EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: April 5, 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: Potential Ballot Measure for Affordable Housing Revenue Recommendation
It is recommended that the City Council take the following actions:
1. Accept staff report on potential ballot measures to support affordable housing;
2. Do not pursue a parcel tax on all real property to support affordable housing;
3. Provide staff direction regarding a potential ballot measure to modify the City’s Transit Occupancy Tax (“TOT”);
4. Direct staff to return with draft proposed Ballot Measure for City Council consideration to extend Measure O to all rental units and return to City Council before the end of May to consider adopting Resolutions:
a. Calling the election;
b. Consolidating the municipal election with November 2022 statewide election; and c. Submitting the ballot measure to the electorate.
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 (“DRA Report”) on potential revenue sources to support affordable housing activities.1 The three 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.
potential revenue sources included a new parcel tax, a modified Transient Occupancy Tax (“Modified TOT”), and a Modified Gross Receipts Tax (“Modified GRT”).
Based on the City Council discussion, staff recommend that City Council not look further into the parcel tax option, and to provide staff with further direction on the Modified TOT and Modified GRT options.
The purpose of this staff report is:
1. To seek further City Council direction on the potential revenue source for affordable housing;
2. To seek City Council direction to draft the above-referenced resolutions and Ballot Measure and return to City Council before the end of May for consideration; and
3. To outline the requisite City Council actions to place the tax on the November 2022 ballot.
Analysis
Transient Occupancy Tax
As presented at the March 15, 2022 meeting, the Modified TOT with a two percent increase from 12% to 14% on the current hotel tax would generate approximately $115,000 annually in additional revenue based on conservative estimates. This fiscal year (FY 2021/22), the TOT generated $750,000 total in revenue, approximately $200,000 more than anticipated.2 Based on Finance’s mid-year analysis, current trends indicate a positive budget adjustment of $0.2M with high uncertainty due to the COVID-19 pandemic. In addition, TOT collection remains suppressed at approximately 69% below pre-COVID levels.
Given the uncertainty regarding hotel occupancy and future tax revenue, staff do not recommend moving forward with the Modified TOT but request that the City Council opine on this option.
Modified Gross Receipts Tax
At the March 15, 2022 City Council meeting, City Council indicated support for pursuing a modified Measure O gross receipts tax (“Modified GRT”) for the November 2022 ballot. City Council directed staff to return with the draft ballot measure language following staff’s recommendation.3 Further legal analysis by the Interim City Attorney and outside counsel regarding applying the Modified GRT only to parcels owned by non-East Palo Alto residents finds that proposal may not be legally tenable.
Staff recommend the following Modified GRT:
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 on the application of the GRT to rental properties.
2 See March 1, 2022 Mid-Year Budget Amendment FY21-22 for report on TOT revenue generated at http://eastpaloalto.iqm2.com/Citizens/Detail_LegiFile.aspx?Frame=&MeetingID=1489&MediaPosition=16 321.452&ID=2097&CssClass=.
Current “Measure O” Gross Receipts Tax
East Palo Alto’s Measure O Gross Receipts Tax (“Measure O GRT”), passed in 2016 with
77.5% voter approval, imposes a 1.5% tax on the gross receipts of landlords renting out five or more residential units for General Fund purposes, such as funding programs to increase affordable housing, and protect local residents from displacement and from homelessness.
The tax may not be passed on to tenants. The tax does not apply to any dwelling unit during the first 10 years after a certificate of occupancy is issued. Anyone leasing fewer than five units, nonprofit operators of affordable housing, Section 8 units, or below market rate units with deed restrictions are exempt. Hardship exemptions from payment may be reviewed for good cause and approved by the Rent Stabilization Program Administrator and are valid for one year (with an opportunity to reapply).
Table 3 of the DRA Report summarizes the annual General Fund revenue from Measure O at the existing 1.5% tax rate (see below). Before the COVID-19 pandemic (FY 2018/19) and partly into the COVID-19 pandemic (FY 2019/20), Measure O generated $599,000 and $600,300, respectively, in General Fund revenues. Last year (FY 2020/21), Measure O generated $546,700.
The relevant sections of Chapter 5.08 are below in their current form:
Section 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 renting or letting five or more residential units within the city, shall pay an annual license fee as provided in the fee schedule established by the city.
Section 5.08.125 - Rental of 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 five or more residential rental units in the city of East Palo Alto.
B. Every person or entity engaged, including through an interest in another entity, in the business of renting or leasing five or more dwelling units in the City of East Palo Alto shall pay an annual tax of 1.5% of gross receipts.
