1. KMA In-Lieu Fee Analysis — Costa Mesa City Council, February 27, 2024

INCLUSIONARY HOUSING:

IN-LIEU FEE ANALYSIS
Prepared for:

City of Costa Mesa
Prepared by:

Keyser Marston Associates, Inc.

January 31, 2024
ATTACHMENT 1
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TABLE OF CONTENTS

I. EXECUTIVE SUMMARY ..................................................................................................... 1 A. BACKGROUND ....................................................................................................................... 1 B. FINDINGS .............................................................................................................................. 2 II. APPROACH ....................................................................................................................... 5 III. ANALYSIS ORGANIZATION ............................................................................................... 5 IV. APARTMENT DEVELOPMENT ANALYSIS ........................................................................... 6 A. APARTMENT RENT ESTIMATES ................................................................................................... 6 B. ESTIMATED AFFORDABILITY GAPS – APARTMENT DEVELOPMENT ...................................................... 7 C. IN-LIEU FEE CALCULATIONS – APARTMENT DEVELOPMENT .............................................................. 8 V. OWNERSHIP HOUSING DEVELOPMENT ANALYSIS .......................................................... 10 A. SALES PRICE ESTIMATES ......................................................................................................... 10 B. ESTIMATED AFFORDABILITY GAPS – OWNERSHIP HOUSING DEVELOPMENT ....................................... 11 C. IN-LIEU FEE CALCULATIONS – OWNERSHIP HOUSING DEVELOPMENT ............................................... 12 VI. CONCLUSIONS / RECOMMENDATIONS .......................................................................... 13 A. RECOMMENDED BASE IN-LIEU FEE PAYMENT AMOUNTS .............................................................. 13 B. RECOMMENDED IN-LIEU FEE SCHEDULES ................................................................................... 14 C. RECOMMENDED INCLUSIONARY HOUSING PROGRAM UPDATES ...................................................... 16

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ATTACHMENTS
Attachment 1: Affordable Housing Cost Calculation Methodologies Appendix A: Affordable Rent Calculation Methodology
Appendix B: Affordable Sales Price Calculation Methodology Attachment 2: Apartment Development
Appendix A: Rent Survey
Appendix B: Affordable Rent Calculations
Appendix C: Recommended In-Lieu Fee
Attachment 3: Ownership Housing Development
Appendix A: Home Resales Survey
Appendix B: Affordable Sales Price Calculations
Appendix C: Recommended In-Lieu Fee
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I. EXECUTIVE SUMMARY
A. Background
On January 16, 2024, the City of Costa Mesa (City) City Council gave first reading to Ordinance 2024-XX (Ordinance), which would modify Title 13 (Planning, Zoning, and Development) of the Costa Mesa Municipal Code by establishing an Inclusionary Housing program. Under defined circumstances the Ordinance allows an in-lieu fee to be paid as a means of fulfilling the Inclusionary Housing obligations.

Keyser Marston Associates, Inc. (KMA) was engaged by the City to assist in creating in-lieu fee schedules for apartment and ownership housing developments that would be subject to the Ordinance requirements. The following report describes the methodology and assumptions that KMA used in preparing this Inclusionary Housing Program: In-lieu Fee Analysis (In-Lieu Fee Analysis).

The Ordinance imposes the following basic requirements on residential development:

1. Residential projects with 15 or more units are subject to the Ordinance requirements.

2. The income and affordability requirements are set as follows:
a. Apartment development:
i. Projects developed at a density level of 60 units per acre or greater must allocate 11% of the units to low income households, or 7% of the units to very low income households.
ii. Projects developed at a density level of less than 60 units per acre must allocate 6% of the units to low income households, or 4% of the units to very low income households.
iii. Projects with 50 or fewer units have the right to pay an in-lieu fee at the developer’s discretion.
b. An incentive is provided for the developers of ownership housing developments to pay an in-lieu fee to fulfill the Inclusionary Housing requirements. The in-lieu fee calculations are based on a moderate income Inclusionary Housing requirement.

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The In-Lieu Fee Analysis is based on development prototypes that were included in the Inclusionary Housing: Financial Evaluation (Financial Evaluation) report prepared by KMA in July 2023 and a supplementary analysis prepared in November 2023. In addition, this analysis was updated to reflect the utilities allowances published by the Orange County Housing Authority on October 1, 2023 and the changes in mortgage interest rates.
1 B. Findings
The results of the KMA financial analysis are summarized in the following text and tables:

BASE IN-LIEU FEE AMOUNTS
Recommended Base In-Lieu Fee Payment Amounts
Per Square Foot of:

Total Leasable or Saleable Area in a Residential Project Apartment Development
Density at 60+ Units Per Acre $26.10
Density at Less than 60 Units Per Acre $13.80
Ownership Housing Development $17.70

The in-lieu fee payment amount should be re-evaluated at least every five years. To allow in-lieu fees to keep pace with changes in the marketplace during the intervening periods, the in-lieu fees should be adjusted each year based on the percentage change in new home prices in Orange County.

IN-LIEU FEE SCHEDULES
Inclusionary housing requirements have a disproportionate impact on smaller projects, because there are fewer market rate units available to spread the impact created by the income and affordability standards. To reflect this, KMA recommends that the City provide a discounted in-lieu fee on a sliding scale basis for residential projects that consist of between 15 and 20 units. The base in-lieu fee would be applicable for all projects that include 21 or more residential units.

1 The mortgage interest rates are based on a 50 basis points premium applied to the Freddie Mac monthly average, between February 2023 and January 2024, for a fixed interest rate loan with a 30 year amortization period. -5-

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KMA recommends that the in-lieu payment schedules presented in the following table be applied. The recommended fees are presented in 2024 Dollars.

KMA recommends that the following in-lieu fee schedules be applied to a fractional “Inclusionary Unit" obligation incurred by a residential development. The recommended fractional in-lieu fee amounts are presented in 2024 dollars.

Total Units
Density: 60+
Units Per Acre
Density: <60
Units Per Acre
15 $3.73 $1.97 $2.53
16 $7.46 $3.94 $5.06
17 $11.19 $5.91 $7.59
18 $14.91 $7.89 $10.11
19 $18.64 $9.86 $12.64
20 $22.37 $11.83 $15.17
21+ $26.10 $13.80 $17.70
Ownership
Housing
Development
Apartment Development
Recommended In-Lieu Fee Payment Schedule
Per Square Foot of Total Leasable or Saleable Area
in a Residential Development
Affordability Gap Per Inclusionary Unit $221,700
Average Unit Size (Square Feet of Leasable Area) 933
In-Lieu Fee Per Square Foot of One Unit $237.60
Fraction
Fractional In-Lieu Fee:

Per Square Foot of One Unit
Total Fractional In-Lieu Fee:

Prototype Apartment
Development

0.10 $23.80 $22,210

0.20 $47.50 $44,330

0.30 $71.30 $66,540

0.40 $95.00 $88,660

0.50 $118.80 $110,870

0.60 $142.60 $133,080

0.70 $166.30 $155,200

0.80 $190.10 $177,410

0.90 $213.80 $199,530

1.00 $237.60 $221,740
Apartment Development @ Density: 60+ Units Per Acre
Fractional In-Lieu Fee Payment Calculations
Per Square Foot of the Leasable Area of One Unit in an
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Affordability Gap Per Inclusionary Unit $221,000
Average Unit Size (Square Feet of Leasable Area) 931
In-Lieu Fee Per Square Foot of One Unit $237.40
Fraction
Fractional In-Lieu Fee:

Per Square Foot of One Unit
Total Fractional In-Lieu Fee:

Prototype Apartment
Development

0.10 $23.70 $22,060

0.20 $47.50 $44,220

0.30 $71.20 $66,280

0.40 $95.00 $88,440

0.50 $118.70 $110,500

0.60 $142.40 $132,560

0.70 $166.20 $154,720

0.80 $189.90 $176,780

0.90 $213.70 $198,930

1.00 $237.40 $221,000
Fractional In-Lieu Fee Payment Calculations
Per Square Foot of the Leasable Area of One Unit in an
Apartment Development @ Density: <60 Units Per Acre
Affordability Gap Per Inclusionary Unit $608,000
Average Unit Size (Square Feet of Saleable Area) 1,620
In-Lieu Fee Per Square Foot of One Unit $375.30
Fraction
Fractional In-Lieu Fee:

Per Square Foot of One Unit
Total Fractional In-Lieu Fee:

Prototype Ownership
Development

0.10 $37.53 $60,800

0.20 $75.06 $121,600

0.30 $112.59 $182,400

0.40 $150.12 $243,190

0.50 $187.66 $304,010

0.60 $225.19 $364,810

0.70 $262.72 $425,610

0.80 $300.25 $486,410

0.90 $337.78 $547,200

1.00 $375.31 $608,000
Fractional In-Lieu Fee Payment Calculations
Per Square Foot of the Saleable Area of One Unit in the Ownership Housing Development Prototype
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II. APPROACH
The purpose of the In-Lieu Fee Analysis is to estimate the in-lieu fee amounts that can be supported by apartment and ownership housing developments. The KMA In-Lieu Fee Analysis is based on the evaluation of prototype developments that were used in the Financial Evaluation and the Inclusionary Housing requirements included in the Ordinance.

