COMMUNITY DEVELOPMENT DEPARTMENT

AGENDA ITEM I-1 COMMUNITY DEVELOPMENT DEPARTMENT Council Meeting Date: June 3, 2014 Agenda Item #: I-1 INFORMATIONAL ITEM: Update on Multi-City Affordable Housing Nexus Study and Impact Fee Feasibility for Commercial and Residential Development RECOMMENDATION This is an informational item and does not require Council action. BACKGROUND Below Market Rate Housing Program The Below Market Rate (BMR) Housing Program was established in 1988 as a way to increase the housing supply for people who live and/or work in Menlo Park and have very low, low or moderate incomes as defined by income limits set by the State for each County. The primary objective of the program is to create actual housing units rather than generate a capital fund. The BMR requirements for residential development projects are a form of inclusionary zoning and the requirements associated with the commercial development projects are a form of linkage fee. Chapter 16.96 of the Zoning Ordinance authorizes the BMR Housing Program. The Program is implemented through Guidelines as adopted and amended by the City Council. Most recently, on May 6, 2014, the City Council adopted modifications to the BMR Guidelines. The revisions were primarily clean up items, but to also seek approval for use of BMR funds to cover the administrative costs to operate the program. All residential developments of five or more units are subject to the City s BMR requirements. However, application of the BMR Ordinance to rental residential projects has not been enforced since a 2009 appellate court decision (Palmer/Sixth Street Properties v. City of Los Angeles) that declared that the State s Costa Hawkins Rental Housing Act preempts a local jurisdiction s inclusionary housing law. The State Legislature passed the Costa Hawkins Rental Housing Act in 1995 to limit the extent of local rent control laws. Therefore, the current BMR Ordinance is applied to for sale residential projects of five or more units only. Per the BMR Ordinance, proposed developments with less than 20 dwelling units are required to provide not less than 10 percent of the units at below market rate to very low-, low-, and moderate-income households while developments of 20 or more PAGE 151

dwelling units are required to provide a minimum of 15 percent of the units at below market rates. This requirement can be met with on-site BMR units incorporated into the project, off-site units, or when the City determines that BMR units are not feasible for the development, payment of an in-lieu fee or a combination of dedicated below market rate units with payment of an in-lieu may be acceptable. The in-lieu fee is generally calculated as a percentage of the sales price of the market rate units for which a BMR unit is not provided. The terms of the BMR Housing Agreement are reviewed by the Housing Commission and the applicable reviewing body (i.e., Planning Commission or City Council). The BMR Ordinance also applies to commercial development of 10,000 square feet or more. Commercial development exempt from this requirement include 1) private schools and churches, 2) public facilities, 3) commercial development projects of less than 10,000 square feet, and 4) projects that generate few or no new employees. Similarly, the BMR Housing Program Guidelines provide various methods to address the requirement, including providing on-site units (if permitted in the zoning district) or off-site units, or payment of an in-lieu fee when providing the BMR units is not feasible. In October 2000, the City Council adopted the Commercial Linkage Fee Nexus Study, which confirmed the justification to charge a fee to mitigate the impacts of commercial and industrial development on affordable housing. The fees for the upcoming 2014-2015 fiscal year, are $15.19 per square foot of new gross floor area for office and R&D uses and $8.24 per square foot of new gross floor area of all other commercial/industrial uses. The fees are adjusted annually on July 1. The fees are collected at the time of building permit issuance and are deposited into the BMR Housing Fund. Below is a summary table of the City s current BMR Program. Summary of BMR Ordinance and Guidelines Dedicated Units In-Lieu Fee Residential (five or more units) Ownership (5-19 units): 10% of units (>20 units): 15% of units Percentage of sales price of market rate unit Commercial (net new 10,000 sf) Group A (Office/R&D) Group B (all other commercial/industrial uses) Rental* N/A N/A If zoning permits residential, number of dwelling units based upon net new commercial square footage If zoning permits residential, number of dwelling units based upon net new commercial square footage $15.19/sf $8.24/sf * Inclusionary zoning for rental developments is currently not enforceable per Palmer/Sixth Street Properties v. City of Los Angeles. PAGE 152

ANALYSIS Why is a Nexus Study Needed? Since the loss of redevelopment agencies and the State court prohibition of rental inclusionary zoning, cities have increasingly relied on impact fees to support affordable housing. Generally, impact fees require new construction to pay money into a fund which, in this case is used to support affordable housing. To enact an affordable housing impact fee, cities must first conduct a nexus study that demonstrates the relationship between new housing or jobs and the need for affordable housing in the community. The need for affordable housing is a continuing issue for San Mateo County and the region, in general. San Mateo County is often ranked as one of the least affordable areas in the State. In order to address the housing problem, save financial resources, and promote cooperation and better policy making, the City is partnering with multiple jurisdictions in San Mateo County to explore the use of impact fees on new development to fund affordable housing. This partnership stems from the City s collaboration with other San Mateo County jurisdictions as part of the City s involvement in 21 Elements. The group is appropriately called 21 Elements because for the past two housing element cycles, all 21 jurisdictions in the County have formed a sub-region to distribute the Regional Housing Needs Allocation (RHNA), to collaborate on housing policy issues and program development, and to develop materials for each jurisdiction s Housing Element. Thirteen jurisdictions in San Mateo County, plus San Mateo County and the City of Palo Alto are participating in the nexus study. Participating Jurisdictions Belmont Brisbane Burlingame Colma Foster City Half Moon Bay Menlo Park Millbrae Pacifica Palo Alto Redwood City San Bruno San Mateo South San Francisco County of San Mateo The Nexus Study would provide a defensible analysis to maintain the legal justification for inclusionary zoning and affordable housing impact fees. The Nexus Study will be customized on a city-by-city basis to allow each jurisdiction to establish individual policy. Participation in this effort would implement the City s Housing Element Program H4.D, PAGE 153

