SR-12-11-2012-8ACity of City Council Report
Santa Monica
City Council Meeting: December 11, 2012
Agenda Item: �— I'
To: Mayor and City Council
From: Andy Agle, Director of Housing and Economic Development
Subject: Affordable Housing Policy
Recommended Action
Staff recommends that the City Council:
1. Direct staff to prepare an ordinance for Council consideration which establishes
an affordable housing linkage fee for commercial development and to continue to
pursue all other approaches to financing affordable housing;
2. Direct staff to prepare amendments to the Affordable Housing Production
Program (AHPP) to support extremely low- income housing, to establish minimum
occupancy standards, and to allow for for - profit developers to contract with non-
profit developers for affordable housing;
3. Affirm the existing approach to establishing income - eligibility limits and
calculating rents for the AHPP;
4. Direct staff to cease offering new loans under the TORCA Loan Program for lack
of demand and authorize the City Manager to approve 10 -year extensions of
existing TORCA loans;
5. Affirm an affordable housing compliance monitoring approach that uses a
random sampling of the total City- funded affordable housing portfolio;
6. Authorize staff to pursue disposition of the City -owned property at 1122 22 °d
Street and to explore approaches to the disposition of two other City -owned
properties, 419 Ocean Avenue and Mountain View Mobile Home Park, returning
to Council with specific recommendations.
Executive Summary
This report seeks Council direction and action on specific recommendations to ensure
that Santa Monica continues to produce affordable housing in the wake of the
dissolution of redevelopment and the associated loss of the City's primary funding
source for affordable housing. To address the long -term needs and priority for
affordable housing, staff recommends a focus on implementation and administration of
programs that most effectively use available resources.
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Staff seeks Council direction on critical policy issues related to affordable housing,
including:
® Developing new strategies to fund affordable housing production, including a
housing linkage fee for commercial development;
• Amending the AHPP to address extremely low- income households, minimum
occupancy standards, non - profit developer participation, and methodology for
calculating rents;
• Streamlining the work of the Housing Division, including ceasing to offer new
TORCA loans, a random sampling approach to compliance monitoring of non-
profit affordable housing, and disposition of certain City -owned housing assets.
Background
Affordable Housing Challenges
On February 28 2012, Council held a study session to consider a variety of issues
related to housing in Santa Monica. At the study session, Council indicated its support
for preparation of a nexus study to establish a linkage fee for commercial development
that would provide a new source of revenue for affordable housing development, given
the loss of redevelopment funding. The nexus study would analyze the relationship
between commercial development, job creation, and the demand for affordable housing.
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 majority the Housing
Trust Fund Dollars, as well as our ability to leverage outside funding, is gone. To date,
legislative activities to create significant alternatives to redevelopment funding have
been vetoed by the Governor, failed to garner the requisite majority votes, or stalled in
committees. If Santa Monica wishes to continue to create affordable housing
opportunities at a significant scale, new sources of revenue must be identified.
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Redevelopment funding also supported staff costs associated with administering
affordable housing programs. Consequently, staffing will likely be impacted by the loss
of redevelopment revenue, resulting in staffing reductions and reduced capacity.
Reduced staffing will require streamlining existing programs and prioritizing core
affordable housing goals and needs, including considering options to modify or
eliminate existing programs.
Discussion
This report is organized by key policies requiring Council direction. Staff has developed
recommendations to address the issues and seeks Council approval and direction to
proceed with the proposed approaches.
1. New Strategies to Fund Affordable Housing Production
Linkage Fee: A potential source of new revenue for affordable housing development is
a commercial linkage fee based upon the need for affordable housing generated when
various types of commercial developments are built (creative office space, hotel, retail
and entertainment, medical, industrial /light manufacturing, institutional, and hospitals).
The variety of jobs and varied degrees of compensation for workers in commercial uses
generates housing demands for households at extremely low, very low, low, and
moderate incomes. A linkage fee is designed to assess the financing gap associated
with building affordable housing to meet the needs of employees associated with
specific commercial uses.
