City Council Meeting: June 14, 2011
Agenda Item: 7-B
To: Mayor and City Council
From: Andy Agle, Director of Housing and Economic Development
Subject: Affordable Housing Production Program Amendments
Staff recommends that City Council:
1. Introduce for first reading amendments to the Santa Monica Municipal Code (SMMC) Chapter 9.56, the Affordable Housing Production Program (AHPP), as set forth in Attachment A, to amend Sections 9.56.070(b) and 9.56.070(c) to defer the comprehensive study of the affordable housing fees until July 1, 2015;
2. Amend the AHPP Administrative Guidelines (Guidelines) as set forth in Attachment B, to:
a. Revise Section 4-D of the Guidelines regarding the procedure for development of offsite affordable housing that satisfies a market-rate project’s affordable housing obligation to require that construction of offsite affordable housing occurs prior to or concurrently with the market-rate housing; and
b. Revise Section 7 of the Guidelines regarding eligibility procedures for occupancy of affordable housing created by the AHPP;
3. Adopt the attached Resolutions that would automatically adjust the Affordable Housing Unit Base Fee and Affordable Housing Unit Development Cost for new market-rate apartments and condominiums; and,
4. Direct staff to prepare for City Council consideration an ordinance implementing an annual fee for the monitoring of affordable housing created by the AHPP.
The proposed modifications to the AHPP Ordinance would defer the study of the City’s affordable housing fees in light of current market conditions and the existing automatic annual fee adjustments that are based upon changes in land and construction costs. Effective November 29, 2011, the Affordable Housing Unit Base Fee for new market rate apartments of $26.79 per square foot of floor area would be increased to $27.35 and the Unit Base Fee for new market rate condominiums of $31.28 per square foot of floor area would be increased to $31.94. Also, the Affordable Housing Unit Development Cost of $281,100 would be increased to $287,003.
Proposed revisions to the AHPP respond to recent circumstances relating to the implementation and effectiveness of the program. Staff recommends that the Guidelines be amended to require that construction of offsite affordable housing units occur concurrently with the associated market-rate housing, and to clarify the procedures for establishing, maintaining and updating the eligibility list for occupancy of affordable units created through the AHPP. Finally, an annual monitoring fee paid by the developer/owner of affordable housing would help offset the cost to the City of ensuring developer/owner compliance with the AHPP. Staff is seeking City Council direction on implementing such a fee.
The AHPP, contained in SMMC Section 9.56, implements Proposition R, which establishes that not less than 30 percent of all newly constructed multifamily housing in the City annually must be affordable to low- and moderate-income households for at least 55 years. The AHPP was adopted by the City Council on July 21, 1998 and has been periodically amended as necessary when the provisions of Proposition R have not been met. The AHPP requires developers of new market-rate multifamily housing to contribute to affordable housing goals through dedication of a portion of a project’s total units as affordable housing, construction of affordable housing offsite, dedication of land for affordable housing development, or payment of a fee. Multifamily ownership housing of four of more units developed in Santa Monica’s multifamily districts is required to include affordable units either onsite or offsite. Currently, there are approximately 900 AHPP affordable residences located throughout Santa Monica that were developed by for-profit developers.
The AHPP Ordinance establishes that the City shall develop administrative guidelines. The Guidelines, originally adopted by the City Council on October 5, 1999 and most recently amended on March 3, 2009, detail the affordable housing fee adjustment methodology, the options available to market-rate housing developers when deciding to build offsite affordable units associated with a market-rate project, the factors used in determining the affordable sale price of ownership units, and protocols regarding the tenant and purchaser selection process for income-qualified households.
Staff has identified components of the AHPP and the associated Guidelines where changes are necessary to:
· Preserve fiscal resources by deferring a redundant fee study;
· Enhance the success of offsite development of affordable housing by eliminating the option allowing developers to construct offsite affordable housing after completing the associated market-rate development;
· Clarify procedures regarding the eligibility list for occupants of affordable housing; and
· Establish an annual monitoring fee paid by market-rate developers to help offset the cost of monitoring compliance with the AHPP as more affordable housing is developed.
Sections 9.56.070(b) and 9.56.070(c) of the AHPP provide that, beginning on July 1, 2010 and approximately every five years thereafter, the City will conduct a comprehensive study of the Affordable Housing Unit Base Fee and Affordable Housing Unit Development Cost and report the results to the City Council. These fees are collected in instances where developers choose to pay a fee toward the construction of affordable housing rather than include affordable housing within their market-rate developments or offsite in another development. The fees are deposited into a housing trust fund and are loaned to nonprofit affordable housing developers to subsidize the production of new affordable housing.
Conducting the comprehensive study (Nexus Study) would require about six months and would cost approximately $50,000 for consultant analysis and hearings support, assuming the same analytic approach used in previous Nexus Study updates were to be employed. Staff believes that this analytic approach remains appropriate and has been a model for other California jurisdictions. However, this is not the most appropriate time to update the City’s Nexus Study, due in large measure to the lingering adverse effects of the recent national recession. Although general economic conditions in Santa Monica appear to be somewhat more favorable than in other parts of the State, the statewide unemployment rate is still in double digits and the housing market continues to languish. Thus, an update of the Nexus Study would necessarily utilize data and market conditions derived from this low point in the economic cycle, and would thereby provide a questionable basis for setting long-term baseline standards for this essential City program.
