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HomeMy WebLinkAboutHousing Element Affordable Housing RequirementsCITY OF NEWPORT BEACH PLANNING COMMISSION STAFF REPORT Agenda Item No. 3 March 9, 2006 TO: CHAIRMAN AND MEMBERS OF THE PLANNING COMMISSION FROM: Sharon Wood, Assistant City Manager 949 -644 -3222, swood @city.newport- beach.ca.us SUBJECT: Housing Element Affordable Housing Requirements RECOMMENDATION: Provide direction to staff for further drafting of the General Plan Housing Element. DISCUSSION: When the Planning Commission reviewed the draft Housing Element at their study session of January 31, 2006, there were a number of questions regarding the existing Housing Element policy that requires residential developers to make an average of 20% of new housing units affordable to low- and moderate - income households. The Commission requested additional information on the policies that other California cities use to meet the requirements of State housing element law. Attached are two reports prepared by EIP Associates, one dealing with inclusionary housing and the other with commercial development linkage fees. The Commission also requested that staff estimate Newport Beach's Regional Housing Needs Assessment (RHNA) goals over the 25 -year planning horizon of the General Plan Land Use Element, and relate that to a percent of the new residential units included in the draft Land Use Element. The Commission should understand that this is a very speculative exercise, since the method for RHNA calculation is not well understood. The basic assumption for this analysis is that Newport Beach's future RHNA goals will remain the same as for the 2000 -2005 planning period. That number is 476 units for Newport Beach prior to annexation of Newport coast. Because the current number for Newport Coast was not calculated in the usual manner, but rather negotiated between the City and County at the time of annexation, I have used two different assumptions for Newport Coast, the full number of 945 units and half of that, 473 units. Another basic assumption is that the income distribution of Newport Beach's future RHNA goals will remain similar to the 2000 -2005 planning period. For the City prior to annexation, 46% of the housing need was for very low -, low- and moderate - income households. For Newport Coast, only a low- income amount of 10% was shown (again, an amount negotiated with the County). For this analysis, I have assumed that 40% of long -term need is for very low -, low- and moderate - income households. 5 -Year RHNA Goal - City 5 -Year RHNA Goal — Coast Total 5 -Year RHNA Goal Total 1 -Year RHNA Goal Total 25 -Year RHNA Goal Affordable Percent 25 -Year Affordable Goal Housing Element Affordable Requirements March 9, 2006 Page 2 Newport Coast # 1 476 945 1,421 284 x 25 7,105 x.40 2,842 Newport Coast # 2 476 473 949 190 x25 4,750 x .40 1,900 The total number of new units that could be developed pursuant to the draft Land Use Element, as analyzed in the environmental impact report (EIR) is 15,000. To achieve the 25- year affordable goals noted above would require that 13% to 19% of total new units be affordable. However, the EIR analyzes the worst case scenario, and staff does not believe it is realistic to assume that all 15,000 units will be developed, even if they are included in the Land Use Element that is approved by the City Council and the voters. We know that the EIR includes more development potential than is likely to be approved because it includes maintaining R -2 zoning in West Newport and on Balboa Island, the potential for all original lots on Lido Isle to be developed, and 4,300 units in the Airport Area, when the City Council has already indicated a desire to reduce that number to 3,300. In addition, even if R -2 zoning is maintained on the Balboa Peninsula and in Corona del Mar, the actual development trend in these areas is for single - family housing. To reflect a more realistic scenario, I also calculated the percent of affordable units needed based on the likely number of new residential units, listed below. On this basis, 26% to 39% of new units would need to be affordable to achieve the estimated RHNA goals for very-low, low- and moderate - income households. Airport Area 3,300 Banning Ranch 1,375 Mariners' Mile 454 Newport Center 600 Newport Coast 400 West Newport Mesa 11000 Total Likely Units 7,129 Submitted by: J����� S aron Wood Assistant City Manager Attachments: Inclusionary Housing in California Key Findings from the Survey of Commercial Development Linkage fee Programs Inclusionary Housing in California In response to the lack of affordable housing, many local governments are turning to inclusionary housing as an effective tool to create much needed affordable housing. Inclusionary zoning or inclusionary housing is a mandatory requirement or voluntary goal to reserve a specific percentage of housing units affordable for lower- and moderate- income households in new residential developments. The primary objective of inclusionary housing is to increase the supply of affordable housing in conjunction with market rate development. It can be a particularly effective tool in areas experiencing rapid growth and a strong demand for housing. Another objective of inclusionary housing is to foster greater economic integration within a community. Affordable units are typically required to be dispersed throughout new development in an effort to generate a mix of income levels within new residential areas. In "job-rich" and high housing cost areas such as Orange County, inclusionary zoning provides a mechanism to allow lower -paid workers to find housing close to employment. Inclusionary programs can be mandatory or voluntary, depending on the form of the local ordinance. Mandatory inclusionary zoning is usually incorporated in the zoning code and /or the housing element, and obtaining a building permit is contingent