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F:\HOUSING\SHARE\WPFILES\ST AFFRPnlNCLUCC2 WPD
Council Meeting: Apnl14, 1998 Santa Monica, California
TO Mayor and Members of the City Council
FROM CIty Staff
SUBJECT Recommendation to Direct the City Attorney to Prepare an Ordinance
Implementing Revisions to the City's 'nclusionary Housing Program by
Enacting an Affordable Housing ProductIon Program
Introduction
Staff recommends that the City Council direct the City Attorney to prepare an ordinance
Implementmg revisions to the City's Incluslonary Housing Program which requires
developers of market rate multifamily housing to pay an affordable housing development
fee to the City, or choose from among other specified alternatives to payment of a
development fee. This staff report transmits a report prepared by Hamilton, Rabinovitz &
Alschuler, 'nc (H R&A) dated April 6,1998 (Attachment A) that presents HR&A's analysis
and recommendations for revising the Inclusionary Housing Ordinance, Santa Monica
Code Section 928 etseq . commonly known as Ordinance 1615. Background Information
regardmg the Ordinance revision process to date IS also Included.
Background
On November 6. 1990, the voters of the City of Santa MOnica approved Proposition R.
adding Section 630 to the City Charter Proposition R (AppendiX UA" of Attachment A)
prOVides that the City Council, at all times, require that not less than 30% of all multifamily
reSIdential hOUSing newly constructed In the City, on an annual baSIS, be permanently
affordable to and occupied by low- and moderate-Income households. It further requires
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that at least 50% of those umts be affordable to "low-income households" defined as not
exceeding 60% of median Income, and the remainder be affordable to "moderate-income"
households defined as not exceeding 100% of median Income
At vanous meetings In 1991, City Council considered strategies for implementation of
Proposition R On March 4, 1992, City Council adopted Ordinance 1615 (Appendix "An of
Attachment A) Subsequently the City Council adopted amendments which requIre the
provision of on-site Inclusionary units in most circumstances and allow payment of a fee
in other limited circumstances.
On June 9,1992, the City Council adopted a resolution which established the incluslonary
unit base price for purposes of calculating the In lieu fee option Those fees were
determined by assessing what, on average, it cost the City to subsidize the construction
of a new residential umt. This analysIs covered a thr::e year penod. On average, the per
unit cost of these subsidies was $51,032 Thus, the incluslonary unit base price for
determining in lieu fees was set at $51,000 Pursuant to Section 928.070(c) of the
IncluSlonary housing ordinance, the lnclusionary umt base price shall be adjusted by the
Consumer Price Index (CPI) between the date of adoption of the Resolution establishing
the base price through the month in which payment is made Currently the fee is
approximately $56,055.
In Apnl1 995, the City initiated the 1998-2003 Housing Element Update As part of thiS
Update, HR&A analyzed whether certain of the City's programs operated as actual or
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potential governmental constraints on new housing development within the meaning of
Government Code Section 65583(a){4) In assessing this Issue, HR&A selected several
financial feasibility thresholds for consideration. These thresholds established the pOint
at which HR&A believed a reasonably well-lnformed and experienced property owner or
developer with an average multifamily housing project would elect not to pursue that
project because of the cost of complYing wIth a City program, regulation, or procedure.
Based on HR&A's approach, projects which would result In a financial return below these
thresholds would be deemed "Infeasible", for purposes of the constraint analYSIs, since the
experienced property owner would not develop the project given that the financial return
would be insuffiCient when measured against other Investment opportunities. In analyzing
the City'S eXisting Incluslonary Housing OrdInance, HR&A determmed that It operated as
a potential constraint Under current market condn:lons, average apartment and
condominium projects In the R2 Dlstnct were found not feaSible even without the
Inclusionary hOUSing requirement However, were market conditions to Improve to the
pOint where multifamily construction was feaSible, HR&A concluded that the Incluslonary
HOUSing Ordinance would operate as an actual constraint.
