February 27, 2024
City Council Study Session
Affordable Housing Ordinance
In-Lieu Fee Study Session
2 Community Demographics
• Lower Income Households: Approximately 47-percent of the Costa Mesa community earn a lower income and approximately 29-percent of the community qualify for very low or extremely low-income housing. • Housing Cost Burdens/Overpayment: Nearly half of renters in Costa Mesa experience housing cost burdens that exceed 30-percent of gross income and over a quarter of renters experience severe housing cost burdens that exceed 50-percent of gross income.
• Low Vacancy Rates: Costa Mesa has a low housing vacancy rate which indicates that there is a high demand for housing but low supply to fulfill the community’s housing needs.
• Age Characteristics: Population aged 65 and over experienced the most growth in Costa Mesa between 2010 and 2018; young adults 20 to 34 years represent the largest age group in Costa Mesa at over 25% of the population.
Similarly, the senior age group & young adults tend to have comparatively lower incomes and tend to favor apartments, or more affordable, single-family units, townhomes, or condominiums.
3 Housing Element
• Housing Element includes over 40 programs for a comprehensive strategy to address housing needs
• Housing Goal #2 - “facilitate the creation and availability of housing for residents at all income levels and for those with special housing needs.”
• Housing Element Program 2A - Adoption of Inclusionary Housing Ordinance
o establishing new housing projects to provide a certain percentage of its housing units as affordable units
o moderate, low, and/or very low-income households
o option of payment of funds in-lieu of providing affordable units onsite
• Adoption of Inclusionary Housing Ordinance - Required to obtain certification of Housing Element
4 Inclusionary Housing Ordinance - Best Practices
• Ordinance developed with best practices to produce affordable housing:
o Promote the development of affordable housing without unduly constraining the creation of market rate housing
o Balances the City’s housing needs with the needs of property owners and developers, while also considering the added value from future rezoning to allow more or new density
o Leverages the private sector’s capacity to get homes built o Creates a new source of financing for affordable housing with the payment of funds in-lieu of the project providing the specified affordable units onsite
• City data driven recommendations – Costa Mesa specific analysis utilizing price and unit size information for rental and ownership housing
KEYSER MARSTON ASSOCIATES, INC.
FEBRUARY 27, 2024
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Planning
Commission and
City Council Actions:
Ordinance 2024-XX
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Planning Commission - November 13, 2024
The draft ordinance amends Title 13 of the Costa Mesa Municipal Code to establish affordable housing requirements for new residential development projects.
Planning Commission recommended changes to the draft ordinance.
Planning Commission voted 5-2 to recommend that the City Council give first reading to Ordinance 2024-XX with their proposed changes.
City Council – January 16, 2024
City Council made additional changes to the draft ordinance.
City Council voted 4-2 to give first reading to the revised Ordinance 2024-XX.
City Council directed staff to provide an in-lieu fee analysis for review and consideration at the second reading of Ordinance 2024-XX.
KEYSER MARSTON ASSOCIATES, INC.
Summary:
Proposed Affordable Housing Requirements
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Program Component City Council’s Proposed Requirements
Project Size Threshold 15 Units
Affordable Housing Percentage Requirement / Income Standards Rental Projects 60+ du/acre: 11% low or 7% very low Under 60 du/acre: 6% low or 4% very low Ownership Projects No specific production requirement - in-Lieu fee payment allowed for all projects Covenant Period Rental: at least 55 years Ownership: 45 years (if producing units) Affordable Unit Characteristics Proportional to bedroom mix and no more than 15% smaller than average market rate units. Evenly distributed throughout the residential project.
In-Lieu Fee Payment Rental: Projects with 50 or fewer units Ownership: all projects are eligible Other Compliance Alternatives Land dedication; off-site construction of affordable units; on-site construction of rental units (ownership projects only)
Incentives Residential uses in commercial/industrial corridors; increased densities; low income rents based on 80% AMI instead of State density bonus at 60% AMI; reduced parking requirements; concurrent processing
KEYSER MARSTON ASSOCIATES, INC.
In-Lieu Fee
Analysis
Approach
The KMA in-lieu fee analysis is based on:
◦ The evaluation of the prototype developments that were used in the Financial Evaluation; and
◦ The affordable housing requirements included in the draft ordinance as modified by the City Council.
The foundational premise is that the in-lieu fee
should correlate to the “Affordability Gap”
associated with producing the affordable units
required by the ordinance.
The Affordability Gap is defined as the difference
between the achievable market rate rents or sales
prices and the allowable rents or sales prices for
the designated affordable units.
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Rent Estimates for Costa Mesa
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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
Projected Market Rate Rents
Apartment Development Prototype
Number of Bedrooms Monthly Rent
Studio $2,410
1 $2,970
2 $3,660
3 $3,330
KEYSER MARSTON ASSOCIATES, INC.