on the developer agreeing to provide affordable housing within the development, or some other permitted alternative, such as payment of an in -lieu fee. Voluntary objectives are usually based on goals identified in the housing element, and set forth in a public policy that requires developers to negotiate with public officials but does not specifically mandate the provision of affordable units. This report provides a summary of inclusionary zoning programs used in other California cities and counties to provide housing affordable to very low —, low -, and moderate - income households. Inclusionary zoning programs are found in over 100 cities and counties throughout the State, representing about one -fifth of all localities, up from 64 such programs in 1994. These programs vary considerably in terms of several key features, including percentage of units required, income levels targeted, length of affordability restrictions, incentives provided to developers to make inclusionary requirements more feasible, and in -lieu fee and other alternatives to building units on site. Data within the report is based on the key findings of two surveys of inclusionary housing programs within California. The first survey was comprehensively conducted by the California Coalition of Rural Housing (CCRH) in 1994 and updated in 2003 (Tables land 2). Additional information on inclusionary programs is supplemented by a local survey conducted by Economic and Planning Systems (EPS) completed specifically for the City of Newport Beach in 2005. From the survey of inclusionary programs documented in both studies, the following characteristics of inclusionary programs can be summarized: Key Findings from Surveys of Inclusionary Housing Programs Geographic Location A large majority of inclusionary programs is found in jurisdictions clustered around San Francisco and in Southern California coastal counties: Los Angeles, Orange, and San Diego Counties. Jurisdictions with inclusionary programs are characterized by high housing costs and strong growth. Inclusionary Housing in California 1 5 Inclusionary Percentage There is considerable variation in terms of the percentage of affordable units required under these programs. The mean percentage of affordable housing required in both rental and for -sale housing developments is 13 percent, indicating little variation in requirements by form of tenure (rental or ownership). Half of all programs require at least 15 percent, of which nearly one - quarter of programs require 20 percent or more. The most frequent inclusionary percentage is 10 percent (44 percent of jurisdictions). Income - Targeting Most jurisdictions use a single standard for what income levels are to be targeted. Some cities provide more flexible options, such as a higher percentage of affordable units required for moderate - income households or a lower percentage targeted to low income (this is similar to the way density bonuses operate). Almost 90 percent of inclusionary programs target at least some percentage of inclusionary units to low- income households and about three - fourths are targeted to moderate - income households. Less than half of programs target very low— income households. In about 40 percent of jurisdictions, rental projects typically require targeting to lower incomes than do ownership projects, while in the remaining 60 percent there is no distinction. The distribution of income requirements for comparable communities within Newport Beach including proximity, status as a coastal city, and /or high property values is displayed on the following table. While the income requirements vary from city to city, in general, fewer units are required for very low— and low- income units than for moderate- income units, representing the higher financial costs associated with the construction of housing for very low— and low- income households.' Table 1: Inclusionary Housing Income Requirements in ....- Jurisdiction Income Re uirements San 15% of projects with 10+ units must be affordable. 7.5% very low income and 7.5% low income. If Clemente for sale 3% very low, and 8% moderate. Oceanside 10% of ownership projects with 3+ units must be affordable for moderate income households. 10% of rental Droiects with 3+ units must be affordable for low- income households. Santa 10% for very low income OR 20% for low- income of multi - family projects with 2+ units. In Monica commercial /industrial zones, all units must be affordable to moderate income households. No incluslonary requirements for sin le -famil housing. Coronado 20% of projects with 2+ lots/dwelling units must be affordable for rent to very low and low income household, or affordable for sale to moderate income households. Laguna 25% of projects with 3+ units must be affordable to low and moderate income households. Beach San Juan 10% of projects with 2+ units, 15% if within boundaries or Redevelopment Agency. Capistrano Irvine 15% of projects with 50+ units must be affordable, with the following distribution: 5% to very low income, 5% to low income, 5% to moderate income. Huntington 10% of ownership projects with 3+ units must be affordable to moderate income households. 10% Beach of rental projects with 3+ units must be affordable to low/very low income households. 15% if within Downtown Specific Plan Area or Redevelopment Area. Some units usually required outside. Santa Cruz 15% of ownership projects must be affordable for moderate income households. 15% of rental ro'ects must be affordable for low- income households. Half Moon 20% or projects with 10+ units. Bay SOURCE: Economic and Planning Systems (EP5) 2005, December . The inclusionary programs described on this table were reviewed and accurate as of 12105 but are subject to change ' Inclusionary Housing in California: 30 Years of Innovation. California Coalition for Rural Housing. 