Rosenow Spevacek Group, Inc. (RSG), a consulting firm that has prepared similar
studies throughout California, is currently finalizing a draft nexus study and fee analysis
for Santa Monica. The study estimates that non - residential development projected to
occur over the next twenty -year period could create 1,280 jobs. Those jobs would
create approximately 1,132 new worker households, 842 of which would earn a
moderate income or below. Of the 842 new households, 547 would be very low- income,
235 would be low- income, and 60 would be moderate - income households. The impact
of this new workforce would stretch the capacity for affordable housing even further if
their needs are not addressed.
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In studying the potential linkage fee, RSG has completed the following analysis:
1. Forecast what percentage of households associated with workers in new
commercial developments would seek housing in Santa Monica.
2. Analyze the employment density and wage levels associated with various
commercial uses to determine the number of lower- income employees per
square foot.
3. Estimate the financing gap associated with building affordable housing to serve
the needs of the lower- income worker households.
4. Based on the three factors above, calculate a per- square -foot cost that could
be paid by new development to provide affordable housing gap financing to
serve the needs of new, lower- income worker households that would seek
housing in Santa Monica.
The full cost to address the affordable housing needs of new worker households varies
widely based on the type of commercial development, the targeted affordability of the
housing, and affordable housing funding mechanisms. The preliminary results of the
RSG study identify a full cost ranging from $12 per square foot to $140 per square foot,
depending on the factors above. In setting housing linkage fees, most jurisdictions
establish a reasonable percentage of the full cost to be captured from new
development. A transportation impact fee and a parks impact fee are also being
studied and will be considered by Council in upcoming months. With the recommended
direction, staff would return to Council in early 2013 with an ordinance and
recommended percentages to establish the new linkage fee.
Dedicated local funding: Santa Monica could consider a local, dedicated funding
source that could be adopted by voters in order to support bond financing or a
dedicated funding stream. For example, several months ago, the Mayor of San
Francisco proposed to ask voters to increase the real estate transfer tax to provide a
dedicated funding source for affordable housing. The proposal was unique in that it
would apply only to sales above a certain dollar amount, to ensure that moderate -
income households purchasing homes or condominiums would not be affected by the
tax increase. The real estate transfer tax is also a unique tool because it is paid only
when real property is sold and is small relative to other transaction closing costs.
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Ultimately, San Francisco's leaders developed an alternative approach that was
approved by voters in November 2012. The voter - approved initiative dedicates funds
for affordable housing based on business taxes reform and increased general fund
revenues due to the dissolution of redevelopment. San Francisco is in a unique position
as a county and city to realize significantly increased general revenues as a result of
redevelopment dissolution. The voter initiative ensures that a portion of those funds
continues to support affordable housing. While San Francisco did not ultimately
choose to pursue dedicated taxes to support affordable housing, it could be a
successful strategy in a community like Santa Monica that is similarly committed to
housing diversity. Pursuing a new, dedicated funding source would require a sustained
educational effort, as well as community champions who are committed to the cause.
San Francisco's use of increased county revenues is also instructive. In Santa Monica,
the largest share of former redevelopment tax increment goes to Los Angeles County.
Since these are new revenues to the County, Santa Monica, perhaps in alliance with
other local cities, could urge the County to dedicate a portion of those funds to
affordable housing throughout the County. Such a strategy could make sense from a
County perspective, as a drop in funding for affordable housing could ultimately lead to
increased homeless, which would put greater financial pressure on County- funded
health and human services.
Council could consider dedicating a portion of the former redevelopment funds that now
flow to the General Fund for affordable housing. However, such funding may be
needed to repay City /Agency loans and pay for City costs associated with housing and
economic development functions and therefore may not be available as a new source of
funding for affordable housing. However, once the loans have been repaid, the
continued flow of funds could be considered for affordable housing purposes.
Staff seeks Council direction to continue exploring all options to fund affordable
housing, including working with local stakeholders on education and outreach.
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2. Affordable Housing Production Program (AHPP) Amendments
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 a fee. Staff recommends three adjustments
to the AHPP in order to enhance affordable housing goals.
