less flexibility) 4. Jesse: Size of project makes a difference. S. Rick: issue of how to avoid 24-unit buildings that try to get out of inclusionary 6. Emily: publicly-owned land, are those ever treated differently? 7. Lydia: are there financial incentives in other jurisdictions? 8. Rick: starting point is to look at Boston, New York, San Jose, Seattle, Portland 9. Fernando: look at San Diego, for land value absorption analysis, Emeryville, for unit mix requirements Century Urban presentation on land residual analysis Comments: 1. Lydia: are we supposed to understand the feasibility, or focus on policy. Ben: we're here to do both. 2. Assumptions a. Question on 5.5% ROC for rentals. Developers felt these too low, work for REITS, but locals need 6%. b. Question on time assumptions: 12 months to permit, 24 months to build, 6 months to stabilize, 42 months total. c. Rick: these numbers are from January, do we need to update them? d. John: we need to ask if there were problems with the January numbers. Clearly we are in a boom, with extraordinarily high const costs. What happens when you change any of those numbers: cost, rents, interest rates.
e. John: We cannot depend on the industry we are about to regulate for numbers. We need independent valuation, esp for construction costs and investor costs. Construction contract is a good proof. We do have good info for Tishman project 160 Fremont just negotiated by DCII. John: Location, location, location. 3. Land Residual Analysis a. Rick: Land residual: how much can land prices go down before we have a problem, how do we measure when something is feasible b. Eric: is the idea that people will continue to transact depending on land value adjustment. The whole theory is - at what price will land value transact at? How much pain will the landowner feel? c. John: that is a decision for the politicians to make. d. Jesse: but the question is when will the landowner not transact. e. John: that's why we need the geographic analysis. f Blue Sky will look at every parcel and what are alternative uses, this is less tested way of making policy decisions. g. John: so alternate use is typically commercial, we see in SOMA both happening so they are relatively equivalent h. John: In low density neighbs, very little of affordable units will be built, I'm really focused on the rules for large scale. Will they stay parking lots - no, we have tools, we can zone parking lots out of L existence... Rick: it would be possible to take some of the prototypes, and compare to alternate uses, but that takes a lot more research... j. Lydia: suggest you pull financing out completely, untrended, unleveraged return on cost 4. Phasing a. Lydia: someday whatever we put will be feasible. That's the question, how long... b. Eric: we can start low, then gradually build up over time, so give time for land price to absorb cost c. Sunny: We are required to do new analysis at least every three years. d. Jess: 3 years can be a longtime. There is nothing that says we cannot do it earlier. We need good indicators of when to reconsider. e. Lydia?: perhaps do new sensitivity analysis if both rents and construction costs are going down? Eric: best metric is probably when permits being pulled go down. That may be when you want to do new feasibility or recalibrate inclusionary g. Fernando: might disagree with "start low," but, yes, phase in larger inclusionary over time, with predictability so all are clear on rules, and a use-it-or-lose it clause, so it doesn't just become a game to get entitled or in EE before the next tier kicks in. We are not in the business of helping get entitles, we want to get these buildings with inclusionary units actually get built.
5. Prototypes a. Jesse: Need to evaluate 240' and above, this has much lower efficiency, has greater life safety b. John: Suggest how tall rather than type c. John: Scale matters: very large projects can have higher inclusionary d. Should there be a higher requirement for condos? Not just a feasibility issue, but a policy issue. Many condos turn out to be corporate housing or second homes, does not help housing crisis e. Tax credit bond deals, 80/20 deals, readily available now, so should be modeled f. Need to test by geography, at least need to understand the consequences g. The big benefit of boom has gone to landowners, not developers, we should not be obligated to anything beyond a fair rate of return. One way to do this is to raise inclusionary rate over time, adds predictability to land market 6. Geography a. Rick: question, can we do geography? In another city, we were looking at 4 building types with 4 neighborhoods, so 16 total prototypes, but in the end, many of the building types mapped to the neighborhoods b. Lydia: yes, but some neighborhoods may have same typology but different costs and rents, for example we would do Type III in Dog Patch or Viz Valley, but cap rate will be higher in Viz Valley vs. Potrero c. Lydia: also need to consider whether in Plan Area vs. not in Plan Area, consider time to entitle d. Eric: easiest way to analyze by neighborhood is to look at rent variations 7. 80/20 a. Fernando comment: Need to model 80/20 deal b. Terence, maybe worth the time? c. Emily: 80/20 not used much, REIT won't go for it. d. Lydia: very few developers understand the complexity of 80/20 deals, there's only a few like Related. Not common in big urban areas. e. Kate Hartley: At some size it's not efficient, $30M bond limit. There are limitations on the size of the transaction. But you can get a waiver on $30M cap, so larger maybe, you're seeing 400 unit deals. 80/20s don't make sense for small deals, nothing under 100 or 200 units f. Fernando (at end): But there have been smaller 80/20s in SF, ArcLight on Townsend was 100 units, Potrero Launch was 200 units. Maybe even if not analyzed, report should consider what effect if any of having an inclusionary at 20% or higher has for creating market incentives for 80/20s. Should look at NY, where 20% is common, has this incentivized 80/20s?. 8. Fees
a. Fernando: note differential in land residual for fee-out projects, need to consider how to keep comparable between on-site and fee option. This analysis should inform a recalibration of fee methodology (if not %, then how per-unit fee is calculated). 9. Density Bonus & By-Right a. Jeff B: what is effect of development incentives? b. John: but we won't know effect of State changes until after this process, good thing is now we can change things... c. Fernando: but Planning (just stepped out) is opining that current existing density bonus has to be applied to underlying zoning, even in areas with no density limits, which State law is silent on. Never been done before, but they tell us many developers are now applying for it. A 35% density bonus (for 20% BMR condos) becomes a 35% height bonus, so a building zoned for 200' can now build a 270' building. This starts to look like Seattle's system. d. John: so we should evaluate the current rules as applied to inclusionary projects. e. Fernando: By Right is a different matter. Will be decided upon by August 31, one way or another. What is effect of cutting entitlement time and adding "certainty", does this lower risk and therefore financing cost? To Lydia's point on Plan Area vs not plan area, if this passes, the whole city becomes effectively a plan area.