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HomeMy WebLinkAbout20 - Inclusionary Housing & In-Lieu Housing FeeCITY OF NEWPORT BEACH CITY COUNCIL STAFF REPORT Agenda Item No. 20 April 27, 2010 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Planning Department Jaime Murillo, Associate Planner 949 - 644 -3209, jmurillo(a)newportbeachca.gov SUBJECT: AMENDMENT TO TITLE 19, "SUBDIVISIONS ", OF THE NEWPORT BEACH MUNICIPAL CODE, CODE AMENDMENT NO. CA2005 -004 AND ADOPTION OF IN -LIEU HOUSING FEE (PA2005 -062) ISSUE Should the City Council approve an amendment to Title 19 (Subdivisions) of the Newport Beach Municipal Code incorporating a new "Inclusionary Housing" chapter and establishing an in -lieu housing fee? RECOMMENDATION 1. Introduce Ordinance No. 2010 - amending Title 19, "Subdivisions ", of the Newport Beach Municipal Code to incorporate Chapter 19.54 (Inclusionary Housing) establishing inclusionary housing requirements and an in -lieu housing fee (Attachment No. CC 1). 2. Adopt Resolution No. 2010 -_ setting the amount of the in -lieu housing fee at $18,500 per market -rate unit and establishing an annual adjustment to the fee (Attachment No. CC 2). INTRODUCTION The proposed chapter (Chapter 19.54) implements Housing Program 2.2.1 of the City's Housing Element which requires that an average of 15 percent of the units in a new residential development be affordable to persons of very low -, low -, or moderate - income, or that an equivalent in -lieu fee be paid. This program was adopted to promote construction of affordable dwelling units necessary to meet the "fair share" requirement set by the Regional Housing Needs Assessment (RHNA) developed by the Southern California Association of Governments. Inclusionary Housing Ordinance —Title 19 April 27, 2010 Page 2 Housing Program 2.2.1 reads as follows: Require a proportion of affordable housing in new residential developments or levy an in -lieu fee. The City's goal over the five -year planning period is for an average of 15 percent of all new housing units to be affordable to very low —, low -, and moderate - income households. The City shall either (a) require the payment of an in -lieu fee, or (b) require the preparation of an Affordable Housing Implementation Plan (AHIP) that specifies how the development will meet the City's affordable housing goal, depending on the following criteria for project size: 1. Projects of 50 or fewer units shall have the option of preparing an AHIP or paying the in- lieu fee. 2. Projects where more than 50 units are proposed shall be required to prepare an AHIP. Implementation of this program will occur in conjunction with City approval of any residential discretionary permits or Tentative Tract Maps. To insure compliance with the 15 percent affordability requirements, the City will include conditions in the approval of discretionary permits and Tentative Tract Maps to require ongoing monitoring of those projects. (Imp 2.1) In the past, in -lieu housing fees paid to fulfill inclusionary housing program requirements have been in an amount negotiated with each developer. In an effort to calculate an equitable in -lieu fee option for residential developers, the City retained the services of Economic Planning Systems, Inc. (EPS) in 2004 to analyze and provide recommendations on the fees a residential developer should have to pay in lieu of providing affordable housing units. The City later retained the services of Keyser Marston Associates (KMA) in 2009 to update the recommendations and to prepare a financial constraints analysis to ensure the City's inclusionary housing requirements would not result in a financial burden to housing production in the City (Attachment No. CC 3). Although Housing Program 2.2.1 is specific with regard to the criteria for when an in -lieu fee may be paid, the Housing Program does not provide direction to staff or to developers with regard to what an Affordable Housing Implementation Program entails, methods for satisfying the affordability requirement, or how the in -lieu fee shall be calculated. The proposed chapter provides the specific requirements necessary to implement the Housing Program and provides the legal basis for the in -lieu housing fee. DISSCUSSION Basic Framework of Chapter 19.54 (Inclusionary Housing) Applicability The proposed chapter will only apply to residential projects for which a parcel map or a tract map is proposed (for -sale units). Residential projects proposed as rentals with no parcel map or tract map will not be subject to the inclusionary housing requirements. This distinction is based on a July 2009 court decision (Palmer /Sixth Street Properties L.P., et al., v. City of Los Angeles) in which the inclusionary housing requirements for Inclusionary Housing Ordinance — Title 19 April 27, 2010 Page 3 rental housing by the City of Los Angeles were invalidated. The court decided that the Costa - Hawkins Rental Housing Act (State law establishing apartment landlords' rights to set rents as they see fit) trumped the power of local authorities to require certain rental units to be made available at certain prices. Staff's research of market -rate rental prices in the City found that a majority of the larger apartment complexes in the City were affordable to moderate - income households and a few complexes were affordable to low- income households. Accordingly, the assumption is that new residential projects proposed as rentals may be affordable to moderate - income households. Even if the units are not affordable to moderate - income households, rentals likely will provide more affordable options in the City than for -sale units. Affordability Requirement Affordable units are defined as dwellings restricted to occupancy by very low -, low -, or moderate - income households. Chapter 19.54 will require developers of residential subdivisions to facilitate production of affordable units in numbers equal to 15 percent of the number of for -sale market rate units produced. Affordable, for -sale units provided in compliance with this Chapter will be required to be sold at prices affordable for moderate - income households. If a subdivision proponent chooses to provide affordable rental units to comply with the Chapter, the units shall be rented at a rate affordable for very-low or low- income households. In all cases, the affordable units provided to meet the requirements of the Chapter shall be legally restricted to occupancy by, and affordable to, households of the income levels for which the affordable units were designated for a minimum duration of 30 years. In order to provide flexibility to developers and reduce the burden that this Chapter may place on new residential subdivision projects, the following alternatives to the on -site construction requirements of the Chapter have been included: 1. Off -Site Construction- A developer may propose to construct all or some of the affordable units required by this Chapter at a location not physically within the residential subdivision project; however, the units must be located within the City boundaries. 2. Off -Site Renovation- A developer may propose to renovate and convert existing off -site units in the City to affordable units in lieu of constructing the affordable units required by the Chapter. The proposed units shall be subject to the following requirements: a. The interiors and exteriors of the units shall be substantially renovated to improve the livability and aesthetics of the units for the duration of the affordability period. P, Inclusionary Housing Ordinance — Title 19 April 27, 2010 Page 4 b. Renovations shall include energy conserving retrofits that will contribute to reduced housing costs for future occupants of the units. c. The units shall be returned to the City's housing supply as decent, safe and sanitary housing and meet all applicable housing and building code requirements. d. The units shall not already be subject to affordability income restrictions unless such restrictions are set to expire in 3 years or less. In such cases, the affordability covenant shall provide for 30 years in addition to any existing covenant time. It should be noted that the conversion of market -rate units into affordable units as provided for by this Chapter would not be eligible to fulfill the City's RHNA "fair share" requirements. State Housing Law does include provisions that would allow for a portion of the RHNA requirement to be fulfilled through converted units; however, certain conditions would have to be included in this Chapter that would make implementation of this option difficult to implement (i.e., minimum affordability duration of 55 years, only units committed within first two years of the 5 -year planning period are eligible, and specific relocation assistance requirements). 3. Land Dedication - A developer may propose to dedicate land to the City or a City - designated housing developer for the provision of affordable units in lieu of constructing some or all of the affordable units required by this Chapter. The Chapter includes specific site suitability requirements for the proposed land to be dedicated. In projects where the land dedication option is proposed, the City Council shall be the final review authority. 4. In -Lieu Housing Fee - For residential subdivision projects consisting of 50 or fewer dwelling units, the requirements of this Chapter may be satisfied by paying a fee in lieu of providing the required number of affordable units (on -site and /or off - site). The in -lieu fee shall be paid for each market -rate unit within the residential subdivision project and shall be paid prior to the issuance of a Building Permit. As explained in detail in the In -Lieu Housing Fee Calculation section of this report, the recommended in -lieu fee per market -rate unit has beer calculated at $18,500. The payment of an in -lieu fee alone or in combination with the provision of a portion of the affordable units (on -site and /or off -site) may also be approved for residential subdivision projects consisting of more than 50 units, through the approval of an Affordable Housing Implementation Plan. W Inclusionary Housing Ordinance — Title 19 April 27, 2010 Page 5 Affordable Housing Implementation Plan (AHIP) An Affordable Housing Implementation Plan (AHIP) provides a description of the residential subdivision and the method of satisfying the affordable housing requirement. An AHIP shall be processed concurrently with the tentative tract map or parcel map application and shall be reviewed and approved by the applicable review authority for such maps. An AHIP is also a means to grant flexibility in satisfying the affordability requirement of this Chapter in one or more of the following ways: • Providing very low- income units in exchange for a reduction in the number of required affordable units. • Modification of the duration of affordability covenants to more than or less than 30 years, depending on the affordability level and number of provided affordable units. • Project phasing. • Providing a combination of affordable units on -site and off -site. • Providing a portion of the affordable units (on -site and /or off -site) in combination with in -lieu fees. • Payment of in -lieu fees for projects consisting of more than 50 units. Payment of in -lieu housing fees for residential subdivision projects consisting of 50 or fewer units and consistent with all the provisions of the Chapter will not require an AHIP. Affordable Housing Agreement A condition of approval of an AHIP will include the recordation of an Affordable Housing Agreement. This agreement will restrict units for occupancy only by very low -, low -, or moderate - income households for a pre- determined number of years, as applicable. Rental unit restrictions shall be in the form of a regulatory agreement recorded against the applicable property. Owner - occupied units shall be subject to resale restrictions recorded against the applicable property. Affordable Housing Fund All funds received through the payment of in -lieu housing fees will be required to be deposited into an Affordable Housing Fund. The Fund shall be used in compliance with the General Plan Housing Element and this Chapter to construct, rehabilitate, or subsidize affordable housing or assist other governmental entities, private organizations or individuals to provide or preserve affordable housing. Specific allowed uses of fund monies are listed within proposed Chapter 19.54. Inclusionary Housing Ordinance — Title 19 April 27, 2010 Page 6 15 Percent Inclusionary Requirement Prior to the 2006 General Plan Update, Housing Program 2.2.1 of the City's Housing Element required that an average of 20 percent of the units in a new residential development be affordable. During the preparation of the 2006 General Plan Update, Housing Program 2.2.1 was revised, reducing the inclusionary requirement to 15 percent. Attachment No. CC 4 provides an analysis that demonstrates that a 15 percent inclusionary requirement is reasonable and is the minimum the City should consider to assist in meeting its RHNA goals. In fact, the analysis illustrates that approximately 47- percent of the City's expected development yield over the General Plan's remaining 21- year horizon would need to be affordable to moderate and lower- income households in order to achieve the estimated future RHNA goals. The estimated future RHNA is based on an assumption that the City's future RHNA goals will remain similar to the past two RHNA periods, with the second period reflecting a more aggressive adjustment by SCAG for higher- income communities. Financial Constraints Analysis The State Department of Housing and Community Development (HCD) has issued a letter (Attachment No. CC 5) stating that State housing