Description: bwwide-R

City Council Report

 

City Council Meeting: February 25, 2014

Agenda Item:  8-C  

 

To:               Mayor and City Council 

From:           Andy Agle, Director of Housing and Economic Development

Subject:        Affordable Housing Funding and Policy

 

Recommended Action

Staff recommends that the City Council:

  1. Direct staff to continue exploration and analysis of placing a ballot measure or measures on the November 2014 ballot related to creating a local, dedicated funding source for affordable housing.  
  2. Authorize the City Manager to negotiate and execute a first modification to Contract No. 9794 with Fairbank, Maslin, Maullin, Metz & Associates (FM3), a California‑based company, in an amount not to exceed $27,800 for a total contract amount of $55,600, to conduct additional voter surveying regarding potential affordable housing ballot measures in November 2014.
  3. Introduce for first reading the attached ordinance amending Section 9.56 of the Municipal Code (Affordable Housing Production Program) to establish minimum occupancy standards for affordable housing.
  4. Approve revisions to the Affordable Housing Trust Fund Guidelines to require affordable housing funded by the City to provide preferences for accessible units to persons living with disabilities.

 

Executive Summary

This staff report discusses opportunities for increasing funding for affordable housing at the federal, state, regional, and local levels.   The report finds that the greatest opportunity to restore funding for affordable housing is at the local level, and recommends that the Council support the exploration and analysis of a potential ballot measure that would increase the documentary (real property) transfer tax, perhaps accompanied by a companion measure that allows voters to express their preference that the increased receipts be directed toward affordable housing.  The report also recommends discrete amendments to existing requirements related to minimum occupancies in privately owned affordable housing and preferences for persons living with disabilities.  

Background

Council held policy discussions on February 28, 2012 and December 11, 2012 to consider a variety of issues related to affordable housing in Santa Monica.  The policy discussions were held in the wake of the dissolution of all redevelopment agencies in California, including the Santa Monica Redevelopment Agency (RDA.)  The RDA provided the primary local funding source for the production and preservation of affordable housing in Santa Monica.   Historically, the Housing Division has invested approximately $15 million of Housing Trust Funds annually to finance affordable housing through loans and grants to non-profit housing developers.  The investment of local Housing Trust Fund dollars has leveraged an additional $15 to $20 million annually from private investors and institutional lenders.  With the dissolution of redevelopment, the flow of funds in the Housing Trust Fund, as well as the City’s ability to leverage outside funding, has been radically diminished.

 

Since 1994, approximately 36 percent of all new housing built in Santa Monica has been affordable to low- and moderate-income households, totaling nearly 1,400 residences that will serve many generations of families and individuals of modest incomes.  This is an outstanding accomplishment that few cities have achieved.  Funding from the RDA played the central role in the City’s ability to finance the production and preservation of affordable housing.  With state-mandated vacancy decontrol significantly impacting the affordability of Santa Monica’s rent-controlled apartment supply, financing the production and preservation of affordable housing has been a critical City tool in ensuring the continued availability of housing that is affordable to households of all income levels and in maintaining economic diversity in Santa Monica.

 

The final wave of redevelopment-funded affordable housing developments has recently been completed or is under construction.  During the first quarter of 2014, over 250 new affordable apartments will become available to low-income households.  Another 32 affordable apartments are expected to be completed in early 2015.  Staff anticipates that two or three additional housing rehabilitation opportunities will be funded from recent land sales.  Once those opportunities are funded and completed, the non-profit affordable housing pipeline in Santa Monica is expected to run dry.  Finding new funding sources will be critical to continuing Santa Monica’s commitment to a diverse community with housing for people of all incomes.

 

 

Discussion

This staff report discusses affordable housing financing opportunities at the federal, state, regional, and local levels, discussing local opportunities in more detail.  It also discusses proposed amendments to the AHPP and Housing Trust Fund (HTF) Guidelines to address affordable housing built and operated by private and non-profit housing providers. 