Extremely Low - Income: At the City Council's Housing Needs Study Session on
February 28, 2012, staff presented data from the City's affordable housing waiting list
showing that the vast majority of Santa Monica residents and workers on the list are at
extremely low- or very low- income levels. While housing subsidy programs such as
Section 8 target extremely low income households, these programs are at capacity with
approximately 1,400 household units served annually. The AHPP does not currently
address the provision of housing for extremely low- income households. Expanding the
program to include extremely low- income households may require amendment of the
nexus studies that originally established and updated the AHPP. Staff seeks
authorization to explore the expansion of the program to include the provision of
housing for extremely low- income households to provide greater income diversity and
options.
Minimum Occupancy: The AHPP has required affordable housing that includes
apartments of two or more bedrooms, subject to certain exceptions. However, the
AHPP does not establish minimum occupancy standards. Establishing minimum
occupancy standards (i.e., minimum household sizes) for each unit size and type could
help ensure that larger apartments are actually used by families. A minimum
occupancy standard could be included in compliance monitoring as is income
certification for inclusionary housing. With Council direction, staff would work with the
City Attorney's Office to explore options for including minimum occupancy in the AHPP,
given that there may be legal constraints on imposing occupancy requirements.
Non - Profit Opportunities: The AHPP does not currently provide opportunities for
market -rate developers to transfer property, cash, or inclusionary affordable unit
requirements to non - profit housing corporations in order to meet affordable housing
goals. Non - profit housing corporations are experienced with the development and
operation of affordable housing and are driven to ensure that low- income people are
housed. Conversely, considerable City time and effort has been spent ensuring that
for - profit housing owners are operating affordable housing according to requirements.
Creating opportunities for non - profit corporations to develop or operate AHPP- required
housing would increase certainty as to occupancy by low- income households and would
reduce staff workload associated with monitoring and gaining compliance for
inclusionary housing. Staff seeks Council authorization to explore opportunities for non-
profit housing corporations to participate in provision of AHPP housing.
3. Methodology for Calculating Affordable Rents
Methodologies for calculating affordable rents based on median income for a four-
person household differ among the various federal, state, and local affordable housing
programs and has significant impacts on property owners and tenants. The City's
Affordable Housing Production Program (AHPP) governs the rent limits for inclusionary
housing. However, which formula to use in calculating affordable rents is an important
issue in administering the AHPP. The issue involves determining the median income
figure to use in calculating rents and how best to balance the competing needs of rental
accessibility for the neediest tenants (which favors lower rents) and economic feasibility
for affordable housing development (which favors higher rent levels.)
The City's past practice has been to establish rents based on adjustments to HUD's
very low- income figure for a four - person household in Los Angeles County. An
alternative approach is to establish rents based on a four - person household at median
income as published by the California Department of Housing and Community
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Development (HCD). For example, the following table demonstrates the different
maximum rent calculations and income categories of HCD and the City approach.
Affordable Housing
Income Limits For 4- Person Household
Rents for 1- Bedroom Unit
HUD State Cit
Income Level
Income
Income
Rent'
Income
Rent
50% of AMI
$42,150
$42,150
$648
$42,150
$843
60% of AMI
$50,600
$50,600
$777
$50,600
$1,011
80% of AMI
$67,450
$67,450
$1,036
$67,450
$1,348
100% of AMI
n/a
$64,800
$1,296
$84,300
$1,686
In addition to lowering rents, adopting the state's formula would reduce the pool of
income - eligible prospective tenants.
A primary advantage of lowering rent levels based on state figures is that future,
privately developed affordable housing would be targeted to households of lower
income levels. In addition, for some households receiving rental subsidies who reside
in future privately developed affordable housing, the total amount of rent paid by the
households could be lower.
A critical disadvantage of lowering the rent limits is that it may render affordable
developments targeted to low- and moderate - income households economically
infeasible, resulting in reduced housing development in the future or requiring public
subsidies for the types of affordable developments that have not previously required
public subsidies. For example, several affordable apartment buildings have been
developed in Santa Monica without public subsidy and several others have been
approved or are in the development pipeline. Lowering rent levels by approximately 25
percent could make it infeasible for future affordable housing to be developed privately,
resulting in potentially undesirable outcomes where:
• Households are unable to take advantage of the lower rents in privately financed
affordable housing because no such housing is built.