element law is neutral relative to the enactment of mandatory inclusionary housing provisions; however, HCD is now requiring local governments to analyze mandatory inclusionary policies as a potential governmental constraint on housing production when adopting or updating housing elements. In order to determine if the structure of the recommended Inclusionary Housing Chapter complies with State housing element law, KMA tested the financial burden associated with the proposed income and affordability restrictions. For -sale: Moderate Income Affordability Requirement Pro forma analyses were prepared to determine the primary financial burden created by imposing affordable housing requirements on for -sale units. The financial burden is =defined as the difference between the achievable market rate prices and the allowable prices for the income restricted units. The pro forma analyses results indicate that the requirement to provide 15- percent of for -sale units for moderate income households reduces the supportable land value in the near term by 50- percent. A land value reduction in this range can be considered an onerous burden that will be an unreasonable constraint to residential development. Inclusionary Housing Ordinance —Title 19 April 27, 2010 Page 7 Rental., Low - Income Affordability Requirement To mitigate the financial burden on for -sale developments, the proposed Inclusionary Housing Chapter provides the option for developers to fulfill the affordability requirements by providing rental units affordable to low- income households. In this case, the results of the pro forma analyses indicate that the proposed inclusionary requirements decrease the supportable land value of a residential development by 10- percent. This value decrease is much less than the primary financial burden typically associated with an inclusionary housing ordinance and is, therefore, determined not to be an unreasonable constraint. Conclusion The ability to provide rental units affordable to low- income households to fulfill the inclusionary requirements for a for -sale development project significantly reduces the financial burden to a level that does not constitute an unreasonable constraint. To corroborate this finding, KMA surveyed over 100 jurisdictions in California that currently impose inclusionary housing requirements and found that the primary financial burden associated with the proposed Inclusionary Housing Chapter is consistent with that of other inclusionary housing programs being implemented throughout the State. It was also noted that the inclusionary housing programs recently adopted in several California locations have been projected to generate land value reductions in the 30- percent range. In -Lieu Housing Fee Calculation To calculate a recommended in -lieu fee amount, KMA translated the financial burden generated by the inclusionary requirements into a per unit fee. Since it has been determined that the proposed inclusionary housing requirements are supportable and do not create an unreasonable constraint on residential housing development, KMA's methodology implicitly results in a reasonable in -lieu fee. The KMA analysis is based on the assumption that developers will choose to fulfill the inclusionary housing requirements with rental units affordable to low- income households since this option would generate a substantially smaller financial burden. Thus, the in- lieu flee analysis was based on a rental housing scenario. Based on the results of the: KMA analysis, the supportable in -lieu fee is equal to $18,500 per market rate for -sale unit. In -Lieu Housing Fee Adiustments KMA has suggested an automatic annual adjustment to the in -lieu housing fee based upon the annual percentage change in new home prices in Orange County (from December to December) as published in the Real Estate Research Council report. This will ensure that the fees, at the time of payment, keep pace with inflation and the future Inclusionary Housing Ordinance — Title 19 April 27, 2010 Page 8 cost to construct affordable housing. The following illustrates the annual percentage change in new homes prices in Orange County over the last 10 years: tip pan , rst � 2008-2009 +11.5% 2004 —2005 +8.7% 2007— 2008 -16.2% 2003 —2004 +19.0% 2006 —2007 -13.6% 2002— 2003 +10.1% 2005 —2006 - 1.6% 2001 —2002 +10.7% Building Industry Association Comments The introduction of this ordinance was originally scheduled for the City Council's review on November 24, 2009. At the request of the Building Industry Association of Southern California (BIA), the item was pulled from the agenda to allow the BIA additional time to review the proposed ordinance and provide comment. On March 12, 2010, the BIA submitted a comment letter raising concerns that the proposed ordinance may conflict with State law (Attachment No. CC 6). The Office of the City Attorney has reviewed the case law cited in the BIA letter and believes that the proposed ordinance is consistent with applicable case law. The proposed inclusionary housing requirements strike a balance between the needs of the BIA's members and the City's goal of providing a wide range of housing options to our residents. ENVIRONMENTAL REVIEW The proposed action is not defined as a project and does not require environmental review under the California Environmental Quality Act (CEQA) because it involves general policy and procedure making activities not associated with a project and does not have the potential for resulting in a direct physical change in the environment or a reasonably foreseeable indirect physical change in the environment (Section 15378 of the CEQA Guidelines). PUBLIC NOTICE Notice of this hearing was made by posting the Council Agenda on the City's official notice bulletin board and posting the agenda and report on the City's Website. Notice of the time and place of the hearing, including the address where the information could be reviewed, was also posted on the City's official notice bulletin board, and mailed to the Building Industry Association of Southern California, Orange County Chapter per their written request not less than 14 days prior to the hearing. In addition, an e-mail WI Inclusionary Housing Ordinance — Title 19 April 27, 2010 Page 9 notification of this meeting was sent to all interested parties on the City's Housing Interest List. ALTERNATIVES 1) The City Council may suggest changes to the proposed code amendment and /or resolution establishing the in -lieu housing fee. Should the City Council choose to do so, staff will return with a revised resolution and /or ordinance incorporating these changes. 2) Deny the proposed code amendment and resolution. Submitted by: Prepared by: D <vid Lepo Jarme Mu-rill Planning Director Associate Planner Attachments: CC 1 Draft Ordinance Amending Title 19 CC 2 Draft Resolution setting the amount of the in -lieu fee CC 3 Keyser Marston Associates (KMA) Analysis of Inclusionary Housing Options CC 4 Estimated Future RHNA Goals CC 5 State Department of Housing and Community Development Letter CC 6 Building Industry Association of Southern California Letter (March 12, 2010) I Attachment No. CC 1 Draft Ordinance Amending Title 19 ORDINANCE NO. 2010- AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF NEWPORT BEACH INCORPORATING A NEW INCLUSIONARY HOUSING CHAPTER (CHAPTER 19.54) INTO TITLE 19 OF THE NEWPORT BEACH MUNICIPAL CODE. WHEREAS, the City of Newport Beach ( "City ") is a charter city, governed by a charter adopted by the citizens of the City; and WHEREAS, it is a public purpose of the City and a policy of the State to achieve a diverse and balanced community with housing available for households of all income levels; and WHEREAS, economic diversity fosters social and environmental conditions that protect and enhance the social fabric of the City and is beneficial to the health, safety and welfare of its residents; and WHEREAS, the lack of affordable housing has a direct impact upon the health, safety and welfare of the residents of the City; WHEREAS, State law pertaining to General Plans and the Housing Element of the City General Plan require that City ordinances regulate land use development and that the City otherwise use its authority in a manner that provides an adequate supply of housing for all economic segments of the community; and WHEREAS, the City is experiencing a shortage of housing affordable to very low -, low- and moderate- income households and will not be able to fully contribute to the attainment of the State housing goals or to retain a healthy environment without additional affordable housing; and WHEREAS, new residential development generally does not provide housing opportunities for very low -, low- and moderate - income households due to the high cost of land in the City; and WHEREAS, an increasing number of persons in very low -, low, and moderate - income households live in overcrowded or substandard housing and devote an overly large percentage of their income to pay for housing; and WHEREAS, the amount of land in the City available for residential development is limited; and WHEREAS, the consumption of this remaining land for residential development without providing housing affordable to persons of all income levels would be contrary to F housing, environmental and planning policies and have a substantial negative impact on the environment and economic climate because (i) housing will have to be built elsewhere, far from employment centers and, therefore, commutes will increase, causing increased traffic and transit demand and consequent noise and air pollution; and (ii) City businesses will find it more difficult to attract and retain the workers they need; and WHEREAS, new residential development in the City that does not provide for affordable units aggravates the existing shortage of affordable housing by absorbing the supply of available residential land, reducing the supply of land for affordable housing and increasing the price of the remaining residential land; and WHEREAS, at the same time, new residential development contributes to the demand for goods and services in the City, increasing local service employment at wage levels which often do not permit employees to afford housing in the City; and WHEREAS, Federal and State funds for the construction of new affordable housing are insufficient to fully address the problem of affordable housing within the City; and WHEREAS, the private housing market has failed to provide adequate housing opportunities for very low -, low -, and moderate- income households; and WHEREAS, the City is aware that there may be times when the inclusionary housing requirements make market -rate housing more expensive; and WHEREAS, in weighing all the factors, including the significant need for affordable housing, the City Council has made the decision that the community's interests are best served by the adoption of inclusionary housing regulations; and WHEREAS, to implement the City's General Plan, to carry out the policies of the State and Federal law and policy, and to ensure the benefits of economic diversity of the residents of the City, it is essential that new residential development in the remaining new growth areas of the City contain housing opportunities to households of very low -, low- and moderate - income, and that the City provide a regulatory framework which ensures development of an adequate supply and mix of new housing to meet the future housing needs of all income segments of the community; and WHEREAS, in July of 2006, the City Council adopted an update to the City's General Plan, which includes a Housing Element that addresses issues, goals, and policies related to ensuring an adequate supply of housing opportunities for all residents; and WHEREAS, with the intent of achieving the City's Regional Housing Needs Assessment (RHNA) construction goals and to encourage the housing development industry to respond to the housing needs of the community and demand for affordable 1q housing, the City updated its longstanding inclusionary housing program and incorporated it into the 2006 Housing Element Update (Housing Program 2.2.1); and WHEREAS, Housing Program 2.2.1 is a statement of the City's inclusionary housing policy and requires the preparation of an Affordable Housing Implementation Plan (or the payment of an in -lieu fee) when the construction of new units are proposed; and WHEREAS, the City Council finds that it is necessary to adopt an inclusionary housing ordinance to implement Housing Program 2.2.1 and to address the City's housing shortage; and WHEREAS, notice of this hearing was made by posting the Council Agenda on the City's official notice bulletin board and posting the agenda and report on the City's Website. Notice of the time and place of the hearing, including the address where the information could be reviewed, was also posted on the City's official notice bulletin board, and mailed to the Building Industry Association of Southern California, Orange County Chapter per their written request not less than 14 days prior to the hearing. In addition, an e-mail notification of this meeting was sent to all interested parties on the City's Housing Interest List. NOW THEREFORE, the City Council of the City of Newport Beach, California, hereby ordains as follows: SECTION 1: Chapter 19.54 of the Newport Beach Municipal Code is hereby added to Title 19 to read as shown in Exhibit 1, which is attached hereto and incorporated by reference into this ordinance. All other provisions of Title 19 of the Newport Beach Municipal Code shall remain unchanged. SECTION 2: If any section, subsection, sentence, clause or phrase of this ordinance is, for any reason, held to be invalid or unconstitutional, such decision shall not affect the