 

 

Federal Opportunities and Challenges

Opportunities for additional federal funding of affordable housing appear bleak.  Over the last several years, the federal government generally has decreased Santa Monica’s Community Development Block Grant (CDBG) and HOME (HOME Investment Partnership Act) funding, two sources of affordable housing development.  With the expected continued gridlock in Washington, as well as continuing federal budget deficits, it seems unlikely that new programs will be developed or that existing programs will be strengthened. 

 

An additional challenge that affordable housing advocates are carefully monitoring is potential federal reductions or elimination of the low‑income‑housing tax credit.  Federal tax credits play a critical role in the financing of affordable housing through the country, including in Santa Monica.  In the absence of tax credits, cities would need to contribute dramatically more to make affordable housing feasible.  Some members of congress and others with policy influence have proposed eliminating tax credits or reducing the amount of tax credits that are available per project or per unit produced.  Both could have severe impacts on Santa Monica, where land and construction costs are very high.

 

State Opportunities and Challenges

Many lawmakers have recognized that the dissolution of redevelopment has had devastating consequences for affordable housing in California.  Lawmakers have proposed legislation to help restore some level of funding for affordable housing.  During the past two years, legislation (SB 391, the California Homes and Jobs Act) has been introduced which would provide an estimated $500 million annually to support affordable housing statewide.  In both years, the legislation failed to make it out of the legislature for the governor’s consideration.  If the bill were to eventually make it to the governor, he has not indicated whether he would sign it.  If the governor were to sign the bill, there is no indication as to how much of the funding would be available for affordable housing in Santa Monica.

 

There has also been significant activity at the state level with respect to inclusionary housing policies, such as Santa Monica’s Affordable Housing Production Program (AHPP, Section 9.56 of the Municipal Code.)  In a 2009 judicial decision against the City of Los Angeles, a state appellate court determined that an inclusionary housing policy in a Los Angeles specific plan (unsupported by a nexus study), which required the construction of housing with restricted rents or payment of an in-lieu fee as part of the development of market-rate housing, violated the Costa-Hawkins Rental Housing Act.  Known as the Palmer decision, the ruling called into question many inclusionary housing policies throughout California.  Fortunately, Santa Monica’s AHPP was not impacted because, in contrast, it imposes affordable housing fee requirements based on a nexus analysis linking the development of market-rate housing to the need for affordable housing.  In addition, by its own terms, the Costa-Hawkins Act does not apply where an owner has otherwise agreed with a public entity to build affordable housing in consideration for a direct financial contribution or any other form of assistance specified in State Density Bonus law.  As a result, neither Costa-Hawkins nor the Palmer decision applies to development agreements or other development approvals in which an owner accepts specified forms of assistance, such as fee and tax waivers, or modified development standards, in exchange for producing affordable housing.

In 2013, the state legislature approved a bill (AB 1229) that would overturn the Palmer decision.  For Santa Monica, the bill had the potential to provide the City with greater flexibility in its design of the AHPP.  The bill was ultimately vetoed by Governor Brown.  Four days after the governor’s veto, the California Supreme Court announced its decision in Sterling Park, L.P. v. City of Palo Alto.  There, the court determined that Palo Alto's on-site inclusionary housing policy requiring a private developer to grant a purchase option to the City and its in-lieu fee requirements were not traditional land use regulations, but rather exactions subject to review under the Mitigation Fee Act, likely requiring the preparation of a nexus analysis.  While Santa Monica’s AHPP again appears to be secure because of its nexus analysis, opportunities to expand affordable housing requirements are likely limited.  Late in 2013, the Supreme Court granted review of a case against the City of San Jose’s inclusionary ordinance.  The San Jose case will give the Court the opportunity to decide the question it reserved in the Palo Alto decision: whether forcing a developer to sell some units below market value, by itself, would constitute an exaction.  A court decision on the case may be issued in 2014.  The decision may provide greater clarity on which inclusionary housing ordinances pass legal muster.  In the meantime, there are limited opportunities to adjust the reach of Santa Monica’s affordable housing objectives, other than within the specific context of negotiated development agreements.       

