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SR-08-25-2015-4A City Council Report City Council Regular Meeting: August 25, 2015 Agenda Item: 4.A 1 of 24 To: Mayor and City Council From: Andy Agle, Director, Housing and Economic Development Subject: Study Session regarding Affordable Housing Financing Recommended Action Staff recommends that the City Council review, comment, and provide direction regarding the current state of affordable housing in Santa Monica and opportunities to increase financing for affordable housing. Executive Summary To support the Council’s consideration, this staff report provides different ways to assess the current need for affordable housing in Santa Monica, as well as potential options for creating a stable funding source to support the preservation and production of affordable housing. Background Santa Monica has a long history of supporting social equity, housing affordability, and an inclusive community. Santa Monica voters first expressed their support for housing affordability with the adoption of the rent-control charter amendment in 1979. Residents continued to affirm the importance of an inclusive community with the adoption of Proposition R (1990), requiring that 30 percent of all new multifamily housing be affordable to low- and moderate-income households, and the adoption of Proposition I (1998), authorizing the City to participate financially in creating affordable housing equal to one-half of one percent of the existing housing stock annually (approximately 250 residences.) A third local initiative, the Tenant Ownership Rights Charter Amendment (TORCA, 2002), amended the charter to direct the use of TORCA condominium conversion fees toward affordable housing. Council has further facilitated affordable housing through the adoption of land use incentives and administrative funding guidelines to streamline affordable housing 2 of 24 preservation and production. The Land Use and Circulation Element of the General Plan identifies affordable housing as a primary community benefit associated with new development. The Affordable Housing Production Program (AHPP) requires developers of multifamily housing to contribute to affordable housing through a flexible framework to help the City meet its affordable housing goals. Finally, the Commercial / Housing Linkage Fee requires new commercial development to address affordable housing by paying an impact fee. Since the dissolution of the Santa Monica Redevelopment Agency in 2012, the City’s primary funding source for the production and preservation of low-income housing has been lost. During its final ten years, the Redevelopment Agency accounted for between 80 and 95 percent of Santa Monica’s funding for affordable housing preservation and production. In November 2014, Santa Monica voters considered a ballot measure to increase the local real estate transfer tax, as well as a companion measure to direct all funds toward affordable housing if the transfer tax increased were approved. While a majority of voters supported directing funds toward affordable housing, the transfer tax increase failed to receive majority support. As a result, the City is left without a significant, stable source of funding for affordable housing. The Housing Commission has prioritized its efforts for 2015 to focus on affordable housing finance. The Commission has hosted a series of speakers, including current and former mayors, non-profit affordable housing organizations and social service organizations, and City staff, to speak to the relevant topics. To complement Council’s deliberations, the Commission expects to prepare recommendations before the end of the calendar year. The following provides background information regarding the history and current status of housing affordability in Santa Monica, including rent control, deed-restricted affordable housing, and potential means for measuring the need for affordable housing in Santa Monica. Rent Control The adoption and implementation of rent control ensured a wide range of housing affordability in Santa Monica during its first two decades. However, the California 3 of 24 Legislature passed two laws that critically affected the continued ability of local rent control laws to ensure housing affordability within the rent -controlled stock. The first, passed in 1985 and known as the Ellis Act, allowed property owners to go out of the rental housing business and thereby remove rent-controlled housing. In Santa Monica, the Ellis Act has been used to demolish existing rent -controlled apartments to be replaced by a variety of other uses, including for-sale condominiums, single-family dwellings, apartments, and commercial uses. The 2014 Rent Control Board Consolidated Annual Report shows that nearly 2,000 rent -controlled apartments have been removed pursuant to the Ellis Act. The second major impact on rent control came from the state legislature’s 1995 passage of the Costa-Hawkins Act. The Costa-Hawkins Act allows a property owner to increase the rent on a rent-controlled apartment to market rate whenever an apartment becomes vacant. The law went into full effect on January 1, 1999. The 2014 Rent Control Report shows that nearly 67 percent of rent-controlled apartments have been rented at least once at market rates since the 1998. Through 2014, the impacts of the Costa-Hawkins Act are that approximately 18,780 apartments have been rented at market rates since 1998, while the remaining approximately 8,980 apar tments serve tenants at long-term controlled rents. The net effect of Costa-Hawkins has been a dramatic reduction of Santa Monica apartments that are affordable to low- and moderate-income households. In 1998, approximately 60 percent of the total housing supply in Santa Monica was affordable to low- and moderate-income households. By 2014, approximately one-third of the housing supply was affordable to these households, reflecting deed-restricted affordable housing, nearly 9,000 long-term rent-controlled apartments, and approximately 3,900 rent-controlled apartments that have rented at least once at market rates (presumably in the early years after vacancy decontrol took effect.) The Rent Control Annual Report demonstrates that long-term rent-controlled apartments continue to go to market each year, ranging between 400 and 550 apartments each year over the last five years. At the current rate, the long - term rent-controlled stock will have mostly disappeared within the next 18 to 20 years. The remaining apartments that are affordable to low- and moderate-income households primarily will be those that contain deed restrictions, including newly constructed 4 of 24 affordable housing as well as existing apartments that were purchased, rehabilitated, and deed restricted by non-profit affordable housing organizations. Deed-Restricted Affordable Housing For several decades, the City has implemented policies and programs to increase the supply of deed-restricted residences that are affordable to low- and moderate-income households. The strategy primarily involves three components: 1. Public financing to support the acquisition, rehabilitation, and deed restriction of existing housing; 2. Public financing to support the construction of new deed-restricted housing; 3. Deed-restricted housing developed by private, for-profit organizations pursuant to the AHPP or development agreements. Currently, there are approximately 4,500 residences in Santa Monica that have been deed-restricted pursuant to the three strategies above, a s identified below: Deed-Restricted Residences Acquisition / rehabilitation 1,096 New construction City-funded 1,845 HUD-funded (no City funding) Inclusionary (AHPP, DAs) 529 966 TOTAL 4,436 Each strategy has played an important role in the City’s affordable housing program, as discussed below: Acquisition and rehabilitation For over three decades, the City has made loans to non-profit housing organizations to purchase existing apartment buildings, which were primarily built before 1979 and are subject to rent control. Once acquired, the non -profit organizations rehabilitate the buildings, including replacing major systems (roofs, windows, electric service, plumbing, 5 of 24 etc.), abating any toxic materials (asbestos, lead), and installing energy-efficient appliances and systems. All apartments are deed-restricted for occupancy by low-income households, though existing tenants are protected by rent control and are allowed to stay in their homes, irrespective of their incomes. Consequently, the deed restrictions apply to new tenants. Acquisition affords existing tenants with peace of mind knowing that they will not be evicted pursuant to the Ellis Act. Acquisition also helps support historic preservation and neighborhood preservation. Several Santa Monica buildings built in the early 20th Century have been acquired and preserved as affordable housing, as have several courtyard apartment buildings that play an important role in neighborhood identity. Rehabilitated affordable apartments exist in every Santa Monica neighborhood, including North of Montana and Sunset Park. Rehabilitation accounts for approximately 41 percent of the City’s housing loans. While acquisition and rehabilitation of existing rent-controlled buildings has played a central role in the City’s affordable housing programs, it has limitations. First, allowing existing tenants to stay in place, irrespective of income, limits the ability for rehabilitation projects to leverage City funding with outside funding, such as low-income housing tax credits. As a result, while the total development costs per apartment for rehabilitation are typically lower than for new construction, the City’s contributions are typically higher than for new construction, where tax credits, state bond funding, and other sources play a critical leveraging role. Second, because the majority of existing apartment buildings in Santa Monica contain studio and one-bedroom apartments, there are limited opportunities to create housing for larger families. Third, rehabilitation potentially channels the City’s limited financial resources for affordable housing toward tenants that would not otherwise qualify for affordable housing, at least during the interim period until vacancies occur in each rehabilitated apartment. As a result, rehabilitated units occupied by over-income tenants do not immediately qualify as affordable housing within the meaning of state law. The rehabilitated residences also do not qualify under Proposition R, which focuses on the delivery of new apartments. Finally, most existing apartment buildings do not include central facilities where enrichment activities, such as after-school homework centers, community classes, and social service support centers, can be housed. As a result, the City’s affordable housing strategy has also included 6 of 24 construction of new buildings that are deed-restricted for occupancy by low-income households. New construction Construction of new apartment buildings allows the City and affordable housing organizations to achieve outcomes that are not typically possible with rehabilitation of existing buildings. The outcomes include providing housing that is targeted to the needs of families, seniors, people with disabilities, and formerly homeless households. The newly constructed buildings often include central facilities such as community rooms (some of which are programmed by the Boys’ and Girls’ Club to provide educational and recreational activities outside of school hours) and