City Council to Look at Affordable Rental Housing

The current rental vacancy rate, along with a growing student population and high overall rents, has severely impact affordability for both students and workforce housing.  As such, staff writes that “developer interest in housing projects is high. The City has received, or expects to receive, multiple proposals for rental housing projects, each with different ideas about how to provide an affordable component.”

The city council postponed their workshop last meeting, and pushed it to the October 3 meeting with the intent to allow the council to focus on some basic issues surrounding affordable rental housing.

One of the biggest appears to be whether they can require affordable rental housing at all.

The lawsuit filed by Michael Harrington against Nishi came with a bit of a surprise.  We knew that new city policies called for an exemption to the Affordable Housing Ordinance for vertical mixed-use stacked flat.

However, we were not aware that the case of Palmer v. City of Los Angeles from 2009 made the entirety of affordable rental housing problematic.

The court held that the Costa-Hawkins Act “precludes local governments from requiring a developer to set affordable rental levels in private rental housing units unless the developer agrees to do so in exchange for financial assistance or other consideration from the local government.”

Therefore, the judge in the Nishi case ruled that “the City was prohibited from requiring rent-restricted rental housing, unless the City decided to provide financial or other consideration for the rent-restricted units and the developer agreed to provide the units based on the City’s financial participation.”

While that was good news for the city and Nishi, it left us wondering exactly where the affordable housing ordinance stood.

City staff in this week’s staff report notes that, in the Palmer case, “a developer protested the local requirement to construct a specified number of affordable units as part of a proposed apartment (rental) project or pay an in-lieu fee. The court ruled that the City did not have the right to require a certain rent level for units in the development, and this ruling stands today.”

This is no small thing, as the Palmer case “drastically limits the City’s ability to require inclusionary housing in rental developments.”

Thus in staff’s view, the city is precluded from “requiring a developer to set affordable rent levels for private rental housing unless the developer has agreed to such rental restrictions in exchange for financial assistance or other considerations from the local government.”

If the development does not require additional legislative approvals from the city – such as it is appropriately zoned, is not requiring any waivers or exemptions from existing rules, does not have any public funding – “then the City may not require any affordable housing be included as part of the project.

“The municipal code now includes a section that notes the inclusionary requirement is moot if a project meets, falls under the umbrella of Palmer,” staff writes.

With that said, “Because most of the proposed rental housing projects in Davis require City legislative action (General Plan amendment or zoning amendment) for entitlements or are utilizing public funding, the City has the opportunity to negotiate an affordable housing plan with each project as a component of a Development Agreement.”

But it is not automatic, which is what allowed Nishi to avoid paying the full in-lieu fees.  The court ruling was such that the plaintiffs in the case conceded the point without challenge.

As staff points out, the question will come down to priority given by
council to affordable housing.  They write “it should be noted that the City must negotiate affordable housing along with other interests for a project not otherwise required (for example, sustainability features, transportation features, supplemental fees, etc). Where affordable housing falls on the City’s priority list for concessions from a developer may differ project to project.”

Another big issue is funding for an affordable housing program.  In 2012, California dissolved the redevelopment agencies (RDA) and, as a result, the city lost about $2 million per year in dedicated funding for affordable housing.

“While the City had some reserve built up in the Housing Trust Fund, the dissolution of RDA meant that there was no longer a consistent stream of funding available for affordable housing. The City needs to determine how best to proceed with the development of new and the maintenance of existing affordable housing in a post-redevelopment world.”

One thing that is not discussed in the staff report is the impact of new legislation on affordable housing.

SB 2, known as the Building Homes and Jobs Act, “establishes a permanent funding source for affordable housing through a $75 fee on real estate transaction documents. The fee is capped at $225 per transaction and exempts real estate sales. The fees would generate roughly $250 million a year, which would be split among state and local housing programs.”

Meanwhile, SB 3, authorizes $4 billion in general obligation bonds for affordable housing programs and a veteran’s home ownership program. SB 3 must be approved by voters next November.

“Senate Bill 3 gives California the opportunity to build $15 billion in much-needed affordable housing for working families, seniors, vets, and the homeless,” said Senator Jim Beall.

That means that roughly $6 billion is available over ten years for affordable housing, but a huge chunk of that is pending voter approval and we do not know how it will be allocated to local governments.

City staff identified the following current funding sources:

• HOME Funding ($267,000 this year. HOME funds have been decreasing each year and they are limited in how they can be spent.)
• CDBG Public Facilities (Approx. $100,000 – $200,000 per year. This money can be used to pay for improvements/rehabilitation to affordable housing
• In-lieu fees (The fees are currently set at $75,000 per unit, based on an analysis from 2015 that looked at the average per-unit subsidy needed for affordable rental complexes built – Cesar Chavez, Eleanor Roosevelt, Moore Village, New Harmony, Owendale, Tremont Green and Walnut Terrace). The City has not used in-lieu fees widely, so revenue has been limited and varies each year. In-lieu fees do not cover the cost to build a new affordable unit. Developers of rental or ownership projects may request in-lieu fees but the City Council has the authority to decide whether to accept in-lieu fees.)
• Residual receipts, loan repayments and monitoring fees (monitoring fees are meant to cover costs to monitor/inspect affordable projects. Most loan repayments are structured as residual receipts, which means they are paid only after all other obligations are paid. The City does not count on loan repayments to fund any major projects.)
• Specific allocations made by the City Council, which would most likely come from the General Fund.
• Tax credits to private developers (State and federal tax credits can assist developers in putting together a funding package for a rental project, however, these funding sources are very competitive. The City does not have control over the tax credit process.)
• While several bills addressing funding for affordable housing are under consideration in the legislature, it is unclear at the writing of this report what may come out of the current legislative session.

Back in 2015, the council increased the in-lieu fee amount from $50,000 to $75,000.  However, that still does not cover the cost of building the new unit.  There are a variety of ways that in-lieu fees may be calculated:

• cost to build an affordable unit on a land dedication site;
• gap between the median-priced market-rate home and the affordable sales price at the same income level;
• gap between the cost of developing a market-rate home and the maximum affordable price;
• percentage of the actual sales prices of a comparable unit;
• cost to purchase the median-priced market-rate home; or
• average per unit financing gap encountered by non-profit affordable housing developers.

Staff notes, “The city’s original program in-lieu fee was based on the gap between construction of an ownership unit and the affordable price at which it could be sold. The original price was set in the early 90s, with the adoption of the affordable housing ordinance, and was adjusted for inflation every couple of years based on construction cost increases.”

Staff notes that the Social Services Commission expressed interest in the council examining the possibility of an impact fee that could be charged to every development to provide the funding for the city’s affordable program.  Currently, developers pay impact fees based on number of units.

However, staff notes, “Affordability and in-lieu fee requirements must be considered in the context of myriad other project development costs of land, design, entitlements, construction, liability, management, etc.”

They warn, “To set any given City fee too high may result in unintended consequences of project infeasibility, or drive development interest toward a certain type of project which may or may not meet community housing objectives.”

As such, staff believes “that additional economic analysis, such as that conducted by A. Plescia in 2015 for vertical mixed-use and stacked flat condominiums, of what a project can reasonably absorb, would be instrumental in helping determine appropriate in-lieu fee amounts and affordability requirements.”

—David M. Greenwald reporting