The foundational premise of this analysis is that an in-lieu fee should correlate to the “Affordability Gap” associated with producing the affordable units required by the Inclusionary Housing Program.

The Affordability Gap can generally be defined as the difference between the achievable market rate rents or sales prices and the allowable rents or sales prices for the designated Inclusionary Units.

III. ANALYSIS ORGANIZATION
The KMA analysis is supported by the following Attachments and Appendices:

ATTACHMENT 1: AFFORDABLE HOUSING COST CALCULATION METHODOLOGIES Appendix A: Affordable Rent Calculation Methodology
Appendix B: Affordable Sales Price Calculation Methodology

ATTACHMENT 2: APARTMENT DEVELOPMENT
Appendix A: Rent Survey 4+ Star Properties
Appendix B: Affordable Rent Calculations
Appendix C: In-Lieu Fee Calculations

ATTACHMENT 3: OWNERSHIP HOUSING DEVELOPMENT
Appendix A: Home Resales Survey
Appendix B: Affordable Sales Price Calculations
Appendix C: In-Lieu Fee Calculations

The recommended in-lieu fee payment amounts were estimated based on the Affordability Gaps associated with the following requirements:
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1. Apartment development:
a. Projects developed at a density level of 60 units per acre or greater must allocate 11% of the units to low income households, or 7% of the units to very low income households. b. Projects developed at a density level of less than 60 units per acre must allocate 6% of the units to low income households, or 4% of the units to very low income households.

2. The Ordinance applies an 8% moderate income Inclusionary Housing production requirement to ownership housing development. To create an incentive for developers to select the in-lieu fee option, this analysis calculates the fee based on a discounted rate tied to a 5% moderate income requirement.

The imposition of Inclusionary Housing requirements creates a disproportionate impact on small development projects. To mitigate this impact, KMA created discounted in-lieu fee schedules for projects that consist of between 10 and 20 units. In -lieu fee payment schedules are provided for any fraction of an Inclusionary Unit that is required to be produced under the Ordinance requirements.

IV. APARTMENT DEVELOPMENT ANALYSIS
A. Apartment Rent Estimates

MARKET RATE RENTS
KMA surveyed apartment projects that received 4+ stars in the CoStar quality ranking system (Attachment 2: Appendix A). Based in part on this survey, the market rate apartment rents used in this analysis are presented in the following table.

Projected Market Rate Rents
Apartment Development
Number of Bedrooms Monthly Rent
Studio $2,410
1 $2,970
2 $3,660
3 $3,330

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The weighted average rent equates to approximately $3.52 per square foot of leasable area.

AFFORDABLE RENTS
The methodology used to calculate the Affordable Rents is described in Attachment 1: Appendix A, and the calculations are presented in Attachment 2: Appendix B. The results are summarized in the following table:

Affordable Rents
Apartment Development Prototype
Number of
Bedrooms

Low Income
Very Low
Income
Studio $1,694 $1,023
1 $1,934 $1,167
2 $2,152 $1,290
3 $2,373 $1,415

B. Estimated Affordability Gaps – Apartment Development KMA estimated the Affordability Gaps associated with apartment development using the following calculation methodology:

1. The differences between the estimated achievable market rate rents and the defined Affordable Rents were calculated for studio, one-bedroom, two-bedroom, and three-bedroom apartment units.

2. KMA assumed that the property taxes for projects that include designated affordable housing units would be based on a lower assessed value due to the reduction in net operating income that would be generated by the project. KMA deducted this lower property tax expense from the estimated rent difference.

3. The estimated “Net Annual Rent Difference Per Inclusionary Unit” represents the annual rent difference minus the estimated property tax savings.
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4. The “Affordability Gap Per Inclusionary Unit” is estimated by capitalizing the Net Annual Difference Per Inclusionary Unit at the threshold return derived from a pro forma analysis of the prototype apartment development at unrestricted market rate rents.

The Affordability Gap calculations are provided in Attachment 2: Appendix C, and the results are summarized in the following table:

Estimated Affordability Gaps Per Inclusionary Unit
Apartment Development
Density: 60+
Units Per Acre
Density: <60
Units Per Acre
Low Income Units $221,700 $221,000
Very Low Income Units $364,300 $363,500

C. In-Lieu Fee Calculations – Apartment Development
The Affordability Gaps Per Inclusionary Unit were converted into the in-lieu fee payment that would be required to fulfill the Inclusionary Housing requirements on site within a proposed market rate apartment development. The conversion calculations are presented in Attachment 2: Appendix C, and the recommended base in-lieu fee payment amounts are summarized in the following table.

Recommended Base In-Lieu Fee Payment Amounts
Per Square Foot of Total Leasable Area in an Apartment Development Density at 60+ Units Per Acre $26.10
Density at Less than 60 Units Per Acre $13.80

To mitigate the disproportionate impact an Inclusionary Housing obligations creates on small projects, KMA prepared a discounted in-lieu fee schedule for apartment developments that consist of between 15 and 20 units. The recommended in-lieu fee schedules, which are presented in 2024 dollars, are provided in the following table:
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Some developers may choose to pay a fee in lieu of fulfilling an obligation to produce a fraction of an Inclusionary Unit. The following tables provide schedules of fractional in-lieu fee payments for apartment development, presented in 2024 dollars:

Total Units
Density: 60+
Units Per Acre
Density: <60
Units Per Acre
15 $3.73 $1.97
16 $7.46 $3.94
17 $11.19 $5.91
18 $14.91 $7.89
19 $18.64 $9.86
20 $22.37 $11.83
21+ $26.10 $13.80
Recommended In-Lieu Fee Payment Schedule
Per Square Foot of Total Leasable Area
in an Apartment Development
Affordability Gap Per Inclusionary Unit $221,700
Average Unit Size (Square Feet of Leasable Area) 933
In-Lieu Fee Per Square Foot of One Unit $237.60
Fraction
Fractional In-Lieu Fee:

Per Square Foot of One Unit
Total Fractional In-Lieu Fee:

Prototype Apartment
Development

0.10 $23.80 $22,210

0.20 $47.50 $44,330

0.30 $71.30 $66,540

0.40 $95.00 $88,660

0.50 $118.80 $110,870

0.60 $142.60 $133,080

0.70 $166.30 $155,200

0.80 $190.10 $177,410

0.90 $213.80 $199,530

1.00 $237.60 $221,740
Apartment Development @ Density: 60+ Units Per Acre
Fractional In-Lieu Fee Payment Calculations
Per Square Foot of the Leasable Area of One Unit in an
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V. OWNERSHIP HOUSING DEVELOPMENT ANALYSIS
A. Sales Price Estimates

MARKET RATE SALES PRICES
KMA compiled a survey of homes that were sold over the previous year (Attachment 3: Appendix A).

Based in part on this survey, the projected market rate sales prices are presented in the following table.

Projected Market Rate Sales Prices
Ownership Housing Development
Number of Bedrooms Sales Prices
2 $890,000
3 $1,083,000
4 $1,211,00

Affordability Gap Per Inclusionary Unit $221,000
Average Unit Size (Square Feet of Leasable Area) 931
In-Lieu Fee Per Square Foot of One Unit $237.40
Fraction
Fractional In-Lieu Fee:

Per Square Foot of One Unit
Total Fractional In-Lieu Fee:

Prototype Apartment
Development

0.10 $23.70 $22,060

0.20 $47.50 $44,220

0.30 $71.20 $66,280

0.40 $95.00 $88,440

0.50 $118.70 $110,500

0.60 $142.40 $132,560

0.70 $166.20 $154,720

0.80 $189.90 $176,780

0.90 $213.70 $198,930

1.00 $237.40 $221,000
Fractional In-Lieu Fee Payment Calculations
Per Square Foot of the Leasable Area of One Unit in an
Apartment Development @ Density: <60 Units Per Acre
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The weighted average sales price equates to approximately $651 per square foot of saleable area.