case-management centers and services for people with disabilities and formerly homeless individuals. New construction also allows for a focus on implementation of highly sustainable building features. New construction of affordable housing has occurred throughout Santa Monica’s commercial and multifamily districts. In the past few years, most new construction has occurred within commercial districts. Approximately 59 percent of all City loans have been associated with new construction. Inclusionary housing The City’s efforts to finance the preservation and production of affordable housing have been complemented by affordable housing developed by for-profit developers pursuant to the AHPP or development agreements. Inclusionary housing mitigates the impacts of market-rate housing development and increases the total supply of affordable housing. It also increases the supply of affordable housing in areas that might otherwise not be accessible to non-profit affordable housing developers (such as high-cost areas like Santa Monica’s downtown.) While the AHPP allows a developer of market-rate housing to pay a fee in certain situations, inclusionary housing programs have resulted in the creation of nearly 1,000 deed-restricted apartments, as identified above. In addition, all inclusionary housing that has been approved since 2009 is required to accept prospective tenants from the City’s consolidated affordable housing list. Such an approach not only ensures that appropriately qualified t enants occupy inclusionary 7 of 24 housing, it also creates difficult-to-find opportunities for some of the neediest tenants who rely on rental assistance programs administered by the Housing Authority. However, the City cannot rely solely on inclusionary housing to meet Santa Monica’s affordable housing goals. First, inclusionary housing alone is highly unlikely to produce sufficient affordable housing to meet the City’s goals, including those identified in Proposition R. Second, inclusionary housing is also unlikely to include the type of amenities and services (after-school homework assistance, parenting classes, case management, etc.) associated with non-profit affordable housing. Finally, inclusionary housing production is primarily reliant on market-rate housing production. During periods when little market-rate housing is produced (i.e. real estate recessions, period of regulatory change, etc.), little inclusionary housing is produced. Results of Three Strategies By pursuing a three-pronged approach to increasing affordable housing resources, the City has preserved and produced a larger and more diverse supply of low- and moderate-income housing than otherwise would be possible if the City pursued a single strategy. With respect to the production of new affordable housing, the City has exceeded the goals of Proposition R, with 40 percent of all new housing built over the past 20 years being deed-restricted for occupancy by low- and moderate-income households. The three strategies are complemented by the City’s rental assistance programs that are administered by the Santa Monica Housing Authority. The assistance programs, including Section 8 Housing Choice Vouchers, Continuum of Care vouchers (formerly known as Shelter Plus Care and Serial Inebriate Program vouchers), and HOME Tenant-Based Rental Assistance vouchers provide rental assistance to approximately 1,300 Santa Monica households. Households with rental vouchers are typically at the lowest end of the economic spectrum, with average incomes of l ess than $1,000 per month, who would otherwise be unable to access any housing in Santa Monica. Vouchers allow extremely low-income households to access private housing, non-profit housing, and inclusionary housing. 8 of 24 The continuing increase in rents in Santa Monica is creating negative impacts on the City’s voucher programs, primarily because the voucher rent payment amounts are continually falling behind market rents. As a result, most voucher-holders find it very difficult to find housing in the private market. While inclusionary housing (particularly newer housing that is required to draw from the City’s housing list) and non -profit-owned housing are rent-accessible for voucher-holders, deed-restricted housing is a limited resource with lower levels of turn-over. At present, households who are issued new vouchers have a very difficult time finding housing in Santa Monica. Staff is currently working with HUD to prepare a request to increase the Santa Monica Housing Authority’s voucher payment standard. Staff anticipates submitting the final request in September, with HUD review expected to take 60 to 90 days. In spite of compelling evidence, it seems highly unlikely that HUD would approve an increase in the payment standard all the way to true competitiveness, given that market rent in Santa Monica is nearly twice the amount that is authorized generally in the region. Discussion This staff report presents different means to address the question of what is the current need for affordable housing in Santa Monica. Following the discussion of needs, the staff report discusses potential avenues to support the continued preservation and production of affordable housing. How to measure the current need for affordable housing? In its deliberations, the Housing Commission has asked the question of how to measure the need for affordable housing in Santa Monica. Staff researched various data sources to assist the Housing Commission’s considerations. The following summarizes some key data in support of the Council discussion. SCAG’s RHNA allocation To assist cities in the preparation of housing elements, the Southern California Association of Governments (SCAG) prepares a Regional Housing Needs Assessment (RHNA) allocation for