validity or constitutionality of the remaining portions of this ordinance. The City Council hereby declares that it would have passed this ordinance, and each section, subsection, clause or phrase hereof, irrespective of the fact that any one or more sections, subsections, sentences, clauses and phrases be declared unconstitutional. SECTION 3: The proposed action is not defined as a project and does not require environmental review under the California Environmental Quality Act (CEQA) because it involves general policy and procedure making activities not associated with a project and does not have the potential for resulting in a direct physical change in the environment or a reasonably foreseeable indirect physical change in the environment (Section 15378 of the CEQA Guidelines); and SECTION 4: The Mayor shall sign and the City Clerk shall attest to the passage of this Ordinance. This Ordinance shall be published once in the official newspaper of the City, and the same shall become effective thirty (30) days after the date of its TVJi adoption. SECTION 5: This Ordinance was introduced at a regular meeting of the City Council of the City of Newport Beach held on the 27th day of April, 2010, and adopted on the 11th day of May, 2010, by the following vote, to wit: AYES, COUNCIL MEMBERS NOES, COUNCIL MEMBERS ABSENT, COUNCIL MEMB 1Ay Keith Curry ATTEST: Leilani Brown, City Clerk APPROVED AS TO FORM, C I ATTORNEY: N 110 Leonie Mulvihill, Acting City Attorney for the City of Newport Beach rd- Page 19.54 -1 Inclusionary Housing EXHIBIT 2 CHAPTER 19.54 INCLUSIONARY HOUSING Sections: 19.54.010 Purpose 19.54.020 Definitions 19.54.030 Applicability 19.54.040 Regulations 19.54.050 In Lieu Fees 19.54.060 Affordable Housing Implementation Plan (AHIP) 19.54.070 Alternatives to On -Site Construction 19.54.080 Affordable Housing Agreement 19.54.090 Affordable Housing Fund 19.54.100 Adjustments, Waivers 19.54.010 Purpose The purpose of this Chapter is to: A. Provide a balanced residential community comprised of a variety of housing types and opportunities for all social and economic segments, including very low- , low -, and moderate - income households; B. Promote the City's goal to add affordable housing units to the City's housing stock in proportion to the overall increase in new housing units; C. Offset the demand on housing that is created by residential development and mitigate environmental and other impacts that accompany residential development by protecting the economic diversity of the City's housing stock, reducing traffic, transit and related air quality impacts, promoting jobs /housing balance and reducing the demands placed on transportation infrastructure in the region; and D. Ensure that the limited remaining developable land in the City's planning area is utilized in a manner consistent with the Housing Element. 19.54.020 Definitions For the purposes of this Chapter and this Title, the following terms shall have the meanings indicated: A. Affordable Housing Agreement. The agreement entered into in compliance with Section 19.54.080 which provides legal restrictions by which the affordable units shall be restricted to ensure that the unit remains affordable to very low -, low -, or moderate- income households, as applicable. With respect to rental units, rent restrictions shall be in the form of a regulatory agreement recorded against the applicable property. With respect to owner - occupied units, resale controls shall Ir Page 19.54 -2 Inclusionary Housing be in the form of resale restrictions, deeds of trust, and /or other similar documents recorded against the applicable property. B. Affordable Housing Implementation Plan (AHIPL A plan prepared in compliance with Section 19.54.060 which provides a description of the residential subdivision and method of satisfying the affordable housing requirement. C. Affordable Housing Price. A sales price that is no more than 3 times the maximum income level for very low -, low -, and moderate - income households. In determining the maximum household income for a given affordable unit, it shall be assumed that each bedroom is occupied by two persons, except for efficiency units (one person). D. Affordable Rental Price. An annual rent that does not exceed 30 percent of maximum income level for very low -, low -, and moderate - income households, as adjusted for household size. In determining the maximum household income for a given affordable unit, it shall be assumed that each bedroom is occupied by two persons, except for efficiency units (one person). E. Affordable Unit. An ownership or rental- housing unit, including senior housing, affordable to households with very low -, low -, and moderate - incomes as defined in this Chapter. F. Conversion. A change of a dwelling unit to a condominium, cooperative, or a similar form of ownership, or to a nonresidential use. G. Low - income. Income between 50% and 80% of the Orange County median income, adjusted for actual household size, as determined by the California Department of Housing and Community Development. H. Moderate - income. Income between 80% and 120% of the Orange County median income, adjusted for actual household size, as determined by the California Department of Housing and Community Development. Very low- income. Income 50% or less of the Orange County median income, adjusted for actual household size, as determined by the California Department of Housing and Community Development. 19.54.030 Applicability Residential subdivision projects that result in a net increase in the number of units on the property shall comply with the requirements of this Chapter, unless granted an adjustment or waiver in compliance with Section 19.54.100 (Adjustments, Waivers). The provisions of this Chapter shall not apply to nonresidential subdivisions, nor to condominium projects or stock cooperatives which consist of the subdivision of air space in an existing apartment building which, at the time of tentative map filing, is five or more years old. i-1 Page 19.54 -3 Inclusionary Housing 19.54.040 Regulations A. Affordability Requirement. 1. Residential subdivision projects subject to this Chapter shall include the construction of 15% of the net increase number of dwelling units within the residential development project as affordable units restricted for occupancy by very low -, low- or moderate - income households. Notwithstanding the construction requirements, alternatives to on -site construction may be provided pursuant to Section 19.54.070 (Alternatives to On -Site Construction). A lower percent of affordable units may be approved as part of an AHIP if the project includes units for very low - income households. 2. The affordability requirement shall apply only to the net increase of residential units on the property. In the event that the residential subdivision project includes the demolition or conversion of existing residential units, except as provided in Chapter 20.86 of the Zoning Code (Low and Moderate Income Housing within the Coastal Zone), the affordability requirement shall only apply to the net increase of residential units on the property. 3. Affordable units required to be replaced under the provisions of Chapter 20.86 of the Zoning Code (Low and Moderate Income Housing within the Coastal Zone) shall not be eligible for fullfilling the number of affordable units required under the provisions of this Chapter. 4. The number of affordable units required for a residential subdivision project shall be determined by the review authority prior to tentative or parcel map approval. 5. To determine the number of units required when new affordable units are to be provided, any decimal fraction less than 0.50 shall be rounded down to the nearest whole number, and any fraction greater than or equal to 0.50 shall be rounded up to the next whole number. Provided, in no case shall the affordability requirement be zero. B. For -Sale Price. Rent, of Affordable Units. For affordable for -sale units provided in compliance with this Chapter, the applicant shall sell the units at a housing price affordable for moderate - income households. If the applicant chooses to provide affordable rental units to comply with this Chapter, the applicant shall rent the units at a rental price affordable for very low- or low- income households. C. Duration of Affordability Requirement. Affordable units required by this Section shall be legally restricted to occupancy by, and affordable to, households of the income levels for which the affordable units were designated for a minimum duration of 30 years, or as provided in an approved AHIP. W) Page 19.54 -4 Inclusionary Housing D. Timing. Affordable units shall be provided and offered for occupancy concurrently with or prior to the occupancy of the market -rate units. For projects that are phased over time, affordable units shall be provided in accordance with an approved AHIP. 19.54.050 In Lieu Fees A. General Requirements. 1. For residential subdivision projects of 50 or fewer dwelling units, the requirements of this Chapter may be satisfied by paying a fee in lieu of providing all or a portion of the affordable units, unless otherwise provided by an approved AHIP. 2. For residential subdivision projects of 51 dwelling units or more, the applicant may not pay a fee in lieu of constructing the required affordable units, unless otherwise provided by an approved AHIP. B. In -Lieu Fee Payment. When a fee is being paid in lieu of providing affordable units, the in -lieu fee shall be paid for each market -rate. unit within the residential subdivision project. C. Timing of Payment. Payment of the in -lieu fee shall be made prior to the issuance of a Building Permit, unless otherwise provided by an approved AHIP. D. Amount of Fee. The amount of the in -lieu fee shall be set by resolution of the Council. 19.54.060 Affordable Housing Implementation Plan (AHIP) A. When Required. 1. Residential subdivision projects of 51 dwelling units or more shall be required to submit an AHIP. 2. Residential subdivision projects of 50 or fewer dwelling units shall have the option of submitting an AHIP or paying an in -lieu fee. B. Contents. The AHIP shall contain the following information: 1. A description of the residential subdivision, including the number of market rate and affordable units proposed, and the basis for the calculation of the number of required affordable units; 2. The method of satisfying the affordable housing requirement, including the income level(s) and tenure of the affordable units to be provided; 3. A phasing plan, if the applicant proposes a phased project, that provides for the timing of development of the affordable units; U Page 19.54 -5 Inclusionary Housing 4. Information necessary to establish compliance with criteria provided in Subsection 19.54.070.13 (Off -Site Renovation Projects) or Subsection 19.54.070.0 (Land Dedication), if applicable; and 5. Any additional information requested by the Planning Director to assist in the evaluation of the AHIP. C. Approval. 1. The review authority for the project shall approve, conditionally approve, or deny the AHIP on the basis of the application, plans, materials, and testimony submitted. 2. If the AHIP proposes the dedication of land in compliance with Subsection 19.54.070.0 (Land Dedication) the City Council shall be the final review authority. In these cases, the Planning Commission shall first recommend and the City Council shall approve, conditionally approve, or deny the AHIP. D. Appeal of review authority's decision. The decision of the review authority may be appealed in compliance with Chapter 20.95 (Appeals). 19.54.070 Alternatives to On -Site Construction The following alternative means of compliance with this Chapter may be considered as part of an AHIP. A. Off -Site Construction Proiects. An applicant may propose to construct some or all of the affordable units required by this Chapter at a location not physically within the residential subdivision project; however, the affordable units shall be located within the City boundaries. B. Off -Site Renovation Projects. An applicant may propose to renovate and convert existing off -site units in the City to affordable units in lieu of constructing some or all of the affordable units required by this Chapter. The proposed units shall meet the following requirements: 1. The interiors and exteriors of the units shall be substantially renovated to improve the livability and aesthetics of the units for the duration of the affordability period. 2. The units shall be returned to the City's housing supply as decent, safe and sanitary housing and meet all applicable housing and building code requirements. 3. Renovations shall include energy conserving retrofits that will contribute to reduced housing costs for future occupants of the units. IMI Page 19.54 -6 Inclusionary Housing 4. The units shall not already be subject to affordability income restrictions unless such restrictions are set to expire in 3 years or less. In such cases, the affordability covenant shall provide for 30 years in addition to any existing covenant time. C. Land Dedication. An applicant may propose to dedicate land to the City or to a City- designated housing developer for the provision of affordable units in lieu of constructing some or all of the affordable units required by this Chapter. The dedicated land shall meet the following site suitability requirements: 1. The dedicated land shall be useable for its intended purpose and have the appropriate General Plan and zoning designation for the development of affordable housing, be free of toxic substances and contaminated soils, be fully improved with infrastructure and adjacent utilities necessary to serve the project, and shall have no title restrictions that would prevent the development of the required number of affordable units. 