AFFORDABLE SALES PRICES
The methodology used to calculate the Affordable Sales Prices is described in Attachment 1: Appendix B, and the calculations are presented in Attachment 3: Appendix B. The results are summarized in the following table:

Affordable Sales Prices
Ownership Housing Development
Number of
Bedrooms

Moderate Income
2 $412,700
3 $451,700
4 $478,700

B. Estimated Affordability Gaps – Ownership Housing Development The Affordability Gaps that were derived from the KMA analysis of ownership housing development are presented in the following table:

Estimated Affordability Gaps Per Inclusionary Unit
Ownership Housing Development
Number of
Bedrooms
Market Rate
Price
Moderate
Income Price
Affordability
Gap
2 $890,000 $412,700 $477,300
3 $1,083,000 $451,700 $631,300
4 $1,211,000 $478,700 $732,300

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C. In-Lieu Fee Calculations – Ownership Housing Development The weighted average Affordability Gaps are translated into the in-lieu fee payment that would be required to fulfill the Inclusionary Housing requirements on site within a proposed market rate ownership housing development. These calculations are presented in Attachment 3: Appendix C, and the results are summarized in the following table:

Recommended In-Lieu Fee Payment
Ownership Housing Development
Weighted Average Affordability Gap Per Inclusionary Unit $608,000 In-Lieu Fee Payment Per Square Foot of Saleable Area $17.70

To mitigate the disproportionate impact an Inclusionary Housing obligations creates on small projects, KMA prepared a discounted in-lieu fee schedule for ownership housing developments that consist of between 15 and 20 units. The recommended in-lieu fee schedule, which is presented in 2024 dollars, is provided in the following table:

The following table provides a schedule of fractional in-lieu fee payments for developers that choose this option for fulfilling an obligation to produce a fraction of an Inclusionary Unit. The fractional in- lieu fee schedule is presented in 2024 dollars:

Total Units
In-Lieu Fee Per Square
Foot of Saleable Area
15 $2.53
16 $5.06
17 $7.59
18 $10.11
19 $12.64
20 $15.17
21+ $17.70
Recommended In-Lieu Fee Payment Schedule
Ownership Housing Development Prototype
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VI. CONCLUSIONS / RECOMMENDATIONS
A. Recommended Base In-Lieu Fee Payment Amounts
The in-lieu fees presented in the preceding table represent the amounts that would need to be charged to provide the City with sufficient funds to produce the same number of affordable units in similar locations and product types as the market rate residential projects that are subject to the requirements proposed to be imposed by the Ordinance.

Based on the requirements proposed to be imposed by the Ordinance, and the results of the preceding analysis, KMA recommends that the following base in-lieu fee payment amounts be applied in 2024:

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Recommended Base In-Lieu Fee Payment Amounts
Per Square Foot of:

Total Leasable or Saleable Area in a Residential Project Apartment Development
Density at 60+ Units Per Acre $26.10
Density at Less than 60 Units Per Acre $13.80
Ownership Housing Development $17.70

It is KMA’s opinion that an in-lieu fee measured against the square footages of the units corresponds more closely to the Affordability Gap than an in-lieu fee that is measured by the number of units in the development. As such, KMA recommends that the in-lieu fee be based on the leasable area for apartment developments and the saleable area for ownership housing developments.

B. Recommended In-Lieu Fee Schedules
In recognition of the disproportionate impact Inclusionary Housing requirements have on small projects, KMA recommends that the following in-lieu fee schedules be applied in 2024:

KMA recommends that the following in-lieu fee schedules be applied in 2024 to fractional Inclusionary Unit obligations incurred by a residential development:

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Affordability Gap Per Inclusionary Unit $221,700
Average Unit Size (Square Feet of Leasable Area) 933
In-Lieu Fee Per Square Foot of One Unit $237.60
Fraction
Fractional In-Lieu Fee:

Per Square Foot of One Unit
Total Fractional In-Lieu Fee:

Prototype Apartment
Development

0.10 $23.80 $22,210

0.20 $47.50 $44,330

0.30 $71.30 $66,540

0.40 $95.00 $88,660

0.50 $118.80 $110,870

0.60 $142.60 $133,080

0.70 $166.30 $155,200

0.80 $190.10 $177,410

0.90 $213.80 $199,530

1.00 $237.60 $221,740
Apartment Development @ Density: 60+ Units Per Acre
Fractional In-Lieu Fee Payment Calculations
Per Square Foot of the Leasable Area of One Unit in an
Affordability Gap Per Inclusionary Unit $221,000
Average Unit Size (Square Feet of Leasable Area) 931
In-Lieu Fee Per Square Foot of One Unit $237.40
Fraction
Fractional In-Lieu Fee:

Per Square Foot of One Unit
Total Fractional In-Lieu Fee:

Prototype Apartment
Development

0.10 $23.70 $22,060

0.20 $47.50 $44,220

0.30 $71.20 $66,280

0.40 $95.00 $88,440

0.50 $118.70 $110,500

0.60 $142.40 $132,560

0.70 $166.20 $154,720

0.80 $189.90 $176,780

0.90 $213.70 $198,930

1.00 $237.40 $221,000
Fractional In-Lieu Fee Payment Calculations
Per Square Foot of the Leasable Area of One Unit in an
Apartment Development @ Density: <60 Units Per Acre
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C. Recommended Inclusionary Housing Program Updates
KMA recommends that the Inclusionary Housing Program be updated at regular intervals:

1. The entire Inclusionary Housing Program should be re-evaluated at least every five years.

2. To allow in-lieu fees to keep pace with changes in the market place during the intervening periods, the in-lieu fees should continue to be adjusted each year based on the following process:
a. Median sales value information for “All New Residential Development” in Orange County should be compiled annually. The Redfin Corporation currently produces and publishes this information.
b. The increase or decrease in the in-lieu fee should be based on the year-to-year percentage change in the median new home sales price.

Affordability Gap Per Inclusionary Unit $608,000
Average Unit Size (Square Feet of Saleable Area) 1,620
In-Lieu Fee Per Square Foot of One Unit $375.30
Fraction
Fractional In-Lieu Fee:

Per Square Foot of One Unit
Total Fractional In-Lieu Fee:

Prototype Ownership
Development

0.10 $37.53 $60,800

0.20 $75.06 $121,600

0.30 $112.59 $182,400

0.40 $150.12 $243,190

0.50 $187.66 $304,010

0.60 $225.19 $364,810

0.70 $262.72 $425,610

0.80 $300.25 $486,410

0.90 $337.78 $547,200

1.00 $375.31 $608,000
Fractional In-Lieu Fee Payment Calculations
Per Square Foot of the Saleable Area of One Unit in the Ownership Housing Development Prototype
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ATTACHMENT 1

AFFORDABLE HOUSING COST CALCULATION METHODOLOGIES
INCLUSIONARY HOUSING: IN -LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA

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APPENDIX A

AFFORDABLE RENT CALCULATION METHODOLOGY

ASSUMPTIONS
The Affordable Rent calculations are presented in Attachment 2 – Appendix B. The calculations are based on the following assumptions:

1. The household income information used in the calculations is based on 2023 income statistics for Orange County as a whole. This information is published annually by the United States Department of Housing and Urban Development (HUD) and distributed by the California Department of Housing and Community Development (HCD).

2. The household size appropriate for the unit is based on the California Health and Safety Code (H&SC) Section 50052.5 standard of the number of bedrooms in the home plus one.1 H&SC Section 50052.5 refers to this as “the family size appropriate for the unit.” This is a benchmark that is used for calculation purposes only. It is neither an occupancy minimum nor a maximum.

3. The benchmark household incomes used in the Affordable Rent analyses are based on the following standards:
a. The low income rents are based on 80% of area median income (AMI). This percentage of AMI is based on the standard imposed in Assembly Bill 1505. b. The very low income rents are based on 50% of AMI, which is the standard imposed by H&SC Section 50053.
c. The affordable rents used in the California Government Code Section 65915 et seq. density bonus analyses are based on the household income standards imposed by H&SC Section 50053.

