SEPTEMBER 20, 2005 IN LIEU AFFORDABLE HOUSING FUND PROGRAM SEPTEMBER 20, 2005 IN LIEU AFFORDABLE HOUSING FUND PROGRAM SEPTEMBER 20, 2005 IN LIEU AFFORDABLE HOUSING FUND PROGRAM

TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL

FROM: DIRECTOR OF PLANNING, BUILDING AND CODE ENFORCEMENT

DATE: SEPTEMBER 20, 2005

SUBJECT: IN LIEU AFFORDABLE HOUSING FUND PROGRAM

Staff Coordinator: Gregory Pfost, AICP, Deputy Planning Director

RECOMMENDATION

Adopt Resolution No. 2005-__, thereby increasing the amount of the affordable housing in-lieu fee to $201,562 plus a 10% administration fee per affordable housing unit required for certain residential and non-residential developments.

EXECUTIVE SUMMARY

At the December 7, 2004 City Council meeting, some Council members expressed concern regarding the amount of the City's current fee that developers may pay in lieu of providing for affordable housing units as part of their development project; feeling that the current fee may be too low since developers prefer to pay the fee rather than build the affordable housing units. At the August 16, 2005 meeting, Staff presented an explanation of how the City's current in-lieu fees were developed and whether the current fees should be changed. As a result, the Council requested that Staff provide recommendations for potential increases to the existing adopted in-lieu fees. Based upon the Council's interest in establishing an in-lieu fee that represents the true subsidy needed to provide for affordable housing units, Staff is recommending that the Council consider adopting an in-lieu fee of $201,562 plus 10% administration fee per affordable housing unit required in residential and non-residential development projects.

BACKGROUND

On December 7, 2004, the City Council provided direction to Staff in regards to the expenditure of the City's existing In-lieu Affordable Housing Funds and the Redevelopment Agency's 20% Set-Aside Funds. Specifically, the Council directed Staff to pursue a combined program to utilize its affordable housing funds for: 1) a contribution toward development of an affordable housing component as part of the Crestridge site; and 2) implementation of a rental subsidy program managed by a non-profit housing agency.

As shown in the attached Minutes, at the December 7th meeting, some Council members expressed concern regarding the amount of the existing fee that developers have the option to pay "in-lieu" of developing the actual affordable units. Council members expressed that the fee may be too low and as a result places the City in the difficult position of providing for affordable housing units when there is not enough funds to do so. Additionally, the attractiveness of the low fee seems to shift the burden of providing affordable units to the City instead of the developer because the developer will most likely request the less expensive in-lieu fee method rather than the more expensive method of providing affordable housing units. One Council member requested that this issue be brought back for further discussion.

On August 16, 2005, Staff presented a Staff Report to the City Council that provided a detailed background on how the City's current In-lieu fee program came to be and whether or not the Council felt the current in-lieu fees should be changed (August 16, 2005 Staff Report attached). At that time, the Council directed Staff to come back with fee options that are more realistic. As a result, Staff is now presenting a discussion of various fee options with a recommendation as to what the City's in lieu fee should be.

DISCUSSION

Since an in-lieu payment is intended to be an alternative to constructing affordable housing, the City's in-lieu fee should be structured to reflect the subsidy required to "write down" the costs of market rate housing to affordable levels. Following this premise, Staff formulated various alternatives for providing this subsidy.

The Discussion below is separated into two parts: Part 1 addresses the Residential In-lieu Fee and includes 4 Alternatives (A-D), wherein Part 2 addresses the Non-Residential In-lieu Fee and includes 2 Alternatives (A-B). The following table is a summary of the various Alternatives.

Alternative

Proposed In-lieu Fee

Example: Total fee for a 20-lot subdivision (Part 1) or a 20,000 sq. ft./31 employee commercial development (Part 2)

Part 1: Residential Development Projects

Alternative A: For-Sale

   

1. Low Income

$846,780/affordable unit

$1,693,560

2. Very Low Income

$995,550/affordable unit

$995,550

3. Blended Version

$938,273/affordable unit

$1,407,410

Alternative B: For Rent

   

1. Low Income

$140,027/affordable unit

$308,059 incl. 10% admin fee

2. Very Low Income

$240,142/affordable unit

$264,156 incl. 10% admin fee

3. Blended Version

$201,562/affordable unit

$332,577 incl. 10% admin fee

Alternative C: Square Footage

$7/square foot of buildable area

$490,000 (3,500 sq. ft.) to $840,000 (6,000 sq. ft.)

Alternative D: Construction Costs

7% of construction costs at $95/square foot

$465,500 (3,500 sq. ft.) to $798,000 (6,000 sq. ft.)