An alternative approach would be to continue the annual inflation adjustment of applicable housing fee and affordable housing cost factors for at least another few years until market conditions are projected to have reached greater stability and be more reflective of more typical economic conditions. The Nexus Study methodology is based on the affordable housing need associated with a portion of the labor demand generated by household spending in new market rate multi-family development, and the amount of new household spending is imputed from the cost of this new market rate housing. The Affordable Housing Unit Base Fee and Affordable Housing Unit Development Cost annual adjustment is based on changes in construction costs and land costs. The weighted average annual change in medium condominium sale prices by ZIP Code is used as a proxy measure for land cost changes measured for the immediately preceding calendar year. As such, the annual inflation adjustment accounts for annual changes in the cost of such housing in the City. Thus, in the short-run, this method serves as a reasonable basis for ensuring that the amount of the Affordable Housing Base Unit Fee and the Affordable Housing Unit Development Cost maintain their association with the Nexus Study methodology and remain consistent with annual changes in short-term market conditions. For the above reasons, staff recommends amending the AHPP to delay the comprehensive study until July 2015. At that point, the City could evaluate whether changed conditions would warrant a new Nexus Study.
Completion of Offsite Housing
The current AHPP Guidelines regarding offsite development of affordable units allow market rate housing projects to be completed and certified for occupancy before the completion of construction of associated off-site affordable housing units. To be eligible for this option, the Guidelines require the developer to meet certain milestones of construction readiness for the offsite development (e.g., building permit, site mobilization, construction commencement), and to provide security at least equal to the affordable housing in-lieu fee. Recent experience with the economic downturn and associated foreclosures on pending multifamily developments has exposed vulnerabilities in this approach to the offsite affordable housing option. The main weakness in allowing market rate projects to be certified for occupancy before completion of the associated affordable housing development is that the various security instruments intended to ensure the completion of the offsite affordable housing, such as letters of credit or trust deeds, do not guarantee that the offsite housing will be built in a timely manner. Staff recommends that the cleanest and clearest way to ensure that offsite affordable housing is constructed according to community expectations is to require the coordinated commencement and completion of both the offsite affordable housing and the associated market-rate housing. Therefore, staff recommends that Section 4-D(1) of the Guidelines be revised to require that the issuance of building permits and the final construction permit sign-off for the off-site affordable housing occur prior to or concurrently with the permit sign-off for the market-rate project, and that Section 4-D(2) be eliminated.
Eligibility List for Occupants of Affordable Housing
Section 7 of the current Guidelines details categories of priority households for affordable housing and specific procedures regarding tenant and purchaser eligibility. Staff proposes that Section 7-A, describing “first priority” households, be amended so that Santa Monica residents displaced due to the closure of a mobile home park or funding reductions in their housing assistance programs are included in this list. Proposed changes in Section 7-C(7) relate to the process for appealing removal from the eligibility list and restate the process as an ‘informal review’ rather than an ‘informal hearing’. This revision is consistent with procedures used for eligibility lists involving federal programs. Finally, minor wording changes are proposed throughout Section 7 to achieve consistency or clarification regarding references to “applicant”, “waiting list”, “eligibility list”, “referral list” and “list of prequalified applicants.”
Annual Fee Adjustments
Section 9.56.070 of the City’s AHPP provides that the Affordable Housing Unit Base Fee and the Affordable Housing Unit Development Cost shall be adjusted annually by City Council resolution based on changes in construction and land costs. The fee adjustment methodology is established in Section 2 of the Guidelines and has been calculated for the Affordable Housing Unit Base Fee. The calculation prepared by HR&A Advisors demonstrates that the current Affordable Housing Unit Base Fee for new market rate apartments of $26.79 should be increased by $0.56 (2.1 percent) to $27.35 per square foot of floor area and the current Affordable Housing Unit Base Fee of $31.28 for condominiums should be increased by $0.66 (2.1 percent) to $31.94 per square foot of floor area. Additionally, the calculation of the Affordable Housing Unit Development Cost adjustment prepared by HR&A Advisors demonstrates that the current Affordable Housing Unit Development Cost of $281,100 should be increased by $5,903 (2.1 percent) to $287,003. The proposed resolutions provided in Attachments C and D would revise the Affordable Housing Unit Base Fee accordingly effective November 29, 2011. Details of the calculations prepared by HR&A Advisors for the Affordable Housing Unit Base Fee and the Affordable Housing Unit Development Cost are provided in Attachments E and F.
Compliance Monitoring Fee
Currently there are approximately 900 affordable housing residences created by the AHPP. Conducting thorough compliance monitoring involves increasing amounts of staff time as the AHPP portfolio grows. The City currently is reimbursed for a portion of its costs with existing inclusionary housing fees as well as redevelopment funds that would otherwise be allocated to the Housing Trust Fund to assist in the development of additional affordable units. An annual monitoring fee paid by developers/owners of future affordable housing would help offset the cost to the City of ensuring compliance with the AHPP. Staff is seeking City Council direction on implementing such a fee and would return to Council with a proposed Ordinance implementing a monitoring fee. The monitoring fee would be applied prospectively to AHPP development based on the per-unit cost of maintaining the eligibility list (for occupancy), initial household income qualification, annual recertification of eligibility and site visits.
At its May 26, 2011 meeting, the Housing Commission considered the recommendations detailed in this report and voted unanimously to support the staff recommendations.
The alternative to deferring the comprehensive fee study would be to conduct the study at an estimated cost of $50,000 or to defer the study for less than the proposed four years. Keeping the current AHPP Guidelines would continue to leave the AHPP vulnerable to economic downturns and inconsistent with other housing services provided by the City.
On June 1, 2011, the City published notice of the two proposed resolutions adjusting the affordable housing fees. The City republished this notice on June 8, 2011.
Financial Impacts & Budget Actions
Deferring the comprehensive fee study would allow the City to maintain its current budget allocation for housing activities and forego an additional budget appropriation of $50,000. There are no financial or budget impacts associated with the staff recommendations in this report involving revisions to the AHPP Guidelines or the annual adjustment to the affordable housing fee.