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SR-11-B (2) J" - "'1 . - - . e 11-8 "AR 2 5 1986 t C/ED:PC:AS:wp city Council Meeting: 3/25/86 Santa Monica, California TO: Mayor and City Council FROM: City Staff SUBJECT: Recommendation Regarding Office Development Project Mitigation Measures for Housing and Parks INTRODUCTION This report recommends that the city Council, as part of the establishment of an Office Development Housing and Parks Project Mitigation Program (Mitigation program) as required by the Land Use and Circulation Element, adopt a method for allocating in-lieu fees between housing and parks, and set certain development standards for the Mitigation Program. The report also recommends that the City Council direct the Ci ty Attorney to prepare an ordinance establishing the Mitigation Program. BACKGROUND The Land Use and Circulation Element (LUCE) adopted in 1984 requires that the City adopt a program to mitigate the impact of office development projects on the community. The LUCE specified that the program was to mitigate the impacts of new office development on parks and public open space, and affordable I/-~ MAR 2 5 1986 - 1 - -r - e ~ housing. On January 14, 1986, as part of a discussion of an ordinance to implement this program, the City council directed the city staff to (1) conduct a re-analysis of the basis for the allocation of mitigation fees between housing and parks, and (2) address certain implementation issues of such a program, including a means by which the provision of housing or park space would be required to obtain discretionary approval by the city and a means to ensure that the provision of park space on an office site would not in any way reduce the amount of open space the development would otherwise be required to provide. The following discussion addresses each of these areas. DISCUSSION The Land Use and Circulation Element adopted in 1984 found that new office developments create a need for additional affordable housing and parks, but do not pay the same taxes as other types of development, such as retail, that the City may use to address these needs. Therefore, the LUCE required that the City establish a Mitigation Program to require that office developments mitigate these impacts by either directly providing housing or parks according to formulas based on the demands for affordable housing or park space created by the new developments, paying an in-lieu fee to the City or participating in an appropriate housing or parks production program to be designed by the City. This discussion outlines the basic parameters for a recommended Mitigation Program, including the method for allocating program - 2 - ... - - (1) Allocation of Fees Between Housing and Parks The LUCE requires that the mitigation measures for housing be based on a formula that estimates the number of new office workers to be employed in new office developments who desire to live in the city and whose income limits their housing options to affordable housing. It also requires that the mitigation measures for parks be based on a formula that estimates the number of square feet per 1000 office employees likely to regularly use the city's parks and public open space. In order to meet legal requirements that the Mitigation Program address the needs created by the office developments, and for sound program planning, the Mitigation Program should define standard allocations of mitigation fees between housing and parks. There are two components of the allocation formula. The first component is the estimated demand for housing or parks created by office developments, and the second is the cost of providing the housing or parks. The combination of the demand and cost estimates shown in Attachment fiB" to the LUCE, which was presented to the City council at the time the LUCE was adopted (Exhibi t "A"), results in an allocation of 72% of the in-lieu fees for housing and 28% for parks. This document included cost estimates of $53,740 per housing unit and $62 per square foot of park space, and demand estimates of one housing unit per 7,740 square feet of office space and 4,356 square feet of parks per 100,000 square feet of office space. - 3 - II' - . e - This allocation can be adjusted from the current 72/28% split either by modifying the demand analysis assumptions developed in the HRS study, or by modifying the cost assumptions outlined in Attachment "B" to the LUE. The following sections summarize the staff review of the assumptions used in this Attachment. A. Estimate of Demand The original basis for the mitigation requirement was a demand analysis conducted by Hamilton, Rabinowitz and Szanton, Inc. in 1982 , which surveyed new off ice developments to determine the effects of office development on housing demand and park usage in the city. This study presented a wide range of policy options for decision-makers; indeed, it specified quite clearly that varying the interpretation of the data collected yields substantially differing results. As directed by the City Council, the staff has reviewed the HRS demand analyses again to determine which assumptions may be adjusted without conducting an entirely new study. The HRS study identified several methods of determining affordable housing demand. Demand could be measured according to the number of office workers who qualified for affordable housing and who (1) said that housing costs were keeping them out of Santa Monica, which creates a demand of one housing unit per 1,454 sq. ft. of office space, or (2) said that they would move to Santa Monica if they could, which creates a demand of one unit per 3,283 sq. ft. or (3) by the number who were in both of