Part 2: Non-Residential Development Projects

Alternative A: For Rent

$201,562/affordable unit

$665,155 incl. 10% admin fee

Alternative B: Square Footage/Use

Not Yet Determined

Not Yet Determined

As described in fee Alternative A (Part 1) above, the fee needed to offset the difference between what the sales price is, as compared to what is considered affordable by low or very low income persons, can be considered relatively high for detached units which are typically proposed in the City. Although the fee amount in Alternative A-3 provides the full subsidy needed to provide affordable housing, the lower fee, as shown in the rental Alternative B-3, may be considered more practical because, given the high cost of vacant land and the existing single family housing stock, it is most likely that the City can target the existing apartment housing stock to make the funds go farther in providing affordable units. As such, Staff is recommending that the Council adopt the fee as found in Alternative B-3 ($201,562, plus a 10% administrative fee). Staff is also recommending the same fee for Non-Residential development projects as shown in Alternative A (Part 2).

Below, Staff has provided a more detailed discussion and explanation of each Alternative summarized in the table above.

Part 1 - Residential In-lieu Fee:

A. Fee based on the subsidy needed to "write-down" the costs of developing for-sale affordable housing within RPV:

The in-lieu fee could be established as a fee per dwelling unit constructed, based on the difference between market rate housing prices and the housing price for units that are affordable to low or very low income households. Factors used in determining a fee for this alternative include:

1. Low-Income: Based upon the factors noted above, it can be derived that a Low-income household of 4 persons can afford to spend $1,102 in monthly housing payments for the purchase of a house, which includes principal and interest payments, mortgage loan insurance fees, property taxes and assessments, fire and casualty insurance, property maintenance and repairs, utility allowance, and association fees. Based upon a 30-year period of affordability (Municipal Code requirement), the total housing cost for a low-income family would equal $396,720. The difference between this amount and the 2004 market rate conditions is $846,780, which would be the subsidy needed to provide for one-low income unit.

Example: The Development Code requires a 20-unit subdivision to provide for 10% of all units to Low-Income families. As such, in this case 2 units would be dedicated to Low-Income families. If an in-lieu fee of $846,780 were adopted, the developer would be required to pay $1,693,560 in lieu of providing the affordable units.

2. Very-low Income: Based upon the factors noted above, it can be derived that a Very-low income household of 4 persons can afford to spend $688.75 in monthly housing payments for the purchase of a house. Based upon a 30- year period of affordability (Municipal Code requirement), the total housing cost for a Very-low income family would equal $247,950. The difference between this amount and the 2004 market rate conditions is $995,550, which would be the subsidy needed to provide for one-low income unit.

Example: The Development Code requires a 20-unit subdivision to provide for 5% of all units to Very Low-Income families. As such, in this case 1 unit would be reserved for a Very Low-Income family. If an in-lieu fee of $995,550 were adopted, the developer would be required to pay $995,550 in lieu of providing the affordable unit.

3. Blended Version: The Development Code allows the developer to choose between providing 10% of the total number of units in the project as low income, 5% as very-low income, or a mixture of both. Based on the fee amounts above, the developer will always choose the Very Low Alternative in requesting to pay an in-lieu fee, as it would always be lower than the Low-income option. For this reason, the Council may wish to consider establishing the in-lieu fee as a blend of the Low income and Very-low income subsidies identified above. If the Council is inclined to pursue a blended fee, Staff recommends that the blended version be based upon the number of Low and Very Low income units needed within the City during its current planning period to meet the region's fair share allocation as established through the City's General Plan Housing Element. In the current planning period, the Housing Element describes this need as 5 Low Income units and 8 Very-low Income units, which is 38.5% and 61.5% of the total 13 units needed, respectively. This blended version would result in an in-lieu fee of $938,273 per unit required. Staff would recommend that in determining the number of affordable units required for the purposes of establishing the in-lieu fee, that the low and very low income requirements (10% and 5% respectively) be blended to 7.5% of the total number of units.

Example: In determining a fee, the blended version would require a 20-unit subdivision to provide for 7.5% of all units affordable. As such, in this case the developer would be required to pay $1,407,410 (1.5 x $1,407,410) in lieu of providing affordable unit(s).

