Inclusionary Housing Policy Issues
City of Costa Mesa
PRESENTED BY KEYSER MARSTON ASSOCIATES, INC.
MAY 16, 2023
Inclusionary Housing Program Context
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 2
Foundational Concepts
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 3
Over 170 jurisdictions in
California include an
Inclusionary Housing program
as one component of their
affordable housing strategy.
It is important to understand
that an Inclusionary Housing
Program can only be expected
to fulfill a small part of the
unmet need for affordable
housing in the community.
Inclusionary
Housing Survey:
98 California
Jurisdictions
Most Inclusionary Housing programs include a threshold
project size:
◦ Common thresholds range from 3 to 10 units.
◦ The average and median threshold project sizes are 7 and 5 units, respectively.
Income and affordability requirements vary widely. Majority of the surveyed programs impose a 10% to 20% requirement:
◦ The thresholds tend to reflect the depth of the affordability standards being required.
◦ The requirements have a disproportionate impact on smaller projects, due to fewer market rate units available to spread the financial impacts. Sliding scale requirements are sometime used.
The covenant periods are often set at 45 years for ownership projects and 55 years for apartment projects. Shorter and longer periods are applied in some jurisdictions.
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 4
Jur isdic tion Compliance Options
Set Aside
%
Threshold
Project Si ze % of AMI
Covenant
Peri od
Threshold
Project Si ze % of AMI
Covenant
Peri od In-Lieu Fee
Brea
C r eate on-site units; pay in-lieu fee. C ity
pr ov ides inc entiv es to mitigate the impac t
of the requirement
10% 20
Undefined
Percentages of
Very Low & Low
55 20 120% 10 C alc ulated per pr ojec t. Based on the Affor dability Gap Huntington Beach
Create on-s ite units ; create off-s ite units ;
preserve or rehab existing housing; pay in-
lieu fee
10% 3 80% 55 3 120% 45
Sliding Sc ale: 3 to 3 0 units. In-Lieu Fee allowed for projects up to 100 uni ts . Renta l : $3.58 to $35.80/SF Owners hi p: $2.54 to $25.36/SF. The per SF mea s urement ca ps a t 2,000 SF.
I rvi ne
Projects with fewer than 50 units can create
on-site units; convert market rate housing
to affordable housing; extend the term of
an ex isting affor dable pr ojec t; pay in-lieu
fee; transfer units to a nonpfot housing
agency; create off-site units; donate land.
Projects with 50+ units must produce the
affordable units on site.
15%
Ordinance
applies to
all housing
projects .
50 uni t
threshold for
the
production
5% @ 50% +
5% @ 80% +
5% @ 120%.
Defined credits
for deeper
affor dability & #
of bedrooms.
30 Ordinance
applies to
all housing
projects .
50 uni t
threshold for
the
production
5% @ 50% +
5% @ 80% +
5% @ 120%.
Defined credits
for deeper
affor dability & #
of bedrooms.
30 C alc ulated per pr ojec t. The c alc ulation methodology is based on the av er age land v alue in Ir v ine, the av er age density of housing in Irvine, and a defined
predevelopment cost allowance.
For mula:
[(Land Value ÷ Density) + Predevelopment Allowance] x
Percentage Share of Cost related to affordable units not being produced
Laguna Woods Create on-s ite units ; create off-s ite units ; pay in-lieu fee; donate land 15% 5 7.5% @ VL + 7.5%
@ Low 45 5 10% @ Low + 5%
@ Mod 45
Allowed for ownership housing projects that can prove
that inc luding affor dable units is financ ially infeasible.
The fee is c alc ulated based on an affor dability gap approach.
San Clemente Create on-s ite units ; create off-s ite units , pay in-lieu fee; donate land. 4% 6 Ve ry Low 30 6 Ve ry Low 30 Greater of 1% of construction costs as determined by the Building Div ision or 2 % of the affor dability gap
determined by the formula in the Housing Element.
San Juan Capistrano
Create on-s ite units ; create off-s ite units ;
preserve or rehab existing housing; pay in-
lieu fee; donate land
10% 2 55 2 55 Based on 90% of the Affordability Gap, which is updated monthly based on benchmark market prices
Santa Ana
Only applies to changes in land use and
zoning designations. Create on-site units;
off-site units; pay in-lieu fee
Rental: 5 %
/ 15% &
Own: 5%
5 15% @ Low or
10% @ VL or 5%
@ ELI or 5% Low
55 5 120% 55
Fee cha rged per s f of ha bi ta bl e a rea : 5-9: $6.00; 10-14:
$9.00; 15-19: $12; 20+: $15. Di s counts for us e of s ki l l ed and trained labor force
Rental Dev elopment Ownership Development
INCLUSIONARY HOUSING PROGRAM SURVEYS - ORANGE COUNTY
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 5
Income and
Affordability
Considerations
Inclusionary Housing programs tend to set the
affordability level for ownership units at the moderate income level. This reflects the need for significant disposal income to support the high cost of home ownership.
AB 1505, and subsequent HCD guidance, strongly
recommend limiting the affordability level on apartment units to 80% of AMI:
◦ Deeper affordability requirements should not be applied to projects that fulfill the Inclusionary Housing requirements on site within the market rate project.
◦ Stricter standards can be applied to an off-site production option.
◦ Developers who use the State density will likely propose to fulfill the affordability requirements with very low income units.
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 6
Program
Standards for
the City Council
to Establish
The minimum project size that will trigger the
requirement.
Target income and affordability standards.
Covenant periods.
Alternative options to the requirement to fulfill the
affordable housing requirement on-site within the
market rate project:
◦ In-lieu fee payment
◦ Off-site production option
◦ Land dedication
◦ Acquisition and substantial rehabilitation of existing apartment units.
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 7
Financial Evaluation
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 8
Financial Evaluation Organization
Step 1: Identified the “Residential Prototypes” using the March 1, 2023 draft Housing Element and the results of KMA’s market surveys. The prototypes do not represent actual projects. They are a composite of many factors.
Step 2: Conducted a pro forma analysis for each Residential Prototype – first assuming a 100% market rate project.
Step 3: Based on the results of Step 2, affordable housing units were incrementally added into the pro forma to measure the impacts of an Inclusionary Housing requirement.
Step 4: The goal is to limit the Inclusionary Housing standards to avoid requirements that are confiscatory or that deprive an owner of a fair and reasonable return on investment.
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 9
Apartment Development Analyses
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 10
Base Zoning Prototype
Density – Units Per Acre 20
Average Unit Size – Square Feet 990
Total Development Costs Per Unit $570,000
Rent Estimates
Market
Rate
Low
Income
Very Low
Income
Studio Units $2,410 $1,576 $951
One-Bedroom Units $2,970 $1,800 $1,085
Two-Bedroom Units $3,660 $2,003 $1,199
Three-Bedroom Units $4,400 $2,208 $1,315
Supportable Inclusionary Requirement 10% 7%
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 11
Section 65915 Density Bonus
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 12
State density bonus can potentially mitigate the impacts of affordable housing requirements by allowing an increased number of units plus one to three incentives or concessions such as height and floor area ratio increases.
Projects that use the State density bonus cannot pay a fee in lieu of producing affordable housing units.
KMA analyzed a prototype density bonus apartment project at the maximum bonus provided by §65915.
Section 65915 Density Bonus Prototype
Density – Units Per Acre 30
Average Unit Size – Square Feet 990
Total Development Costs Per Unit $457,000
Rent Estimates
Market
Rate
Very Low
Income
Studio Units $2,410 $952
One-Bedroom Units $2,970 $1,085
Two-Bedroom Units $3,660 $1,199
Three-Bedroom Units $4,400 $1,315
Supportable Inclusionary Requirement 15%
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 13
Next Steps –Apartment Development Projects
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 14
The analysis indicates that the §65915 density bonus can potentially offset the financial impact created by the imposition of Inclusionary requirements.
The draft Housing Element identifies multiple areas in which rezoning is being contemplated that will allow for increased densities.
It is KMA’s recommendation that the rezoning be coupled with the imposition of affordable housing requirements.
With City Council policy direction, KMA will work with City staff to identify supportable affordable housing requirements at varying densities.
Ownership Housing Development Analyses
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 15
Development Characteristics
Townhomes Live/Work Condominiums
Density – Units Per Acre 20 16 25
Average Unit Size – Square Feet 1,740 1,850 1,540
Total Development Costs Per Unit $869,000 $922,000 $841,000 Market Rate Sales Prices
Two-Bedroom Units $846,000 $959,000 $806,000
Three-Bedroom Units $1,148,000 $1,208,000 $1,027,000
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 16
Sales Price Comparisons
Two-Bedroom Units Three-Bedroom Units
Market Rate Price $806,000 - $959,000 $1,027,000 - $1,208,000 Moderate Income Price $439,900 $465,800
Low Income Price $203,300 $210,300
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 17
Supportable Inclusionary Housing Requirement
Moderate Income Low Income
Townhomes 8% 5%
Live/Work 7% 5%
Condominiums 8% 6%
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 18
Fulfillment Alternatives
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 19
In-Lieu Fee
Payment
Considerations
Will in-lieu fee payments be allowed by right, or only under defined circumstances? Considerations are:
◦ Program goals
◦ Ownership housing versus apartment projects
◦ Project size thresholds
◦ Community’s views on density
◦ City responsibility to implement the affordable housing development
Establishing the in-lieu fee payment amounts:
◦ Affordability gap methodology
◦ An in-lieu fee calculated on a project-by-project basis based on a defined formula
◦ A discounted amount to encourage payment of the in-lieu fee ◦ A schedule that provides reduced in-lieu fees for small projects May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 20
Other Fulfillment Options for Consideration
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 21
Parcelization to create
an affordable housing
site:
• Opportunity to
develop an
apartment project at
deeper affordability.
• Provides the
affordable units in
the same location as
the market rate
project.
Off-site production of
affordable units:
• Tenure decision –
apartment units as a
requirement?
• Unit comparability
• Proximity to the
market rate project?
Land dedication:
• Appropriate site for
fulfilling the
affordable housing
obligations.
• City responsibility for
developer selection.
• Proximity to the
market rate project?
Acquisition &
rehabilitation of
existing rental units:
• Cannot obtain RHNA
credits for the
affordable units.
• Does not add units to
the housing
inventory.
Issues for
Consideration
Legal limits on Inclusionary Housing Programs:
◦ The requirements cannot be confiscatory
◦ The requirements cannot deprive an owner of a fair and reasonable return on their investment.
Inclusionary Housing obligations provide the City with
the flexibility to establish development standards that the Section 65915 density bonus alone does not
provide.
In-lieu fees can be used for a wide variety of affordable housing activities including:
◦ Assistance to 100% affordable projects
◦ Contributions to homeless shelters
◦ Home buyer programs
◦ Rehabilitation loans
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 22
Policy Decisions
for the City
Council
The minimum project size that will trigger the
requirement.
Target income and affordability standards.
Covenant periods.
Alternative options to the requirement to fulfill the
affordable housing requirement on-site within the
market rate project:
◦ In-lieu fee payment
◦ Off-site production option
◦ Land dedication
◦ Acquisition and substantial rehabilitation of existing apartment units.
May 16, 2023 KEYSER MARSTON ASSOCIATES, INC. 23