Affordability Gap Calculation Methodology
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Differences between Market Rents and Affordable Rents are calculated.
Property tax differential is estimated and deducted from the differences between the Market Rents and the Affordable Rents.
The difference represents the annual Affordability Gap.
The net Affordability Gap per affordable unit is estimated by capitalizing the annual Affordability Gap at the threshold return derived from the pro forma analysis of the prototype apartment development at unrestricted market rate rents.
Estimated Affordability Gaps Per Affordable Unit in
Costa Mesa
Estimated Affordability Gaps Per Affordable 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
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Base In-Lieu Fee Calculations:
Apartment Development
The Affordability Gaps Per affordable unit were converted into the in-lieu fee payment that would be required to fulfill the affordable housing requirements on site within a proposed market rate apartment development. The results are presented in the table below:
February 27, 2024 14KEYSER MARSTON ASSOCIATES, INC.
Base In-Lieu Fee Payment Amounts
Per Square Foot of Leasable Area in an Apartment Development Density at 60+ Units Per Acre 11% Low or 7% Very Low Income $26.10 Density at Less than 60 Units Per Acre 6% Low or 4% Very Low Income $13.80 Sample In-Lieu Fee Calculations:
Apartment Density at 60+Units Per Acre
February 27, 2024 KEYSER MARSTON ASSOCIATES, INC. 15
Total Units 23
Affordable Housing Requirement - Low Income 11%
Required Number of Low Income Units 3
Leasable Area (Square Feet) 17,000
In-Lieu Fee Per Square Foot of Leasable Area $26.10
Required Total In-Lieu Fee Payment $443,700
Affordable Housing Requirement at 11% Low or 7% Very Low Income In-Lieu Fee Example
Total Units 23
Affordable Housing Requirement - Very Low Income 5%
Required Number of Low Income Units 1
Leasable Area (Square Feet) 17,000
In-Lieu Fee Per Square Foot of Leasable Area $19.50
Required Total In-Lieu Fee Payment $331,500
Affordable Housing Requirement at 10% Low or 5% Very Low Income In-Lieu Fee Example
Sample In-Lieu Fee Calculations:
Apartment Density at Less than 60 Units Per Acre
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Total Units 240
Affordable Housing Requirement - Low Income 6%
Required Number of Low Income Units 14
Leasable Area (Square Feet) 220,000
In-Lieu Fee Per Square Foot of Leasable Area $13.80
Required Total In-Lieu Fee Payment $3,036,000
In-Lieu Fee Example
Affordable Housing Requirement at 6% Low or 4% Very Low Income Sliding Scale In-Lieu Fees:
Apartment Development
To mitigate the disproportionate impact an affordable housing obligation creates on small projects, KMA prepared the following discounted in-lieu fee schedule for apartment developments that consist of between 15 and 20 units:
February 27, 2024 17KEYSER MARSTON ASSOCIATES, INC.
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
In-Lieu Fee Payment Schedule
Per Square Foot of Total Leasable Area
in an Apartment Development
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Sales Price Estimates for Costa Mesa
Projected Market Rate Sales Prices
Ownership Housing Development Prototype
Number of Bedrooms Sales Prices
2 $890,000
3 $1,083,000
4 $1,211,000
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Affordable Sales Prices
Ownership Housing Development Prototype
Number of
Bedrooms Moderate Income
2 $412,700
3 $451,700
4 $478,700
KEYSER MARSTON ASSOCIATES, INC.
Estimated Affordability Gaps Per Affordable Unit in
Costa Mesa
Estimated Affordability Gaps Per Affordable 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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Base In-Lieu Fee Calculations:
Ownership Housing Development
The weighted average Affordability Gaps were converted into the in-lieu fee payment that would be required to fulfill the affordable housing requirements on site within a proposed ownership housing development. The results are presented in the table below:
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Base In-Lieu Fee Payment
Ownership Housing Development
Weighted Average Affordability Gap Per Affordable Unit $608,000 In-Lieu Fee Payment Per Square Foot of Saleable Area $17.70 KEYSER MARSTON ASSOCIATES, INC.
Sliding Scale In-Lieu Fees:
Ownership Housing Development
To mitigate the disproportionate impact an affordable housing obligation creates on small projects, KMA prepared the following discounted in-lieu fee schedule for ownership housing developments that consist of between 15 and 20 units:
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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
In-Lieu Fee Payment Schedule
Ownership Housing Development Prototype
Sample In-Lieu Fee Calculations
Ownership Housing Development
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Total Units in the Project 16 30
Saleable Area (Square Feet) 38,900 73,000
In-Lieu Fee Per Square Foot of Saleable Area $5.06 $17.70 Required Total In-Lieu Fee $196,700 $1,292,100
In-Lieu Fee Example
Example Ownership Housing Projects
Density Bonus
Developers can use State Density Bonus (Govt. Code Section 65915 et seq.) by right for qualifying residential projects. Benefits are:
◦ Increased density above General Plan Land Use Element standards ◦ A statutorily defined number of concessions or incentives ◦ Development standards reductions or waivers if physically needed If a developer uses the State Density Bonus, the City must count the density bonus affordable units towards the City’s affordable requirements as long as the more stringent requirements of the two programs is applied.