the above two groups, which creates a demand for one unit per 7,740 - 4 - ~ e e square feet of office space. The demand for affordable housing that was used in the LUCE was based on the third assumption, which was the lowest demand possible resulting from the HRS analysis. This produced a demand for affordable housing equal to 3.23% of the office workers in the average building. It is not recommended that the Mitigation program change the assumptions about housing demand at this time. The assumptions used to determine the demand for parks created by office development were based on the Parks and Recreation Commission' s standard for parks and open space, which is 2.5 acres per 1,000 residents. This standard for residents was adjusted to reflect the number of office workers who responded to the HRS survey indicating that they used the city's parks, and an estimate of the amount of time that those office workers spent in the City. The HRS study found that 40% of the office workers who responded to the survey used the city1s parks. The most flexible assumption in this formula was the estimate of the amount of time spent by office workers in the City's parks, as compared to the amount of time spent by residents. Attachment liB" to the LUCE estimated that office workers were in the city about 25% of the time that residents were here. Various complicated methods of estimating this amount of time can be used, including calculating the number of dayl ight evening and weekend hours spent in the City by residents, the number of lunchtime and after work hours spent in the parks by office workers, and the number of daylight hours spent in the city by non-resident office workers who would usually be working in their offices. One of the most direct - 5 - "" " e e methods of adj usting the assumption that office workers spend twenty-five percent of the time that residents spend in the City would be to use the percentage of the daytime population made up by office workers. According to the HRS study, office workers comprise forty percent (40%) of the daytime population of the city. If this figure is used in the formula the demand for park space per 1,000 office workers increases significantly, as shown below. Table 1: Demand for Park Space A. Original Demand Formula: 400 employees (@ 1 employee per 250 sq. ft.) x .40 (percent of office workers who use parks) x .25 (time in city) x 108,900 sq. ft. (2.5 acres) = 4,356 square feet of park space B. Revised Demand Formula: 400 employees (@ 1 employee (percent of office workers who City) x 108,900 = 6,969 square per 250 sq. ft.) x .40 use parks) x .40 (time in feet of park space NOTE: Example is based on 100,000 sq. ft. office building B. Estimate of Costs The second component to the mitigation program formula is the cost of providing affordable housing or parks. The costs of providing subsidized housing or parks presented in Attachment IIBII were $53,740 per housing unit, and $62 per square foot of park space. The actual costs of both housing and parks will vary depending on the type of housing construction or park improvements and on the cost of land. The ranges of actual cost estimates are shown in detail in Exhibit "B" to this report. - 6 - r e e Based on the city's experience in affordable housing programs over the past few years, if it is assumed that the City could use funds received through the in-lieu fee program in the most effective manner po~sible, the per unit subsidy would be $30,060. The parks costs could range from $22 to $70 per square foot of improved park space. These costs will vary based on different assumptions of the value of park land, particularly in a prime office development area. As discussed in the implementation issues section below, it is reasonable that the value of land used in on-site park development be reduced if the park area is included in the development's Floor Area Ratio (FAR) calculation. It is recommended that the midpoint of the range, which is $48 per square foot as shown in Exhibit "B", for parks costs be used in the Mitigation Program. c. Use of Demand and Cost Estimates to Develop New Formula The previous two sections indicated that the demand analysis for either housing or parks can be adjusted by using different assumptions, and the cost estimates can vary significantly. As shown in Exhibit "D" to this report, if the demand estimates are adjusted to increase the percentage of time office parks users spend in the City's parks, but the original cost estimates are not adjusted, the allocation of fees between housing and parks would be approximately 60% and 40%, respectively. This exhibit also shows that adjusting the range of actual cost estimates, but not adjusting the demand analysis, can produce a split between 51%/49% to 93%/7% for housing and parks respectively. - 7 - <'" e e Another approach is out1 ined in Table 3, which presents three possible scenarios based on (a) the original allocation formula, (b) the allocation formulas with revised costs, and (c) the formulas with both revised costs and revised demand. Table 3 A. Housing: 12.92 units x $53,740 = $694,320 (72%) Parks: 4,356 sq. ft. x $62 = $270,072 (28%) Total = $964,392 B. Housing: 12.92 units x $30,060 = $388,375 (65%) Parks: 4,356 sq. ft. x $48 = $209,088 (35%' Total = $597,463 C. Housing: 12.92 units x $30,060 $388,375 (50%) Parks: 6,969 sq. ft. x $48 = $334,512 (50%) Total = $672,887 Note: The formula for housing mitigation is based on the cost estimate of $30,060 in subsidy per affordable unit, and the parks formula is based on the midpoint of the parks cost range, which is $48 per square foot of improved park space. The City Council could adopt one of the above formulas as part of the Mitigation Program. However, in order to provide additional flexibility in the use of the in-lieu fees it is recommended that the City council permit ten percent (10%) of the funds to be used in either category, and allocate the remaining ninety percent (90%) between housing and parks according to one of the allocation formulas. To further enhance the flexibility of the program it is recommended that the Mitigation Program allow the Planning Commission and the City Council to approve specific office projects that include on-site parks or housing units in different ratios than required by the allocation formula, provided that the - 8 - ~ .