4. Thirty percent (30%) of defined household income is allocated to housing-related expenses.

5. The following monthly utilities allowances were applied in this analysis. 2 1 For example, the imputed household size for a two-bedroom unit is three persons. 2 Utilities allowances are based on utilities costs comprised of electric heating, cooking and water heating; and basic electric. The allowances are based on the Orange County Housing Authority schedule effective as of October 1, 2023. -21-
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Utility Allowances
Apartment Development
Number of
Bedrooms
Monthly Utilities
Allowances
Studio $95
1 $111
2 $148
3 $183

AFFORDABLE RENTS
The resulting affordable rents are presented in the following table:

Affordable Rents
Apartment Development
Number of
Bedrooms

Low Income
Very Low
Income
Studio $1,694 $1,023
1 $1,934 $1,167
2 $2,152 $1,290
3 $2,373 $1,415

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Affordable Housing Cost Calculation Methodologies Page 3 Inclusionary Housing: In-Lieu Fee Analysis January 31, 2024

APPENDIX B

AFFORDABLE SALES PRICE CALCULATION METHODOLOGY

ASSUMPTIONS
The Affordable Sales Price calculations are presented in Attachment 3 – Appendix B. The calculations are based on the following assumptions:

1. The household income information used in the calculations is based on 2023 income statistics for Orange County as a whole:
a. The household incomes for low income households are produced by HUD and distributed by HCD.
b. The household incomes for moderate income households are produced and distributed annually by HCD.

2. The Affordable Sales Price estimates are based on the calculation methodology imposed by H&SC Section 50052.5.

The elements included in the Affordable Sales Price calculations are described in the following sections of this Attachment.

Household Size
For the sole purposes of calculating Affordable Sales Prices, H&SC Section 50052.5 sets household sizes based on the number of bedrooms in the home plus one. As discussed previously, this is not an occupancy minimum or maximum. Rather, it is a benchmark that creates a consistent Affordable Sales Price calculation methodology.

Household Income
For calculation purposes only, H&SC Section 50052.5 applies benchmark household incomes as the standard for determining the Affordable Sales Prices. These benchmarks are based on the following percentages of the Orange County AMI:

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Affordable Housing Cost Calculation Methodologies Page 4 Inclusionary Housing: In-Lieu Fee Analysis January 31, 2024

Income Category % of AMI
Moderate 110%
Low 70%

The identified benchmark percentages of AMI are not income caps. The household income qualification standards are set at the upper limits presented in the HCD and are based on the actual size of the homebuyer’s household.

Income Allocated to Housing-Related Expenses
H&SC Section 50052.5 allocates the following percentages of the benchmark household incomes to the payment of housing-related expenses:

Income Category
% of Benchmark
Income
Moderate 35%
Low 30%

Housing-Related Expenses
Based on research undertaken by KMA, the variable housing related expense assumptions used in this analysis are presented in the following table:

Variable Housing Related Expenses
Ownership Housing Development

Number of
Bedrooms

Monthly Utilities
Allowances 3
Monthly HOA,
Insurance &
Maintenance
2 $249 $350
3 $317 $400
4 $392 $450

3Utilities allowances are based on utilities costs comprised of electric heating, cooking and water heating; basic electric; and water, sewer and trash services. The allowances are based on the Orange County Housing Authority schedule effective as of October 1, 2023.
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Affordable Housing Cost Calculation Methodologies Page 5 Inclusionary Housing: In-Lieu Fee Analysis January 31, 2024

The property tax expense estimates are based on 1.15% of the defined Affordable Sales Prices. This assumes that the City will require the homes to be resold at an Affordable Sales Price throughout one cumulative 45-year covenant period.

Supportable Mortgage Amount
The mortgage amounts used in the Affordable Sales Price calculations are estimated using the income available after the other housing-related expenses are paid. The mortgage terms used in this Financial Evaluation were based on a 30-year fully amortizing loan at a 7.33% interest rate. 4 Benchmark Down Payment
KMA set the benchmark down payment at 5% of the estimated Affordable Sales Price. A down payment of this magnitude is commonly allowed by affordable housing programs.

AFFORDABLE SALES PRICES
The resulting Affordable Sales Prices are estimated as follows:

Affordable Sales Prices
Ownership Housing Development
Number of
Bedrooms

Moderate Income
2 $412,700
3 $451,700
4 $478,700

4 Based on a 50 basis points premium applied to the Freddie Mac monthly average, between February 2023 and January 2024, for a fixed-interest rate loan with a 30-year amortization period. -25-
ATTACHMENT 2

APARTMENT DEVELOPMENT
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA
Prepared by: Keyser Marston Associates, Inc.

File name: 1 31 24 CM Apt; ATT 2 TITLE Page 1 of 8
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ATTACHMENT 2: APPENDIX A

RENT SURVEY
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA

APARTMENT DEVELOPMENT
Prepared by: Keyser Marston Associates, Inc.

File name: 1 31 24 CM Apt; App A Apt Titles Page 2 of 8 -27-
ATTACHMENT 2: APPENDIX A

RENT SURVEY

APARTMENT DEVELOPMENT
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA
Name Address # of Units
Unit Size
(SF) Total Per SF Year Built
I.
580 Anton 580 Anton Blvd Costa Mesa 92626 5 506 $2,365 $4.67 2018 3400 Avenue of the Arts Apartments 3400 Avenue of the Arts Costa Mesa 92626 85 539 $2,315 $4.29 1987 Baker Block 123 Baker Street E Costa Mesa 92626 31 623 $2,346 $3.77 2018 Wimbledon Glen 1142 Buckhingham Dr Costa Mesa 92626 50 505 $1,999 $3.96 1985 27 Seventy Five Mesa Verde 2775 Mesa Verde Dr Costa Mesa 92626 64 480 $2,084 $4.34 1979 Minimum 480 $1,999 $3.77
Maximum 623 $2,365 $4.67
Weighted Average 526 $2,190 $4.17
II.
580 Anton 580 Anton Blvd Costa Mesa 92626 165 745 $2,879 $3.86 Halcyon House 585 Anton Blvd Costa Mesa 92626 221 741 $3,022 $4.08 3400 Avenue of the Arts Apartments 3400 Avenue of the Arts Costa Mesa 92626 349 756 $2,637 $3.49 Baker Block 123 Baker Street E Costa Mesa 92626 108 789 $2,730 $3.46 Blue Sol 421 Bernard Street Costa Mesa 92627 73 771 $2,592 $3.36 2014 Wimbledon Glen 1142 Buckhingham Dr Costa Mesa 92626 102 942 $2,649 $2.81 The Enclave at South Coast 400 Enclave Circle Costa Mesa 92626 459 731 $2,787 $3.81 2008 27 Seventy Five Mesa Verde 2775 Mesa Verde Dr Costa Mesa 92626 468 780 $2,451 $3.14 Azulon at Mesa Verde 1500 Mesa Verde Dr E Costa Mesa 92626 132 834 $2,559 $3.07 2014 Minimum 731 $2,451 $2.81
Maximum 942 $3,022 $4.08
Weighted Average 770 $2,687 $3.51
Average Effective Rent
Studio Units
One-Bedroom Units
Prepared by: Keyser Marston Associates, Inc.

File name: 1 31 24 CM Apt Page 3 of 8
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ATTACHMENT 2: APPENDIX A

RENT SURVEY

APARTMENT DEVELOPMENT
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA
Name Address # of Units
Unit Size
(SF) Total Per SF Year Built
Average Effective Rent
III.
580 Anton 580 Anton Blvd Costa Mesa 92626 80 1,144 $3,780 $3.30 Halcyon House 585 Anton Blvd Costa Mesa 92626 172 1,230 $4,149 $3.37 3400 Avenue of the Arts Apartments 3400 Avenue of the Arts Costa Mesa 92626 336 1,228 $3,306 $2.69 Baker Block 123 Baker Street E Costa Mesa 92626 93 1,124 $3,376 $3.00 Blue Sol 421 Bernard Street Costa Mesa 92627 30 1,110 $3,555 $3.20 Wimbledon Glen 1142 Buckhingham Dr Costa Mesa 92626 92 1,146 $2,872 $2.51 The Enclave at South Coast 400 Enclave Circle Costa Mesa 92626 431 1,033 $3,353 $3.25 27 Seventy Five Mesa Verde 2775 Mesa Verde Dr Costa Mesa 92626 408 1,119 $2,972 $2.66 Azulon at Mesa Verde 1500 Mesa Verde Dr E Costa Mesa 92626 83 1,075 $3,045 $2.83 Minimum 1,033 $2,872 $2.51
Maximum 1,230 $4,149 $3.37
Weighted Average 1,130 $3,317 $2.94
IV.
321 Avocado Street 321 Avocado Street Costa Mesa 92627 18 1,222 $3,406 $2.79 Baker Block 123 Baker Street E Costa Mesa 92626 8 1,452 $4,540 $3.13 Blue Sol 421 Bernard Street Costa Mesa 92627 10 1,448 $4,539 $3.13 27 Seventy Five Mesa Verde 2775 Mesa Verde Dr Costa Mesa 92626 24 1,456 $3,931 $2.70 Minimum 1,222 $3,406 $2.70
Maximum 1,456 $4,540 $3.13
Weighted Average 1,384 $3,956 $2.86
Source: CoStar; April 2023
Two-Bedroom Units
Three-Bedroom Units
Prepared by: Keyser Marston Associates, Inc.

File name: 1 31 24 CM Apt Page 4 of 8
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ATTACHMENT 2: APPENDIX B

APARTMENT DEVELOPMENT

AFFORDABLE RENT CALCULATIONS
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA
Prepared by: Keyser Marston Associates, Inc.

File name: 1 31 24 CM Apt; App B Apt Titles Page 5 of 8 -30-
ATTACHMENT 2: APPENDIX B

AFFORDABLE RENT CALCULATIONS
2023 INCOME STANDARDS

APARTMENT DEVELOPMENT
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA
Studio Units
One-Bedroom
Units
Two-Bedroom
Units
Three-
Bedroom Units
I. General Assumptions
Area Median Income (AMI) 1 $89,450 $102,250 $115,000 $127,800 Monthly Utilities Allowance 2 $95 $111 $148 $183
II. Affordable Rent Calculations
A. Low Income - Rent Based on 80% AMI 3
Benchmark Annual Household Income $71,560 $81,800 $92,000 $102,240 Percentage of Income Allotted to Housing Expenses 30% 30% 30% 30% Annual Income Available for Housing Expenses $21,468 $24,540 $27,600 $30,672 Monthly Income Available for Housing Expenses $1,789 $2,045 $2,300 $2,556 (Less) Monthly Utilities Allowance (95) (111) (148) (183) Maximum Allowable Rent $1,694 $1,934 $2,152 $2,373
B. Very Low Income - Rent Based on 50% AMI 4
Benchmark Annual Household Income $44,725 $51,125 $57,500 $63,900 Percentage of Income Allotted to Housing Expenses 30% 30% 30% 30% Annual Income Available for Housing Expenses $13,418 $15,338 $17,250 $19,170 Monthly Income Available for Housing Expenses $1,118 $1,278 $1,438 $1,598 (Less) Monthly Utilities Allowance (95) (111) (148) (183) Maximum Allowable Rent $1,023 $1,167 $1,290 $1,415
1 2
3 Based on 80% of AMI. This percentage of AMI is based on the standard identified in AB 1505. 4 Based on 50% of AMI. This percentage of AMI is based on the standard identified in California Health & Safety Code Section 50053.

Based on the 2023 Orange County household incomes published by the California Department of Housing & Community Development (HCD). The benchmark household size is set at the number of bedrooms in the unit plus one.

Based on the Orange County Housing Authority utilities allowance schedule effective as of October 1, 2023. Assumes: Electric Cooking, Electric Heating, and Electric Water Heater; and Basic Electric.

Prepared by: Keyser Marston Associates
File name: 1 31 24 CM Apt; Aff Rent Page 6 of 8
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ATTACHMENT 2: APPENDIX C

IN-LIEU FEE ANALYSES
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA

APARTMENT DEVELOPMENT
Prepared by: Keyser Marston Associates, Inc.

File name: 1 31 24 CM Apt; App C 11 7 Apt ILF Page 7 of 8 -32-
ATTACHMENT 2: APPENDIX C

SUPPORTABLE IN-LIEU FEE

APARTMENT DEVELOPMENT
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA
Low Income Very Low Income Low Income Very Low Income
I. Rent Difference
A. Studio Units
Market Rents 1 $2,410 $2,410 $2,410 $2,410
Affordable Rents 2 1,694 1,023 1,694 1,023
Difference $716 $1,387 $716 $1,387
B. One-Bedroom Units
Market Rents 1 $2,970 $2,970 $2,970 $2,970
Affordable Rents 2 1,934 1,167 1,934 1,167
Difference $1,036 $1,803 $1,036 $1,803
C. Two-Bedroom Units
Market Rents 1 $3,660 $3,660 $3,660 $3,660
Affordable Rents 2 2,152 1,290 2,152 1,290
Difference $1,508 $2,371 $1,508 $2,371
D. Three-Bedroom Units
Market Rents 1 $4,400 $4,400 $4,400 $4,400
Affordable Rents 2 2,373 1,415 2,373 1,415
Difference $2,027 $2,986 $2,027 $2,986
II. Distribution of Total Units 3
Studio Units 5% 5% 5% 5%
One-Bedroom Units 50% 50% 50% 50%
Two-Bedroom Units 40% 40% 40% 40%
Three-Bedroom Units 5% 5% 5% 5%
III. Annual Rent Difference/Inclusionary Unit $15,100 $24,819 $15,056 $24,766 Less: Property Tax Difference 4 (3,656) (6,009) (3,645) (5,996) Net Annual Rent Difference/Inclusionary Unit $11,444 $18,810 $11,411 $18,770 IV. Assumptions
Total Units 300 300 172 172
Total Leasable Area 279,975 279,975 160,115 160,115
Weighted Average Unit Size (Sf) 933 933 931 931
Inclusionary Housing Percentage 11% 7% 6% 4%
Inclusionary Units 33 21 10 7
Affordability Gap Per Inclusionary Unit 5 $221,700 $364,300 $221,000 $363,500 V. In-Lieu Fee
Total In-Lieu Fee 6 $7,316,100 $7,650,300 $2,210,000 $2,544,500 Per Total Unit in the Project $24,390 $25,500 $12,850 $14,790 Per Sf of Total Leasable Area $26.10 $27.30 $13.80 $15.90 1 The market rents are drawn from the Financial Evaluation. 2 Based on the Affordable Rent Calculations included in the Financial Evaluation. 3 Based on the unit mix distribution applied in the pro forma analyses included in the Financial Evaluation. 4 Based on the Annual Rent Difference/Inclusionary Unit capitalized at a 4.75% rate to establish the value, and a 1.15% property tax rate. 5 Based on the Net Annual Rent Difference/Inclusionary Unit capitalized at the Threshold Return on Total Investment generated by the pr 6 Based on the Affordability Gap Per Inclusionary Unit multiplied times the number of Inclusionary Units. 60+ Units Per Acre <60 Units Per Acre
Prepared by: Keyser Marston Associates, Inc.

File name: 1 31 24 CM Apt; Apt 11 7 ILF Page 8 of 8
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ATTACHMENT 3

OWNERSHIP HOUSING DEVELOPMENT
INCLUSIONARY HOUSING: FINANCIAL EVALUATION

COSTA MESA, CALIFORNIA
Prepared by: Keyser Marston Associates, Inc.

File Name: 1 31 24 CM Own; Att 3 Title Page 1 of 8
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ATTACHMENT 3: APPENDIX A

OWNERSHIP HOUSING DEVELOPMENT
INCLUSIONARY HOUSING: FINANCIAL EVALUATION

COSTA MESA, CALIFORNIA

HOME SALES SURVEY
Prepared by: Keyser Marston Associates, Inc.