each jurisdiction in the five-county region. The allocation 9 of 24 identifies the amount of extremely low-income, low-income, moderate-income, and other housing that should be produced in each city over a specific period in order to address regional housing needs. For Santa Monica, SCAG has determined that 974 residences that are affordable to low- and moderate-income households should be created by 2021. While there are many questions about the methodology and resultant equity of the SCAG allocations, it is the most definitive number addressing the need. Since the housing element period began in 2014, Santa Monica has approved 490 low-and moderate-income residences, resulting in a remaining need of 484 residences. Affordable residences compared to resident incomes Another potential means to assess the need for affordable housing is to compare the number of residences that are affordable to low- and moderate-income households relative to the number of residents whose incomes would be categorized as low or moderate income. If the number of qualified residents is greater than the number of affordable homes, it could indicate that some current residents are rent-burdened (paying more than 30 percent of their incomes for housing) or severely rent-burdened (paying more than 50 percent of their incomes for housing.) In attempting to quantify the congruence of Santa Monica rents and resident incomes, staff started by looking at the current affordable rent levels compared to 2014 market rents, as shown in Figure 1 below. FIGURE 1 FIGURE 1: Maximum Allowable Rents Market Rents Unit Type E Low (30%) V Low (50%) Low (80%) Mod (120%) 2014 0 Bed $340 $567 $680 $1,247 $1,450 1 Bed $389 $648 $778 $1,426 $1,895 10 of 24 Figure 1 demonstrates the maximum allowable rent for each apartment size relative to the various income categories, with extremely low-income households defined as those making no more than 30 percent of the area median income (AMI), very low-income households making no more than 50 percent of the AMI, low-income households making no more than 80 percent of the AMI, and moderate -income households making no more than 120 percent of the AMI. The figure also identifies that as of 2014, even moderate-income households are not able to afford market rents in Santa Monica. The 2014 market rents come from the Rent Control Annual Report, reflecting the median rent for rent-controlled apartments that were subject to vacancy decontrol during 2014. The market-rent figure does not include apartments built after 1979, for which the rents are generally higher, and in many cases much higher, than the median market rents on rent-controlled apartments. In order to understand the connection between rents and incomes, staff next looked at the income standards for affordability, as demonstrated in Figure 2, below. FIGURE 2 Maximum Allowable Income (Annual) Household Size E Low (30%) V Low (50%) Low (80%) Mod (120%) 1 $17,950 $29,900 $47,850 $54,450 2 $20,500 $34,200 $54,650 $62,200 3 $23,050 $38,450 $61,500 $70,000 4 $25,600 $42,700 $68,300 $77,750 2 Bed $437 $729 $875 $1,604 $2,500 3 Bed $486 $810 $972 $1,925 $3,196 11 of 24 Figure 2 demonstrates the maximum allowable income associated with different household sizes and income categories. Cross-referencing Figure 2 with Figure 1 shows that a family of four with a moderate income (up to approximately $78,000 per year) would be unable to afford the median-priced apartment in Santa Monica. In order to understand how maximum income levels compare to Santa Monica incomes, staff looked Santa Monica income data from the 2013 American Community Survey. The American Community Survey is prepared by the US Census Bureau based on sample date. Figure 3 represents the 2013 income categories for Santa Monica residents. FIGURE 3: SANTA MONICA HOUSEHOLD INCOMES Source: American Community Survey, 2013 Figure 3 demonstrates that in 2013, Santa Monica households were split equally above and below $75,000 in annual income, which is close to the maximum allowable income for a family of four that would qualify it as a moderate-income household. The chart 20% 16% 14% 12 of 24 also demonstrates that approximately one in five Santa Monica households make less than $25,000 per year, which would qualify them as extremely low -income households. In order to quantify the qualifying households, staff looked that the exact numbers of households in each American Community Survey income category, as demonstrated in Figure 4 below. FIGURE 4: SANTA MONICA HOUSEHOLD INCOMES, 2013 Income Level # of Households % of HHs $0 - $25,000 9,324 20% $25,000 - $50,000 7,385 16% $50,000 - $75,000 6,678 14% TOTAL 23,387 50% Source: American Community Survey, 2013 Figure 4 demonstrates that in 2013, over 23,000 Santa Monica households had incomes at or below the level that would qualif y a four-person household as low- or moderate-income. The exact qualification of any household would be affected by its size. For example, a single-person household with an income of $74,000 would not qualify as a moderate-income household. As the American Community Survey identifies the average household size in Santa Monica as less than two people, some of the 23,387 households at the upper end of the range would not be expected to qualify for affordable housing. However, the data is not disaggregated in a manner to identify that number. In order to compare income data to availability of affordable housing, staff aggregated data regarding deed-restricted affordable housing with data from the Rent Control 13 of 24 Annual Report regarding rent-controlled apartments that currently rent at affordable levels, as demonstrated in Figure 5. FIGURE 5: Apartments Renting at Affordable Rents in 2014 Type of Housing # of Residences % of total