 

 

Regional Opportunities and Challenges

Counties throughout California have been principal beneficiaries of redevelopment dissolution, as counties are often the largest property-taxing entities within former redevelopment project areas.  For example, through July 17, 2013, approximately one and a half years after redevelopment agencies were dissolved, the California Department of Finance calculated that the County of Los Angeles had received over $400 million of additional funds due to redevelopment dissolution, with nearly $24 million coming from Santa Monica.  Some counties have targeted the funds toward the production and preservation of affordable housing.  For example, San Francisco voters approved an initiative in November 2012 that targeted a large portion of the newly received funds to affordable housing.  Los Angeles County representatives have informed City staff that the County plans to invest approximately $86 million of such funds into affordable housing over the next five years.  While this represents a small fraction of the total funds received by the County, it does represent some redirection of the funds toward their original purpose.  However, it is uncertain whether any of the funds will be allocated toward affordable housing opportunities in Santa Monica.  For example, County mental health funds were recently made available through a competitive process for permanent supportive housing.  However, Santa Monica was excluded as a targeted geographic location.

 

Local Opportunities and Challenges

Staff believes that if Santa Monica wants to continue its commitment to creating affordable housing opportunities, it cannot rely on uncertain opportunities at the federal, state, and regional levels.  Continuing to negotiate for significant commitments to affordable housing through development agreements, as well as providing for additional affordable housing in the new zoning ordinance will address some affordable housing needs.  However, providing an affordable housing program that addresses the needs of a variety of households, including working families, seniors, people with disabilities, veterans, and formerly homeless individuals, will require local funds that can be dedicated to investing in housing produced and preserved by non-profit affordable housing providers.

 

Given the growing pressures on the City’s General Fund in the coming years, dedicating existing City funds toward affordable housing production would require serious reductions in other City programs.  Before redevelopment dissolution, the City was spending an average of $15 million per year on affordable housing production and preservation.  To give an order-of-magnitude comparison, the FY 2013-14 budget of the Santa Monica Public Library is approximately $12 million, demonstrating that severe cuts would be necessary to return affordable housing funding to its previous level.  Another suggestion is to consider the residual funds the City is receiving as a result of redevelopment dissolution.  However, unlike the counties and the state, the City receives a relatively small portion of redistributed redevelopment property tax increment. During FY 2013-14, the General Fund impact from redevelopment dissolution is approximately $9 million, including the cost of the senior housing voucher program, Civic Parking Structure bond payments, parking structure insurance and assessments, RDA loan repayments that the state disallowed, and certain project costs related to capital improvements that the City is now funding.  By comparison, the City is projected to receive less than $6 million of redistributed redevelopment property taxes during FY 2013-14.  If residual redevelopment funds grow in the coming years, those funds could be considered for dedication to affordable housing.     

               

Staff believes that in order to make a substantial investment in affordable housing production and preservation, new, local funding sources must be created.  Two opportunities were discussed by Council on December 11, 2012, including implementing a fee on commercial development to mitigate affordable housing impacts and an adjustment to the City’s documentary (real property) transfer tax.  These two opportunities to dedicate new funds to affordable housing are discussed below.

 

 

Commercial / Housing Linkage Fee

In December 2012, staff described the methodology for the commercial / housing linkage fee nexus study.  The nexus study and analysis of maximum justifiable fee amounts have been completed.  An economic consultant is now completing an analysis of how the financial feasibility of various development prototypes would be affected by the commercial/housing linkage fee, as well as the proposed park development impact fee, in the context of existing fees, including the transportation impact fee.  Council is expected to consider both proposed development impact fees in the coming months.