which calls for the preparation of an updated nexus study, and will help ensure compliance with the State Mitigation Fee Act (AB1600 Government Code Section 66001 through 66003). The City of Foster City has taken the lead in coordinating the study, and issued a Request for Proposals (RFP) for the consultant late last Fall 2013. The firms of Strategic Economics and Vernazza Wolfe and Associates were selected to prepare the analysis and studies. The latter firm also prepared the City s Linkage Fee Nexus Study from 2000. Scope of Work The study contains three main tasks, including 1) affordability gap calculation, 2) residential nexus study (for-sale and rental units), and 3) commercial linkage fee nexus study. The affordability gap is defined as the difference between what a household (renter and owner) can afford to pay and the cost of a new dwelling unit. The second component is the residential nexus study, which will estimate the increase in demand for affordable housing associated with new residential development. The study will define a maximum fee that a jurisdiction could charge, either on a dwelling unit basis or square foot basis instead of a percentage of sales price, which is the current method used in Menlo Park. Lastly, the nexus study will provide a commercial linkage fee analysis to estimate the increase in demand for affordable housing that accompanies new non-residential development. Similar to the residential impact fee, a maximum commercial fee on a per square foot basis will be calculated. An outline of the scope of work is included as Attachment A. In order to determine the maximum allowable fee, it is necessary to select a maximum income level for households (or cut-off) that will require affordable housing. To help answer this question, the consultant plans to perform the analysis for multiple income levels for comparison. The income levels are based on area median income (AMI), as defined by the California Housing and Community Development Department (HCD). The table on the next page shows the typical income ranges associated with various income groups and the selected assumptions for both rental and ownership housing. The assumptions differentiate between rental and ownership housing because rental housing is often more affordable than ownership housing, and targeting rental units at a higher AMI may result in pricing that is at or above the market value. In addition, it is common practice to have ownership units priced higher to ensure that buyers are financially capable of owning a home. The income group cut-off affects the amount of the maximum fee that is calculated. The level is important because 1) it identifies the percentage of new employee-households that will need access to affordable housing and 2) it defines the level of affordability gap. For example, a cut-off that is lower results in a higher affordability gap. The cost of housing remains the same regardless of the income group served. The question about which income group/cut-off to select will be a policy decision for the Council to consider in the future. PAGE 154

Income Category Income Level (Cut-Off) for Households Range Rental Housing Assumptions Ownership Housing Very Low 50% AMI 50% AMI 50% AMI Low 50-80% AMI 70% AMI 80% AMI Moderate 80-120% AMI 90% AMI 110% AMI Process and Timeline The kick-off for the Nexus Study was conducted in mid-march 2014. The consultants are currently collecting data regarding newly completed projects and pipeline projects for both residential and commercial developments to conduct the analysis. A draft of the nexus report is anticipated in the Fall 2014 with the final summary anticipated at the end of the calendar year. As the process proceeds, staff may check-in with the City Council as questions arise and/or guidance is needed. An information item on the Nexus Study was prepared for the Housing Commission s May 2014 meeting. The City s participation in the multi-jurisdictional nexus study will provide the City with the opportunity to make policy decisions about affordable housing. Participation in this effort does not obligate the City to change any of its current polices or practices. However, jurisdictions will have the choice to adopt or modify an impact fee, and to determine the amount of the fee, so long as the fee is below the maximum amount identified in the study. IMPACT ON CITY RESOURCES The cost of the Nexus Study is being shared amongst the participants. The City is contributing $14,300 for both the residential and commercial analysis. Any City-specific request to customize the analysis beyond the agreed upon scope of work would be an additional fee charged on a time and materials basis. The overall cost of the study, including contingencies, is $206,600. Given the innovative and collaborative approach to the study, part of the overall consultant fee is being offset by the Enterprise Community Partners, Inc., a national Section 501(c)(3) charitable organization that provides expertise for affordable housing and sustainable communities. The group is underwriting up to $25,000 of the cost of the study. In addition, the Metropolitan Transportation Commission (MTC) is providing a $10,000 Housing and Urban Development (HUD) grant towards the study. Ultimately, the City Council will determine whether to modify and/or adopt new inclusionary or affordable housing impact fee programs. The dwelling units resulting from inclusionary zoning and the collection of impact fees would increase the City s ability to provide affordable housing in the community. PAGE 155

POLICY ISSUES As stated earlier, the need for affordable housing in the region is a continuing issue. How to address and respond to this unmet need is a policy question for the City Council. If the Council determines that updating the inclusionary zoning and affordable housing impact fees are appropriate, part of that decision will include a discussion on what income level to target. Currently, the City s BMR Guidelines establish the initial selling price of a for-sale affordable unit to what is affordable to households with incomes at 110 percent of the median income related to household size as established by HCD for San Mateo County. As a separate, but related matter, staff will be bringing additional policy questions related to potential changes to the BMR Guidelines that are necessary for consistency with implementation of the Housing Element, including amendments to the Guidelines to address State Density Bonus Law and the Affordable Housing Overlay Zone. In addition, changes will need to be made to allow for the prioritization of funds for nonprofit development of workforce rental housing affordable to low and very low income households on sites the City has determined to be viable for Low Income Housing Tax Credits per the 2012 Settlement Agreement related to the Housing Element. Staff plans to bring these changes forward following the completion of the Nexus Study. ENVIRONMENTAL REVIEW This informational item is not subject to environmental review. PUBLIC NOTICE Public notification was achieved by posting the agenda, at least 72 hours prior to the meeting, with this agenda item being listed. Staff will be creating a project webpage that will be updated as information becomes available about the study and potential changes to the BMR Ordinance and BMR Guidelines. Similar to other project webpages, interested persons may subscribe to the page and receive email bulletins. Staff will also proactively advise potential groups such as the Chamber of Commerce and developers about the Nexus Study through the project page. ATTACHMENT A. Scope of Work Outline Report prepared by: Deanna Chow Senior Planner Report reviewed by: Justin Murphy Development Services Manager PAGE 156

ATTACHMENT A Grand Nexus Study Outline of Scope of Work Task 1. Project Initiation Collect background data from 21 Elements and City Staff and review relevant nexus studies. Kick-off meeting. Task 2. Affordability Gap Calculation Affordability gap is defined as the difference between what households (renters and owners) can afford to pay and the cost of new units. Housing affordability will be the same for all jurisdictions, calculated based on San Mateo County estimated incomes. Because market-rate housing prices vary in each jurisdiction, the affordability gap will be calculated individually for each jurisdiction. This makes the findings on the affordability gap more accurate and more defensible from a legal perspective. Task 2 Deliverable: Concise technical memorandum containing draft tables summarizing the affordable housing gap for renters and owners. Task 3. Residential Nexus Study The residential nexus study will estimate the increase in demand for affordable housing associated with new residential development. The first step will be to determine the type of new development likely to occur in each jurisdiction based on a review of newly completed and pipeline projects. Based on the rents and sales prices of these projects, the team will calculate the household incomes of new households. The primary driver for this increase in demand for affordable housing is the growth in expenditures for goods and services, which would generate new jobs. The number and wages of jobs associated with new households is then estimated using an economic model (IMPLAN). Based on the wages of these jobs, the household income of employee households will be calculated. The aggregate housing affordability gap is estimated by multiplying the number of households that earn lower wages by the average affordability gap estimated in Task 2. The aggregate housing affordability gap is divided by the number of housing units in each prototype. This figure defines a maximum per unit fee amount. The Nexus Study provides estimates of the maximum fee that can be charged, but jurisdictions have choice about the actual fee to adopt, as long as the fee is below the maximum. Fees can be defined on either a unit basis or a square foot basis. Task 3 Deliverables: Technical memorandum on housing impact fees with summary tables and methodology appendix. PAGE 157

Task 4. Commercial Linkage Fee Nexus Study The purpose of a Commercial Linkage Fee Nexus Study is to estimate the increase in demand for affordable housing that accompanies new non-residential development. Based on commercial prototypes and industry standards of employment densities, it is possible to estimate employment growth associated with each property prototype. Again, like the residential nexus calculations, some of these new jobs pay wages that are too low to afford market-rate housing. The remaining research steps are the same as for the residential nexus study. Fees are defined on a square foot basis. Similar to the residential impact fee, the actual commercial linkage fee that a jurisdiction adopts is based on financial considerations, as well as other factors. Task 4 Deliverables: Technical memorandum on Commercial Linkage Impact Fees with summary tables and methodology appendix. Task 5. Meetings with 21 Elements Staff and Stakeholders Discuss findings and recommendations. Task 6. Prepare Draft and Final Reports A sample report will be prepared for one jurisdiction to serve as a model. Nexus study reports will be prepared for each jurisdiction participating in the study. A summary report will also be prepared that is user-friendly and easily understood by a wide audience, providing an overview of the results for all the jurisdictions. Task 6 Deliverables: Sample nexus study report, draft nexus reports and final nexus reports for all participating jurisdictions. Draft and final summary reports. All work products to be delivered electronically. Task 7. Meeting with 21 Elements Staff Optional (Unfunded) Tasks Attend public hearings Support and specific recommendations to individual jurisdictions Excel models PAGE 158