HH* City-funded 2,941 5.9% HUD-funded 529 1.1% Inclusionary 966 1.9% Vacancy Decontrolled 3,861 7.4% Long-term Controlled 8,977 17.3% <Rehabilitated> <1,096> <2.2%> TOTAL 16,178 32.2% *Based on 50,268 total residences in Santa Monica, American Community Survey, 2013 Figure 5 identifies that there were more than 16,000 apartments renting at affordable rents during 2014. The total includes nearly 13,000 rent -controlled apartments. The affordable rent-controlled apartments that have experienced vacancy decontrol likely went to market in the early years of vacancy decontrol; re-control of the rent levels have kept those apartments affordable. Existing rent-controlled apartments that were rehabilitated and deed-restricted by non-profit housing providers are excluded from the total count to avoid double-counting. The rent-controlled housing stock continues to 14 of 24 provide the greatest number of residences that rent at affordable levels. However, the affordable rent-controlled stock is a gradually diminishing resource, with 400 to 550 long-term rent-controlled apartments going to market each year over the past five years. If current trends continue, all long-term rent- controlled apartments will have gone to market rents in the next 18 to 20 years. A comparison of the supply of affordable apartments to the Santa Monica hou seholds that could qualify for affordable housing is shown in Figure 6. FIGURE 6: Comparing resident incomes and affordable rents Low- and moderate-income households 23,387 Apartments affordable to low- and moderate-income households 16,178 POTENTIAL MISMATCH 7,209 Figure 6 finds that there is a potential mismatch of more than 7,000 homes relative to residents who would qualify. Some of the mismatch could be attributable to long -term residents of owner-occupied housing who purchased their homes when prices were lower and more affordable. There is likely an additional large contingent of residents who are rent-burdened or severely rent-burdened. Income Diversity Another means to assess the need for affordable housing is to analyze the income diversity within Santa Monica. Many community members consider Santa Monica’s diversity and inclusiveness to be one of its hallmarks, and something that distinguishes it from other similarly desirable cities. Some have expressed concerns that Santa Monica is rapidly losing the qualities of inclusiveness that make it unique relative to similar communities. One measure of equity and inclusiveness is to look at Santa 15 of 24 Monica’s affordable housing profile before vacancy decontrol took effect and that profile today. Data from the Rent Control Annual Report, as well as the count of deed - restricted apartments, relative to the total number of residences in Santa Monica, shows the following affordability levels in 1998 and in 2013. FIGURE 7: Percentage of residences affordable to low/moderate -income households Figure 7 demonstrates that 60 percent of all Santa Monica residences were affordable to low- and moderate-income households in 1998, before vacancy control went into full effect, while 33 percent were affordable in 2013. 20% 14% 32% 33% 60% 16 of 24 Barring any significant changes in state law with respect to the Costa-Hawkins Act, the majority of the rent-controlled housing that is currently affordable to low- and moderate- income households is not expected to be affordable in the long run. As a result, it would require a huge infusion of deed-restricted apartments, either through acquisition of existing apartment buildings or construction of new affordab le residences, in order to maintain the current diversity of housing, let alone return to the diversity of 1998. The affordable housing production numbers necessary to maintain or enhance diversity are far beyond anything Santa Monica has ever seen or is likely to see. Affordable housing for Santa Monica’s workforce The measures above provide a variety of different ways to look at the need for affordable housing among Santa Monica residents. An additional way to look at the issue is the need for affordable housing among people who work in Santa Monica. The local workforce spends a large percentage of its waking hours in Santa Monica and is a major source of transportation demand associated with commutes into Santa Monica. Data from the California Employment Development Department (EDD) shows that there were over 86,000 jobs in Santa Monica in 2014. Approximately one-third of Santa Monica residents who are in the workforce are employed in Santa Monica, or approximately 20,000 workers, leaving approximately 68,000 workers in Santa Monica who live outside Santa Monica. The Commercial Nexus Study that was completed by RSG in 2013 identified the percentage of employees in different industries with low or moderate incomes. Applying the percentages to the industry breakdown provided by the EDD results in an average of 71 percent of workers who would be expected to earn low- or moderate-level incomes. (The percentage ranges from 58 percent to 91 percent, depending on the industry. Santa Monica experiences two countervailing forces in this regard. First, Santa Monica has large technology and entertainment industries that tend to pay higher incomes. Those industries are balanced against even 17 of 24 larger accommodation and food service industries, which tend to h ave many lower- income workers.) Applying the 71 percent ratio results in an estimated 48,700 low- and moderate-income, non-resident workers. The final piece in assessing the need among the workers is to estimate how many workers would seek to live in San ta Monica if they could find affordable housing. The RSG study used a conservative figure of 34 percent, which would result in 16,600 workers seeking affordable housing. Given that Santa