 

 

While a commercial/housing linkage fee would play an important role in mitigating the impacts of commercial development on affordable housing needs, staff does not expect it to be a significant, on-going source of funding to invest in affordable housing.  One of the primary reasons is that there is not expected to be significant commercial development in Santa Monica in the coming years.  Within the current development pipeline, most of the proposed projects are primarily residential.  Most of the significant commercial developments (hotels, mixed-use creative office / residential developments) are anticipated to include affordable housing.  Commercial components of any new developments will also likely be off-set by existing, on-site commercial structures.  While only a portion of the projects may ultimately make it into construction, it does provide a reasonable proxy for the type of development that will be expected.  As a result, if approved, the new fee will likely be an important, though relatively insignificant, source of funding for affordable housing, requiring funds to be accumulated over multiple years to be sufficient to create or preserve new affordable housing.

 

Documentary (Real Property) Transfer Tax

A documentary transfer tax is collected by a county recorder whenever property changes hands and an ownership transfer document is recorded.  All California counties collect a documentary transfer tax of $1.10 per $1,000 of transferred value.  In addition, many California cities charge an additional transfer amount that is collected by the county recorder and paid to the respective city.  Santa Monica collects an additional amount of $3 per $1,000 of transferred value that goes to support general City programs.  Currently, the range of city transfer rates in California is $1.10 to $25.00 per $1,000 of transferred value. (See Attachment A for a list of California cities’ transfer rates.)

 

 

For example, if a property in Santa Monica sold for $1,000,000, the Los Angeles County Recorder would collect a transfer tax of $4,100 ((1,000,000/1000)*(1.10+3.00)), with $1,100 for the county and $3,000 for the City.  Payment of the transfer amount can be negotiated between the buyer and the seller.

 

 

In 2012, the Mayor of San Francisco proposed to increase the local real estate transfer rate and dedicate the funds toward affordable housing.  As a city and county, San Francisco ultimately chose to allocate increased county revenues which resulted from the elimination of redevelopment toward affordable housing. Since this option is unavailable to Santa Monica, the idea of increasing transfer rates and using the increased receipts for affordable housing is appealing for a variety of reasons.  First, transfer receipts can vary widely from year to year, based on transactions that occur during any year.  Such receipts tend to be affected by the general volume of residential and commercial sales and the exact timing of significant sales.  For example, a handful of significant commercial property sales in one year, combined with brisk residential sales activity, could spike transfer receipts, while minimal commercial and residential sales in a subsequent year could drop municipal receipts.  (See Attachment B for historical transfer fee receipts in Santa Monica.)  The volatility of transfer receipts would make it difficult to fund an operating program that has relatively fixed costs each year.  By comparison, affordable housing opportunities are funded once sufficient funds have been collected to support the opportunity.  As a result, the volatility of the funding source would not be a significant detriment to the City’s funding system for affordable housing.

 

Increasing the transfer rate and later allocating funds toward affordable housing also has appeal from a policy perspective.  While the existing AHPP ensures that new market-rate residential development mitigates the need for affordable housing, and the proposed housing linkage fee will help mitigate new commercial development’s impact, there is no means to address the affordable housing impacts of existing commercial and residential properties, particularly those that were developed before current affordable housing policies were in place.  Increasing the transfer rate on property transfers and then allocating the revenues toward affordable housing could allow a small portion of the escalation in values of existing residential and commercial properties to be dedicated to promoting economic diversity and to helping address the housing needs of low-income members of the Santa Monica community.

 

Adjusting the local transfer tax with a requirement that it be dedicated to a specific purpose would require approval of over two-thirds of Santa Monica residents voting in an election, pursuant to Proposition 218, passed by California voters in 1996.  If the tax were increased for general municipal purposes, it would require approval by over 50 percent of voters.  A tax adjustment for general purposes could be paired with a companion measure demonstrating voters’ desire that the increased revenue be directed toward affordable housing.  Recent voter polling has shown that while a significant percentage of voters are wary of the need for additional funding for general government and capital purposes, there is support for additional funding for affordable housing, as discussed below.