B. Fee based on the subsidy to "write-down" the costs of providing affordable rental units within RPV:

The in-lieu fee could be established as a fee per dwelling unit based upon the difference between affordable rents for low and very low income households and the market rental rate of units in Rancho Palos Verdes. Factors used in this alternative include:

1. Low Income: Based upon the factors noted above, it can be derived that a Low-income household of 4 persons can afford to spend $1,102 in monthly housing payments for a 2-bedroom rental unit, which includes use and occupancy of the unit, security deposits, and a reasonable allowance for utilities. Based upon a 30-year period of affordability (Municipal Code requirement), the total housing cost for a low-income family would equal $396,720. The difference between this amount and the current average rental rate is $208,080, which would be the subsidy needed to provide for one-low income unit. However, this amount should be reduced to account for the Net Present Value (NPV) of the proposed fee. NPV takes into consideration the interest accumulated over the 30 year period. As such, by considering NPV, the subsidy needed for a low income unit would be $140,027.

Example: The Development Code requires a 20-unit subdivision to provide for 10% of all units to Low-Income families. As such, in this example 2 units would be dedicated to Low-Income families. If an in-lieu fee of $140,027 were adopted, the developer would be required to pay $280,054 in lieu of providing the affordable units. To partially offset the City’s cost of managing any affordable housing program that allocates the in-lieu funds so that affordable housing will be provided in the City, Staff recommends that any developer of a project who pays the in lieu fee to the City also shall pay an administrative fee equal to 10% of the in-lieu fee. The proposed 10% administrative fee is a continuation of the administrative fee that was adopted previously in 1997 and 1999 for the residential and non-residential in-lieu fees. This would bring the total fee in this example to $308,059.

2. Very Low Income: Based upon the factors noted above, it can be derived that a Very Low-income household of 4 persons can afford to spend $688.75 in monthly housing payments for a 2-bedroom rental unit. Based upon a 30-year period of affordability (Municipal Code requirement), the total housing cost for a very low-income family would equal $247,950. The difference between this amount and the current average rental rate is $356,850, which would be the subsidy needed to provide for one-low income family. At NPV, this would be reduced to $240,142, plus an administrative fee of $24,014 (i.e. 10%) for a total of $264,156.

Example: The Development Code requires a 20-unit subdivision to provide for 5% of all units to Very Low-Income families. As such, in this case 1 unit would be reserved for a Very Low-Income family. If an in-lieu fee of $240,142 plus 10% administrative fee were adopted, the developer would be required to pay $264,156 in lieu of providing the affordable unit.

3. Blended Version (Staff's recommended fee): Similar to the for-sale alternative above, based on the in-lieu fee amounts, the developer will always choose the Very Low Alternative. Again, for this reason, the Council may wish to consider establishing the in-lieu fee as a blend of the Low income and Very-low income subsidies identified above. For rental units, this blended version, at NPV, would result in an in-lieu fee of $201,562 per unit required. Staff would also recommend that in determining the number of affordable units required for the purposes of establishing the in-lieu fee, that the low and very low income requirements (10% and 5% respectively) be blended to 7.5% of the total number of units.

Example: In determining a fee, the blended version would require a 20-unit subdivision to provide for 7.5% of all units affordable. As such, in this case the developer would be required to pay $332,577 (1.5 x $201,562 = 302,343, plus 10% admin fee of 30,234) in lieu of providing affordable unit(s).

C. Fee based upon the square footage of the residences within the project:

This concept, which is also used in the City of Huntington Beach, is what the City's current in-lieu fee is based upon. The City's current fee is $1.00/square foot of buildable area with an additional 10% administrative fee. The Council could raise the amount of the fee so that it is more consistent with the subsidy needed to provide for an affordable housing unit. However, determining an appropriate fee that would be more representative of the actual subsidy needed is difficult as the size of the homes affects the amount of fee. A project with homes averaging 3,500 square feet would pay an in-lieu fee less than a project with homes averaging 6,000 square feet. To gauge what may be a more realistic amount to account for the subsidy needed, below, Staff has provided a table using homes in the 3,500, 4,500 and 6,000 square foot range at different prices.

$/sq. ft.

Fee for a 20 unit development at

3,500 sq. ft./unit

Fee for a 20 unit development at

4,500 sq. ft./unit

Fee for a 20 unit development at

6,000 sq. ft./unit

$1

$70,000

$90,000

$120,000

$3

$210,000

$270,000

$360,000

$5

$350,000

$450,000

$600,000

$7

$490,000

$630,000

$840,000

$9

$630,000

$810,000

$1,080,000

Based upon the subsidy needed as identified in Alternatives A and B above, a more realistic fee than the current fee would be $7 per square foot.

D. Fee based upon a percentage of the estimated construction costs of the units in the project:

This program has been adopted by the City of San Clemente using 1% of construction costs. This amount would be determined using construction cost estimates equal to $95/square foot, which is what the City uses in estimating building permit plan check and issuance fees. To gauge what may be a more realistic amount to account for the subsidy needed, below, Staff has provided a table using homes in the 3,500, 4,500 and 6,000 square foot range at different percentages.