The goal of the City’s program is to provide similar or greater incentives than the State Density Bonus while being consistent with the community’s housing values.
February 27, 2024 KEYSER MARSTON ASSOCIATES, INC. 24
Density Bonus
100 unit rental project at 60 units/acre
City’s Affordable Requirement:
◦ 11% Low: 11 units – or – 7% Very Low: 7 units
State Density Bonus (50% density bonus):
◦ 24% Low: 24 units – or – 15% Very Low: 15 units
Developer’s Options
1. If developer uses State Density Bonus at low income, 11 of the 24 density bonus affordable units will count towards satisfying the City’s affordable requirement. However, the low income rent calculated under the State Density Bonus is based on 60% of AMI.
2. If developer uses State Density Bonus at very low income, 7 of the 15 density bonus affordable units will count towards satisfying the City’s affordable requirement.
3. If a developer chooses to pay the City’s in-lieu fee, the project will not be eligible for the State Density Bonus and must comply with City’s affordable requirement.
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Recommended In-Lieu Payment Amounts
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:
Rental Projects
◦ 60+ du/acre: $26.10/leaseable sq. ft.
◦ Between 15 – 20 units: $3.73 – $22.37
◦ Under 60 du/acre: $13.80/leaseable sq. ft.
◦ Between 15 – 20 units: $1.97 – $11.83
Ownership Projects
◦ $17.70/saleable sq. ft.
◦ Between 15 – 20 units: $2.53 – $15.17
February 27, 2024 KEYSER MARSTON ASSOCIATES, INC. 27
Recommended Affordable Housing Program Updates
February 27, 2024 KEYSER MARSTON ASSOCIATES, INC. 28
The Affordable Housing Program
should be evaluated at least
every five years.
To allow in-lieu fees to keep pace
with changes in the market
during the intervening period,
the in-lieu fee should continue to
be adjusted each year based on
the following process:
Median sales value information
for new homes in Orange County
should be compiled annually.
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.
Affordable Housing Program Example:
Huntington Beach
30 Huntington Beach – Existing Affordable Units
Elan
Monarch Walk
Coastal Walk
Residences at
Pacific City
75 existing
affordable
housing
properties
w/
approx
.
3 ,
000
units
31 Huntington Beach – Existing Affordable Units
Elan
18504 Beach Blvd.
274 Total Units
Rental Property
274 Low- and Moderate-Income Units
32 Huntington Beach – Existing Affordable Units
Residences at Pacific City
21060 Pacific City Cir.
516 Total Units
Rental Property
51 Moderate-Income Units
33 Huntington Beach – Existing Affordable Units
Coastal Walk
16877-16901 Airport Cir.
45 Total Units
Ownership Property
4 Moderate-Income Units
34 Huntington Beach – Existing Affordable Units
Monarch Walk
17541-17557 Newland St.
13 Total Units
Ownership Property
2 Moderate-Income Units
35 Community Benefits of Affordable Housing Program
• Achieve City Council Housing Goal to “diversify,
stabilize, and increase housing to reflect community
needs”
• Contribute towards the State’s Regional Housing Needs Allocation (RHNA)
• Comprehensive and diverse affordable housing program
provides developers options to design projects to
maximize potential housing development while meeting
local affordable housing objectives
36 Community Benefits of Affordable Housing Program
• Increase affordable housing options for the community especially lower income households including seniors
• Develop diverse neighborhoods with varying age groups and socioeconomic backgrounds
• Helps reduce or end the cycle of poverty, eviction,
homelessness in the community
37 Conclusion
• Recommendations provided are data driven based on Costa Mesa specific analysis
• Ordinance can be modified in the future and
recommendation for regular program and fee review
• Best practices utilized by local governments for affordable housing
• Much needed affordable housing is produced along with market-rate units
• Requiring affordable units as part of new residential development ensures units are built onsite and integrated into a housing project
38 Next Steps
• March 19, 2024 City Council Meeting:
o Second Reading of Affordable Housing Ordinance
o In-Lieu Fee Resolution/Revised Fee Schedule
• Notify State HCD of adoption of ordinance which satisfies Program 2A of the Housing Element
• Prepare program guidelines for implementation including template agreements/forms and administrative regulations • Mid-year budget adjustment for staffing recommendations 39 Staff’s Recommendation
• Staff Recommends: City Council receive the staff
presentation and provide direction on proposed in-lieu fee amounts and subsequent fee resolution for potential future City Council adoption
February 27, 2024
City Council Study Session
Affordable Housing Ordinance
In-Lieu Fee Study Session