2003 Inclusionary Housing in California Developer Incentives Density bonuses are by far the most popular incentive offered to developers to build affordable housing, reported by 91 percent of the programs. This is hardly surprising given that State Density Bonus law requires such a bonus. Nonetheless, many jurisdictions have adopted additional density bonus provisions to provide developers further incentives. Among other options, fast -track permit processing is an incentive in 44 percent of programs, followed by subsidies in 43 percent, and design flexibility in 40 percent. In addition, fee waivers (38 percent), fee reductions (32 percent), and fee deferrals (25 percent) were also reported. Length of Affordability and Monitoring Virtually all jurisdictions now report that they have formal mechanisms to maintain affordability for required affordable units over time. Restrictions range from periods of ten years to in perpetuity, with the mean term for rental housing being 42 years, and for homeownership housing being 34 years. Permanent affordability is reported in at least 20 percent of programs for both rental and for -sale. Mandatory vs. Voluntary Only 6 percent of jurisdictions responding report voluntary programs, which allow more flexibility for developers but compromise local ability to guarantee affordable housing production. Project Size Most ordinances exempt smaller projects from inclusionary requirements, as they don't have the same economies of scale as larger projects, typically the minimum project size ranges from 3 to 10 units. Alternatives to On -Site Construction: Rather than require all inclusionary units to be provided on site by the developer, most localities provide one or more of the following options. The most common alternatives to on -site construction are in -lieu fees and land dedications. However, the in -lieu fee option is automatic in only 45 percent of programs; for instance, payment of fees may be an option only if the developer can prove that construction of affordable units is infeasible. In two - thirds of programs, developers are permitted to construct affordable units off site. Less commonly, land dedications are allowable. The mean in -lieu fee level among 57 programs reporting was $107,598 per affordable unit with a high of $272,889 (County of Santa Cruz) and a low of $7,340 (City of Patterson in San Joaquin County). Typically, the dollar total of fees collected is not sufficient to produce the same number of units that would have been produced had developers opted to construct the units themselves. Some cities use in -lieu fees not for construction, but for home ownership down payment assistance or rental assistance programs such as within the city of Coronado. In addition, developers are sometimes allowed to build the affordable housing off site or receive credit for excess affordable units built in prior projects. A summary of alternatives to on -site construction are as follows: Inclusionary Housing in California 3 In -Lieu Fees Developer can pay a fee into a local fund instead of constructing the Allowed by 81% of required affordable units. Often, fees are calculated per unit or per surveyed jurisdictions. square foot for each unit not built. Land Developer can substitute a gift of land that may accommodate an Allowed by 43% of Dedications equivalent number of units in place of affordable unit construction. surveyed jurisdictions. Credit Developer can credit affordable units built beyond the inclusionary Allowed by 20% of Transfers requirement in one project to satisfy the requirement in another. surveyed jurisdictions. Off-Site Developer can build the affordable units at a different site than the Allowed by 67% of Construction market -rate units, sometimes conditioned on agreeing to increase surveyed jurisdictions. the number of affordable units to be built. Obstacles to Implementation Jurisdictions cited a number of obstacles to implementation, including scarcity of land for development, and developer opposition. Lack of funding and community opposition to affordable housing is also cited. Areas of Controversy Inclusionary housing practices are not without controversy. While local authorities turn to inclusionary policies as a means to ensure affordable housing provision, opponents, particularly market -rate developers, argue that they may have harmful market effects. Market -rate developers argue that requiring production of below - market -rate units forces them to recover their losses by increasing the prices of their market rate units; in other words, shifting costs to moderate- and above moderate — income renters and homebuyers. Other observers have noted that costs can only be shifted to consumers if the homes would have otherwise been priced below prevailing market prices, and that the willingness and ability of renters and buyers to absorb these costs is limited. Thus, all or part of the costs will have to be borne by developers, or passed on to land sellers (through reduced land values). The presence of an inclusionary, program may even dissuade developers from building at all within a particular jurisdiction, resulting in price increases in the existing stock over time. Some inclusionary critics go further, arguing that the demand for lower -cost housing is generally satisfied by the older housing stock, and that price- capping units are not the most efficient market intervention. There are numerous other affordable housing strategies, such as mortgage or rental assistance programs, that achieve affordability by supporting the consumer. Inclusionary supporters counter that developers' claims regarding costs are exaggerated, and that current interest in the strategy is tied, in large part, to its unique strengths as an affordable housing policy. First, by requiring the affordable housing to be developed as part of larger market -rate developments, it expands the supply of affordable housing and creates economically diverse communities. Second, inclusionary