-- e e overall allocation of fees and actual in-kind developments be maintained within the Mitigation program. For example, an office development that is required to provide 5,000 square feet of park space and twelve housing units could provide more than 5,000 square feet of park space and fewer housing units. As additional fees were paid from subsequent projects they would then be allocated in greater proportions to housing until the overall allocation was brought into balance. This provision is described in greater detail in the following section on "Equivalent units of Exchange". (2) Implementation Issues In addition to the allocation of mitigation requirements between housing and parks there are a number of issues concerning the implementation of the mitigation program that require resolution. These include the need to have "equivalent units" of exchange for valuing mitigation measures provided on-site rather than paid in fees, the guidelines for on- or off-site provision of mitigation measures, and the establishment of a mechanism for discretionary approval of any in-kind provision of mitigation measures. (1) Equivalent Units of Exchange If all or a portion of the housing or park space needed to satiSfy project mitigation is provided on-site or off-site by the developer, a mechanism to value the housing or park space is needed to determine the credit the developer should receive toward the mitigation fees. The LUCE established a cap on in-lieu fees of $2.25 for the first 15,000 square feet, and $5.00 for - 9 - or e e every square foot thereafter. New construction projects with fewer than 15,000 square feet and additions to existing offices of less than 10,000 square feet are automatically exempted. As shown in Exhibit "D" this "economic cap" fee is much lower than the actual costs of providing housing or parks. Because the provision of these measures on-site is almost always more costly than the payment of the fees, no developer has as yet opted for the on-site satisfaction of these requirements. To date, three office developments with a total of 208,450 square feet have received approvals from the Planning Commission and entered into third party agreements to pay mitigation fees of $830,000. Another 140,000 square feet of office developments are in the pipeline and will produce in-lieu fees of approximately $550,000. The use of an equivalent unit of exchange is needed in order to value housing units and park space if a developer wishes to satisfy only a portion of the mitigation requirement on site and pay the balance in fees, or wishes to provide more on-site park space or housing than would be required and receive a credit of the balance toward the housing or park fee. In order to determine the value of these mitigation measures we can use the averaged allocation of housing and parks fees, and the housing subsidy and parks cost per unit or square foot, to determine the equivalent - 10 - (' - e unit of exchange, as shown in the following example: Sample Building - 100,000 Total in-lieu fee $458,750 x 50%* (housing) $458,750 x 50%* (parks) sq. ft. net rentable - $458,750 - $229,375 - $229,375 Average Cost per Affordable Housing unit - $30,060 Average Cost per Square Foot of Park - $48 $229,375 / $30,060 per unit = 8 affordable units $229,375 / $48 per sq. ft. = 4,778 sq. ft. of improved park. *Note: This 50%/50% split is used as an example only. Thus, if this method were used, the developer in this example would have the option to pay the in-lieu fee or to provide on or Off-site, with City approval, eight units of affordable housing, and 4,778 square feet of improved park space. If the developer provided only five units of housing then the economic equivalent of three units, multiplied by the average cost of $30,060 per unit, would be due the City in in-lieu fees, in addition to the fees for the parks mitigation. If the developer were to provide, with city approval, additional square feet of park space and receive credit for this additional park space against the housing portion of the requirement, then the value of the in-lieu fees for the park space in excess of the park requirement would be due to the housing portion of the fund from subsequent in-lieu payments from later developments. It should be noted that other methods of establishing the value of on-site housing or parks were considered prior to developing this recommendation. In particular, the idea of using the actual fair market value as based on an appraisal was considered. However, the question of how to value a parcel of land for a park - 11 - .. - e that has no buildable value, because the office development has used the park site for establishing the FAR, is a very difficult one that would have to be resolved before the city could determine the assumptions that could be used in an appraisal. Therefore, it is recommended that the equivalent units of exchange of $48 per square foot of improved park space, and $30,060 per affordable housing unit be used to determine