The Housmg Element has gone through extensive pubhc review. On Apnl15, 1997, the
City Council approved the HOUSing Element in concept.
Program 2.a of the City'S Draft Housing Element reqUires review and reVision of the City's
lncluslonary HOUSing Ordinance SpeCifically, the HOUSing Element states' "Study modifi-
cabons of the City's Incluslonary HOUSing Program (Ordinance 1615) whIch would help
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support new housing production in a way that balances thIS production with maintenance
and conservation of eXIstIng housIng stock, while complying with Proposition R "
At the same meeting where the City Council gave conceptual approval to the Housing
Element, the Council directed staff to prepare an amended Incluslonary Housing
Ordinance
On July 8, 1997, CIty Council approved the select/on of HR&A to prepare analyses relating
to modifications to the City's Incluslonary Housing Ordinance. HR&A has provided
assistance to staff In conductmg public workshops and hearings to gather public Input on
the existing program It's scope of work has been dIVided mto three phases, from mid-July
through April 1998. These phases Include: 1) research and analYSIS prior to articulation
of preliminary concepts; 2) review and presentation of prefiminary concepts through public
workshops, study sessions and public hearings, and 3) final recommendatIons of an Imple-
mentation program and revIew With decision makers. Based on comments from the
Commissions and the public who testified before them, and after further diSCUSSions With
City staff, HR&A has developed a final recommendation to reVise the Crty's Incluslonary
HOUSing Program.
Discussion
F or more than a decade, the CIty of Santa MOnica has required developers of market rate
multifamily housing (I e., apartment buildmgs and condominium projects) to help offsetthe
Impacts that their projects have on the City'S household income balance and in order to
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comply with State and City law and local housing policies. Proposition R requires that 30
percent of all new multifamily construction each year be affordable to low- (60% of median
Income) and moderate-Income households (100% of median Income). The PrOposition
requires that the City Council adopt an ordinance to Implement its requirements. It does
not, however, mandate the project-by-proJect inclusionary housing production approach
established by Ordinance 1615, as enacted In 1992
Dunng its consideration of the 1998-2003 Housing Element Update, the City Council
concluded that the current developer requirement, the Incluslonary HOUSing Program as
embodied in Ordinance 1615 and related gUidelines, needs to be changed to address
problems With the program, changes In the local hOUSing market, State law, and the
funding environment for affordable hOUSIng.
After considering public comments on SIX conceptual alternatives to Ordinance 1615 that
were reviewed in workshops and public hearings over the past SIX months, It is recom-
mended that the City discontinue the current project-by-project incluslonary housing
production approach, and Instead enact a new Affordable HOUSing Production Program
that requires developers of market rate multifamily hOUSing to pay an affordable hOUSing
developmentfee to the City, or choose from among other specified alternatives to meetthe
requirement. The fees would be pooled and leveraged With other available funding to
develop hOUSing affordable to lower-income households, through the auspices of non-
profit, community-based development organJzabons The revised program would also
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allow developers to Include affordable umts In their projects, bUild affordable units on other
Sites, or perform other actions that assist the development of affordable housmg.
Summary of Recommended Affordable Housmq Production Proqram
The recommended program has the following general features
. Development Fee. Developers of market rate multifamily projects (Le , two or more
Units), may elect to pay an affordable hOUSing development fee to the City,
assessed on a per-gross square foot baSIS
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Base Fee Amounts. Base fees will be established by ResolutIon ofthe Crty Council,
after conSidering, among other factors, the feasibility of the base fee for typical
market rate multifamily development projects (constraint analysis) and the nexus
between market rate multifamily development and the need for affordable hOUSing.
Simulations of the feaSibility oftyplcaJ multifamily projects, undertaken as part of the
constraint analysIs, indicate that there IS a reasonable basis to vary the fee by area
ofthe CIty (e.g ,one fee north of Wilshire Boulevard and in Ocean Park, another fee
for all other areas), and by product type (apartment versus condominium) While
there IS justification for varyIng the fee by area of the City staff recommends, for
ease of administration, that the fee vary only by product type.
. Fee Reductions as an Incentive to Minimize Tenant Displacement. Because It is
City policy to reduce adverse impacts of new development on the City'S supply of
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existing rental housing, It is proposed that the fee be reduced for multifamily projects
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Sites that are vacant (multifamily or non-residential)
Non-residential sites (i e , commercial or Industnal zOning dlstncts)
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On-Site Affordable Housmg Production Option. As an ~ltemative to paying an
affordable housing development fee, the developer of a new market rate multifamily
project may elect to include units affordable to lower-income households in the
project. If the proportion of such units matches the mimmum thresholds needed to
qualify for the State-mandated density bonus (I e , 10% affordable at 50% or less
of Median Income, or 20% affordable at up to 60% of Median Income), new zoning
f1exlbiht,es are proposed to be pennltted by the City The program will Include
further speCifications about the on-site affordable units (e g., qualifying household
incomes and minimum 2-BR umt sizes).
· Other Affordable Housing Production Options. Developers may also choose to
perform other actions which assist in the production of affordable housing, such as
off-site construction of affordable units within a one-half mile radius of the market
rate project or purchaSing or optioning land for an affordable hOUSing development.
Staff has relied on the expertJse of HR&A to proVide the threshold for assessing when a
development fee would operate as a constralnUo market rate apartment and condominium
development. Tables 3A and 38 in the HR&A report proVided In Attachment "A" indicate
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the development fee amounts that HR&A beheve could be charged That fee could range
from four to eight dollars per square foot for condominiums and from five to six dollars per
square foot for apartment proJects, without crossing the line that defines a "constraint".
HR&A's analysis of the developer profit margin threshold IS based on a return on equrty
model. The analysIs suggests that a threshold 40-50% return IS needed by developers of
condominiums for a project to be ~easlble" An assumption behind what is a feasible
threshold return is that the return IS not annual, but, rather, a return taken after the project
is developed and the Units are sold. ThiS said, staff beheves there may be other more
appropriate approaches to determimng what is a feaSible return, and one or more of these
approaches will be presented as part of the presentation of this staff report
The constraint-determined fee ranges shown in HR&A's report will not be enough to
compensate the City for the cost of producing new affordable housing. For a typical five-
Unit apartment project, fee revenue denved within the constramt-determined range is equal
to about one..quarter (28%) to almost one-third (34%) of the City'S subsidy gap for a new
lOW-Income Unit For a condominIUm version of the same project, the constraint-
determined fee revenue equates to Just under one-quarter (23%) to Just below one-half
(45%) of the City's subsidy gap for a new low-income unit. Stated another way, i1 would
take between 15 and 18 units of market rate apartments or between 11 and 22 new
condominium umts to generate enough fee revenue at the constralnt-detemllned fee levels
to equal the average City subsidy gap needed for one new unit affordable to a low-income
househoJd.
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A "nexus" study is also being prepared by HR&A under separate cover and will be provided
to the City Council at the time It IS presented with a draft Implementation ordinance.
Public Meetings
The recommendatIOns for a new Affordable Housmg Production Program (Revised
Incluslonary Housing Program) take Into consideration comment~ from the Commissions
and the public who testified before them SIX conceptual alternatives to Ordinance 1615
were identified and discussed with the public and City decision makers beginning In
September 1997. More specifically, a Public Workshop was held September 7. 1997 that
Included an open house segment where participants viewed and commented on display
panels that explained the current Inclusionary Program and possible conceptual
alternatives. A presentation wrth group discussion about the eXIsting Incluslonary Program
and conceptual alternatives was conducted Subsequently, Public Heanngs and Study
Sessions were conducted at the September 10, 1997 Planmng Commission meeting, at
the September 18, 1997 HOUSing Commission meeting, and at the October 7, 1997 City
Council meeting.
Preliminary recommendations were presented to the HOUSing Commission on February 19,
1998 and to the Planning Commission on March 5, 1998. In addition, staff conducted a
Public Workshop on March 26, 1998 to proVide the publIc an opportumty to diSCUSS the
preliminary recommendations before coming to City Council with a final recommendation
All Council and CommiSSion Meetings and Public Workshops were noticed in the local
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newspaper and notices were mailed to the Planning Division's List developed for compre-
hensive planning projects.
Planning Commission Recommendations
The Planning Commission recommendations are attached to this report as Attachment B.
In summary, the Planning CommisSion recommends adoption of the preliminary
recommendations for revising the City's Incluslonary Housing Program as outlined in the
February 4, 1998 report by HR&A. The Planning CommiSSion, however, identified several
key Issues for City Council conSideration
1. Development Fee - The fee imposed should be set at a level which would
actually generate funds to support affordable housing development but not hIgher
than IS feaSible for the average development project
2. Development Fee in Commercial Areas - Look at/compare Office Mitigation
Fee to ensure no disincentive to develop multifamily residential rather than
commerCial use.
3. Tenant Displacement - Develop a relocation program to provtde assistance
to tenants displaced by demolition of their buildings for new construction proJects.
4 On-Site Affordable Housing - In the event that Prop R's 30% annual requirement
of low/moderate hOUSing IS not met and as a result permits for residential
development are stalled, allow a development project whIch prOVides on-site
afford able Units to proceed.
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Housinq Commission Recommendations
The Housing Commission recommendations are attached to this report as Attachment C
In summary, the Housing Commission supports the preliminary recommendations for
revising the City's Inclusionary Housing Program as outlined in HR&A's February 4, 1998
Report. The Housing CommiSSion agreed that the City must aggressively pursue a vanety
of strategies to both Increase (through new construction) _and preserve (through
acqUisition/rehabilitation proJects) affordable housing to comply with State law and local
housing policies. The Housing CommiSSion believes that the proposed new Affordable
Housing Production Program IS only one part of that strategy and urges the City Council
to conSider additional sources of revenue for affordable housmg construction and
preservation
The Housing CommiSSion Identified additional areas for City Council conSideration in
revIsing the Inclusionary HOUSing Program
1. Development Fee - The development fee should be in the range of $5 to $8 per
square foot based on the "constraint" thresholds Identified In HR&A's memorandum
dated February 4, 1998.
2 Qevelopment Fee for Commercial Properties and Vacant Land - The new
program should include a reduced fee In commercIal areas to encourage reSidential
development on commercial sites and on vacant multifamily parcels The relation-
shIp between the new fee and the current Office Mitigation Fee should be reViewed
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3 PeriodIc Fee Recalculation Criteria - The new program should include crltena to
revIew and recalculate the development fee and other program elements on a
regular basis.
March 26, 1998 Public Workshop
A Public Workshop was held on March 26, 1998 to provide the public with an opportunity
to both comment on and ask questions about the Preliminary Recommendations to revIse
the Inclusionary Housing Program, the Draft Housing Element, and proposed changes to
the R2 and R3 development standards to accommodate denSIty bonus Units Comments
from the public at the March 26 Workshop focused on a number of issues (Attachment D)
The major Issues regarding revisions to the CIty'S Incluslonary HOUSIng Program which
engendered comment Included
1 Development Fee - Concerns were expressed regarding how the development
fee will be set If the development fee is set too low it will encourage recycling of
eXisting housing How was a reasonable rate of retum to developers calculated?
2. Tenant Displacement- Existmg tenants will be displaced Ifthe development fee
IS set too low. Specifically, PIca Neighborhood resIdents expressed concern that
their neIghborhood would expenence a greater recycling of properties and therefore
a greater rate of tenant displacement than other areas of the City
3. Se/eellon of Tenants for On-Site Affordable Housing/Priontize Santa Monica
ResIdents - A maJonty of Workshop participants expressed a deSire to see Santa
Monica residents prioritized for selection in on-site affordable units.