2. Title to the dedicated land, or lease hold for the useful life of the housing improvements, shall be conveyed to the City or City- designated housing developer before a Building Permit is issued for any portion of the residential subdivision project. 3. All property taxes, special taxes, fees, or other assessments shall be current before the title is conveyed. 4. The dedicated land shall be sufficient in size to construct the number of affordable units that the applicant would otherwise be required to construct. D. Findings and Decision. The review authority may approve or conditionally approve, an AHIP that proposes alternative means of compliance with the requirements of this Chapter after first finding all of the following: 1. The purpose of this Chapter would be served by the implementation of the proposed alternative; 2. The units provided are located within the City and are consistent with the requirements of this Chapter; and 3. It would not be feasible or practical to construct the units on -site. 19.54.080 Affordable Housing Agreement. An affordable housing agreement shall be executed in a recordable form prior to the issuance of a Building Permit for any portion of a residential subdivision project subject to the requirements of this Chapter. 2i Page 19.54 -7 Inclusionary Housing A. Contents. Affordable housing agreements shall include the following where applicable: 1. A description of the residential subdivision project, how the affordable housing requirements will be met by the applicant, and whether the affordable units will be rented or owner - occupied; 2. The number, size, and location of each affordable unit; 3. Incentives provided by the City (if any) for density bonus; 4. Limits on income, rent and sales price of affordable units; 5. Procedures for tenant selection and the process for qualifying prospective households for income eligibility; 6. Provisions and /or documents for resale restrictions, deeds of trust, rights of first refusal for owner - occupied units, or restrictions for rental units; 7. Provisions for monitoring the ongoing affordability of the units; 8. Performance guarantees (e.g., a cash deposit, bond, or letter of credit) as required by the review authority; and 9. Provisions for the enforcement and penalties for violation of the agreement. B. Recording of Agreement. Affordable housing agreements in a form acceptable to the City Attorney shall be recorded against the owner- occupied affordable units and the projects containing rental affordable units. Additional rental or resale restrictions, deeds of trust, rights of first refusal and /or other documents shall also be recorded against owner - occupied affordable units. In cases where the requirements of this Chapter are satisfied through the development or renovation of off -site units, the affordable housing agreement shall simultaneously be recorded against the property where the off -site units are located. 19.54.090 Affordable Housing Fund A. Fund Revenues. The fund shall receive all in -lieu fees paid under Section 20.34.050 (In -Lieu fees) and may also receive monies from other sources. B. Purpose and Limitations. Affordable Housing Fund monies shall be used in compliance with the General Plan Housing Element and this Chapter to construct, rehabilitate, or subsidize affordable housing or assist other governmental entities, private organizations or individuals to provide or preserve affordable housing. The fund may be used for the benefit of both rental and owner- occupied housing. Allowed uses of fund monies include: 1. Assistance to housing development corporations; 22 Page 19.54 -8 Inclusionary Housing 2. Equity participation loans; 3. Grants; 4. Pre -home ownership co- investment; 5. Predevelopment loan funds; 6. Participation leases; 7. Other public - private partnership arrangements; 8. The acquisition of property and property rights; 9. Construction of affordable housing including costs associated with planning, administration, and design, as well as actual building or installation; 10. Costs of rehabilitation and maintenance of existing affordable housing when needed to preserve units that are at risk of going to a market rate or at risk of deterioration; 11. Other costs associated with the construction or financing of affordable housing; 13. Reasonable administrative charges or related expenses; and 14. Reasonable consultant and legal expenses related to the establishment and /or administration of the fund. 19.54.100 Adjustments, Waivers The City Council may waive, wholly or partially, the requirements of this Chapter and approve alternative methods of compliance with this Chapter if the applicant demonstrates, and the City Council finds that either: A. Taking. There is no reasonable relationship between the impact of a proposed development and the requirements of this Chapter and applying the requirements of this Chapter would take property in violation of the United States or California Constitutions; or 23 Page 19.54 -9 Inclusionary Housing B. Special circumstances. There are special circumstances unique to the residential development that justify the granting of an adjustment or waiver; the residential development would not be feasible without the modifications; a specific and financial hardship would occur if the modification was not granted; and no alternative means of compliance are available that would be effective in attaining the purpose of this Chapter than the relief requested. II. Attachment No. CC 2 Draft resolution setting in -lieu fee amount %(n n-1 RESOLUTION NO. 2010- A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF NEWPORT BEACH SETTING THE AMOUNT OF THE AFFORDABLE HOUSING IN -LIEU FEE PURSUANT TO SECTION 19.54.050(D) OF THE NEWPORT BEACH MUNICIPAL CODE WHEREAS, in July of 2006, the City Council adopted an update to the City of Newport Beach's ( "City ") General Plan, which includes a Housing Element that addresses issues, goals, and policies related to ensuring an adequate supply of housing opportunities for all residents; and WHEREAS, with the intent of achieving the City's Regional Housing Needs Assessment construction goals and encouraging the housing development industry to respond to the housing needs of the community and the demand for affordable housing, the 2006 Housing Element Update (Housing Program 2.2.1) incorporates the City's longstanding inclusionary housing policy; and WHEREAS, Housing Program 2.2.1 is a statement of the City's inclusionary housing policy and requires the preparation of an Affordable Housing Implementation Plan, or the payment of an in -lieu fee, when the construction of new units is proposed; and WHEREAS, Chapter 19.54 of the Newport Beach Municipal Code implements Housing Program 2.2.1 and establishes an affordable housing requirement requiring that 15- percent of the total number of dwelling units required in conjunction with residential subdivisions be affordable to very low -, low- or moderate- income households; and WHEREAS, to increase the flexibility in the means of fulfilling inclusionary housing requirements, Chapter 19.54 provides the option of paying a fee in lieu of providing the affordable units within residential subdivision projects; and WHEREAS, in an effort to provide an equitable in -lieu fee option to residential developers, the City retained the services of Economic Planning Systems, Inc. (EPS), in 2004 to analyze and provide recommendations on the fees a residential developer should have to pay in lieu of providing affordable housing units; and WHEREAS, the City retained the services of Keyser Marston Associates (KMA) in 2009 to update the EPS in -lieu fee recommendations and to prepare selected analyses of the financial burden associated with income and affordability restrictions that may be imposed under the requirements of Chapter 19.54 (Exhibit A); and WHEREAS, such financial analyses indicated the inclusionary housing requirements can be fulfilled without creating an unreasonable constraint on residential development; and WHEREAS, the KMA in -lieu fee analysis is based on the assumption that the City will provide developers with the option to fulfill the inclusionary requirements with either ownership or rental units; and WHEREAS, the analysis further indicates that the provision of affordable rental units generates a substantially smaller financial burden than the provision of affordable ownership units, and, accordingly, the in -lieu fee analysis is based on a rental housing scenario; and WHEREAS, KMA projected the financial burden imposed on a typical new residential subdivision by the inclusionary requirements into an equivalent per unit in- lieu fee; and WHEREAS, the results of the in -lieu fee analysis indicate that the financial burden incurred providing low- income rental units pursuant to the provisions of Chapter 19.54 translates to an in -lieu fee of $18,500 per market rate ownership unit; and WHEREAS, the City Council has reviewed the financial analyses and methodology used to establish the in -lieu housing fee, and determines the in -lieu fee to be appropriate; and WHEREAS, the proposed action is not defined as a project under the California Environmental Quality Act (CEQA) because it involves general policy and procedure making activities not associated with a project or a physical change in the environment (Section 15378 of the CEQA Guidelines); and WHEREAS, notice of this hearing was made by posting the Council Agenda on the City's official notice bulletin board and posting the agenda and report on the City's Website. Notice of the time and place of the hearing, including the address where the information could be reviewed, was also posted on the City's official notice bulletin board, and mailed to the Building Industry Association of Southern California, Orange County Chapter per their written request not less than 14 days prior to the hearing. In addition, an e-mail notification of this meeting was sent to all interested parties on the City's Housing Interest List. NOW THEREFORE, the City Council of the City of Newport Beach, California, hereby resolves as follows: SECTION 1: The in -lieu housing fee pursuant to Section 19.54.050 (D) of the Newport Beach Municipal Code is set at Eighteen Thousand Five Hundred Dollars ($18,500). 01 O SECTION 2: The in -lieu housing fee shall be increased automatically, based upon the annual percentage change in the new home prices in Orange County (from December to December) as published in Real Estate Research Council report in order to ensure that the fees keep pace with inflation and the cost to construct affordable housing. SECTION 3: This Resolution passed and approved at a regular meeting of the City Council of the City of Newport Beach held on the 27th day of April, 2010, by the following vote, to wit: AYES, COUNCIL MEMBERS NOES, COUNCIL MEMB ABSENT, COUNCIL MEMBERS MAYOR Keith Curry ATTEST: Leilani Brown, City Clerk 0 0 EXHIBIT A Keyser Marston Associates Analysis of Inclusionary Housing Options (To Be Inserted) ,'�A Attachment No. CC 3 KMA Analysis 2„ 2- /�3 A bV:ISG#tSJ'�; :BEAT: ErrAT¢ Rei>eveLOeinsy ArFORVAtlCh HOOSIWI ' ECO V O W C =DEVELOPMENT SAN FRANOSCO A.IEmX KEYt61 T /4l,OTHYC: KELLY Kot EARLSS FVNK Lima m.. -.KERN $OftERTf WGfMQRE 'Rub T. KASVAE0ruA LOSANCIf LLS KAI H.UiN" H. HFA0 JAMES A. RABE TAI LC. ANL)E'NSdh Q;kFCOnr D. Siw -I1On Krvin L ENCiSTROM 1WRLE.L.aROMEY, DENISE RICRERSTATT S:n+I GLEC.0 'rGMAW w T.RlmUir . PAUEC. MARRA EYSER MARSTON ASSOCIATES- ADVISORS IN PLI&LICIPRIVATE REAL ESTATE ' DEVELOPMENT MEMORANDUM To: Sharon Wood, Assistant City Manager City of Newport Beach From: Kathleen Head Date: September 17, 2009 Subject: Analysis of Inclusionary Housing Options At your request, Keyser Marston Associates, Inc. (KMA) prepared selected financial analyses pertaining to the City of Newport Beach (City) Inclusionary Housing Program. These analyses can be described as follows: The inclusionary housing requirements are proposed to be imposed on new ownership residential development. Market rate rental projects are not proposed to be subject to the Inclusionary Housing Program requirements. 2. The proposed Program will allow the income and affordability requirements to be fulfilled in any of the following ways: a. On -site development of units within the proposed market rate ownership residential development; or b. Development of income restricted rental units; or C. Payment of a fee to the City in lieu of developing any income restricted housing units. 3. KMA tested the financial impacts associated with income and affordability restrictions that may be imposed under the Inclusionary Housing Program. Based on that analysis, KMA identified an Inclusionary Housing Program structure that does not create an onerous burden on residential development. The recommended structure is intended to comply with the State of California (State) Housing Element requirement that the program should not create an unreasonable constraint on residential development. 500- SOU'rHGRAND AVENULSU1TE14809 LOS ANGELES, CAurokNIA90 07, 1.'> MOM:1136228095 >EAX:213622.5204- W WW KEYSERMARSTONCOM: 0905025_2.doc;NB: KH H: NYM:gbd 16091.001/012 ->-A To: Sharon Wood, City of Newport Beach September 17, 2009 Subject: Analysis of Inclusionary Housing Options Page 2 BACKGROUND STATEMENT The City has applied an inclusionary housing requirement on a case -by -case basis for new residential development for more than 20 years. This requirement is currently being formalized into an ordinance that w ill impose specific restrictions on future new ownership residential development. As part of the process, the City engaged Economic & Planning Systems, Inc. to prepare an "Inclusionary Housing In -Lieu Fee Study" (EPS Study). This study was completed in October 2008. KMA was recently engaged by the City to test the financial impacts associated with the proposed requirements. The ultimate objective of the KMA analysis is to create Inclusionary Housing Program terms that fulfill the City's affordable housing objectives without eliminating the developer's economically beneficial use of the property. KMA tested the following baseline inclusionary housing obligations: Threshold requirement: 15% of the units in market rate ownership residential development are subject to income and affordability restrictions. 