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® The City has to subsidize affordable housing developments that were previously
funded without City assistance.
® The City's limited affordable housing funds are further constrained because
privately financed affordable housing is no longer addressing the needs of these
households.
® The City's limited funds may mean that such households are not served by any
future developments. Such an outcome could run contrary to the City's goals of
diversity across all incomes.
Additionally, applicability of any revised approach in calculating rents would need to be
prospective in nature, creating a two -tier system of rent limits for affordable rents,
thereby increasing complexity regarding administration, compliance, and monitoring of
affordable housing. Therefore, staff recommends that the City Council endorse the
existing administrative approach to establishing income eligibility limits and calculating
rents for the AHPP. Staff would return to Council with necessary actions to formalize
the income and rent levels.
4. Streamlining Affordable Housing Administration
The loss of redevelopment funding will impact staffing levels in the Housing and
Economic Development Department. This circumstance necessitates a review of
existing programs to evaluate streamlining opportunities based on reduced staff
capacity and a reevaluation of core affordable housing goals. Described below are
three areas where Council could consider streamlining opportunities.
TORCA Loan Program
This program provides shared - appreciation and deferred - payment loans to qualifying
low- and moderate - income households for the purchase of condominiums that were
converted from apartments. The program provided 53 loans from 1994 to 2001, but no
new loan applications have been submitted for more than ten years. This situation could
represent a general lack of interest in the program, buyer desire to finance property
without TORCA assistance to realize all property value appreciation gains, or sale
prices exceeding qualifying buyers' ability to afford a residence even with TORCA loan
subsidy. Staff recommends that new loans not be offered due to the demonstrated lack
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of demand. Not offering new loans would reduce the administrative duties associated
with framing and explaining the program to prospective applicants.
The structure of the TORCA program establishes a deferred - payment loan with terms of
twenty years for low- and moderate - income households. A challenge has arisen related
to borrowers' ability to repay their existing loans at maturity. The 20 -year term of the
TORCA loans present a problem because it does not coincide with the associated
30 -year bank loan. Repaying the TORCA loan at the end of the 20 -year term will
require borrowers to repay the loan in cash or attempt to refinance with a new bank loan
to repay the existing mortgage and the TORCA loan. This may not be feasible for the
low- and moderate - income borrowers who obtained the TORCA loans. The table below
illustrates a loan repayment scenario.
TORCA Loan Repayment Example
Notes
TORCA Unit Original Price
$100,000
Borrower Funds
$60,000
City Loan Funds
$40,000
City Share of Cost
40%
$40,000/$100,000
TORCA Unit Current Value
$300,000
Total Appreciation
$200,000
Current value minus original
price
City Share of Appreciation
$80,000
40% of $200,000
Borrower Repayment of City
Loan Principal
$40,000
Original City loan amount
Borrower Repayment of City's
Share of Appreciation
$80,000
40% of $200,000 appreciation
Total Loan Repayment Due
$120,000
The existing TORCA loans will begin maturing over the next few years and will become
an administrative burden if several borrowers default due to inability to repay at the
twenty -year term. More importantly, it could place loan recipients in an untenable
position where tight lending criteria makes it impossible for them to repay loans in spite
of their best intentions. One approach to resolving this anticipated problem is to revise
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the terms of existing loans to allow for City Manager approval of 10 -year extensions to
coincide with the principal mortgage term.
The amount of a loan repayment would include the original principal and a proportionate
share of the difference between the purchase price and the current property value (at
the time the loan is repaid). In the example above, the TORCA borrower will need to
repay the City $120,000. Monthly payments on a $120,000 loan, assuming four percent
interest, would be $573 for a 30 -year loan and $888 for a 15 -year loan. TORCA
borrowers may not be able to afford a new bank loan to repay the TORCA loan if they
still have limited incomes. Loan defaults may begin to be commonplace in the program
and may require more staff with shrinking resources available. Allowing 10 -year
extensions of the existing loan terms would likely improve repayment feasibility.