 

 

In September 2013, Fairbank, Maslin, Maullin, Metz & Associates (FM3) conducted a telephone survey of 477 likely Santa Monica voters, with a margin of error of plus or minus 4.5 percent.  The poll results showed strong support for the City’s funding of affordable housing.  The poll also asked about increasing the real property transfer rate to support the City’s affordable housing program.  The survey asked about increasing rates for transfers valued at over $1,000,000 and $5,000,000. While the poll did not present a fully developed ballot question, it did find that 55 percent of the likely electorate would vote to double the transfer rate for sales valued over $1,000,000, with 57 percent support at a $5,000,000 threshold, if the funding were used to support affordable housing.  (See Attachment C for a summary of FM3’s September 2013 poll results.)   The approach is intended to shield homeowners of more modest means from the increased rate when they sell their homes.  The threshold ensures that virtually all commercial transactions would pay the higher transfer rate and that most of the higher‑value residential transactions would pay the higher rate.  (San Francisco is currently the only city in California that employs a graduated rate, with the highest-value transactions paying a fee of 2.5 percent or $25 per $1,000 of sales value.)

 

Staff believes that there are several reasons for the demonstrated voter support for an increased real estate transfer rate.  First, residents encounter the transfer tax only when they are buying or selling property, which is a rare occasion for most residents.  Second, residential sales prices in Santa Monica have peaked at a level that is commensurate with their pre-recession levels.  (See Attachment D for median residential sales prices since 2000.)  As a result, most residential sales are expected to involve value appreciation that far surpasses any likely amount of the transfer rate.  Sales by longer-term owners can see doubling, tripling, and quadrupling of values since purchase.  Local brokers estimate that commercial property values have similarly recovered from the recession.  Second, the payment of the transfer tax can be negotiated between buyers and sellers and the payment is accompanied by a variety of other escrow and closing costs that many buyers and sellers consider to be part of the cost of the transaction.  Finally, with a minimum transaction threshold for application of the higher rate, commercial properties would play an important role in the total receipts from the increased rate, ensuring that existing commercial properties contribute to the community’s needs when a sale occurs.

 

 

It is worth emphasizing the last point.  During 2013, Santa Monica saw some striking sales of commercial properties.  For example, one commercial property sold for over $325 million.  Under the current transfer rate, the City received less than $1 million for the general fund as part of the recording of the single sale.  If the fee were doubled with the incremental increase used for affordable housing, the sale would have provided nearly $1 million of additional funding that could be used for purposes such as affordable housing.  A similarly scaled transaction in San Francisco would provide that jurisdiction with over $8 million.  One approach could be to impose the higher transaction rate on commercial transfers only.  Staff cautions against such an approach, as the receipts would be reduced markedly and would become even more volatile, making it difficult to do any long-term planning.  Attachment E provides estimates of average annual receipts based on different amounts and thresholds of an increased transfer rate.  

 

 

A counter-argument to increasing the transfer rate is that it could cool real estate sales and values.  However, San Francisco’s transfer rates, which peak at nearly $10 higher than any other city in California, have not appeared to dampen one of the hottest real estate markets in the country.  Berkeley, with the next highest rate, has a very strong real estate market as well.  Santa Monica’s strong real estate fundamentals are very likely able to similarly withstand a higher real estate transfer rate.                

 

Additional Voter Surveying

While the FM3 voter survey tested the general notion of increasing the transfer rate and using the increased revenues to support affordable housing, it did not test different levels of increase to the transfer rate.  In addition, it tested only two thresholds of increase at $1,000,000 and $5,000,000 of sales value, and the wording of the questions could have led survey respondents to conclude that the tax would apply to residential transactions only.  In crafting a potential ballot measure, staff believes that it would be valuable to complete additional testing of voter attitudes toward the amount of the transfer rate increase, the valuation threshold for the increase, and the inclusion of residential and commercial transfers.  Additional surveying could also test support for a dedicated tax measure compared to a general tax measure, as well as voter attitudes toward discrete elements of the funding program, such as inclusion of a rental stabilization program, exclusion of all staff and administrative costs, and attitudes toward affordable housing compared to other City programs and efforts.  In addition, polling could measure voter support when critical arguments are presented.  As a result, staff recommends amending FM3’s existing contract by an amount not to exceed $27,800 to conduct additional voter surveying to help identify a ballot structure that would most likely resonate with voters.