File Name: 1 31 24 CM Own; App A HS Page 2 of 8
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ATTACHMENT 3: APPENDIX A
RESALE HOME SALES SURVEY 1

OWNERSHIP HOUSING DEVELOPMENT
INCLUSIONARY HOUSING: FINANCIAL EVALUATION

COSTA MESA, CALIFORNIA
Unit Size (SF) Total Per SF Year Built
2152 Harmony Way Costa Mesa 92627 1,715 $800,000 $466 2014 597 Seabright Cir Costa Mesa 92627 1,559 $875,000 $561 2014 2109 W Place Dr Costa Mesa 92627 1,653 $890,000 $538 2015 2097 W Place Dr Costa Mesa 92627 1,653 $940,000 $569 2015 2170 Harmony Way Costa Mesa 92627 1,730 $949,000 $549 2014 605 Seabright Cir Costa Mesa 92627 1,559 $975,000 $625 2015 2162 Harmony Way Costa Mesa 92627 1,731 $978,000 $565 2014 577 Donovan Ln Costa Mesa 92627 1,705 $1,000,000 $587 2017 1826 Coastal Way Costa Mesa 92627 1,785 $1,015,000 $569 2014 1686 Topanga #111 Costa Mesa 92627 1,972 $1,125,000 $570 2018 3061 Paragon Costa Mesa 92626 1,937 $1,175,625 $607 2016 1675 Grand Vw Costa Mesa 92627 2,243 $1,395,000 $622 2017 Minimum 1,559 $800,000 $466 2014
Maximum 2,243 $1,395,000 $625 2018
Average 1,770 $1,009,800 $570 2015
797 Wonder Ln Costa Mesa 92627 1,738 $965,000 $555 2016 2138 Palmilla Ct Costa Mesa 92627 1,653 $995,000 $602 2015 585 Victoria St Costa Mesa 92627 1,711 $1,005,000 $587 2016 307 Ford Rd Costa Mesa 92627 1,688 $1,100,000 $652 2020 1941 Vitae Pl Costa Mesa 92627 1,700 $1,135,000 $668 2017 693 W 17th St Costa Mesa 92627 1,904 $1,150,000 $604 2019 649 W 17th St Costa Mesa 92627 1904 $1,169,000 $614 2018 1000 Katama Bay Dr Costa Mesa 92627 1,820 $1,185,000 $651 2017 3063 Paragon Costa Mesa 92626 1,847 $1,200,000 $650 2015 2998 Lumiere Costa Mesa 92626 2061 $1,225,000 $594 2019 617 W 17th St Costa Mesa 92627 2,101 $1,275,000 $607 2015 1827 Coastal Way Costa Mesa 92627 1,611 $1,300,000 $807 2014 634 Port Dr Costa Mesa 92627 2,267 $1,360,000 $600 2015 1686 Grand Vw Costa Mesa 92627 2,057 $1,375,000 $668 2017 1809 Ocean Ct Costa Mesa 92627 1,873 $1,375,000 $734 2014 636 Channel Way Costa Mesa 92627 2,267 $1,398,000 $617 2016 690 Malibu Costa Mesa 92627 2,142 $1,448,000 $676 2019
1679 Topanga Costa Mesa 92627 2,057 $1,500,000 $729 2019 1676 Grand Vw Costa Mesa 92627 2,057 $1,535,000 $746 2018 1676 Pomona Ave Costa Mesa 92627 2,057 $1,565,000 $761 2019 301 Shadow Bay Dr Costa Mesa 92627 1913 $1,620,000 $847 2015 607 Trestles Costa Mesa 92627 2,366 $1,740,000 $735 2018 628 Cardiff Reef Costa Mesa 92627 2,380 $1,775,000 $746 2019 Minimum 1,611 $965,000 $555 2014
Maximum 2,380 $1,775,000 $847 2020
Average 1,964 $1,321,500 $673 2017
Sales Price
Address
Two-Bedroom Units
Three-Bedroom Units
Prepared by: Keyser Marston Associates, Inc.

File name: 1 31 24 CM Own; Home Resales Page 3 of 8
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ATTACHMENT 3: APPENDIX A
RESALE HOME SALES SURVEY 1

OWNERSHIP HOUSING DEVELOPMENT
INCLUSIONARY HOUSING: FINANCIAL EVALUATION

COSTA MESA, CALIFORNIA
Unit Size (SF) Total Per SF Year Built
Sales Price
Address
2120 Palmilla Ct Costa Mesa 92627 1,763 $1,049,000 $595 2015 2108 Harper Way Costa Mesa 92627 2,019 $1,115,000 $552 2016 2633 Clarion Ln Costa Mesa 92626 2,230 $1,320,000 $592 2017 2988 Lumiere Dr Costa Mesa 92626 2,227 $1,335,000 $599 2018 1648 Topanga Costa Mesa 92627 2,142 $1,375,000 $642 2019 947 Tesla Ln Costa Mesa 92626 2,453 $1,400,000 $571 2019 1669 Grand Costa Mesa 92627 2,142 $1,435,000 $670 2018
174 Costa Mesa Costa Mesa 92627 1,942 $1,515,000 $780 2019 137 Woodflower Ln Costa Mesa 92627 2,361 $1,515,000 $642 2018 1034 Bridgewater Way Costa Mesa 92627 1,869 $1,625,000 $869 2018 393 Latitude Pl E Costa Mesa 92627 2,148 $1,775,000 $826 2016 1923 Church St Costa Mesa 92627 2,432 $1,860,000 $765 2022 309 Anderson Ln Costa Mesa 92627 2,344 $2,000,000 $853 2014 Minimum 1,763 $1,049,000 $552 2014
Maximum 2,453 $2,000,000 $869 2022
Average 2,159 $1,486,100 $688 2018
Source: Redfin; June 2023
1 Based on a search of the Redfin data base for sales occurring between May 2022 and June 2023. The survey is limited to homes constructed within the past 10 years with a sales price of $2 million or less.

Four-Bedroom Units
Prepared by: Keyser Marston Associates, Inc.

File name: 1 31 24 CM Own; Home Resales Page 4 of 8
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ATTACHMENT 3: APPENDIX B

AFFORDABLE SALES PRICE CALCULATIONS

OWNERSHIP HOUSING DEVELOPMENT
INCLUSIONARY HOUSING: FINANCIAL EVALUATION

COSTA MESA, CALIFORNIA
Prepared by: Keyser Marston Associates, Inc.

File Name: 1 31 24 CM Own; App B ASP Page 5 of 8
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ATTACHMENT 3: APPENDIX B
AFFORDABLE SALES PRICE CALCULATIONS 1
MODERATE INCOME UNITS - 2023 INCOME STANDARDS

OWNERSHIP HOUSING DEVELOPMENT
INCLUSIONARY HOUSING: FINANCIAL EVALUATION

COSTA MESA, CALIFORNIA
Two-Bedroom
Units
Three-Bedroom
Units
Four-Bedroom
Units
General Assumptions
Area Median Income 2 $115,000 $127,800 $138,000
Annual Utilities Allowance 3 $2,988 $3,804 $4,704
HOA, Maintenance & Insurance 4 $4,200 $4,800 $5,400
I. Income Allotted to Housing Based on 110% AMI
Benchmark Annual Household Income $126,500 $140,580 $151,800 Income Allotted to Housing @ 35% of Income $44,280 $49,200 $53,130 II. Property Taxes @ 1.15% of Affordable Sales Price $4,750 $5,200 $5,510 III. Income Available for Mortgage Debt Service 5 $32,342 $35,396 $37,516 IV. Affordable Sales Price
Supportable Mtg @ 7.33% Interest 6 $392,100 $429,100 $454,800 Home Buyer Down Payment @ 5% of ASP 20,600 22,600 23,900 Affordable Sales Price $412,700 $451,700 $478,700
1 2
3 4 Based in part on the HOA dues identified in the home sales survey. 5 6
Based on 2023 Orange County household incomes published by the California Department of Housing & Community Development (HCD). The Affordable Sales Price calculations are based on the California Health and Safety Code Section 50052.5 methodology.

Under the California Health & Safety Code Section 50052.5 calculation methodology, the benchmark household size is set at the number of bedrooms in the unit plus one. This benchmark is used solely for the purposes of calculating the Affordable Sales Price. It is neither an occupancy cap nor a floor.

Utilities allowances are based on the Orange County Housing Authority utilities allowance schedule effective as of October 1, 2023 Assumes: Electric Heating, Electric Cooking, Electric Water Heater, Basic Electric, Water, Sewer, and Trash.

Based on the Income Allotted to Housing minus the following: Annual Utilities Allowance; HOA, Maintenance & Insurance; and Property Taxes @ 1.15% of Affordable Sales Price.

Based on a 50 basis points premium applied to the Freddie Mac monthly average, between February 2023 and January 2024, for a fixed- interest rate loan with a 30-year amortization period.

Prepared by: Keyser Marston Associates
File name: 1 31 24 CM Own; ASP Page 6 of 8
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ATTACHMENT 3: APPENDIX C

IN-LIEU FEE ANALYSES

OWNERSHIP HOUSING DEVELOPMENT
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA
Prepared by: Keyser Marston Associates, Inc.

File Name: 1 31 24 CM Own; App C Own ILF Page 7 of 8
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ATTACHMENT 3: APPENDIX C

OWNERSHIP HOUSING DEVELOPMENT
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA
I. Sales Price Difference
A. Two-Bedroom Units
Market Rate Sales Price 1 $890,000
Affordable Sales Price 2 412,700
Difference $477,300
B. Three-Bedroom Units
Market Rate Sales Price 1 $1,083,000
Affordable Sales Price 2 451,700
Difference $631,300
C. Four-Bedroom Units
Market Rate Sales Price 1 $1,211,000
Affordable Sales Price 2 478,700
Difference $732,300
II. Distribution of Total Units 3
Two-Bedroom Units 25%
Three-Bedroom Units 60%
Four-Bedroom Units 15%
III. Assumptions
Total Units 85
Total Saleable Area 137,750
Weighted Average Unit Size (Sf) 1,620
Inclusionary Housing Percentage 5%
Inclusionary Units 4
Affordability Gap Per Inclusionary Unit 4 $608,000
IV. In-Lieu Fee
Total In-Lieu Fee $2,432,000
Per Total Unit in the Project $28,610
Per Sf of Saleable Area $17.70
1 2 See ATTACHMENT 3: APPENDIX B
3 Based on the unit mix distribution applied in the pro forma analyses. 4 Based on the Affordability Gap Per Inclusionary Unit multiplied times the Supportable Inclusionary Housing Percentage.

Based in part on a survey of homes in Costa Mesa that were constructed after 2014 and resold between May 2022 and June 2023. See ATTACHMENT 3: APPENDIX A.

Prepared by: Keyser Marston Associates, Inc.

File Name: 1 31 24 CM Own; Own ILF Page 8 of 8
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777 SOUTH FIGUEROA STREET, SUITE 2555  LOS ANGELES, CALIFORNIA 90017  PHONE 213.622.8095 2401014.CM:KHH
WWW.KEYSERMARSTON.COM 11391.031.001

ADVISORS IN:

Real Estate
Affordable Housing
Economic Development

BERKELEY
Debbie M. Kern
David Doezema

LOS ANGELES
Kathleen H. Head
Kevin E. Engstrom
Julie L. Romey
Tim R. Bretz

AN DIEGO
Paul C. Marra
Linnie A. Gavino

EMERITUS
A. Jerry Keyser
Timothy C. Kelly

MEMORANDUM

Keyser Marston Associates, Inc. (KMA) prepared an Inclusionary Housing: In-Lieu Fee Analysis (In-Lieu Fee Analysis) in a report dated January 31, 2024. The In-Lieu Fee Analysis was based on the Inclusionary Housing requirements included in Ordinance 2024-XX (Ordinance), which received its first reading on January 16, 2024.

The proposed Ordinance imposes the following Inclusionary Housing requirements on apartment developments that include 15 or more units:

1. Projects developed at a density level of 60 units per acre or greater must allocate 11% of the units to low income households, or 7% of the units to very low income households.

2. Projects developed at a density level of less than 60 units per acre must allocate 6% of the units to low income households, or 4% of the units to very low income households.

At their January 16, 2024 meeting the City Council discussed reducing the Inclusionary Housing requirements, for apartments developed at 60 units per acre or greater, to a 10% low income standard or a 5% very low income standard. The requirements for apartments developed at less than 60 units per acre were not proposed to be modified.

To: Nancy Huynh, Principal Planner
City of Costa Mesa
From: Kathleen Head
Date: January 31, 2024
Subject: Inclusionary Housing: Supplemental In-Lieu Fee Analysis

-42-
Nancy Huynh, City of Costa Mesa January 31, 2024
Inclusionary Housing: Supplemental In-Lieu Fee Analysis Page 2

2401014.CM:KHH
11391.031.001

KMA prepared the following Inclusionary Housing: Supplemental In-Lieu Fee Analysis (Supplemental Analysis) to identify the applicable in-lieu fee payment amounts based on these alternate Inclusionary Housing requirements. The fundamental assumptions and methodology applied in this Supplemental Analysis are the same as were applied in the In-Lieu Fee Analysis.

KEY FINDINGS
If the City Council chooses to adopt the reduced Inclusionary Housing requirements for apartment developments at a density level of 60 units per acre or greater, based on the results of the Supplemental Analysis, KMA offers the following recommendations:

1. The base in-lieu fee payment amount should be set at $19.50 per square foot of total leasable area in an apartment development that is subject to the Inclusionary Housing program requirements.

2. KMA prepared a discounted in-lieu fee schedule for apartment developments that consist of between 15 and 20 units. The recommended in-lieu fee schedule is presented below:

APPROACH
The Supplemental Analysis is based on an evaluation of the prototype developments that were used in the Inclusionary Housing: Financial Evaluation report. The foundational premise is that the in-lieu fee will be based on the “Affordability Gap” associated with producing the affordable units required by the Inclusionary Housing Program.

Units In-Lieu Fee
15 $2.
79 16 $5.57
17 $8.36
18 $11.14
19 $13.93
20 $16.71
21+ $19.50
In-Lieu Fee Payment Schedule
Per Square Foot of Total Leasable Area
in an Apartment Development
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Nancy Huynh, City of Costa Mesa January 31, 2024
Inclusionary Housing: Supplemental In-Lieu Fee Analysis Page 3

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SUPPORTING DOCUMENTS
The Supplemental Analysis is supported by the following Attachments and Appendices:

ATTACHMENT 1: AFFORDABLE HOUSING COST CALCULATION METHODOLOGY ATTACHMENT 2: APARTMENT DEVELOPMENT
Appendix A: Rent Survey 4+ Star Properties
Appendix B: Affordable Rent Calculations
Appendix C: In-Lieu Fee Calculations

ASSUMPTIONS
Apartment Rent Estimates
The apartment rents used in the Supplemental Analysis are presented in the following table:

Estimated Apartment Rents
Number of
Bedrooms
Market Rate
Units
Low Income
Units
Very Low
Income Units
Studio $2,410 $1,694 $1,023
1 $2,970 $1,934 $1,167
2 $3,660 $2,152 $1,290
3 $3,330 $2,373 $1,415

Affordability Gap Calculation Methodology
The Affordability Gap calculations are presented in Attachment 2: Appendix C; the calculations are based on the following assumptions:

1. The differences between the estimated achievable market rate rents and the defined Affordable Rents were calculated.
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Nancy Huynh, City of Costa Mesa January 31, 2024
Inclusionary Housing: Supplemental In-Lieu Fee Analysis Page 4

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2. KMA assumed that the property taxes for projects that include designated affordable units would be based on a lower assessed value due to the reduction in net operating income that would be generated by the project. KMA deducted this lower property tax expense from the estimated rent difference.

3. The estimated “Net Annual Rent Difference Per Inclusionary Unit” represents the annual rent difference minus the estimated property tax savings.

Estimated Affordability Gaps
The Affordability Gaps derived from the analysis are estimated as follows:

Estimated Affordability Gaps Per Inclusionary Unit
Low Income Units $221,700
Very Low Income Units $364,300

It is important to note that estimated Affordability Gaps per Inclusionary Unit do not vary from the amounts identified in the In-Lieu Fee Analysis report. The difference between the In-Lieu Fee Analysis and this Supplemental Analysis is the percentage of Inclusionary Units required to be provided in the apartment development.

In-Lieu Fee Calculations

ESTIMATED BASE IN-LIEU FEE PAYMENT AMOUNTS
The Affordability Gaps Per Inclusionary Unit were converted into the in-lieu fee payment that would be required to fulfill the Inclusionary Housing requirements on site within a proposed market rate apartment development. The conversion calculations are presented in Attachment 2: Appendix C, and the results are summarized in the following table.

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Nancy Huynh, City of Costa Mesa January 31, 2024
Inclusionary Housing: Supplemental In-Lieu Fee Analysis Page 5

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Estimated Base In-Lieu Fee Payment Amounts
Per Square Foot of Total Leasable Area
in an Apartment Development
Low Income Units $23.80
OR
Very Low Income Units $19.50

Under the Ordinance terms Developers can choose between the low and very low income Inclusionary Housing requirements. As such, it is appropriate to set the in-lieu fee payment at the lower of the two amounts derived from the Affordability Gap analyses. The resulting recommended in-lieu fee payment amount is $19.50 per square foot of total leasable area in an apartment development.

