SR-08-25-2015-4A
City Council
Report
City Council Regular Meeting: August 25, 2015
Agenda Item: 4.A
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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
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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
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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
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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,
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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
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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
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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.
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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
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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
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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
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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%
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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
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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
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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
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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%
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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
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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
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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
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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
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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
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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.
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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
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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
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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: