July 26, 2023
Special Joint Study Session
Inclusionary Housing (IH) Ordinance
2 May 16, 2023 Joint Study Session
• Keyser Marston Associates (KMA) presented a
comprehensive overview of an inclusionary housing
ordinance and its preliminary findings of the Financial Evaluation
• Public comments from Study Session included:
• Ensure that the IH program helps address significant
affordability issues within the City; target low and very-low income for rentals
• Provide pathways to home ownership; allow in-lieu by right for ownership
• Ensure that the IH program reflects market conditions 3 Financial Evaluation
• May 16 Preliminary Findings: prototypes analyzed in the preliminary findings were based on –
• Vacant land scenario
• Current densities allowed under the existing Zoning Code • IH requirement would apply to housing projects anywhere in the City
• Updated FE: includes additional analysis with prototypes based on –
• City’s rezoning areas identified in the Housing Element (HE) • Densities identified in the adopted HE
• IH requirement would apply to housing projects in the specific rezoning areas
4 Prototypes in the Updated Financial Evaluation
• Prototypes developed based on the five existing urban plan areas and areas along the major corridors representative of the entire City.
• These are not actual projects but representative of recently developed or proposed housing projects in the City and
representative of the properties identified in the adopted Housing Element’s candidate housing opportunity sites.
• Prototypes assume a rezone scenario where a developed (or vacant) non-residential property would be rezoned to allow residential uses.
5 Prototypes – Ownership Housing
• Ownership Housing
Prototypes:
• Densities analyzed
range from 15
units/acre to 25
units/acre
• Site sizes range from
0.53 acres to 3.4
acres
• Parking standard
assumed at 2
spaces/unit
Elara (929 Baker St.)
15 du/acre
Westside Walk (390 Ford Rd.)
20 du/acre
Aura (2626 Harbor Blvd.)
9 du/acre
6 Prototypes – Rental Housing
• Rental Housing Prototypes:
• Densities analyzed range from 40 units/acre to 60 units/acre • Site sizes range from 2 acres to 4 acres
• Parking standard assumed at 1.75 spaces/unit
• Density ranges analyzed consistent with adopted HE
LUX (2277 Harbor Blvd.)
54 du/acre
Baker Block (125 Baker St.)
58 du/acre580 ANTON (580 Anton Blvd.)
125 du/acre
Inclusionary Housing: Financial Evaluation
City of Costa Mesa
PRESENTED BY KEYSER MARSTON ASSOCIATES, INC.
JULY 26, 2023
Financial Evaluation: Vacant Sites Analyses
MAY 16, 2023 STUDY SESSION
INCLUSIONARY HOUSING POLICY ISSUES
July 26, 2023 KEYSER MARSTON ASSOCIATES, INC. 8
Fundamental
Assumptions:
The State Legislature and the courts have established
parameters under which Inclusionary Housing programs
must be structured.
There is a recognition that if incentives are not
provided, the imposition of income and affordability
restrictions impacts a project’s economics.
The resulting legal limits on Inclusionary Housing
Programs can be summarized as follows:
◦ The requirements cannot be confiscatory
◦ The requirements cannot deprive an owner of a fair and reasonable return on their investment.
Vacant Sites
Analyses
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Methodology:
Financial Evaluation presented at the May 16th Study
session was premised on the following assumptions:
◦ The Housing Element was reviewed to identify vacant
potential residential development sites.
◦ Apartment and ownership housing development
prototypes were created for testing purposes.
◦ The following pro forma analyses were performed:
◦ A 100% market rate scenario was tested to identify the return that can be anticipated if no restrictions are applied. ◦ Affordable housing units were incrementally added to measure the impacts created by an Inclusionary Housing requirement. ◦ The goal is to limit the Inclusionary Housing impacts to comport with the parameters applied by the State
Legislature and the Courts.
Vacant Sites
Analyses
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Findings: Vacant Sites Analyses
Development Type
Supportable
Inclusionary
Housing
Requirement
Apartments
Low Income 10%
Very Low Income 7%
Section 65915 Density Bonus – Very Low Income 15%
Ownership Housing
Moderate Income 8%
Low Income 5%
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Financial Evaluation: Overlay Zones Analyses
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Fundamental
Assumptions:
Primary goal is to create a program that provides
sufficient incentives and benefits to offset the impacts created by the affordable housing requirements.
Overlay Zones deemed suitable for new residential
development were identified in the Housing Element.
Zoning Code amendments are proposed to be enacted
within the Overlay Zones.
◦ It is assumed that these amendments will enhance the
value of properties located in the Overlay Zones.
◦ A fundamental premise is that a share of the enhanced value can be allocated to the impact created by the
imposition of Inclusionary Housing requirements.
Overlay Zones
Analyses
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Site Selection
Parameters:
The following site selection parameters were applied in the Overlay Zone analyses:
◦ Sites that are currently developed with residential uses were excluded from the analyses.
◦ The following property types are included in the analyses:
◦ Vacant residentially zoned properties that are appropriate for increased allowable density.
◦ Vacant properties that are not currently zoned for residential development.
◦ The following types of improved commercial properties:
◦ Industrial
◦ Industrial plus retail
◦ Warehouse
◦ Auto sales and service
◦ Motel
Overlay Zones
Analyses
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Methodology
Apartment and ownership housing development
prototypes were created for testing purposes.
Market surveys were performed to identify:
◦ Land and improved property values
◦ Common apartment and ownership housing densities
◦ Apartment rents and ownership housing sales prices
The following analyses were performed to estimate:
◦ Property values as zoned and/or improved.
◦ Land values supported by market rate apartment or
ownership housing development.
◦ Magnitude of the value enhancement created by the
zoning modifications.
◦ Share of the value enhancement that can reasonably be committed to Inclusionary Units.
◦ Conversion to the supportable Inclusionary Housing
requirements.
Overlay Zones
Analyses
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Apartment Development Analyses
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Prototype Apartment Development Scenarios
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Existing Use
Site Area
(Acres) Total Units
Density
(Units/Acre)
Vacant Business Park Land 4.00 240 60
Improved Auto Property 2.40 96 40
Improved .39 FAR Industrial + Retail 4.30 172 40
Improved .39 FAR Industrial + Retail 2.00 80 40
Improved .49 FAR Industrial 2.40 120 50
Improved Auto Property 3.15 189 60
Project Descriptions
Apartment Development Prototypes
Common Assumptions
Prototype apartments include a mix of studios – three-bedroom units.
The rents range from $2,410 - $4,400 per month.
The affordable rents in 2023 are:
July 26, 2023 KEYSER MARSTON ASSOCIATES, INC. 18
Number of
Bedrooms Low Income
Very Low
Income
Studio $1,698 $1,027
1 $1,939 $1,172
2 $2,159 $1,297
3 $2,382 $1,424
Pro Forma Results: Market Rate Scenarios
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Existing Use Total Per Unit
Stabilized
NOI Total
Per Square
Foot
Vacant Business Park Land $96,481,000 $402,000 $6,512,000 $29,646,000 $170 Improved Auto Property $35,058,000 $365,000 $2,604,000 $15,377,000 $147 Improved .39 FAR Industrial + Retail $61,735,000 $359,000 $4,657,000 $28,464,000 $152 Improved .39 FAR Industrial + Retail $28,766,000 $360,000 $2,170,000 $13,263,000 $152 Improved .49 FAR Industrial $43,841,000 $365,000 $3,257,000 $19,242,000 $184 Improved Auto Property $75,975,000 $402,000 $5,128,000 $23,346,000 $170 Construction Costs Residual Land Value
Estimated Residual Land Values
100% Market Rate Apartment Development Prototypes
Funds Available for Inclusionary Housing
The funds available for Inclusionary Housing are set at 50% of the value enhancement estimated to be achieved by the zoning modifications.
July 26, 2023 KEYSER MARSTON ASSOCIATES, INC. 20
Existing Use
Market Rate
Apartments - Existing Use =
Value
Enhancement
Percentage
Share
Total
Contribution
Vacant Business Park Land $29,646,000 - $11,326,000 = $18,320,000 50% $9,160,000 Improved Auto Property $15,377,000 - $11,182,000 = $4,195,000 50% $2,098,000 Improved .39 FAR Industrial + Retail $28,464,000 - $23,953,000 = $4,511,000 50% $2,256,000 Improved .39 FAR Industrial + Retail $13,263,000 - $11,141,000 = $2,122,000 50% $1,061,000 Improved .49 FAR Industrial $19,242,000 - $16,586,000 = $2,656,000 50% $1,328,000 Improved Auto Property $23,346,000 - $14,677,000 = $8,669,000 50% $4,335,000 Estimated Land Value / Sq. Ft. Contribution
Supportable Inclusionary Housing Requirements
Area Low Income Units OR
Very Low Income
Units
Vacant Business Park Land 19% 12%
Improved Auto Property 11% 7%
Improved .39 FAR Industrial + R 6% 4%
Improved .39 FAR Industrial + R 8% 4%
Improved .49 FAR Industrial 6% 3%
Improved Auto Property 12% 7%
Supportable Inclusionry Housing Requirements
Single Income Category Analyses
Apartment Development Prototypes
July 26, 2023 KEYSER MARSTON ASSOCIATES, INC. 21
Existing Use
Low Income
Units +
Very Low
Income Units =
Total
Obligation
Vacant Business Park Land 11% + 5% = 16%
Improved Auto Property 6% + 3% = 9%
Improved Auto Property 7% + 3% = 10%
Supportable Inclusionry Housing Requirements
Mix of Income Categories Analyses
Apartment Development Prototypes
Section 65915
Density Bonus:
An ancillary evaluation of Section 65915 density bonus
projects was also prepared.
The key finding was that in general the additional
density is not anticipated to enhance the project
economics.
The primary reason is that the zoning modifications
being considered by the City provide parking relief,
which is a major reason developers opt to use the
Section 65915 density bonus.
Impacts on
Project
Economics
July 26, 2023 KEYSER MARSTON ASSOCIATES, INC. 22
Recommended Inclusionary Housing Production Options
KMA recommends that the City provide the following menu of Inclusionary Housing production options:
July 26, 2023 KEYSER MARSTON ASSOCIATES, INC. 23
Density Range
Low
Income
Units +
Very Low
Income
Units =
Total
Obligation
0 to 39 Units Per Acre 6% + 0% = 6%
40 to 59 Units Per Acre
Low Income Only 11% + 0% = 11%
Very Low Income Only 0% + 7% = 7%
Low & Very Low Income 6% + 3% = 9%
60+ Units Per Acre
Low Income Only 19% + 0% = 19%
Very Low Income Only 0% + 12% = 12%
Low & Very Low Income 11% + 5% = 16%
Ownership Housing Development Analyses
July 26, 2023 KEYSER MARSTON ASSOCIATES, INC. 24
Prototype Ownership Housing Development Scenarios
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Existing Use
Site Area
(Acres) Total Units
Density
(Units/Acre) Bedroom Mix
Vacant Residential Land @ 20 Units/Acre 3.40 85 25 2 - 4 Improved .39 FAR Industrial + Retail 0.53 8 15 3 & 4
Improved Auto Property 1.18 20 17 3 & 4
Improved .39 FAR Industrial + Retail 2.00 40 20 2 - 4
Improved .42 FAR Industrial + Retail 0.67 11 16 3 & 4
31 Room Motel 0.63 10 16 3 & 4
Project Descriptions
Ownership Housing Development Prototypes
Pro Forma Results: Market Rate Scenario
July 26, 2023 KEYSER MARSTON ASSOCIATES, INC. 26
Existing Use Total Per Unit
Average Sales
Price Per Unit Total
Per Square
Foot
Vacant Residential Land @ 20 Units/Acre $55,435,000 $652,000 $1,055,000 $20,826,000 $141 Improved .39 FAR Industrial + Retail $5,448,000 $681,000 $1,252,000 $3,262,000 $141 Improved Auto Property $13,348,000 $667,000 $1,193,000 $7,174,000 $140 Improved .39 FAR Industrial + Retail $25,986,000 $650,000 $1,103,000 $11,961,000 $137 Improved .42 FAR Industrial + Retail $7,389,000 $672,000 $1,222,000 $4,298,000 $147 31 Room Motel $6,701,000 $670,000 $1,210,000 $3,818,000 $139 Construction Costs Residual Land Value
Estimated Residual Land Values
100% Market Rate Ownership Housing Development Prototypes Funds Available for Inclusionary Housing
The funds available for Inclusionary Housing are set at 50% of the value enhancement estimated to be achieved by the zoning modifications.
July 26, 2023 KEYSER MARSTON ASSOCIATES, INC. 27
Existing Use
Market Rate
Units - Existing Use =
Value
Enhancement
Percentage
Share
Total
Contribution
Vacant Residential Land @ 20 Units/Acre $20,826,000 - $11,552,000 = $9,274,000 50% $4,637,000 Improved .39 FAR Industrial + Retail $3,262,000 - $2,955,000 = $307,000 50% $154,000 Improved Auto Property $7,174,000 - $5,500,000 = $1,674,000 50% $837,000 Improved .39 FAR Industrial + Retail $11,961,000 - $11,151,000 = $810,000 50% $405,000 Improved .42 FAR Industrial + Retail $4,298,000 - $3,736,000 = $562,000 50% $281,000 31 Room Motel $3,818,000 - $6,504,000 = ($2,686,000)
Estimated Land Value / Sq. Ft. Contribution
No Contribution is Supported
Affordability Gap Analyses
As shown in the table below, there are large gaps between the achievable market rate sales prices and the defined moderate income prices:
July 26, 2023 KEYSER MARSTON ASSOCIATES, INC. 28
Existing Use
Average Sales
Price Per Unit -
Average
Moderate
Income Price =
Affordability
Gap
Vacant Residential Land @ 20 Units/Acre $1,055,000 - $498,000 = $557,000 Improved .39 FAR Industrial + Retail $1,252,000 - $507,000 = $745,000 Improved Auto Property $1,193,000 - $509,000 = $684,000 Improved .39 FAR Industrial + Retail $1,103,000 - $500,000 = $603,000 Improved .42 FAR Industrial + Retail $1,222,000 - $508,000 = $714,000 31 Room Motel Not Applicable
Supportable Inclusionary Housing Requirements
July 26, 2023 KEYSER MARSTON ASSOCIATES, INC. 29
Existing Use
Moderate
Income Units
Vacant Residential Land @ 20 Units/Acre 9.8%
Improved .39 FAR Industrial + Retail 2.5%
Improved Auto Property 6.1%
Improved .39 FAR Industrial + Retail 1.7%
Improved .42 FAR Industrial + Retail 3.5%
31 Room Motel N/A
Recommended Given the magnitude of the Affordability Gaps associated with new ownership housing units KMA
recommends that developers be permitted to pay a fee
in lieu of producing affordable housing units.
KMA further recommends that the in-lieu revenue be
used to create a first time homebuyer program that
provides assistance to households who wish to purchase
an existing home in Costa Mesa.
Inclusionary
Housing
Production
Requirements
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Recommendations
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Income and Affordability Requirements
Apartment Development
Ownership Housing Development
On-site production of Inclusionary Units should not be required July 26, 2023 KEYSER MARSTON ASSOCIATES, INC. 32
Density Range
Low Income
Units +
Very Low
Income Units =
Total
Obligation
0 to 39 Units Per Acre 6% + 0% = 6%
40 to 59 Units Per Acre
Low Income Only 11% + 0% = 11%
Very Low Income Only 0% + 7% = 7%
Low & Very Low Income 6% + 3% = 9%
60+ Units Per Acre
Low Income Only 19% + 0% = 19%
Very Low Income Only 0% + 12% = 12%
Low & Very Low Income 11% + 5% = 16%
Other Fulfillment
Recommendations
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Apartment
Development
Ownership Housing
Development
Threshold Project Size 5 units 5 units
Covenant Period Not less than 55 years.
After 55 years, the
covenant should only
be removed if the
property is put to a
non-residential use.
Over one cumulative
45-year period the
home must be sold and
resold to a moderate
income household at
the affordable price.
In-Lieu Fee Payment
Fractional Inclusionary Unit Obligations
Projects with 100 or
fewer units Projects of any size
Alternative Production
Options Not Recommended
Affordable apartment
units mixed with the
ownership housing
units, or on a separate
parcel within the
ownership housing site.
Implementation
Marketing Requirements
Require developers to
prominently advertise the
affordable units locally. Provide
the marketing information on the
City’s website.
§65915 Density Bonus
City is currently amending the
density bonus ordinance to
reflect changes made by the
State. Until the update is
codified, State Law will prevail.
Affordable Housing Regulations
Separate Affordable Housing
Regulations should be prepared
for Apartment and Ownership
Housing development.
Program Updates
Re-evaluate the program at least
every five years. Adjust the in-
lieu fee annually based on a
defined index.
Staffing Plan
Create a staffing plan for
managing the development
process and ongoing monitoring.
Recommendations
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Inclusionary Housing: Financial Evaluation
City of Costa Mesa
PRESENTED BY KEYSER MARSTON ASSOCIATES, INC.
JULY 26, 2023