Monica is one of the most desirable communities in the region, it is possible the percentage would be much higher. Housing capital funding Another way to assess the unmet need is to evaluate the City’s historical contribution to affordable housing relative to necessary future contributions to ensure the continued pace of creating affordable housing opportunities. As discussed above, the City’s affordable housing policies have relied on a three -pronged strategy that includes acquisition and rehabilitation of existing housing, construction of new housing, and inclusionary housing. The first two elements of the strategy have relied heavily on the City’s ability to leverage outside funding sources and close the financing gap to make affordable housing projects feasible. While funding is not an ideal measurement of need, given that it addresses inputs rather than outcomes, it could be used to create targets in the context of the City budget and other financing sources. During the years leading up to the demise of the Santa Monica Redevelopment Agency, the City was committing over $15 million per year toward the production and preservation of affordable housing. City financing, combined with leveraging of outside funding and the inclusionary housing program, played a key role in exceeding the goals of Proposition R. The Council approved the allocation of $20 million to $30 million of one-time funds during FY 15/16 and FY 16/17 to support the continued financing of affordable housing. Thereafter, however, the City’s projected contribution amounts to approximately $2 million per year. Affordable Housing Financing Opportunities 18 of 24 Presuming Council considers the preservation and production of affordable housing to be a continuing local priority, the following section discusses potential financing opportunities, irrespective of which measure is used to assess the current and future need for affordable housing. The discussion considers opportunities at the federal, state, county, and local levels. Federal Opportunities Policymaking at the federal level continues to be dominated by gridlock and interparty hostility. Many legislators in Congress are generally opposed to government programs that support low-income people. Programs funded by the Department of Housing and Urban Development (HUD) are frequently under attack, including a recent Congressional proposal to cut funding for the HOME program by over 90 percent. Even federal low-income housing tax credits (LIHTC), which have played a critical role in leveraging local funds for construction of new affordable housing, have come under attack, including attempts to exclude projects that exceed a certain level of total development costs, which would severely affect high -cost areas such as Santa Monica. One bright spot at the federal level is the creation of the National Housing Trust Fund (NHTF) which is to be created in 2016. Funding for the NHTF will be based on a fraction of a percent of loans made by Freddie Mac and Fannie Mae and should thereby not be subject to the politically charged federal appropriations process. The NHTF is expected to produce between $120 million and $200 million annually. While it is a very small amount on a national scale, it will be important nationally, especially with its focus on serving the needs of extremely low-income households. State Opportunities The state legislature continues to pursue strategies to restore funding for affordable housing in California, which exceeded $1 billion annually from redevelopment agencies alone, prior to the dissolution of redevelopment. A significant new funding source is the Affordable Housing and Sustainable Communities (AHSC) program, which will receive a fixed portion of funds generated by the emissions cap and trade program. The first round funding for the program was recently completed, with over $120 million 19 of 24 granted primarily to affordable housing developments. The first round application and selection criteria had very tight criteria, including fully entitled projects with proximity to high-frequency transit service. As there were no entitled Santa Monica affordable housing developments that met the funding requirements, there was not an opportunity to apply during the first round. There could be opportunities to apply in future rounds if appropriate sites can be identified and entitled. A critical element of the program, and a key part of the authorizing legislation, is to channel at least 50 percent of the funds to disadvantaged communities. While projects in Santa Monica will be less competitive because there are no census tracts in Santa Monica that meet the disadvantaged community designation, Santa Monica’s competitiveness will be enhanced by the location of three light-rail stations. Staff will continue to work with non-profit housing organizations to explore potential opportunities to qualify for AHSC funding. However, it is unlikely that the AHSC funds will be sufficient to close the funding gap for affordable housing. As a result, local contributions will likely be necessary to leverage AHSC funds. In September 2014, Governor Brown signed legislation creating Enhanced Infrastructure Financing Districts (EIFDs). Touted by some as Redevelopment 2.0, EIFDs allow cities to use tax-increment financing. However, in order for any property taxes to be available beyond those that would otherwise accrue to the sponsoring city, the affected taxing agencies must agree that incremental growth in property taxes will accrue to the EIFD rather than to the taxing agency. As counties are typically the largest taxing entities, county approval will likely be necessary to have any significant revenue opportunities. Other than a few isolated cases, it seems unlikely that EIFDs will become a significant source of financing for affordable housing or infrastructure, unless the legislation is significantly amended. Since redevelopment dissolution, legislators have proposed the imposition of a small fee on the recording of real estate documents, with the funds targeted toward affordable housing. The City has actively supported the legislation, including in its current form, AB 1335. The proposal would impose a $75 fee on recorded documents and could raise as much as $500 million annually. Whether the proposal will make it out of the 20 of 24 legislature, and whether the governor would sign the legisla tion, is currently uncertain. If both occur, it is unclear how the funds would be allocated and how much would reach Santa Monica. Under any scenario, it is unlikely that the funds would be sufficient to fill the financing gap for any project. Local funds would likely be necessary to leverage the state funds. The package of bills in support of affordable housing also includes a bill (AB 35) that would increase California’s LIHTC allocation by $300 million annually, which would leverage an additional $600 million of federal LIHTC. Increased tax credits could further opportunities to leverage local funding for affordable housing. In 2013, the state legislature restructured the Veteran’s Bond Act of 2008 to create the Veteran’s Housing and Homelessness Prevention (VHPP) Program. The VHPP authorizes nearly $600 million of funding over the next several years to support the creation of affordable housing for veterans and their families. The program could be used to leverage funding for a veteran-focused housing opportunity in Santa Monica. Under any of the opportunities identified above, it is important to recognize that none of the sources would be expected to provide financial leveraging for the acquisition and rehabilitation of existing rent-controlled housing, because outside funding sources typically require that any subsidized residences be occupied immediately by income - qualified residents. Though not directly related to affordable housing financing, the California Supreme Court’s decision in June upholding San Jose’s inclusionary housing ordinance provides important legal support for the third prong of Santa Monica’s affordable housing strategy. Pursuant to Council direction, staff and the City Attorney’s Office are evaluating whether the court decision provides additional flexibility with respect to the methodology and design of Santa Monica’s AHPP. County Opportunities The County of Los Angeles has been the biggest beneficiary of redevelopment dissolution in the region. For example, over 40 percent of the funds that would 21 of 24 otherwise have been allocated to the Santa Monica Redevelopment Agency are now being distributed to L.A. County. Many people have been urging the Board of Supervisors to allocate a portion of the funds toward affordable housing. The Board has made some initial allocations and there is hope that the County will continue to support affordable housing. County support has been and will likely continue to be directly toward special-needs housing that serves the needs of homeless and mentally ill households. Prospective special-needs housing proposals in Santa Monica could benefit from the support. In addition, the County Departments of Health Services and Mental Health have both identified the importance of permanent , supportive housing and have contributed funding as a result. Local Opportunities If Santa Monica wants to ensure a robust affordable housing program that addresses a variety of community needs and values, the development of a stable local funding source is necessary. Local funds have played a central role in leveraging outside funding sources, such as tax credits and state bonds, and would likely be necessary to be competitive for any new outside funding sources. Local funds typically are necessary to support land acquisition, which is critical because of high land costs in Santa Monica and because many outside funding sources require site control. Certain outside funding sources also score funding application competitiveness based on the amount of local leveraging. Local funds also serve as the primary funding source for the preservation of existing rent-controlled housing stock, due to outside funding limitations on protecting existing tenants who do not meet income qualifications. There are a variety of approaches to consider for funding affordable housing, as discussed below:  Cut other City services: Council could carve out a portion of the General Fund that could be allocated toward affordable housing. A primary challenge with such an approach is that virtually every service supported by the General Fund has a constituency that relies on the service. In addition, such an approach could create a dynamic of affordable housing vs. libraries, social services, education, or public safety, all of which are critical to the success of residents of affordable housing. 22 of 24  Flat-line City services: Council could hold funding for all General Fund services at a fixed level and allocate any growth in revenues toward affordable housing. A primary challenge with such an approach is that the City’s costs, including supplies and equipment, labor, health care, pensions, etc. continue to grow, often at a pace faster than the cost of revenue growth. Fixing General Fund expenditures at a set level would require a reduction of services to offset inflationary pressures.  