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Projects Completed Subject to Ordinance 1615
A summary of completed multifamily projects, subject to Ordinance 1615 (based on
Certificates of Occupancy issued from Apnl1, 1992 to March 31, 1998), has been proVIded
for City Council information (Attachment E-1) A total of 10 projects, consIsting of 151
unrts, have been completed subject to Ordinance 1615. A total of 5 pnvately-financed
projects, consisting of 28 units, have been completed subject to Ordinance 1615 The
nettotal of privately-financed new Units completed, subject to Ordmance 1615, IS 22 units
(6 Units were demolished prior to construction). Of the 28 total units completed, subject
to Ordinance 1615, 6 units were made available for low/moderate Income households, or
21% of the units that received a certificate of occupancy.
During the same period. another 5 projects or 123 unrts that received a City loan received
Certificates of Occupancy. Of those 123 units that received a City loan, 22 Units were
constructed by a non-profit and an were affordable to low/moderate income households.
It is Important to note that these totals include multifamily residential projects approved
subject to Ordmance 1615. There have been other projects approved under other
lnclusionary OrdInances or under the Earthquake Recovery Act that have received
Certificates of Occupancy since February 11, 1992.
Projects With BUlldlnH Permit Issued Sublect to Ordinance 1615
Also attached to this report IS Attachment E-2, "List of Completed Multifamily ProJects-
Bulldmg Permits Issued Per Ordinance 1615", which IS Included for your InformatIon and
companson purposes Attachment E-2 shows bUilding permits that were Issued for 12
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multifamily residential projects containing 244 Units Of these 244 units, approximately
83% were affordable to low/moderate income households Of these affordable unrts,
approxImately 40% were constructed by non-profit organizations.
Projects with Planning Approvals Issued Subject to Ordinance 1615
Attachment E-3 to this report, "List of Multifamily Projects Planning Approval Received Per
Ordinance 1615", shows planning approvals have been obtained for 16 projects totaling
643 Units Approximately 40% of the projects ISSUed a planning permit were affordable to
low/moderate Income households. Of these affordable units, approximately 27% were
constructed by non-profit organizations.
BudQetary/Financiallmpact
The amount of fee revenue produced as a result of these amendments depends on the
number and scale of projects that apply for permits Development fees collected pursuant
to a new ordinance would be deposited Into a deferred revenue account until they can be
programmed for use In accordance with established budget procedures and necessary
CounCil approvals. Approval of the new Affordable Housing Productron Program does not
have a finanCIal or budgetary impact at thIS time.
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Recommendation
It is recommended that the City Council dIrect the City Attorney to draft an ordinance
Implementing the Affordable Housing Production Program recommended in the HR&A
Report, Recommendations for Revising the City of Santa Monica's Inclusionary Housing
Program dated April 6, 1998 (Attachment A)
Prepared by
Attachments
Jeff MathIeu, Director, Resource Management Department
Robert T. Moncrief, Housing Manager
Johanna Gullick, Housing Coordinator
Attachment A April 6,1998 HR&A Report, Recommendations for Revising the City of
Santa Momca's Inclusionary Housing Program
Attachment B Planning Commission Recommendations -Incluslonary Housing Program
Revisions
Attachment C
Attachment 0
Attachment E.1
Attachment E-2
Attachment E-3
Housing CommIssion Recommendations -Incluslonary Housing Program
Revisions
Public Comments from March 26, 1998 Public Workshop
List of Completed Multifamily Projects - Certificate of Occupancy
Received, Developed Per Ordinance 1615
List of Multifamily Projects - Building Perrmts Issued Per Ordinance 1615
List of Multifamily Projects - Planning Approval Received Per Ordinance
1615
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