Therefore, staff recommends that the Council authorize the City Manager to approve
10 -year extensions of existing TORCA loans.
Compliance Monitoring
Housing Division staff currently monitors all inclusionary housing constructed by for -
profit entities for compliance with covenants, and on October 23, 2012, Council
approved fees for this purpose. However, compliance monitoring of City- funded
affordable housing is unfunded and with the loss of redevelopment, streamlining may be
warranted. Staff recommends that the City Council approve a compliance monitoring
approach consistent with staff capacity.
The City- funded affordable housing portfolio currently houses more than 2,000
households. Housing developments funded by the City are constructed and operated
by nonprofits for a minimum of 55 years. The vast majority of the affordable housing is
owned and operated by Community Corporation of Santa Monica, a local non - profit
housing developer. All City- funded developments are layered with multiple funding
sources that require ongoing monitoring, such as federal and state tax credits, federal
subsidy programs, state financing programs and traditional financial lending institutions.
As a result, the possibility of covenant violations is a low risk. The City could assess
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fees for nonprofit affordable housing development, though it would increase the amount
of the financial support required from the City.
Compliance monitoring can be approached within a range of intensity. It may include
receiving and filing reports from property owners, analyzing the veracity of the report
content, and auditing tenant income eligibility documentation for each household. Some
options to consider are:
a. Monitor a specific percentage of affordable housing units for compliance (for
example, 25 percent), with the goal of monitoring all units over a four -year cycle
(approximately 500 annually);
b. Monitor a representative random sample of the total portfolio (five percent review
annually of all units);
c. Monitor tenant income documentation used to determine eligibility in 100 percent
of all units; or
d. Contracting with a monitoring agency, if it is more cost - effective.
Based on current expectations of staffing reductions, reduced monitoring would be
anticipated for City- funded developments. If Council seeks a high level of monitoring of
City- funded developments, additional staff would be required at an additional cost to the
General Fund. Staff recommends that Council approve a compliance monitoring
approach which relies upon random sampling of the total City- funded affordable housing
portfolio, representing the most cost - effective approach given low risk of compliance
violations by nonprofit housing organizations.
City -Owned Properties
The Housing Division oversees four residential rental properties consisting of 26 rent -
controlled apartments in two buildings (1616 Ocean Avenue, 419 Ocean Avenue), a
vacant single - family dwelling (1122 22nd Street), and a rent - controlled mobile home
park with capacity of 105 households (Mountain View Mobile Home Park). Property
management of residential housing is a 24 -hour, 365 -day responsibility. It requires
expertise in Rent Control, income and asset determinations, tenant rights, accessibility
regulations and practices, maintenance, eviction procedures, mediation with tenants,
and other legal challenges. For economies of scale to occur, many jurisdictions
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delegate property management operations to their Housing Authority as a portion of
their public housing portfolio. As Santa Monica does not operate public housing, it has
contracted with a property management firm to assume the day -to -day property
management responsibilities. Staff oversight of property management is still required
and often involves significant allocations of time. Compounding this challenge is the
reality that residential property management may not be the best fit with City operations.
As a result, staff recommends that all City -owned properties managed by the Housing
Division be evaluated for disposition to other entities. The proceeds from sales of the
properties could be used to fund future housing development. Selling properties would
also eliminate property management costs and indirect staff oversight costs.
The property at 1122 22nd Street consists of a single - family dwelling on a 5,900- square
foot lot. The property is located north of Wilshire Boulevard in a neighborhood of mostly
four and five -unit multifamily buildings. The property is not subject to Rent Control and is
currently unoccupied. The property is in a prime location and would likely be viewed by
buyers as a future development opportunity, given the property's underutilization
compared to surrounding properties. The property would need significant rehabilitation
to occupy and would likely need to be demolished. Staff believes that selling the
property could provide funding for affordable housing opportunities broadly and reduce
City demands associated with maintaining a vacant property. Staff recommends that
Council authorize staff to take the necessary steps to place the property on the open
market for sale. Council would make the final determination regarding an acceptable
offer for the property. Sale proceeds would be deposited in the Housing Trust Fund for
future affordable housing development.
