EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: April 19, 2022
TO: Honorable Mayor and Members of the City Council
VIA: Jaime M. Fontes, City Manager
BY: Karen Camacho, Housing Project Manager
Rachel Horst, Housing and Economic Development Manager
SUBJECT: Modified Gross Receipts Tax Ballot Measure for Affordable Housing Revenue Recommendation
That the City Council:
1. Provide further direction on the Ballot Measure concepts;
2. Select two subcommittee members for the Ballot Measure argument; and
3. Direct staff to return to the May 3, 2022 City Council meeting with the draft proposed Ballot Measure for consideration and adopting a resolution:
a. Calling and ordering the submission of the ballot measure, and b. Consolidating the municipal election with the statewide November 2022 election.
Alignment with City Council Strategic Plan
This recommendation is primarily aligned with:
Priority No. 2: Enhance Economic Vitality
Priority No. 3: Increase Organizational Effectiveness and Efficiency Priority No. 6: Create a Healthy and Safe Community
Background
On March 15, 2022, the City Council reviewed a report by David Rosen & Associates on potential revenue sources to support affordable housing activities.1 The three potential revenue sources included a new parcel tax, a modified Transient Occupancy Tax (“Modified TOT”), and a modified Gross Receipts Tax (“Modified GRT”). City Council expressed interest in exploring the Modified GRT option due to its potential to generate the most revenue. 1 A recording of the March 15, 2022 City Council meeting and all meeting materials can be viewed at http://eastpaloalto.iqm2.com/Citizens/SplitView.aspx?Mode=Video&MeetingID=1804&MinutesID=1518&F ormat=Minutes&MediaFileFormat=mpeg4.
On April 5, 2022,2 staff provided a follow-up report (see Attachment 1) on the three options, including a Modified GRT that would:
1. Increase the GRT to 2.5%;
2. Extend the GRT to rental residential properties of fewer than five units; and
3. Remove the existing 10-year delay after issuance of the certificate of occupancy.
City Council directed staff to no longer pursue the parcel tax and the Modified TOT options, and to draft a general tax ballot measure for a Modified GRT that would make the revisions mentioned above and maintain the current Measure O Gross Receipts Tax (“Measure O GRT”) uses of “funding programs to increase affordable housing and protect local residents from displacement and from homelessness.”
City staff is now seeking further direction from City Council on specific ballot measure concepts and have the following questions:
1. Should a tax of 2.5% apply to all rental residential properties?
2. Should the 10-year delay be eliminated, or the time reduced?
3. Should all nonprofits providing housing, not just those whose primary purpose is the provision of affordable housing, be exempt from the gross receipts tax?
4. Should any additional affordable housing uses be considered besides displacement, homelessness, and increasing the supply of affordable housing?
Analysis
Municipal Code Amendments
Highlighted below are proposed amendments to the City’s gross receipts business license tax, based on City Council input on March 15 and April 5, 2022. City Council may further discuss changes to the ballot measure language.
The notable elements of the changes to the Measure O GRT are as follows:
1. Application: Remove 1-4 unit rental properties from the annual business license fee requirement (Section 5.08.120) and apply to the Measure O GRT instead (Section
5.08.125). The business license tax would still apply to properties exempted from the gross receipts tax under Section 5.08.125.C.
5.08.120 - Rental of real property.
Every person or entity engaged in the business of renting or letting a building, structure or other property, or a portion of such building, structure or property, within the city for any purpose, except for those engaged in the business of 2 A recording of the April 5, 2022 City Council meeting and all meeting materials can be viewed at http://eastpaloalto.iqm2.com/Citizens/SplitView.aspx?Mode=Video&MeetingID=1806&MinutesID=1524&F ormat=Minutes&MediaFileFormat=mpeg4
renting or letting one five or more residential units within the city, which is exempted by subdivision C of Section 5.08.125 from the tax imposed by subdivision D of Section 5.08.125, shall pay an annual license fee as provided in the fee schedule established by the city.
5.08.125 - Rental of one five or more units of residential real property.
A. Notwithstanding Section 5.08.120, This section shall govern the taxation of gross receipts from the rental of one five or more residential rental units in the City of East Palo Alto.
2. Tax Imposed: Increases the City’s current gross receipts tax rate of 1.5% by 1% increase on January 1, 2023 to a rate of 2.5%.
5.08.125.B. Every person or entity engaged, directly or indirectly, including through an interest in another entity, in the business of renting or leasing of one five or more dwelling units in the City of East Palo Alto shall pay an annual tax of two one and one-half percent (2.5% 1.5%) of gross receipts.
3. Exemptions:
a. Remove the 10-year exemption. City Council may choose to eliminate completely the 10-year delay or reduce the time period.
5.08.125.C.4. Any dwelling unit during the first ten (10) years after the issuance of a certificate of occupancy.
b. Exempt from the gross receipts tax all dwelling units owned by nonprofit corporations who rent affordable housing whether or not the primary purpose of the organization is to provide affordable housing. They will still be subject to the business license tax pursuant to 5.08.290. This ensures there is regulation of nonprofit organizations who may also be renting.