2. Household Income Restrictions: If ownership units are provided to fulfill the obligation, the restricted units must be allocated to moderate income households. b. If rental units are provided to f ulfill the obligation, the restricted units must be rented to low income households. KMA prepared pro forma analyses of prototypical product types to estimate the financial impact created by imposing the identified inclusionary housing requirements. The analyses compare baseline market rate project pro formas to pro formas for projects that meet the inclusionary standards. These comparisons are used to quantify the financial impacts created by the requirements being tested. KMA also reviewed the characteristics of inclusionary housing ordinances currently in place throughout California. The purpose of this survey is to provide further assistance in determining whether the requirements being considered by the City fall within the range of other existing ordinances. PRO FORMA ANALYSIS ORGANIZATION A summary of the analysis is presented in Table 1. The supporting pro forma analyses are organized as follows: 0905025_2.d oc; NB: KHH: NYM:gbd 16091.001/012 S5 To: Sharon Wood, City of Newport Beach Subject: Anal, Appendix A: Appendix B: Appendix C: Appendix D: Appendix E: Isis of Inclusionary Housing Options Affordable Housing Cost Calculations Ownership: Baseline Market Rate Project Ownership: Moderate Income Inclusionary Rental: Baseline Market Rate Project Rental: Low Income Inclusionary ANALYSIS ASSUMPTIONS Ownership Assumptions September 17, 2009 Page 3 KMA reviewed ownership residential projects that have recently been submitted to the City's Planning Department to identify the product type to use as the baseline market rate project scenario. Based on the available information, KMA created a prototype project with the following characteristics: The development site is set at two acres. 2. The prototype project includes 32 units, which represents a density of 16 -units per acre. 3. The average unit size is set at approximately 2,100 square feet. The pro forma analyses are based on the following assumptions: 1. The construction costs, excluding land acquisition costs, are estimated at $1.2 million per unit. 2. The average sales price for the market rate units is projected at $1.8 million per unit. 3. Based on the affordable housing cost calculation methodology defined in the City's Housing Element, the 2009 affordable purchase price for a three - bedroom unit is approximately $360,000 (See Appendix A -Table 1). 4. The threshold developer prof it is set at 15% of the project's construction costs. Rental Assumptions The rental prototype being tested in the KM A financial analysis is based on a survey of apartment complexes in Newport Beach. The key components of the prototype project are: 0905025_2.doc;NB:KHH: NYM:gbd 16091.001/012 �G To: Sharon Wood, City of Newport Beach September 17, 2009 Subject: Analysis of Inclusionary Housing Options Page 4 1. The development site is set at two acres. 2. The prototype project includes 36 units, a densi ty of 18 -units per acre. 3. The project includes the following unit mix: a. 40% one - bedroom units; b. 40% two- bedroom units; and C. 20% three - bedroom units. The following assumptions are used in the rental scenarios: 1. The construction cost estimates are based on the assumptions applied in the EPS Study. The construction costs, excluding land acquisition, are estimated at $154,000 per unit. 2. Projected Market Rents a. One - bedroom unit: $2,100 per month; b. Two- bedroom unit: $2,700 per month; and C. Three - bedroom unit: $3,000 per month. 3. Affordable Rent Inclusionary Housing Units a. The affordable rents are based on the calculation methodology identified in the City's Housing Element. b. The 2009 low income rents are: i. One - bedroom unit: $1,441 per month; ii. Two - bedroom unit: $1,802 per month; and iii. Three - bedroom unit: $2,065 per month. 4. The threshold stabilized return on total investment for the rental housing projects is set at 6.6 %. This return rate is approximately equal to the rate ap plied in the EPS Study, 0905025_2.doc; NB: KHH: N YM:9bd 16091.001/012 -I To: Sharon Wood, City of Newport Beach September 17, 2009 Subject: Analysis of Inclusionary Housing Options Page 5 FINANCIAL CONSTRAINTS ANALYSIS Ownership: Moderate Income Inclusio nary The primary financial impact created by imposing affordable housing req uirements on ownership units is the difference between the achievable market rate prices and the allowable prices for the income restricted units. However, there are also some minor differences in cost categories that are driven by the revenues generated by an ownership project. The pro forma analyses in Appendices B and C illustrate the estimated impact created by providing the inclusionary units within a market rate project. The pro forma analyses results indicate that the requirement to set aside 15% of the units for moderate income households acts to reduce the supportable land value i n the near term by 50% (Appendix C — Table 3). A land value reduction in this range can be considered an onerous burden that will act as a constraint to residential developm ent. Rental: Low Income Inclusionary To mitigate the financial burden, the proposed Inclusionary Housing Program provides the option for developers to fulfill the requirements by constructing affordable rental units. This section of the analysis evaluates the financial impact associated with providing the required inclusionary units in rental projects. The financial impact associated with imposing income and affordability restrictions on apartment development is largely related to the decrease in supportable investment created by the reduction in the achievable rents. However, the revenue reduction is offset to some degree by the fact that the property taxes for the income restricted project will be lower than the property taxes for a market rate project. The pro forma analyses in Appendices D and E illustrate the impact created by providing low income rental units. The results of the comparative pro forma analysis indicate that the proposed inclusionary requirements act to decrease the supportable land value by 10% (Appendix E) This value decrease falls well within the typical range for an inclusionary housing ordinance. 0905025_2.doc; N B:KHH: NYM:gbd 16091.0011012 To: Sharon Wood, City of Newport Beach September 17, 2009 Subject: Analysis of Inclusionary Housing Options Page 6 Development Constraints Conclusions The results of the ownership residential analysis indicate that the identified inclusionary housing requirements impose an onerous burden on developers. However, the option for developers to fulfill the requirements by providing affordable rental un its mitigates the detriment sufficiently to eliminate the constraint to residential development. Thus, it can be concluded that the inclusionary housing requirements do not create an unreasonable constraint on ownership residential development. ORDINANCE COMPARISON The financial analyses undertaken by KMA indicate that the inclusionary housing requirements can be fulfilled without creating an unreasonable constraint on residential development. To crosscheck this finding, KMA surveyed over 100 jurisdictions in California that currently impose inclusionary housing requirements. The results of this survey indicate that the identified requirements fall within the norm of the standards imposed by inclusionary housing programs being implemented throughout the state. The courts have held that affordable housing is a "public benefit ", and that locally imposed inclusionary housing ordinances are a legitimate means of providing this public benefit. The courts have further found that the requirements cannot deprive an owner of "all economically beneficial use" of the property. However, to date, no definition of all economically beneficial use has been provided. For reference purposes, it should be noted that inclusionary housing programs recently adopted in several California locations have been projected to generate land value reductions in the 30% range. As discussed previously in this analysis, the inclusionary housing obligations being tested are projected to create a financial detriment that is significantly less than a 30% decrease to the supportable land value. As such, it can be concluded that the proposed inclusionary housing requirements do not create an unreasonable constraint on residential development. SUPPORTABLE IN -LIEU FEE To increase the Program's flexibility, the inclusionary housing obligations can be fulfilled through the payment of an in -lieu fee. To establish a recommended in -lieu fee amount, KMA translated the financial impact generated by the inclusionary requirements into a per unit fee. Since it has been determined that the identified inclusionary housing requirements are supportable, this methodology implicitly results in a reasonable in -lieu fee. 0905025_2.doc;NB:KHH: N YM:gbd 16091.0011012 Sq To: Sharon Wood, City of Newport Beach September 17, 2009 Subject: Analysis of Inclusionary Housing Options Page 7 The KMA analysis is based on the assumption that the City will provide developers with the option to fulfill the inclusionary requirements with either ownership or rental units. The analysis further indicates that the provision of affordable rental units generates a substantially smaller financial impact than the provision of affordable ownership units. Thus, the in -lieu fee analysis is based on a rental housing scenario. The following methodology was used to establish the recommended in -lieu fee amount: As shown on Appendix E —Table 3, the financial impact is estimated at $591,000 for the 36 -unit prototype apartment project being evaluated. 2. The inclusionary housing obligation is applicable to market rate ownership housing development. As such, the in -lieu fee analysis is based on the inclusionary requirement for the 32 -unit prototype ownership that was tested previously in this analysis: a. The 32 -unit ownership project generates a requirement for five income restricted units. b. When the $591,000 gap is divided by the five affordable units, the supportable in -lieu fee equals approximately $118,200 per affordable unit. 3. The affordability gap can also be divided by the total number of market rate ownership units to arrive at a supportable in -lieu fee per market rate unit. Based on the results of the KMA analysis, the supportable in -lieu fee is equal to $18,500 per market rate ownership unit ($591,000 / 32 units). CONCLUSIONS Based on the results of the financial analysis, KMA reached the following conclusions: The Inclusionary Housing Program structure evaluated by KMA does not deprive an owner of "all economically beneficial use' of the property, nor does it create an unreasonable constraint on residential development as defined by State Housing Element requirements. 2. The inclusionary option selected by developers will vary depending on the actual scope of development being proposed. However, the financial analysis demonstrates that there is a strong f inancial incentive for developers to select the in -lieu fee option. Nonetheless, it is possible that some developers may find it preferable to fulfill the inclusionary housing requirements by constructing affordable rental units. 0905025_2.d oc; NB:KHH: NYM:gbd 16091.001/012 TABLE 7 AFFORDABLE HOUSING CASE STUDIES INCLUSIONARY HOUSING ANALYSIS NEWPORT BEACH, CALIFORNIA I. 1OWNERSHIP - SITE 87,120 SF OWNERSHIP: MARKET RATE IMODERATE INCOME SCENARIO I NCLUSIONARY of Units 32 32 (Units /Acre) 16.0 16.0 Affordable Housing None 5 Units -15% Moderate Requirements Income Housing Cost N.A. Housing Element Standards Land Cost' $167 /SF $167 /SF Supportable Land Value $84 /SF % (Decrease) /Increase in Land Value -50% RENTAL - SITE 87.120 SF MARKET RATE RENTAL: LOW INCOME SCENARIO I N CLU S IONARY Number of Units 36 36 Density (Units /Acre) 18.0 18.0 Affordable Housing None 5 Low Income Units a Affordable Housing Cost N.A. Housing Element Standards - Land Cost 2 $68 /SF $68 /SF Supportable Land Value $61 /SF %(Decrease) /Increase in Land Value -10% III. ISupportable In -Lieu Fee/ Market Rate Unit 4 $18,500 /Unit ' The land cost is based on the residual land value supported by the market rate scenario. '2 The land cost is set at $69/ SF based on the EPS Inclusionary Housing Study, 1017/2008. a Based on the number of inclusionary units required by the ownership residential project. 