housing offers a way for communities to create affordable housing at little or no cost to local governments. Third, it addresses the challenge of creating affordable housing in communities in which very little land is deemed suitable for new housing. In that context, inclusionary housing is essential to ensuring that the price of housing available within a jurisdiction, particularly ones that are growing, matches the housing needs of local residents and provides shelter for a growing workforce. Fourth, simultaneous construction of affordable and market -rate units reduces the increased costs of producing affordable housing due to NIMBY (Not In My Back Yard) opposition and resulting lengthy challenges. Inclusionary Housing in California (D Effects of Inclusionary Housing Programs on the Amount of Market -Rate Development There is some debate as to whether inclusionary housing requirements reduce overall development activity, and if so, by how much. Conventional wisdom that the cost of the affordable units will translate directly into higher costs for market -rate units does not appear to be bome out in practice. In many instances, developers will factor in the cost of providing affordable units into the price they pay for land. Additionally, incentives provided by cities reduce the actual costs to developers. The authors of the CCRHP study were unable to find any empirical studies that assessed the impacts of inclusionary requirements on the level and /or financial feasibility of housing development, either in general or in particular localities. In most markets where inclusionary zoning has been adopted, development activity has continued to take place. Cities with several years of experience are moving to increase their inclusionary requirements, and in the last few years there has been a wave of new cities adopting inclusionary requirements. According to the CCRHP study, deeper targeting and higher percentages of affordable units do not seem to affect the amount of affordable housing that is produced. If stricter requirements were to have a negative impact on development, then stricter programs would have less production. In fact, the 15 most productive programs surveyed require similar percentages to all other programs, and the most productive programs are actually targeted to lower incomes than other programs. The most significant factor affecting success appears to be rapid growth. In areas where population (and housing demand) is rising quickly, housing prices are increasing due to high demand rather than increases in costs of production. In these circumstances, the cost of providing inclusionary units is more easily absorbed by developers, and over time it becomes a standard cost of doing business. In slower - growing markets, the additional costs of providing below - market -rate units may be reflected in lower prices paid for land and /or reductions in developers' rates of return. Again, where developer margins are already small, this could lead to a reduction in development activity. Despite these findings, it still remains unclear whether housing production would be even higher in the absence of inclusionary requirements. This is likely to depend on a variety of conditions specific to each local housing market, and further study is needed before fine conclusions can be drawn. At a minimum, as the authors of the CCRHP study note, future research could focus on a comparison within each region of housing production in jurisdictions with inclusionary zoning and those with no inclusionary requirements. 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In the same way that local governments require residential developers to offset the school impacts caused by their development, businesses are required to mitigate the new housing needs created by their new job development. They are based on the idea of a linkage, or a nexus, between the impacts created by a new development and the need to pay for some of the housing need it generates. Several cities in California, such as San Diego, Sacramento, and San Francisco have established commercial development linkage fees, to generate revenues for affordable housing development. Through payment of these fees, nonresidential developers mitigate at least a portion of the impact of their developments on the housing market. This report provides an overview of commercial development linkage fees and a summary of survey results conducted by David Paul Rosen and Associates and Keyser Marston Associates conducted for California jurisdictions in 2003 and 2004. Legal Basis and Context he first housing linkage fee programs were adopted in the cities of San Francisco and Boston In the mid- 1980s. To support the linkage, the City of San Francisco commissioned a short analysis to show the relationships, or what might now be characterized as an early version of a nexus analysis. Since that time, there have been several court cases and California statutes that affect what local jurisdictions must demonstrate when imposing impact fees on development projects. The most important U.S. Supreme Court cases are Nollan v. California Coastal Commission and Dolan v. City of Tigard (Oregon). The rulings on these cases, and others, help clarify what governments must find in the way of the nature of the relationship between the problem to be mitigated and the action contributing to the problem. Following the Nollan decision in 1987, the California legislature enacted AB 1600 which requires local agencies proposing an impact fee on a development project to identify the purpose of the fee, the use of the fee, and to determine that there is a reasonable relationship between the fee's use and the development project on which the fee is imposed. The local agency must also insure that there is a reasonable relationship between the fee amount and the cost of mitigating the problem that the fee addresses. Studies