 

Proposed AHPP and HTF Guidelines Amendments

In addition to replenishing lost funding sources for affordable housing, staff supports improvements to the existing affordable housing program to serve as many people as possible given limited funding. Staff recommends that amendments to the Affordable Housing Production Program (AHPP) and Housing Trust Fund (HTF) Guidelines could fine-tune the City’s housing programs by establishing minimum occupancy standards and setting preferences for occupancy of accessible apartments by persons living with disabilities.

 

 

Minimum Occupancy

On December 11, 2012, Council directed staff to explore opportunities to establish minimum occupancy standards for affordable housing governed by the AHPP and built by private developers.  Establishing minimum occupancy standards (i.e., minimum household sizes) for each unit size could help ensure that larger apartments actually house larger families.  While the AHPP requires private apartment owners to pull first from the City’s consolidated housing waitlist, the waitlist does not always contain all household sizes and income levels.  (The City’s waitlist is mostly composed of one- and two-person households at extremely low- and very low-income levels.)  As a result, it is sometimes necessary for private owners to complete tenant selection and certify the incomes of prospective tenants. Staff has worked with the City Attorney’s Office to confirm that minimum occupancy standards can be established while complying with fair housing requirements.  The proposed minimum occupancy standards below are taken from HUD standards for publicly funded affordable housing.

 

Unit Size

Minimum Number of Occupants

0 BR

1

1 BR

1

2 BR

2

3 BR

3

4 BR

5

 

If approved by Council, minimum occupancy would be reviewed as part of the compliance monitoring process for affordable housing.  

 

Housing for Persons Living with Disabilities

Whether by law or agreement, newly built apartments are being designed and constructed to serve the housing needs of persons living with disabilities.  However, the City’s Housing Trust Fund (HTF) Guidelines do not address how affordable apartments with special features would be accessed by the target population who needs them.  Staff recommends amendments to the HTF Guidelines to provide persons living with disabilities with a preference for the specially designed, accessible apartments.  The preferences would be aligned with the existing preferences for households who live or work in Santa Monica, so that Santa Monica households living with disabilities would be given preference for the accessible apartments.  If a household with a disability was not successful in getting an accessible apartment, but was able to get another apartment within the building, the household with the disability would be able to petition to move to the accessible apartment once it became available.  Implementing the requirements would need to be coordinated with other federal and state requirements. Because accessible apartments represent a small percentage of the total number of apartments created, staff does not believe that the proposed preferences would significantly interfere with other preferences for evicted, homeless, and veteran households.  To the contrary, these amendments to the Guidelines provide a formal, proactive procedure for reasonable accommodations.

 

Next Steps

If Council accepts staff’s recommendations, FM3 will conduct additional polling to assist in developing potential ballot measures that have the highest likelihood of achieving success with voters in November 2014.  Staff would return to Council before July 2014 with recommendations regarding potential ballot language. Staff would also implement the proposed changes to the AHPP and HTF to ensure that the existing housing program maximizes its ability to serve all types of eligible households.

 

Financial Impacts & Budget Actions

The contract amendment to be awarded to Fairbank, Maslin, Maullin, Metz & Associates is $27,800, for an amended contract total not to exceed $55,600.  Funds are available in the FY 2013-14 Budget in Division 2071.  The contract will be charged to account 012071.555060.

 

 

Prepared by: Andy Agle, Director of Housing and Economic Development 

Approved:

 

Forwarded to Council:

 

 

 

 

 

 

Andy Agle, Director

Housing and Economic Development

 

Rod Gould

City Manager

 

Attachments:

A.    Comparison of Existing California Documentary Transfer Rates

B.    Historical Documentary Transfer Receipts: 1991 - 2012

C.    2013 Voter Survey Results Related to Affordable Housing

D.    Median Residential Sales Prices: 2000 – 2013

E.    Summary of Documentary Transfer Rate Scenarios

F.    Ordinance Amending Section 9.56 of the Santa Monica Municipal Code

G.   Proposed Amendments to the Housing Trust Fund Guidelines