5.08.125.C.1. Dwelling units owned by a nonprofit corporation renting affordable housing whose primary purpose is the provision of affordable housing In Section 5.08.290, the Municipal Code contains a partial exemption for nonprofit organizations from the gross receipts tax, but this exemption does not apply solely to housing rentals.
4. Use of General Tax Revenue: Maintain the advisory provision that revenues collected annually shall be dedicated to and used for funding programs to increase affordable housing and protect local residents from displacement and from homelessness.
5.08.125.G. The city council may use the funds generated for any purposes deemed necessary and appropriate for the benefit of the citizens of East Palo Alto. Periodically, council shall review housing policy, housing programs, and related issues to determine how and to what extent the city should establish and fund such programs, if any, to increase the supply of affordable housing and protect residents from displacement and homelessness, in light of the city's budget cycle and other relevant funding cycles.
Projected Revenue
Table 1 illustrates the potential revenue from a Modified GRT. The potential total annual revenue generated from a 2.5% Modified GRT that applies to all rental properties is $2.06M, and the potential increase in annual revenue is $1.49M.
Table 1
Average Annual
Revenues from
Measure O GRT
(FY2018/19-
FY2021/22)
Estimated Annual Revenues from
Modified Gross
5+ Units1 1 Unit 2-4 Unit Total Revenue
(1+ Units)
Estimated Number of
Rental Parcels2
- 1,260 76 -
Estimated Units Per Parcel3- 1 2.3 -
Estimated Rental Units - 1260 172 -
Average Monthly Rent
Assumption4
- $2,700 $2,700 -
Gross Annual Rental
Income5
$38,303,333 $38,782,800 $5,294,165 $82,380,298
1.5% Tax $574,550 $581,742 $79,412 $1,235,704
2.5% Tax $957,583 $969,570 $132,354 $2,059,507
Increase from 1.5% to 2.5% $383,033 $387,828 $52,942 $823,803 Potential Increase in
Revenue from Modified GRT
6 $383,033 $969,570 $132,354 $1,484,957
Source: City of East Palo Alto FY 2021/22 Adopted Budget; PropertyRadar; David Rosen & Associates. Note that all figures are rounded.
1 These figures take the average of the annual fund revenues from the Measure O GRT between FY 2018/2019 to FY 2021/22 (as of 2/18/22). For the past three years, the City has been collecting the Measure O GRT from about 32 owners/property management companies. 2 Count excludes properties exempted by the Municipal Code Section 5.08.125.C. For 1-unit parcels, assumes that single-family residential parcels (SFR) and condo parcels (CND) without owner occupancy are rental units.
3 For 2–4-unit multi-family residential parcels (MFR), one unit is subtracted from the total unit count if the data indicates there is owner occupancy, resulting in an average of 2.3 units/parcel.
4 Average apartment rent per unit from RentCafe.com for January 2022. This may underestimate the average rent, especially for single-family units, which tend to be larger than apartment units.
5 Assumes 95% average occupancy rate.
6 Potential increase in revenue assumes full compliance and full recovery from COVID-19 pandemic.
Ballot Measure Subcommittee
Staff recommend that City Council identify no more than two members of City Council to write an argument in support of the measure. The argument in favor can be signed by up to five individuals, including one or two member(s) of City Council.
Next Steps
Staff will return on May 3, 2022 with the ballot measure for City Council to vote to place the measure on the November 2022 ballot. This requires a two-thirds vote on City Council. The resolutions include:
1. A resolution calling and ordering the submission to the electors of the City of East Palo Alto a measure amending Chapter 5.08 of the East Palo Alto Municipal Code; and
2. A resolution consolidating the municipal election with November 2022 statewide election.
These actions must be completed before July 2022 to meet the August deadlines for local ballot measures.
Fiscal Impact
A 2.5% Modified GRT on all rental properties equals approximately $1.49M in potential additional annual tax revenue. If approved by voters, the tax revenues will be placed into the general fund for affordable housing purposes in accordance with the tax ordinance. If City Council chooses to proceed with a ballot measure, additional staff capacity is required for the actions described in this staff report.
On February 1, 2022, the City Council directed the City Manager to release a Request for Proposal (“RFP”) for Business License and Tax Administration Services.3 This RFP seeks a qualified firm to improve customer experience for payment of business license taxes and to manage all operations, including collection of payments, reducing administrative burden on Finance staff. The selected firm will improve overall administration related to both the existing Business License Tax and Measure O and would play a key role in implementation of a Modified GRT. Staff is currently reviewing the responses.
Public Notice
The public was provided notice of this agenda item by making the agenda and report available on the City’s website and on the City’s official bulletin board located outside City Hall at 2415 University Avenue, East Palo Alto.
Environmental
The action being considered does not constitute a “Project” within the meaning of the California Environmental Quality Act (CEQA), pursuant to CEQA Guideline section 15378 (b)(5), in that it is a government administrative activity that will not result in direct or indirect changes in the environment.
Attachments
1. April 5, 2022 Staff Report
3 See Item 2.a: http://eastpaloalto.iqm2.com/Citizens/Detail_Meeting.aspx?ID=1487.