by local governments designed to fulfill the requirements of AB 1600 are often referred to as AB 1600 or "nexus" studies. One court case that involved housing linkage fees was Commercial Builders of Northern California v. City of Sacramento. The commercial builders of Sacramento sued the City following the City's adoption of a housing linkage fee. Both the U.S. District Court and the Ninth Circuit of Appeals upheld the City of Sacramento and rejected the builders' petition. The U.S. Supreme Court denied a petition to hear the case, letting stand the lower court's opinion. Commercial Development Linkage Fee Programs Key Findings from the Survey of Commercial Development Linkage Fee Programs Compared to the over 100 inclusionary housing programs or ordinances across the State, commercial linkage fee programs are far fewer in number. According to the survey provided by Keyser Marston Associates, Inc. and David Paul Rosen and Associates, approximately 20 jurisdictions in California have commercial linkage fee ordinances including San Diego, Santa Monica, Sacramento, Palo Alto, and San Francisco. The majority of these communities are located within Northern California and are within areas impacted by high housing costs. Table 1 presents the survey of other commercial fee linkage programs within California, organized by fee level. The top tier includes cities with fees of $10 per square foot or more including San Francisco, Palo Alto and Menlo Park; all cities with very powerful market conditions. The second tier has five cities that have programs in the $4 to $9 per square foot range. These cities include several Silicon Valley cities and a few others. The third tier includes cities with fees under $4 per square foot, many of them in the $11 square foot range. With some exceptions, these tend to be older programs or programs in jurisdictions where a huge volume of construction activity is occurring such as Sacramento and San Diego. Linkage fee programs differ in fee level, land uses included and type of payment. Key findings from the survey are included below: ■ Fee Levels: There is a significant range of fees charged by jurisdiction, which are generally dependent on the strength of the real estate market. Fees range from less than $1 /square foot in San Diego and Livermore to a high of $15 and $14 1square foot for office and commercial uses in Palo Alto and San Francisco. ■ Land Uses: Linkage fees apply to land uses that generate employment, generally commercial land uses. In cities impacted by a particular type of development, such as Silicon Valley, that use may be targeted. Conversely, uses that are encouraged, such as hotel or retail in some localities are exempted. ■ Timing of Payment: The timing of payments varies from community to community, but in most cases payments are made when building permits are issued. Cities typically adopt this policy because it is the period when the jurisdiction has the greatest leverage over a developer. Some jurisdictions extend the payment period such as the City of Oakland which allows portions of payments to be paid at the issuance of temporary certificates of occupancy. ■ Minimum Project Size: Some jurisdictions have established a minimum square footage threshold to exempt smaller developments. For example, Berkeley exempts developments smaller than 7,500 square feet. San Francisco exempts developments smaller than 25,000 square feet. Other cities do not exempt projects based on size; however, exemptions may be based on other factors such as type of project, nonprofit status, and geographic location. ■ Options: Several cities allow program variations such as permitting the developers to construct the housing units themselves, recognizing that it may be faster and more economical for the developer to construct the housing units. Table 1 also provides information on a number of program features in addition to the fee amount, such as exemptions and thresholds. The cities that have collected the most funds from commercial linkage fees are San Diego, San Francisco, and Sacramento. Since 1990, over $33 million has been raised for affordable housing in San Diego. In San Francisco, the fee adopted by the ordinance has raised over $40 million since inception in 1980 (according to a survey conducted by the Boston Redevelopment Authority). Sacramento City and County have raised over $26 million since their commercial linkage ordinance was passed in 1989. Commercial Development Linkage Fee Programs jl ,l Areas of Controversy Similar to inclusionary housing programs, commercial linkage fee programs can also be controversial. While local authorities turn to inclusionary policies as a means to ensure affordable housing provision, opponents, particularly market -rate developers, argue that the additional cost of the linkage fee is passed down to the buyers or renters of new buildings, reducing a city's competitivness and threatening economic growth. Another criticism is that linkage fees are unreliable revenue sources for affordable housing production, with revenues increasing and decreasing with the economy. Proponents argue that jobs- housing linkage fees are likely to be adopted by localities with substantial market conditions and during periods of rapid economic expansion. Supporters contend that commercial development linkage fees have very little impact on overall market conditions, because linkage fees represent a small cost factor in a business decision on where to locate or develop. Although no definitive research is available for commercial linkage fee programs, other cities that have adopted linkage fees do not appear to have discouraged continued nonresidential development. In San Francisco, which has had a linkage fee in place for 15 years, development has continued unabated during periods when demand for new nonresidential space has been strong.' 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