Allocate all revenue above an inflation factor toward affordable housing : Council could ensure that existing City operations receive inflationary increases to ensure continued operations, while allocating any excess revenues toward affordable housing. The challenge of such an approach is that it does not create a stable source of funding for affordable housing, as some years could be very lean or non - existent with respect to revenues exceeding costs increases. It would also limit the Council’s ability to address other emerging needs, which in the past year have included additional public safety personnel and conversion of as-needed employees to permanent status. If the Council wanted to avoid impacting existing City services while creating a stable and dependable funding source for affordable housing, increased revenue sources that could then be allocated toward affordable housing is an option. Any option that involves an increase to an existing tax would require approval by Santa Monica voters. The following discusses Santa Monica’s primary revenue sources and the associated considerations related to prospective increases:  General obligation bonds: The issuance of G.O. Bonds requires two-thirds voter approval. If a $100 million G.O. Bond were to be approved on the ballot, it would impose a property tax of $220 per year per median single-family residential property for 30 years. With approval of the Rent Control Board or explicit ballot languag e, owners of apartment buildings could pass the tax on to their tenants.  Transient Occupancy Tax: An increase in the TOT on hotel visits requires majority approval by voters. Each increase of one percentage point to the TOT results in approximately $3 million in increased funding to the City. Santa Monica’s current tax rate is 14 percent. Only two cities in California have higher TOT rates: Anaheim at 15 percent and Garden Grove at 14.5 percent. The TOT rates in Los Angeles, Culver City, and Beverly Hills are on par with Santa Monica’s 14 percent rate. An increase in the TOT rate could appeal to voters because it is paid mostly by non - residents. However, if the local hotel industry were to oppose the rate increase, it could wage a well-funded opposition campaign.  Sales Tax: An increase in the sales tax requires majority voter approval. Each quarter-cent increase in the sales tax results in approximately $7.5 million of additional revenue to the City. The City’s current sales tax rate, including the transaction and use tax adopted by voters in 2010, is 9.5 percent. The maximum 23 of 24 allowed sales tax rate in California is 10 percent. If the County electorate adopts a sales tax increase to support transit on the same ballot that a sales tax increase is adopted in Santa Monica, both sales taxes increases would be valid, though there could be voter antipathy toward two sales tax increases on the same ballot. Currently, fewer than ten cities in California have sales tax rates of 10 percent. Culver City’s rate of 9.5 percent matches Santa Monica’s, while the cities of Los Angeles and Beverly Hills impose rates of 9.0 percent. Some community members have advocated for a one-half percent sales tax increase in Santa Monica, with a companion measure that asks Council to allocate 50 percent of the funding toward school maintenance. The advocacy reflects concern that while approved school bonds are financing new and renovated school facilities, funding for maintenance of existing school facilities continues to be a challenge.  Real Property Transfer Tax: An increase in the real property transfer tax requires majority voter approval. Every $1.50 increase in the real property transfer tax is expected to raise approximately $2.4 million per year, though transfer tax receipts are extremely volatile in any year. Santa Monica’s current tax rate is $3 per $1,000 of sale value. While some Northern California cities have transfer tax rates of up to $15 per $1,000 of sale value (including a San Francisco rate that goes u p to $25 per $1,000), the rates in Culver City and Los Angeles are $4.50 per $1,000, while Beverly Hills maintains the general rate of $1.10 per $1,000. In November 2014, Santa Monica voters rejected an increase in the real property transfer tax, following a well-funded opposition campaign by the California Association of Realtors.  Parking Tax: An increase in the parking tax requires majority voter approval. Every one percentage point increase in the parking tax could be expected to raise approximately $1 million annually. However, because the City’s owns 30 percent of the parking in Santa Monica, nearly a third of the funds would not be realized unless Council increased public parking rates, which are carefully set to achieve a variety of public policy goals. The current parking tax of 10 percent is among the highest in the region.  Utility User Tax: Increasing the utility user tax requires majority voter approval. Every one percentage point increase in the utility user tax could increase City funding by approximately $3 million. Santa Monica’s rate of 10 percent is among the highest in the region. Every voter pays the utility user tax.  Parcel Tax: Imposing a parcel tax requires two-thirds voter approval. If a parcel tax were to raise $8 million annually, each property in Santa Monica would pay up to $344 per year, in perpetuity. With approval of the Rent Control Board or explicit ballot language, owners of apartment buildings could pass the parcel tax on to their tenants. As discussed above, there are no easy means to increasing City funding in order to create a stable and dependable source of funding for affordable housing. Staff seeks Council direction on which options, if any, merit further research and evaluation. Such 24 of 24 direction would also assist the Housing Commission in its current deliberations on the topic. Financial Impacts & Budget Actions There is no immediate financial impact or budget action associated with conducting the study session. Prepared By: Andy Agle, Director Approved Forwarded to Council Attachments: