City Council Meeting: September 11, 2012

Agenda Item: 7-C

 

To:                   Mayor and City Council 

From:              Andy Agle, Director of Housing and Economic Development

Subject:          Affordable Housing Production Program Amendment

 

 

Recommended Action

Staff recommends that the City Council:

 

1.      Introduce for first reading the attached Ordinance that would eliminate the existing discount to the Affordable Housing Unit Base Fee, currently 50 percent in commercial/industrial zones and 25 percent in residential zones; and

2.      Adopt the attached Resolutions that would automatically adjust the Affordable Housing Unit Base Fee for new market-rate apartments and condominiums and the Affordable Housing Unit Development Cost.

 

Executive Summary

This report discusses a proposed amendment to the Affordable Housing Production Program eliminating the existing discount to the Affordable Housing Unit Base Fee (Section 9.56.070). The fee discount applies when a proposed development does not displace existing multi-family housing.  At its June 26, 2012 meeting, City Council directed staff to return with a draft ordinance eliminating this provision.  The discount policy was intended to encourage housing development on parcels without existing multi-family housing. However, staff review of development data over the last several years indicates that the majority of developments have occurred on parcels with existing multi-family housing units.  Therefore, this policy does not appear to be effective.

 

The proposed adjustments to the Affordable Housing Unit Base Fee and Affordable Housing Unit Development Cost reflect changes in land and construction costs. On June 13, 2006, the City Council approved the methodology for ascertaining changes in these costs and thereby calculating the adjustment. The attached resolutions have been prepared in accordance with the approved methodology. The Affordable Housing Unit Base Fee and the Affordable Housing Unit Development Cost would be 0.8 percent higher than the existing amounts and would become effective November 10, 2012, if approved.

 

Background

 

The Affordable Housing Production Program (AHPP), Chapter 9.56 of the City’s Municipal Code, implements Proposition R, which establishes that not less than 30 percent of all newly constructed multi-family 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.  The AHPP requires developers of new market-rate multi-family housing to contribute to affordable housing goals by dedicating a portion of a development’s total residences as affordable housing, constructing affordable housing off-site, dedicating land for affordable housing development, or paying the Affordable Housing Unit Base Fee. This fee is updated annually based upon changes in land and construction costs.

 

When a developer chooses to dedicate a portion of a project’s total residences as affordable housing, the number of affordable residences that must be provided is based on the number of market-rate units in the development. Oftentimes, the calculation of required affordable residences results in a fraction. In that instance, when the fraction is 0.75 or more, the number is rounded-up to a whole number. However, any fraction less than 0.75 can be satisfied by payment of a fee.  The amount of the fee is based upon the Affordable Housing Unit Development Cost, which is also automatically adjusted annually based upon changes in land and construction costs. For example, if a developer is required to provide 4.7 units of affordable housing within a development, the developer would be required to dedicate four affordable units and pay 0.7 times the Affordable Housing Unit Development Cost to satisfy the requirement associated with the fraction.

 


 

Discussion

Eliminate Fee Discount

The AHPP currently provides a discount to the Affordable Housing Unit Base Fee for new multi-family housing developments that will not displace existing multi-family housing.  There is a 50 percent discount in commercial/industrial zones and a 25 percent discount in residential zones. At the time of the AHPP’s adoption, most existing multi-family housing had rent levels that were affordable to low- and moderate-income households. The fee discount was intended to encourage residential development on sites that would not result in tenant displacement. However, staff has found that more than one-half of the 140 new developments since the implementation of the discount policy have involved properties with existing multi-family housing. Therefore, the discount does not appear to be achieving its intended purpose.  Eliminating the discount and requiring that all multi-family housing developments pay the full fee amount would increase fee revenue contributed to the City’s Housing Trust Fund, which is used to finance affordable housing throughout the City.  The amount of increased fee revenue that would result if the discount is eliminated is difficult to estimate given the sporadic nature of development. However, a review of development data from the past three years indicates fee revenue may increase in the range of $50,000 to $150,000 annually.  Any such additional revenue for affordable housing is crucial in light of the recent loss of redevelopment funding.

 

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 detailed in Section 2 of the AHPP Administrative Guidelines and reflects the methodology approved by the City Council in 2006. The fees are adjusted based on two factors: 1) changes in construction costs as measured by the Engineering News Records Construction Cost Index, and 2) changes in land costs measured by using the proxy of change in median condominium sales prices.  The previous annual adjustment, adopted by Council on June 14, 2011, increased the fees by 2.1 percent ($0.56 per square foot for apartments and $0.66 per square foot for condominiums). The table below summarizes the proposed adjustment to the fees.

 

Fee Description

2011 Amount

2012 Amount

% Change

Affordable Housing Unit Base Fee – Apartments (per square foot)

$27.35

$27.57

+0.8%

Affordable Housing Unit Base Fee – Condominiums (per square foot)

$31.94

$32.30

+0.8%

Affordable Housing Unit Development Cost

$287,003

$289,299

+0.8%

 

The proposed Resolutions, Attachments B and C, would adjust the fees accordingly, effective November 29, 2012.  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 D and E.  The revenue implications are minimal as the proposed fees represent an increase of less than one percent and the average annual fee revenue in recent years has been approximately $700,000. 

 

On August 31, 2012, the City published notice of this hearing and the availability of the HR&A Advisors' analyses.  The City republished this notice on September 5, 2012.  Copies of these analyses have been available in the City Clerk's Office for public review since August 31, 2012.


 

Financial Impacts & Budget Actions

The elimination of the AHPP fee discount will result in increased revenue on a per project basis, although annual AHPP revenue in general can fluctuate significantly based upon the sporadic nature of development.  For example, annual AHPP revenue has ranged from approximately $304,000 to $1,200,000 over the last three years.  Additionally, the proposed annual increase to the AHPP fees is minimal at less than one percent and will therefore have only a minimal effect on revenue. 

 

 

Prepared by:  Caroline Sim, Senior Development Analyst

 

 

Approved:

 

Forwarded to Council:

 

 

 

 

 

Andy Agle, Director

Housing and Economic Development

 

Rod Gould

City Manager

 

Attachments:

 

A.   Proposed Ordinance Eliminating the Discount to the Affordable Housing Unit Base Fee

B.   Resolution Automatically Adjusting the Affordable Housing Unit Base Fee - S.M.M.C. 9.56.070(b)

C.   Resolution Automatically Adjusting the Affordable Housing Unit Development Cost -  S.M.M.C. 9.56.070(c)

D.   HR&A Analysis: Proposed FY 2012-13 Annual Automatic Adjustment for the Affordable Housing Unit Base Fee

E.   HR&A Analysis: Proposed FY 2012-13 Annual Automatic Adjustment for the Affordable Housing Unit Development Cost