the value of on or off-site parks and housing developments. (2) Guidelines for On- or Off-Site Mitigation Measures If park space or housing is to be developed on or off a project site to mitigate the proj ect impacts , it is necessary to set forth clear standards to ensure the developments are consistent with City goals and policies. The following standards are recommended for inclusion in the mitigation program: General Standards: o The developer has a right to pay the in-lieu fees and may not be required to provide any parks or housing on- or off-site. The only exception to this is in the Special Office District defined in the LUE, which states that the open space must be provided on site if the development is allowed by the Planning Commission to exceed the standard height limits. o The developer may satisfy all or a portion of the mitigation measures on- or Off-site only with a conditional Use Permit, or a Development Agreement approved by the Planning Commission or the city Council. - 12 - ~ e e o Prior to issuance of a building permit for an office project developers shall post a security device in a form acceptable to the city, in the amount of the in-lieu fee securing payment of the fees in a timely manner. The Mitigation Program Ordinance shall establish provisions ensuring that the actual development of housing or parks by office developers be completed in a timely manner, and that adequate security devices are provided to the City to ensure that the housing or parks are completed. o New housing or parks developments shall be under construction within two years, and must be completed within four years, after issuance of the Building Permit for the office project. Park standards: o All required setbacks shall be provided and shall not count as park space. Park space must be separated by a clearly defined physical barrier, such as a fence, hedge or landscaping treatment, from the office building. The physical barrier must be separated from the office buildings by the normally required setback. o The minimum approvable park size shall be one-half acre (21,780 square feet). o Park space shall be accessible to the general public directly from public thoroughfares. Parks shall be located so as to be highly visible from the surrounding streets. o Parking spaces for the park shall be provided according to a demand analysis. The parking for the park may be included in the - 13 - .. < e e park space square footage if the parking is dedicated solely to park users. If the parking spaces are included in the park square footage they may not be used as additional office or visitor parking. o Park space shall be improved to the standards set by the Planning commission upon the advice of the Department of Recreation and Parks, or to the satisfaction of the City Council upon appeal of a decision of the Planning Commission. o Park space shall be dedicated to, and maintenance shall be the responsibility of, the City unless alternative mutually acceptable arrangements are made. o I f any park space improvements required by the city can be clearly demonstrated to exceed the average of $6.00 per square foot used in this report, as averaged for the entire park and adjusted for inflation from the date of the adoption of the ordinance, the cost in excess of $6.00 per square foot shall be credited to the office developer against the Mitigation Program requirements. The burden of proof of excess cost shall lie with the developer, and the Planning Commission or City Council shall clearly approved any excess expenditure as part of the approval process. - 14 - . . e e Housing standards: o All of the units provided on- or off-site must be affordable to households earning no more than 120% of the median area income, as published by the U.S. Department of Housing and Urban Development from time to time. o The formulas for establishing rents shall be the same as those used in the city's inclusionary housing program. o Units that are required to be provided on or off-site under the terms of a Removal penni t from the Rent Control Board by an office development that will displace existing controlled rental units may not be counted towards satisfaction of the mitigation requirements. o Housing developed as part of the mitigation program shall be targeted primarily to low and moderate-incom.e families. Units shall have an average of at least two-bedrooms. o Prior to approval of a permit for on-site or off-site housing the developer must submit a managment plan describing how tenants will be selected and how the building will be managed to ensure that the developer has the capacity to manage affordable housing. o Units developed under the Mitigation Program shall be deed-restricted for at least fifty years to ensure long-term affordability to low and moderate income residents. - 15 - . e BUDGETARY I FISCAL IMPACT This ordinance will result in the receipt of housing and parks funds. There is no budgetary or fiscal action required at this time. RECOMMENDATIONS It is recommended that the city Council: (1) Adopt a formula to allocate ninety (90%) of the the Office Mitigation Program in-lieu fees between housing and parks, and permit the remaining ten percent (10%) to be used for either purpose; and (2) Direct the city Attorney to prepare an Ordinance establishing a Mitigation Program as described in this report. Prepared by: Peggy curran, Acting Director Ann Sewill, Housing Program Manager Department of Community and Economic Development Attachments: "AIf - Attachment "B" to the LUE "B" - Ranges of Estimated Housing and Parks Costs "c" - Comparison of Actual Costs and Cap on Fees "0" - Adjusted Demand and Cost Estimates - 16 -