4 The in -lieu fee is based on the affordability gap associated with fulfilling the obligation with rental units. See APPENDIX E. Prepared by: Keyser Marston Associates, Inc. File name: NS Incl_9_17_09.xis; Summary d� APPENDIX A AFFORDABLE HOUSING COST CALCULATIONS Prepared by: Keyser Marston Associates, Inc. File name: NB Incl_9_17_09.xls; Afford Cost Lo_ APPENDIX A -TABLE 1 AFFORDABLE HOUSING COST CALCULATIONS OWNERSHIP UNITS INCLUSIONARY HOUSING ANALYSIS NEWPORT BEACH, CALIFORNIA I. Income Assumptions Income Level Number of Bedrooms Benchmark Household Size Household Income for Calculation Purposes 1 11. Affordable Housing Price Calculation Household Income Multiplier 2 Total Affordable Housing Price Moderate Three - Bedrooms Six Person $119,850 $119,850 3.0 $359,600 Based on the 2009 area median income published by the California Housing & Community Development Department. The household size is set at the number of bedrooms in the unit multiplied times two. z Based on the methodology defined in the City's Housing Element. Prepared by: Keyser Marston Associates, Inc. File name: NB Incl_9_17 09.xis; Afford Cost IA 2 APPENDIX A - TABLE 2 AFFORDABLE HOUSING COST CALCULATIONS RENTAL UNITS INCLUSIONARY HOUSING ANALYSIS NEWPORT BEACH, CALIFORNIA I. Income Level Low II. One- Bedroom Units Benchmark Household Size Two Person Household Income for Calculation Purposes $59,500 % of Income Allotted to Housing Costs 30% Annual Income Available for Housing Costs $17,850 Monthly Income Available for Housing Costs $1,488 Less: Utilities Allowance 47 Total Affordable Rent $1,441 III. Two - Bedroom Units Benchmark Household Size Four Person Household Income for Calculation Purposes ' $74,400 % of Income Allotted to Housing Costs 30% Annual Income Available for Housing Costs $22,320 Monthly Income Available for Housing Costs $1,860 Less: Utilities Allowance 58 Total Affordable Rent $1,802 IV. Three - Bedroom Units -. .Benchmark Household Size Six Person Household Income for Calculation Purposes' $86,300 % of Income Allotted to Housing Costs 30% Annual Income Available for Housing Costs $25,890 Monthly Income Available for Housing Costs $2,158 Less: Utilities Allowance 93 Total Affordable Rent $2,065 Based on the 2009 household incomes published by the California Housing & Community Development Department. The household size is set at the number of bedrooms in the unit multiplied times two. Prepared by: Keyser Marston Associates, Inc. File name: NB Incl_9 17_09.x1s: Afford Cost L\ APPENDIX B OWNERSHIP: BASELINE - MARKET RATE PROJECT: 32 UNITS (16 UNITS /ACRE) Prepared by: Keyser Marston Associates, Inc. File name: NB Incl_9 17_09.xis; Own Base U5- APPENDIX B - TABLE 1 ESTIMATED CONSTRUCTION COSTS OWNERSHIP: BASELINE - MARKET RATE PROJECT: 32 UNITS (16 UNITS /ACRE) AFFORDABLE HOUSING CASE STUDIES INCLUSIONARY HOUSING ANALYSIS NEWPORT BEACH. CALIFORNIA I. Direct Costs Site Work Costs 87,120 Sf Land Area $40.00 /Sf Land Area $3,485,000 Building Costs' 67,952 /Sf GBA $285 /Sf GBA 19,366,000 Total Direct Costs $22,851,000 IL Indirect Costs General Indirect Costs 2 13% Direct Costs $2,971,000 Permits & Fees 32 Units $20,000 /Unit 640,000 Insurance 32 Units $15,000 /Unit 480,000 Developer Fee 3% Sales Revenues 1,769,000 Total Indirect Costs $5,860,000 III. Financing /Closing Costs Interest During Construction /Absorption 3 $5,885,000 Loan Origination Fees 4 $35,380,000 Loan Amount 2.5 Points 885,000 Closing & Sales, & Warranties s 3,108,000 Total. Financing /Closing Costs $9,878,000 IV. ITotal Construction Costs 32 Units $1,206,000 /Unit $38,589,000 1 Average unit size equal to 2,124 square feet. GBA includes a 0% allowance for non - livable area. 2 Includes architecture, engineering & consulting; taxes, legal & accounting; marketing; and soft cost contingency. 3 Construction and absorption period interest set at a 10.2% blended return on debt and equity. Carrying costs are based on an 18 month development period. Absorption rate is set at 4 units /month. - Based on a 60% loan to value ratio. 6 Based on 5% of sales revenues plus $5,000 /unit for warranties costs. Prepared by: Keyser Marston Associates, Inc. File name: NB Incl_9_17_09.xls; Om—Base to b APPENDIX B -TABLE 2 PROJECTED SALES REVENUES OWNERSHIP: BASELINE - MARKET RATE PROJECT: 32 UNITS (16 UNITS /ACRE) AFFORDABLE HOUSING CASE STUDIES INCLUSIONARY HOUSING ANALYSIS NEWPORT BEACH. CALIFORNIA MARKET RATE SCENARIO 1 I. ITotal Sales Revenues 32 Units @ $1,842,700 /Unit $58,966,000 Sales price at $868 /sf of net livable area. Prepared by: Keyser Marston Associates, Inc. File name: NB Incl_9 17 09.xis; Own Base APPENDIX B - TABLE 3 RESIDUAL LAND VALUE ANALYSIS OWNERSHIP: BASELINE - MARKET RATE PROJECT: 32 UNITS (16 UNITS /ACRE) AFFORDABLE HOUSING CASE STUDIES INCLUSIONARY HOUSING ANALYSIS NEWPORT BEACH, CALIFORNIA I. Total Sales Revenues II. Project Costs Total Construction Costs Threshold Developer Profit Total Project Costs See APPENDIX B - TABLE 2 See APPENDIX B - TABLE 1 15% of Total Construction Costs $38,589,000 5,788,000 $58,966,000 $44,377,000 III. lResidual Land Value 87,120 Sf Land Area $167 /Sf Land Area $14,589,000 Prepared by: Keyser Marston Associates, Inc. File name: NB Incl 9_17_09.xls; Own Base 49 /e1 :2 »J II OWNERSHIP: IMODERATE INCOME INCLUSIONARY: 32 UNITS (16 UNITS /ACRE) Prepared by: Keyser Marston Associates, Inc. File name: NB Incl 9_77_09.xis; Own Inc u 0 APPENDIX C - TABLE 1 ESTIMATED CONSTRUCTION COSTS OWNERSHIP: [MODERATE INCOME INCLUSIONARY: 32 UNITS (16 UNITS /ACRE) AFFORDABLE HOUSING CASE STUDIES INCLUSIONARY HOUSING ANALYSIS NEWPORT BEACH, CALIFORNIA I. Direct Costs Site Work Costs 87,120 Sf Land Area $40.00 /Sf Land Area $3,485,000 Building Costs' 67,952 /Sf GBA $285 /Sf GBA 19,366,000 Total Direct Costs $22,851,000 II. Indirect Costs General Indirect Costs 2 13% Direct Costs $2,971,000 Permits & Fees 32 Units $20,000 /Unit 640,000 Insurance 32 Units $15,000 /Unit 480,000 Developer Fee 3 1,769,000 Total Indirect Costs $5,860,000 III. Financing /Closing Costs Interest During Construction /Absorption 4 $6,073,000 Loan Origination Fees 5 $35,380,000 Loan Amount 2.5 Points 885,000 Closing & Sales; & Warranties 5 2,738,000 Total Financing /Closing Costs $9,696,000 IV. ITotal Construction Costs 32 Units $1,200,000 /Unit $38,407,000 Average unit size equal to 2,124 square feet. GBA includes a 0% allowance for non - livable area. 2 Includes architecture, engineering & consulting; taxes, legal & accounting; marketing; and soft cost contingency. 3 See APPENDIX B - TABLE 2 - The Developer Fee is set equal to the amount calculated in the market rate scenario- 4 Construction and absorption period interest set at a 10.2% blended return on debt and equity. Carrying costs are based on an 18 month development period. Absorption rate is set at 4 units /month. 5 Based on a 60% loan to value ratio. s Based on 5% of sales revenues plus $5,000 /unit for warranties costs. Prepared by: Keyser Marston Associates, Inc. File name: NB Incl_9_17_09.xis: Om_lnc Ci APPENDIX C - TABLE 2 PROJECTED SALES REVENUES OWNERSHIP: IMODERATE INCOME INCLUSIONARY: 32 UNITS (16 UNITS /ACRE) AFFORDABLE HOUSING CASE STUDIES INCLUSIONARY HOUSING ANALYSIS NEWPORT BEACH, CALIFORNIA I. Market Rate Units 1 27 Units @ $1,842,700 /Unit $49,752,900 II. Moderate Income Units - 3 Bd z 5 Units @ $359,600 /Unit 1,798,000 III. ITotal Sales Revenues $51,550,900 1 Sales price at $868/sf of net livable area for Three- Bedrooms and $0 /sf of net livable area for Five - Bedrooms. 2 See APPENDIX A - TABLE 1 for the affordable housing cost calculations. Prepared by: Keyser Marston Associates, Inc. File name: NB Incl_9_17_09.4s; Own Inc '�_1 APPENDIX C -TABLE 3 LAND VALUE IMPACT ANALYSIS OWNERSHIP: IMODERATE INCOME INCLUSIONARY: 32 UNITS (16 UNITS /ACRE) AFFORDABLE HOUSING CASE STUDIES INCLUSIONARY HOUSING ANALYSIS NEWPORT BEACH, CALIFORNIA Total Sales Revenues See APPENDIX C - TABLE 2 IL Project Costs Total Construction Costs Land Cost 1 Threshold Profit 2 Total Project Costs III. Affordability Gap IV. Effective Land Value Land Cost Affordability Gap Effective Land Value % Land Value Decrease V. Supportable In -Lieu Fee Total Fee Fee/ Affordable Unit Fee/ Market Rate Unit See APPENDIX C - TABLE 1 See APPENDIX B - TABLE 3 See APPENDIX B - TABLE 3 87,120 Sf Land Area $84 /Sf Land Area 38,407,000 14,589,000 5,788,000 $14,589,000 (7,233,000) 1 Land Cost is based on the Residual Land Value generated by the market rate scenario in APPENDIX B. 2 Threshold Profit is based on the amount of profit generated by the market rate scenario in APPENDIX B. Prepared by: Keyser Marston Associates, Inc. File name: Na Incl 9 17_09.xis; Own—Inc $51,550,900 $58,784,000 ($7,233,000) $7,356,000 -50% $7,233,000 $1,446,600 /Unit $267,900 /Unit r7 APPENDIX D RENTAL: BASELINE - MARKET RATE PROJECT: 36 APARTMENT UNITS (18 UNITS /ACRE) Prepared by: Keyser Marston Associates, Inc. File name: NB Inc]-9-1 7-09.xls; Apt Base S3 APPENDIX D - TABLE 1 ESTIMATED CONSTRUCTION COSTS RENTAL: BASELINE - MARKET RATE PROJECT: 36 APARTMENT UNITS (18 UNITS /ACRE) AFFORDABLE HOUSING CASE STUDIES INCLUSIONARY HOUSING ANALYSIS NEWPORT BEACH, CALIFORNIA II. Direct Costs t One - Bedroom 14 Units Two - Bedrooms 14 Units Three - Bedrooms 8 Units Total Direct Costs III. Indirect & Financing Costs 30% Direct Costs $88,450 /Unit $1,238,000 $128,100 /Unit 1,793,000 $152,500 /Unit 1,220,000 $4,251,000 $1,275,000 V. ITotal Construction Costs 36 Units $153,500 /Unit $5,526,000 - Direct Costs are based on Economic & Planning Systems' Construction Costs from "Inclusionary Housing In -Lieu Fee Study ", dated October 7, 2008. Prepared by: Keyser Marston Associates, Inc. File name: NB Incl 9 17_09.xis; Apt_Base 54 APPENDIX D - TABLE 2 STABILIZED NET OPERATING INCOME RENTAL: BASELINE - MARKET RATE PROJECT: 36 APARTMENT UNITS (18 UNITS /ACRE) AFFORDABLE HOUSING CASE STUDIES INCLUSIONARY HOUSING ANALYSIS NEWPORT BEACH, CALIFORNIA I. Rent Income' One - Bedroom 14 Units@ $2,100 /Month $352,800 Two - Bedrooms 14 Units @ $2,700 /Month 453,600 Three - Bedrooms 8 Units @ $3,000 /Month 288,000 Gross Income $1,094,400 Vacancy & Collection Allowance 5% Gross Income (54,700) Effective Gross Income $1,039,700 II. Operating Expenses General Operating Expenses 36 Units @ $4,200 /Unit $151,200 Property Taxes Z 36 Units @ $3,680 /Unit 132,500 Total Operating Expenses 36 Units @ ($7,880) /Unit ($283,700) III. I Net Operating Income 7$756,000 ' Market rent = $2.83/sf for One - Bedroom; $2.53/sf for Two - Bedrooms; and $2.44/sf for Three - Bedrooms. 2 Based on the project value at a 6.0% capitalization rate and a 1.05% tax rate. Prepared by: Keyser Marston Associates, Inc. File name: NB Incl 9_17_09.xis; Apt Base APPENDIX D -TABLE 3 RESIDUAL LAND VALUE ANALYSIS STABILIZED NET OPERATING INCOME RENTAL: BASELINE - MARKET RATE PROJECT: 36 APARTMENT UNITS (18 UNITS /ACRE) AFFORDABLE HOUSING CASE STUDIES INCLUSIONARY HOUSING ANALYSIS I. Warranted Private Investment Net Operating Income Threshold Return on Total Investment' Total Warranted Investment II. Total Construction Cost See APPENDIX D - TABLE 2 See APPENDIX D - TABLE 1 $756,000 6.6% $11,455,000 $5,526,000 III. lResidual Land Value 87,120 Sf Land Area $68 /Sf Land Area $5,929,000 i. Threshold Return on Total Investment is based on a 6.0% capitalization rate and 20% profit as a percentage,of construction costs. Prepared by: Keyser Marston Associates, Inc. File name: NB Incl 9_17_09.xis: Apt Base 5_� APPENDIX E RENTAL: LOW INCOME INCLUSIONARY : 36 APARTMENT UNITS (18 UNITS /ACRE) Prepared by: Keyser Marston Associates, Inc. File name: NB Incl 9 17 09.xis; Apt_Low C-1 APPENDIX E -TABLE 1 ESTIMATED CONSTRUCTION COSTS RENTAL: LOW INCOME INCLUSIONARY : 36 APARTMENT UNITS (18 UNITS /ACRE) AFFORDABLE HOUSING CASE STUDIES INCLUSIONARY HOUSING ANALYSIS NEWPORT BEACH, CALIFORNIA I. Direct Costs 1 One - Bedroom 14 Units $88,450 /Unit $1,238,000 Two - Bedrooms 14 Units $128,100 /Unit 1,793,000 Three - Bedrooms 8 Units $152,500 /Unit 1,220,000 Total Direct Costs $4,251,000 IL Indirect & Financing Costs 30% Direct Costs $1,275,000 III. ITotal Construction Costs 36 Units $153,500 /Unit $5,526,000 Construction Costs are based on Economic & Planning Systems' "Inclusionary Housing In -Lieu Fee Study ", dated October 7, 2008. Prepared by: Keyser Marston Associates, Inc. File name: NB Incl 9 17_09.xis; Apt Low `Y. APPENDIX E - TABLE 2 STABILIZED NET OPERATING INCOME j RENTAL: LOW INCOME INCLUSIONARY : 36 APARTMENT UNITS (18 UNITS /ACRE) AFFORDABLE HOUSING CASE STUDIES INCLUSIONARY HOUSING ANALYSIS NEWPORT BEACH, CALIFORNIA I. Rent Income Market Rent' One - Bedroom Two - Bedrooms Three - Bedrooms Low Income 2 One - Bedroom Two - Bedrooms Three - Bedrooms Gross Income Vacancy & Collection Allowance Effective Gross Income II. Operating Expenses General Operating Expenses Property Taxes 3 Total Operating Expenses 12 Units @ $2,100 /Month $302,400 12 Units @ $2,700 /Month 388,800 7 Units @ $3,000 /Month 252,000 2 Units @ $1,441 /Month $34,600 2 Units @ $1,802 /Month 43,200 1 Unit @ $2,065 /Month 24,800 $1,045,800 5% Gross Income (52,300) $993,500 36 Units @ $4,200 /Unit $151,200 36 Units @ $3,480 /Unit 125,300 36 Units @ ($7,680) /Unit ($276,500) III. Net Operating Income $717,000 ' Market rent = $2.83/sf for One - Bedroom; $2.53/sf for Two-Bedrooms; and $2.44/sf for Three - Bedrooms. 2 See APPENDIX A - TABLE 2 for the affordable housing cost calculations. 3 Based on the project value at a 6.0% capitalization rate and a 1.1 % tax rate. Prepared by: Keyser Marston Associates, Inc. File name: NB Incl_9_77_09.xis; Apt Low FQ APPENDIX E -TABLE 3 LAND VALUE IMPACT ANALYSIS RENTAL: LOW INCOME INCLUSIONARY : 36 APARTMENT UNITS (18 UNITSIACRE) AFFORDABLE HOUSING CASE STUDIES INCLUSIONARY HOUSING ANALYSIS NEWPORT BEACH, CALIFORNIA I. Warranted Private Investment Net Operating Income Threshold Return on Total Investment 1 Total Warranted Investment II. Total Construction Cost III. Residual Land Value IV. Effective Land Value Land Cost From Mkt Scenario Supportable Land Value Decrease in Land Value % Land Value Decrease See APPENDIX E - TABLE 2 See APPENDIX E - TABLE 1 $717,000 6.60% See APPENDIX D - TABLE 3 $5,929,000 87,120 Sf Land Area $61 /Sf Land Area $5,338,000 V. Supportable In -Lieu Fee Total Fee Fee/ Affordable Unit Fee/ Market Rate Unit in the Market Rate Ownership Project 2 $10,864,000 $5,526,000 $5,338,000 $591,000 $118,200 /Unit $18,500 /Unit $591,000 10% 1 Threshold Return on Total Investment is based on a 6.0% capitalization rate and 20% profit as a percentage of construction costs. 