C. Gross receipts from the following categories of dwelling units shall not be subject to this Section, but shall be subject to section 5.08.120:
1. Dwelling units owned by a nonprofit corporation whose primary purpose is the provision of affordable housing;
2. Dwelling units whose rents are controlled under state or federal law, deed restrictions, or agreements with public agencies, at rental rates that are affordable to households earning no more than 80% of AMI and whose tenants must be income-qualified;
3. Units occupied by tenants receiving monthly rental assistance (such as Section 8 vouchers or Shelter+ Care) from the County of San Mateo Department of Housing; and
4. Any dwelling unit during the first IO years after the issuance of a certificate of occupancy.
D. Any person or entity otherwise subject to the tax imposed under this Section may seek a one year hardship exemption due to exceptional circumstances. The Rent Stabilization Administrator may approve such applications for good cause, such good cause being determined in accordance with standards set out in the City Rent Stabilization and Just Cause for Eviction Ordinance, Chapter 14.04 of the East Palo Alto Municipal Code. Such approvals shall be in writing and specifically state the factors that constitute good cause. Any hardship exemption shall be effective for one tax year only� after which it will expire. Taxpayers who seek hardship exemptions must reapply every year.
E. The City Council may reduce the tax rate set forth in this Section for rental of five or more dwelling units, and may terminate any such reductions, without further voter approval.
F. The tax imposed by this chapter shall not be passed on to existing tenants in the form of rent increases or in any manner, including reduction in services or added charges for services, unless such pass through is constitutionally required.
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.
Modifications to the Gross Receipts Tax (Measure O)
The following modifications to the GRT would apply a 2.5% tax on the gross receipts of all rental properties. Each of these modifications are described in turn below.
1. Increase the GRT to 2.5%
Currently, rental properties of 5+ units pay a 1.5% GRT; a Modified GRT would apply a 1% increase in GRT to 2.5%.
DRA reviewed the business license tax requirements on rental properties in other Bay Area cities. Oakland charges the same GRT (1.395%) for all residential rental properties. Berkeley charges two different GRT rates based on number of residential rental units. Berkeley charges the higher rate (2.880%) for properties with five or more housing units and a lower rate (1.081%) for smaller properties. Oakland charges the same gross receipts on all rental properties. San Francisco charges a GRT on a sliding scale by gross receipts. Residential landlords with fewer than four units in any individual building are considered a “small business enterprise” and are exempt. By 2024, San Francisco’s tax rate will be fully phased in if certain thresholds are met. A summary of the gross receipts taxes other cities levy on rental properties in summarized in Table 4 of the DRA Report and replicated below.
Table 4
Gross Receipts Tax on Residential Rental Properties
Selected Bay Area Cities
Tax Rate as % of Gross
Receipts
Berkeley Rental Properties with 5+ Units
Rental Properties with <5 Units
2.880%
1.081%
Oakland All Rental Properties 1.395%
San
Francisco1
Rental Properties with 4+ Units
With Gross Receipts up to $5M
With Gross Receipts greater than $5M
0.442%
0.465%
1 For tax year 2024, if certain thresholds are met. Rates for 2021 tax year are approximately 90% of the 2024 rate and are gradually increased during tax years 2022 and 2023 if certain thresholds are met. Source: Cities of Berkeley, Oakland and San Francisco; DRA.
2. Extend the GRT to rental residential properties of fewer than five units Staff recommend extending application of the Measure O GRT to 1 to 4-unit rental properties.
This creates uniformity in the type of tax is applied to all rental properties. Currently, rental properties with fewer than 5 units pay an annual license fee (also known as the Business License Tax) based on the fee schedule established by the City (see Table 1 in the DRA report, also below). Under a Modified GRT, 1 to 4-unit rental properties would pay a 2.5% tax based on gross receipts. This would follow Oakland’s model of applying the same GRT across all rental properties.
3. Remove the existing 10-year delay after issuance of the certificate of occupancy on the application of the GRT to rental properties.
The practice of collecting gross receipts tax from rental properties as soon as they receive a certificate of occupancy aligns with other jurisdictions with similar taxes. According to the DRA Report, DRA is not aware of other local GRT’s that exempt new businesses, rental housing or others.
Revenue Generation of Modified Gross Receipts Tax
1. Increase the GRT to 2.5%
According to DRA, an increase on the Measure O GRT on multiple-family rental properties of 5 or more units from 1.5% to 2.5% would generate close to $400,000 in additional revenue per year (see Table 3 in the DRA Report, also below).