IN-LIEU FEE PAYMENT SCHEDULE
KMA prepared a discounted in-lieu fee schedule for apartment developments that consist of between 15 and 20 units. The resulting recommended in-lieu fee schedule is presented below:

Units In-Lieu Fee
15 $2.
79 16 $5.57
17 $8.36
18 $11.14
19 $13.93
20 $16.71
21+ $19.50
In-Lieu Fee Payment Schedule
Per Square Foot of Total Leasable Area
in an Apartment Development
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Inclusionary Housing: Supplemental In-Lieu Fee Analysis Page 6

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FRACTIONAL IN-LIEU FEE PAYMENT
Some developers may choose to pay a fee in lieu of fulfilling an obligation to produce a fraction of an Inclusionary Unit. The following table provides a recommended schedule of fractional in- lieu fee payments.

Affordability Gap Per Inclusionary Unit $221,700
Average Unit Size (Square Feet of Leasable Area) 933
In-Lieu Fee Per Square Foot of One Unit $237.60
Fraction
Fractional In-Lieu Fee:

Per Square Foot of One Unit
Total Fractional In-Lieu Fee:

Prototype Apartment
Development

0.10 $23.80 $22,210

0.20 $47.50 $44,330

0.30 $71.30 $66,540

0.40 $95.00 $88,660

0.50 $118.80 $110,870

0.60 $142.60 $133,080

0.70 $166.30 $155,200

0.80 $190.10 $177,410

0.90 $213.80 $199,530

1.00 $237.60 $221,740
Fractional In-Lieu Fee Payment Calculations
Per Square Foot of the Leasable Area of One Unit in an Apartment Development -47-

ATTACHMENT 1

AFFORDABLE RENT CALCULATION METHODOLOG Y
INCLUSIONARY HOUSING:

SUPPLEMENTAL IN-LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA

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Affordable Housing Cost Calculation Methodologies Page 1 Inclusionary Housing: Supplemental In-Lieu Fee Analysis January 31, 2024

ATTACHMENT 1

AFFORDABLE RENT CALCULATION METHODOLOGY

ASSUMPTIONS
The Affordable Rent calculations are presented in Attachment 2 – Appendix B. The calculations are based on the following assumptions:

4. Thirty percent (30%) of defined household income is allocated to housing-related expenses.

5. The following monthly utilities allowances were applied in this analysis. 2 1 For example, the imputed household size for a two-bedroom unit is three persons. 2 Utilities allowances are based on utilities costs comprised of electric heating, cooking and water heating; and basic electric. The allowances are based on the Orange County Housing Authority schedule effective as of October 1, 2023. -49-
Affordable Housing Cost Calculation Methodologies Page 2 Inclusionary Housing: Supplemental In-Lieu Fee Analysis January 31, 2024

Utility Allowances
Apartment Development
Number of
Bedrooms
Monthly Utilities
Allowances
Studio $95
1 $111
2 $148
3 $183

AFFORDABLE RENTS
The resulting affordable rents are presented in the following table:

Affordable Rents
Apartment Development
Number of
Bedrooms

Low Income
Very Low
Income
Studio $1,694 $1,023
1 $1,934 $1,167
2 $2,152 $1,290
3 $2,373 $1,415

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ATTACHMENT 2

APARTMENT DEVELOPMENT
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA
Prepared by: Keyser Marston Associates, Inc.

File name: 1 31 24 CM Apt; ATT 2 TITLE Page 1 of 8
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ATTACHMENT 2: APPENDIX A

RENT SURVEY
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA

APARTMENT DEVELOPMENT
Prepared by: Keyser Marston Associates, Inc.

File name: 1 31 24 CM Apt; App A Apt Titles Page 2 of 8 -52-
ATTACHMENT 2: APPENDIX A

RENT SURVEY

APARTMENT DEVELOPMENT
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

File name: 1 31 24 CM Apt Page 3 of 8
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ATTACHMENT 2: APPENDIX A

RENT SURVEY

APARTMENT DEVELOPMENT
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

File name: 1 31 24 CM Apt Page 4 of 8
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ATTACHMENT 2: APPENDIX B

APARTMENT DEVELOPMENT

AFFORDABLE RENT CALCULATIONS
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA
Prepared by: Keyser Marston Associates, Inc.

File name: 1 31 24 CM Apt; App B Apt Titles Page 5 of 8 -55-
ATTACHMENT 2: APPENDIX B

AFFORDABLE RENT CALCULATIONS
2023 INCOME STANDARDS

APARTMENT DEVELOPMENT
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

Based on the Orange County Housing Authority utilities allowance schedule effective as of October 1, 2023. Assumes: Electric Cooking, Electric Heating, and Electric Water Heater; and Basic Electric.

Prepared by: Keyser Marston Associates
File name: 1 31 24 CM Apt; Aff Rent Page 6 of 8
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ATTACHMENT 2: APPENDIX C

IN-LIEU FEE ANALYSES

APARTMENT DEVELOPMENT
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA
Prepared by: Keyser Marston Associates, Inc.

File name: 1 31 24 CM Apt; App C Apt 10 5 ILF Page 7 of 8 -57-
ATTACHMENT 2: APPENDIX C

SUPPORTABLE IN-LIEU FEE

APARTMENT DEVELOPMENT
INCLUSIONARY HOUSING: IN-LIEU FEE ANALYSIS

COSTA MESA, CALIFORNIA
Low Income Very Low Income Low Income Very Low Income
I. Rent Difference
A. Studio Units
Market Rents 1 $2,410 $2,410 $2,410 $2,410
Affordable Rents 2 1,694 1,023 1,694 1,023
Difference $716 $1,387 $716 $1,387
B. One-Bedroom Units
Market Rents 1 $2,970 $2,970 $2,970 $2,970
Affordable Rents 2 1,934 1,167 1,934 1,167
Difference $1,036 $1,803 $1,036 $1,803
C. Two-Bedroom Units
Market Rents 1 $3,660 $3,660 $3,660 $3,660
Affordable Rents 2 2,152 1,290 2,152 1,290
Difference $1,508 $2,371 $1,508 $2,371
D. Three-Bedroom Units
Market Rents 1 $4,400 $4,400 $4,400 $4,400
Affordable Rents 2 2,373 1,415 2,373 1,415
Difference $2,027 $2,986 $2,027 $2,986
II. Distribution of Total Units 3
Studio Units 5% 5% 5% 5%
One-Bedroom Units 50% 50% 50% 50%
Two-Bedroom Units 40% 40% 40% 40%
Three-Bedroom Units 5% 5% 5% 5%
III. Annual Rent Difference/Inclusionary Unit $15,100 $24,819 $15,056 $24,766 Less: Property Tax Difference 4 (3,656) (6,009) (3,645) (5,996) Net Annual Rent Difference/Inclusionary Unit $11,444 $18,810 $11,411 $18,770 IV. Assumptions
Total Units 300 300 172 172
Total Leasable Area 279,975 279,975 160,115 160,115
Weighted Average Unit Size (Sf) 933 933 931 931
Inclusionary Housing Percentage 10% 5% 6% 4%
Inclusionary Units 30 15 10 7
Affordability Gap Per Inclusionary Unit 5 $221,700 $364,300 $221,000 $363,500 V. In-Lieu Fee
Total In-Lieu Fee 6 $6,651,000 $5,464,500 $2,210,000 $2,544,500 Per Total Unit in the Project $22,170 $18,220 $12,850 $14,790 Per Sf of Total Leasable Area $23.80 $19.50 $13.80 $15.90 1 The market rents are drawn from the Financial Evaluation. 2 Based on the Affordable Rent Calculations included in the Financial Evaluation. 3 Based on the unit mix distribution applied in the pro forma analyses included in the Financial Evaluation. 4 Based on the Annual Rent Difference/Inclusionary Unit capitalized at a 4.75% rate to establish the value, and a 1.15% property tax rate. 5 Based on the Net Annual Rent Difference/Inclusionary Unit capitalized at the Threshold Return on Total Investment generated by the p 6 Based on the Affordability Gap Per Inclusionary Unit multiplied times the number of Inclusionary Units. 60+ Units Per Acre <60 Units Per Acre
Prepared by: Keyser Marston Associates, Inc.

File name: 1 31 24 CM Apt; Apt 10 5 ILF Page 8 of 8
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Costa Mesa City CouncilFebruary 27, 2024

Costa Mesa City Council
February 27, 2024