The property at 419 Ocean Avenue consists of seven rental units on an 11,000- square
foot lot and is protected by the Rent Control Charter. This property is also in a prime
location (four blocks north of Montana Avenue) and if placed on the market, would likely
be viewed by buyers as a solid income property or a development opportunity. Although
development potential could have a positive impact on the property sales price, it could
leave the existing tenants vulnerable to a future Ellis Act eviction. Possible solutions to
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this concern include selling the property to a nonprofit housing provider or recording an
affordability covenant on the property's title as a condition of sale. In these scenarios,
the City would realize a reduced price for the property, due to a nonprofit's inability to
pay market price (without a subsidy) or the reduced value that would result from the
affordability restrictions. Another possible solution to protect existing tenants could be to
provide rental housing vouchers to current residents, if qualified as very low- income
households, so they could obtain replacement housing. Staff believes that selling the
property could provide funding for affordable housing opportunities broadly and reduce
City demands associated with maintaining the rental property. Staff seeks authorization
to further explore this opportunity.
Mountain View Mobile Home Park consists of 105 rent - controlled mobile home pads
and is deed restricted through covenants to low- income households. The City recently
completed infrastructure improvements as well as installation of twenty new
manufactured homes to replace travel trailers and outdated mobile homes.
The additional replacement of nine mobile homes with new manufactured homes is
currently underway and will be complete within the next several months. Council
recently approved the Development Agreement for the Village Trailer Park property and
displaced residents may seek relocation at Mountain View. Primary disposition
opportunities associated with the property involve finding a non - profit housing
corporation that would own and operate the property. Staff seeks authorization to
explore opportunities to dispose of the property.
Housing Commission Action
On November 20, 2012, the Housing Commission made the following recommendations
to Council:
Financing Strategies for Affordable Housing
® Dedicate all of the. net new post - redevelopment revenue (after debt payment)
currently remitted to the City that was formerly remitted to the redevelopment
agency for affordable housing.
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• The Commission unanimously recommends that 18 -20 percent of the legally
justifiable Housing Linkage Fee be adopted.
TORCA Loan Program
Revise terms of existing loans to 'due on sale' rather than 20 -year maturity, as
currently required. The Commission was not presented with the option of extending
loan terms for 10 -year periods, as the concept had not been contemplated by staff
when the Commission met.
Compliance Monitoring
Focus monitoring efforts primarily on affordable housing in developments owned by
for - profit entities, where compliance problems have arisen previously. Perform
occasional random tenant file audits of City- funded affordable housing since the
developments are usually monitored by multiple regulatory entities.
City -Owned Rental Properties
• Proceed expeditiously to place 1122 22nd Street property on the market for sale.
Continue to proceed with transitioning 1616 Ocean to OPCC and CCSM.
• Begin exploring the sale of 419 Ocean Avenue and the Mountain View Mobile
Home Park. The Commission is very supportive of identifying a non - profit to own
and operate Mountain View Mobile Home Park.
Calculating Affordable Rents
Maintain current formula for Affordable Housing Production Program which derives
the area median income by taking the published (Los Angeles County area median
income) figure for a four - person household at 50 percent of median and multiplying
by two.
Income Targetinq
Entitlement incentives should refocus priorities to Extremely Low- (30% of median),
Very-Low (50% of median), and low- income households. Moderate — income housing
should only be incentivized for 3- bedroom units for larger families. The extremely -
low income household category should be added to the AHPP criteria.
Next Steps
With City Council direction on the policy issues discussed in this report, HED would
continue to restructure staffing of the Housing Division, pursue new funding
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opportunities, and prioritize core functions. Staff would return to Council to consider a
new commercial /housing linkage fee based on the nexus study in early 2013.
Financial Impacts & Budget Actions
The recommended action will not result in any financial impacts or budget implications.
Should the Council direct staff to develop policy recommendations with potential
financial impacts, those actions will be further analyzed when brought forward to
Council for consideration.
Prepared by:
James Kemper, Housing Administrator, Housing and Economic Development
Approved:
Andy �61 , Director
Housing and Economic Development
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Forwarded to Council:
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Rod Gould i
City Manager