2 The Market Rate Ownership Project includes 32 units. Prepared by: Keyser Marston Associates, Inc. File name: N6 Incl_9 17_09.xls; Apt_Low Fr_ I- � Attachment No. CC 4 Estimated Future RHNA Goals . n Estimated Future RHNA Goals Background (2006 Analysis) Prior to the 2006 General Plan Update, Housing Program 2.2.1 of the City's Housing Element required that an average of 20 percent of the units in a new residential development be affordable to persons of very low -, low -, or moderate - income, or that an equivalent in -lieu fee be paid. During the preparation of the 2006 General Plan Update, the Planning Commission requested that staff estimate the City RHNA goals over the 25 -year horizon of the General Plan Land Use Element (estimated at 2,842 affordable units), and relate the 25 -year RHNA goal to a percent of the new residential units included in the draft Land Use Element (15,000 units). The analysis illustrated that to achieve the estimated 25 -year RHNA goal, 19 percent of the total units would have to be affordable; however, it was acknowledged at the time that this analysis used highly speculative assumptions as the basis for projecting future RHNA goals. It was also acknowledged that it is unrealistic to assume that the theoretical build -out capacity of 15,000 units would be realized. An alternative analysis.was prepared using a realistic development scenario of 7,129 new units (Table 3). Using this figure, it was estimated that as many as 40 percent of the units would have to be affordable to meet our estimated RHNA goals over the 25 -year horizon. Although the analysis at the time indicated that the 20 percent inclusionary requirement was reasonable, to strike a proper balance between promoting affordable housing construction and not impeding market rate housing construction, Housing Program 2.2.1 was revised reducing the inclusionary requirement to 15 percent. Included in deliberations as to the appropriate inclusionary requirement was the fact that Housing Program, 2.2.1 was only one component of an overall strategy for meeting RHNA goals. Revised 2010 Analysis Since 2006, the City has received new RHNA goals for the 2006 -2014 planning period that are substantially higher than what was previously anticipated. Also, the number of new housing units that was ultimately approved in the 2006 General Plan Update was Tess than what was originally proposed. Therefore, staff has updated the 2006 analysis by revising the estimated RHNA goals for the remaining 21 years of the General Plan horizon (using current and past RHNA goals) and relating that goal to the current realistic development yield. The results of the updated analysis illustrate that to achieve the revised RHNA goal (2,212 affordable units), 47 percent of the total realistic development yield (4,675 units) would have to be affordable. Calculations The analysis relies on the assumption that the City's future RHNA and income distributions will remain similar to the combined 2000 -2005 and 2006 -2014 planning periods. The following tables provide the calculations for the estimated RHNA goals over the General Plan horizon, realistic development yields, and affordable percentages. /, Ll 2006 -2014 389 319 359 702 1769 60016 (includes Newport Mariner's Mile =13 =5 Total 1 -year RHNA Goal 245 Coast 284 Newport Coast x21 x25 21 -Year RHNA Goal 2000 -2005 25 -Year RHNA Goal 7,105 Affordable Percent x.41 Affordable Percent x.40 Newport Beach 86 53 83 254 476 RHNA Goal Newport Coast 95 0 0 850 945 Total 181 53 83 1104 1421 22% Total 1 570 372 4421 1806 3190 43% Average I I 1 1 41% Approximately 41 % of the total housing need is for very low -, low- and moderate - income households. 2010 Estimate 2,200 2006 Estimate 3,300 Combined 13 -year RHNA Goal 3190 Total 5 -Year RHNA Goal 1,421 Mariner's Mile =13 =5 Total 1 -year RHNA Goal 245 Total 1 -year RHNA Goal 284 Newport Coast x21 x25 21 -Year RHNA Goal 5145 25 -Year RHNA Goal 7,105 Affordable Percent x.41 Affordable Percent x.40 Estimated Affordable 2,212 Estimated Affordable 2,842 RHNA Goal RHNA Goal Airport Area 2,200 2010 Analysis 3,300 Banning Ranch 1,375 1,375 Mariner's Mile 300 454 Newport Center 450 600 Newport Coast 250 400 West Newport Mesa 100 1000 Total Likely Units 4,675 7,129 Formula Affordable RHNA Goal / Realistic Development Yield = Affordable Percent 2010 Analysis 2,212/4,675= 0.47 47% 2006 Analysis 2,842/7,129= 0.40 40% 1 Attachment No. CC 5 HCD Letter / l_ r -t TATF OF CAI IFGRNIA _RIIRINFSB TRANAPORTATION AND HOI)RING AGENCY ARNDI n FCHWARZFNFGGFR Gnvemn DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT OFFICE OF THE DIRECTOR 1800 Third Street, Room, 450 Sacramento, CA 95611 (916) 4454775 Fm(916)324 -5107 w .hod.ce.00v .. August 26, 2009 Mr. Stephen D. Madison Executive Vice President Building Industry Association of Central California 1401 F Street, Suite 200 Modesto, CA 95354 Dear Mr. Madison: Thank you for your recent inquiry regarding inclusionary ordinances. The Department is pleased to provide information on the requirements of State law and its policy. For your information, neither State law nor Department policy requires the adoption of any local inclusionary ordinance in order to secure approval of a jurisdiction's housing element. State law does require incentives for voluntary inclusionary development (State density bonus law), pronounces housing element law neutral relative to enactment of mandatory local inclusionary provisions, and circumscribes the responsibilities of local governments which do enact inclusionary policies. The relevant sections of the Government Code are described below. Government Code Section 65915 -17, State density bonus law, requires local governments to make incentives available to residential developers that voluntarily propose to reserve specified portions of a proposed development for occupancy by low- or moderate - income households, and indicates that local governments are not to undermine implementation of this provision. Every local government is required to adopt an ordinance establishing how it will implement State density bonus law, including setting forth the incentives the local government will provide. State housing element law requires jurisdictions to plan for their existing and projected housing needs, identify adequate sites to accommodate their share of the regional housing need, and, among other things, analyze local policies, regulations or requirements that have the potential to constrain the development, maintenance or improvement of housing for all income level. The law also requires programs to "assist in the development of adequate housing to meet the needs of low- and moderate - income households ". Many local governments adopt mandatory inclusionary programs as one component of a comprehensive affordable housing strategy and have demonstrated success in increasing the supply of housing affordable to low- and moderate - income households. However, some inclusionary programs may have the potential to negatively impact the overall development of housing. As a result, local governments must analyze mandatory inclusionary policies as potential governmental constraints on housing production when adopting or updating their housing elements, in the same way that other land -use regulations must be evaluated as potential constraints. iQ Mr. Stephen D. Madison Page 2 For example, local governments must analyze whether inclusionary programs result in cost shifting where the cost of subsidizing the affordable units is underwritten by the purchasers of market -rate units in the form of higher prices. Such increases can be a barrier to some potential homebuyers who already struggle to qualify for a mortgage, and earn too much to qualify for government assistance. Local governments must also analyze their inclusionary policies to evaluate whether sufficient regulatory and financial incentives are offered to facilitate compliance with the requirements. In addition, it is important to note that the adoption of mandatory inclusionary zoning programs do not address housing element adequate sites requirements to accommodate the regional housing need for lower- income households. Inclusionary programs are not a substitute for designating sufficient sites with appropriate zoning, densities and development standards as required by Government Code Section 65583(c)(1). Finally, Government Code Section 65589.8 specifies that nothing in housing element law shall be construed to expand or contract the authority of a local government to adopt an ordinance, charter amendment, or policy requiring that any housing development contain a fixed percentage of affordable housing units. It further states that a local government which adopts such a requirement shall permit a developer to satisfy all or a portion of that requirement by constructing rental housing at affordable monthly rents, as determined by the local government. California has been for many years in the midst of a severe housing crisis; there are simply not enough homes for the number of residents who need them. Continued undersupply of housing threatens the State's economic recovery, its environment, and the quality of life for all residents. Effectively addressing this crisis demands the involvement and cooperation of all levels of government and the private sector. Both the public and private sector must reexamine existing policies, programs and develop new strategies to ensure they operate most effectively and provide an adequate housing supply for all Californians. The Department is committed to working with its public and private sector partners in this effort for the benefit of California's growing population. If you need additional information, please call me at (916) 445 -4775 or Cathy Creswell, Deputy Director, Division of Housing Policy Development, at (916) 323 -3177. Sincerely, Lynn L. Jacobs Director W Attachment No. CC 6 BIA Letter �n -11 March 12, 2010 via U.S. Mail and Electronic Mail David R. Hunt, Esq. City Attorney City of Newport Beach 3300 Newport Blvd. Newport Beach, CA 92663 Re: Building Industry Association Comments on Proposed Inclusionary Housing Requirements Dear Mr. Hunt, As the Vice President and General Counsel of the Building Industry Association of Southern California, Inc., I am writing on behalf of its Orange County Chapter ( "BIA/OC ") to express our concerns with the city's proposed Inclusionary Housing Proposed Ordinance (the "Proposed Ordinance "). Specifically, the Proposed Ordinance may conflict with California law, which is becoming increasingly clear and prohibitive of undue local government impositions on those who develop or redevelop property. BIA/OC and its members are among the most steadfast supporters of housing availability in general, and are proponents of appropriate measures at both the State and local levels to increase the availability of housing that is affordable to all California residents and to persons at all levels of income. BIA/OC, its members and affiliates actively support legislation and local policies that encourage the provision of housing, or remove or reduce barriers to the construction of affordable housing. On the other hand, BIA/OC strongly opposes policies that unduly inhibit development of affordable housing or that may unlawfully burden its members. Recent decisions by the California Courts of Appeal have invalidated local inclusionary housing requirements similar to those included in both the Proposed Ordinance and the City's current inclusionary housing policy. Specifically, in light of the appellate court decisions in Building Industry Assn v. City of Patterson (2009) 171 Cal.App.4s' 886, and in Palmer /Sixth Street Associates v. City of Los Angeles (2009) 175 Ca1.App.4a' 1396, it may be appropriate or necessary for the City to both (i) forgo the Proposed Ordinance, and (ii) review and reconsider its current inclusionary housing policy to determine whether the latter is legally valid and compliant with California law, as clarified by the opinions in these cases. The recent case law on affordable housing makes clear the following key points: 1. A CITY MUST SHOW "INCLUSIONARY HOUSING" EXACTIONS OR FEES TO BE REASONABLY RELATED TO "DELETERIOUS IMPACTS OF NEW DEVELOPMENT" — SIMILAR TO OTHER DEVELOPMENT FEES AND EXACTIONS An Affiliate of the National Association of Home Builders and the California Building Industry Association Building Industry Association of Southern California 17744 Sky Park Circle, Suite 170 Irvine, California 92614 949.553.9500 fax: 949.769.8942/Exec. Office fax: 949.769.8943 /BIS /Mbrship. http: //w .biaK.org --I i David R. Hunt, Esq, March 12, 2010 Page 2 of 6 In Building Industry Association et al. v. City of Patterson, which was decided in March 2009, the Court of Appeal held that the imposition of neither affordable housing mandates nor fees in lieu thereof was legally justified, because the city attempted to make such an imposition without making an evidentiary showing that the mandate or in lieu fee was "reasonably related" to, and did not exceed, offsetting the affordable housing needs caused by the new development. Specifically, in Patterson, the unanimous Court of Appeal invalidated the City's affordable housing in lieu fees (which were to be imposed at the rate of nearly $21,000 per new home). The amount of the in lieu fee was based on the assumption that the city's need for additional affordable housing units (those identified in its regional housing needs analysis) should be met exclusively by saddling new and prospective development — without any showing of exactly how much, if any, of such the societal needs for affordable housing were in fact caused by the new and prospective market -rate residential development (e.g., as opposed to reflecting an existing deficiencies of affordable housing or a deficiency caused by other factors). In Patterson, the developer had a development agreement with the City. In the agreement, the developer had contracted to pay the city its revised, generally- applicable affordable housing in lieu fees (which were not yet known) — provided that the revised fees were "reasonably justified." The Court of Appeal held that this contractual provision necessarily implied that the fees would need to "conform to existing law." The Court also held that "existing law" in California required that the City must justify its affordable housing in lieu fees in conformity with "the legal standards generally applicable to development fees" -- including the "reasonable relationship" requirement as stated in the Mitigation Fee Act (at Government Code section 66001(b)), and as described by the Supreme Court in San Remo Hotel v. City & County of San Francisco (2002) 27 Cal.4r' 643. Importantly, San Remo Hotel reflects the California Supreme Court's most recent discussion of the standard of review that California courts should use when reviewing "legislatively- adopted" development fees of all types (as opposed to ad hoc exactions). In San Remo Hotel, the Supreme Court had explained that, even under the most deferential standard of judicial review, a fee "is not `reasonably justified' ... unless there is a reasonable relationship between the amount of the fee, ... and `the deleterious public impact of the development. "' The City of Patterson had amended its housing element and changed its affordable housing policy to an "inclusionary" approach, requiring 15% of new homes be set aside as "affordable" units, or pay in lieu fees. The City provided no evidence, however, to relate its purported need for affordable housing to any particular impacts of new residential development in the City, nor to any identified needs for housing caused by the particular development project. The Court explained: The evidence presented in this case reveals that the amount of the fee was not calculated based on the cost of City's affordable housing need attributable to the [the development at issue].... Neither was it based on the affordable housing need attributable to the ... [projected future development in the City]. -7? David R. Hunt, Esq. March 12, 2010 Page 3 of 6 The Patterson Court thus rejected the City of Patterson's method for setting the in lieu affordable housing fees because they were not based on any evidence demonstrating the reasonable relationship between the amount of the fee and the costs related to addressing any deleterious impacts on the City's needs for affordable housing caused by the particular project, or reasonably attributable to new residential development in general: The Patterson opinion is seemingly the first published California appellate court opinion that directly addresses affordable housing fees or exactions "on the merits" and how they must be calculated and justified. Properly applied to the issues at and in the City of Newport Beach, Patterson has several implications for inclusionary housing policies and exactions concerning mandatory set - asides and/or in lieu fees, including the following: A. Requirements for Dedication or Set -Aside of Affordable Housing Are "Exactions" and Are Subject to Constitutional and Evidentiary Requirements: Prior to the Patterson case, no published California appellate decision had squarely addressed what kind of evidentiary justification (if any) is required in order to legally mandate "affordable housing" units or exact in lieu fees from new development. The holding is that affordable housing policies will be treated like other types of development exactions; and thus they must be shown — at a minimum — to be "reasonably related" to the impacts or community needs caused by new development. Although the legal standard applied is generally considered a very deferential standard (the "reasonable relationship" test), unfairly burdening new and prospective development and redevelopment with the burden of addressing a broader need for affordable housing does not meet the legal test. B. Legal Standards Generally Applicable to Development Fees Apply Even If the Fee Is Not Imposed to Finance "Public" Facilities: The Patterson decision holds that non- traditional or quasi- optional fees or mandates imposed on new development, such as "affordable housing in lieu fees," are governed by the legal standards applicable to other types of development fees and mandates for financing public facilities. The trial court had noted that these fees were to be used for privately -owned affordable housing, rather than for publicly -owned facilities, but the Court of Appeal held that did not lessen the City's burden to factually justify the exactions. C. Even "Legislatively- Enacted" Fees — Those Which Are Not Ad Hoc Exactions — Must Have Sufficient Evidentiary Justification: Patterson recognized that current case law holds that legislatively - enacted fees of broad application — as distinguished from project - specific (ad hoc) or discretionary exactions — are generally not subject to the relatively "heightened scrutiny" ofNollan and Dolan (a "rough proportionality" standard). Instead, the Court in Patterson explained that even generally applicable "formulaic, legislatively - mandated" fees or exactions (like an affordable housing ordinance) must be supported by evidence and analysis demonstrating a "reasonable relationship" to an adverse public impact or resulting cost that is shown to be caused by new development. Patterson quoted the Supreme Court's San Remo Hotel decision: "As a matter of both statutory and constitutional law, such fees must bear a reasonable relationship, in both intended use and amount, to the deleterious public impact of the development." ­7u David R. Hunt, Esq. March 12, 2010 Page 4 of 6 D. Patterson Calls Into Questions the Earlier Napa Opinion — and Other Assumptions About Affordable Housing Exactions: The Court of Appeal in Patterson expressly questioned the continuing relevance of the one older case that had rejected a challenge to a city's inclusionary ordinance -- HBANC v. City of Napa (2001). That case was dismissed at an early stage (on the pleadings), without a careful review of the merits of the ordinance, because the court held that a "facial" challenge to the ordinance was not "ripe." Although unnecessary to the court's decision, the Napa court's opinion also included some observations that were complimentary of policies reasonably aimed at promoting "affordable housing," which were viewed by some as a broad endorsement for the "inclusionary zoning" or "inclusionary housing" approach. The 2001 Napa opinion had been viewed by some advocates of mandatory, privately - subsidized affordable housing as "validating" inclusionary programs on their merits, despite the narrow procedural basis of the decision. The Patterson opinion, however, in contrast to the Napa opinion, involved a careful review of the evidence concerning the City of Patterson's affordability mandate and in lieu fee option, , and held that such mandates and fees must be based on an evidentiary showing that new development causes a need for additional affordable housing in a community. Importantly, the Court in Patterson noted that Napa "was decided about 9 months before the Supreme Court decided San Remo Hotel" — implying that the Napa opinion is suspect because it was issued without the benefit of the California Supreme Court's reasoning concerning the "reasonable relationship" standard. E. "Affordable Housing" Exactions Require a "Nexus" -- Patterson also requires that local governments demonstrate a reasonable nexus between new market -rate development and the imposition of mandatory affordable housing set - asides or fees in lieu thereof. Following Patterson, such mandatory set -asides or in lieu fees must be justified by evidence demonstrating a reasonable relationship between development and affordable housing needs, rather than on the basis of arbitrarily selected set -aside percentages, or needs assessed with a view to the community as a whole. As a consequence, many legal commentators and attorneys have concluded that inclusionary zoning programs need to be reviewed, re- assessed and substantially changed. There are, however, great difficulties inherent in demonstrating any "reasonable relationship" or nexus between (i) any approval of market -rate housing development or redevelopment, and (ii) the need for more affordable housing. More thoughtful commentators have long been understood and appreciated the illogic of inclusionary zoning. (See, e.g., Ellickson, The Irony of Inclusionary Zoning (1981).) The likely significance of the Patterson opinion's demand for evidence demonstrating the reasonable relationship was emphasized in a commentary by two prominent land use scholars, published in the State Bar's REAL PROPERTY LAw REPORTER (vol. 32, May 2009): Prof. Roger Bernhardt: The great issue for me is, how can a city show "the deleterious public impact" on a housing development in terms of creating a need for affordable housing? One can see the linkage between the industrial or commercial development and affordable housing, but where is the nexus when the new development is residential instead? o� David R. Hunt, Esq. March 12, 2010 Page 5 of 6 Prof. David Callies: That's the point: The city can't show a deleterious impact on affordable housing resulting from a residential development. There isn't any. I think these mechanisms won't hold up in court anywhere, and following the Patterson decision and the Supreme Court's Lingle decision, I don't think they're constitutional in California either. Similar views have been expressed by public agency attorneys and by legal counsel for proponents of inclusionary housing mandates, regarding the need for cities to reconsider their approach to such housing exactions. 2. THE COSTA- HAWKINS ACT PREEMPTS LOCAL ATTEMPTS TO REGULATE THE INITIAL RENTAL RATES FOR HOUSING THROUGH INCLUSIONARY HOUSING MANDATES In July 2009, another Court of Appeal opinion held that large portions of the City of Los Angeles' inclusionary housing program were preempted by State law and were invalid — Palmer /Sixth Street Properties, L.P., et al., v. City of Los Angeles. Specifically, the Palmer court concluded that the city's attempt to impose its inclusionary housing restrictions on the rents to be charged on new housing conflicts with, and is preempted by, the statewide rent control provisions of the Costa - Hawkins Rental Housing Act. The Costa - Hawkins Act provides in relevant part that all residential landlords have the legal right to "establish the initial rental rate for a dwelling or unit." Civ. Code §1954.53(a). The City of Los Angeles' inclusionary housing ordinance conflicted with the State law; and the fact that its ordinance gave developers the "option" of paying a fee (in lieu of setting aside rent - restricted units) did not save the from invalidation by preemption. The Palmer court held that the in lieu fee option was "inextricably intertwined" with the City's preempted affordable housing rental rate requirements. Specifically, the ordinance confronted developers with two supposed "options" — but both options effectively conflicted with State law because neither would allow the developer or owner to establish the initial rental rate for the units. Importantly, although the Palmer opinion focused on inclusionary housing as it relates to rent control, the opinion logically has similar ramifications concerning inclusionary housing mandates aimed at for -sale housing as well. Indeed, there is seemingly no legitimate governmental interest in dictating that newly developed or redeveloped property may not be rented — pursuant to the Costa - Hawkins Act, at market rates — and must instead be sold. Given that, it seems that for -sale inclusionary housing schemes are called into question as well by the Palmer opinion. 3. TAKEN TOGETHER, THE PATTERSON AND PALMER OPINIONS INDICATE THE NEED TO REMOVE THE CITY'S PRESENT POLICY AND FORGO THE PROPOSED ORDINANCE The net result of these two recent appellate court opinions is this: Any requirements imposed on new development or redevelopment to provide some portion or percentage of housing units in a development as "affordable" units to be sold or rented to selected income - restricted ­7h David R. Hunt, Esq. March 12, 2010 Page 6 of 6 occupants at below - market terms (or be required to pay fees in lieu of providing such housing units) will be treated like any other "exactions" and must be justified by evidence demonstrating a reasonable relationship between the impacts caused by the new development and the amount of affordable housing or in lieu fees exacted from the development. Therefore, BIA/OC requests that the City of Newport Beach reject the Proposed Ordinance, and consider rescinding its existing policy in light of recent decisions. BIA/OC and its members look forward to working constructively with the City to provide housing opportunities to all, and to removing barriers to housing supply and affordability. To this end, BIA/SC would welcome additional opportunities to provide input and otherwise help to assure that City ordinances reflect sound and lawful policies. Thank you for your consideration. Sincerely, Andrew R. Henderson Vice President and General Counsel Building Industry Association of Southern California, Inc. on behalf of its Orange County Chapter cc: City Council Members David Kiff, City Manager David Lepo, City Planning Director Cathy Creswell, Dep. Director, California HCD Kristine Thalman, CEO, BIA/OC Bryan Starr, BIA/OC 7'1