Table 3
Annual General Fund Revenues from Measure O Business License Tax And Potential Revenues from Increase in Tax Rate
City of East Palo Alto
FY 2019/2020 to FY 2021/22
FY 2018/2019 FY 2019/2020 FY 2020/21
FY 2021/22
(as of
2/18/22)
1.5%1
(Actual) $599,000 $600,300 $546,700 $552,200
2.0%
(Estimate) $798,667 $800,400 $728,933 $736,267
2.5%
(Estimate) $998,333 $1,000,500 $911,167 $920,333
Increase from
1.5% to 2.0% $199,667 $200,100 $182,233 $184,067
Increase from
1.5% to 2.5% $399,333 $400,200 $364,467 $368,133
1 Actual figures at current 1.5% tax rate are rounded. For the past three years, the City has been collecting from about 32 owners/property management companies.
Source: City of East Palo Alto FY 2021/22 Adopted Budget; City of East Palo Alto; DRA.
2. Extend the GRT to rental residential properties of fewer than five units Under the current Municipal Code, a 1–4-unit rental property with annual gross receipts under $1,000 pays $50, those between $1,001 and $100,000 pays $125, those between $100,001 and $250,000 pays $250, and so on. This is based on the City’s current Business License Tax fee schedule (see Table 1 below). Under the Modified GRT, 1 to 4-unit properties would pay a
2.5% tax on their gross receipts.
Table 1
Business License Tax Rates
City of East Palo Alto
Annual Gross Receipts Range Tax
-- $1,000 $50
$1,001 $100,000 $125
$100,001 $250,000 $250
$250,001 $500,000 $500
$500,001 $10,000,000 $1 for each $1,000 of gross receipts $10,000,001 And up $10,000 + $0.50 for each $1,000 of
gross receipts above $10,000,001
Source: City of East Palo Alto 2022 Business License Renewal, Instructions for Completing Declaration; DRA.
Staff currently does not have a projection on the potential revenue from the application of the
2.5% gross receipts tax on 1 to 4-unit rental properties.
Staff researched whether Measure O could be extended only to rental properties of 1-4 units owned by absentee landlords and concluded there may be legal concerns with this approach and is therefore not recommending it to the City Council.4
3. Remove the existing 10-year delay after issuance of the certificate of occupancy on the application of the GRT to rental properties.
The removal of the 10-year delay after issuance of the certificate of occupancy would allow for the gross receipts tax to apply to more units, increasing potential tax revenue in the short-term.
Uses of Modified Gross Receipts Tax
On March 15, 2022, City Council directed staff to return with general tax ballot measure language. General taxes require approval by a simple majority of voters (50% of voters plus one additional voter), while special taxes require two-thirds voter approval (66.66% of voters).
While revenue generated from a general tax may be used at the City’s discretion, City Council may advise specific uses for a general tax in the ballot measure language. Measure O GRT is an example of a recently approved general tax. East Palo Alto voters passed Measure O GRT for the purposes of “funding programs to increase affordable housing and protect local residents from displacement and from homelessness.”
City Council may choose to put forth a ballot measure that presents the current uses under Measure O GRT or it may suggest other advisory language. This language would be included both in the ballot measure question and in the Municipal Code.
Staff Recommendation
As detailed above, staff recommends the City Council move forward with a proposed Ballot Measure for City Council consideration to modify Measure O as follows:
1. Increase the GRT from 1.5% to 2.5%.
2. Apply to all rental units in the City.
3. Remove the existing 10-year delay after issuance of the certificate of occupancy on the application of the GRT to rental properties.
The City Council may provide additional direction or modifications regarding the specifics outlined above.
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 to abide by the Brown Act. The argument in favor can be signed by up to five individuals, including one or two member(s) of City Council.
Next Steps
As noted in the March 15 staff report, City Council must take immediate next steps to ensure the measure is placed on the November 2022 ballot. These include:
4 The potential revenue generated from the application of a GRT on 1-4 units owned by absentee landlords is $1.15M.
1. Vote to place the measure on the November 2022 ballot. This requires a three-fifths vote on City Council.
2. Adopt a series of resolutions:
a. A resolution calling the election in November 2022.
b. A resolution consolidating the municipal election with November 2022 statewide election.
c. A resolution submitting the ballot measure to the electorate.
These actions must be completed before July 2022 to meet the August deadlines for local ballot measures. If City Council chooses to proceed, staff will draft the above-referenced resolutions and return to City Council in May 2022 for review and approval.
If directed, staff will also work with two members of City Council to draft the ballot measure argument for City Council review at its May 2022 meeting.
Fiscal Impact
If City Council chooses to proceed with a ballot measure, additional staff capacity is required for the actions described in this staff report. The Office of the City Attorney will utilize an existing contract with an outside legal firm to assist with drafting of ballot language and ordinance.
Public Notice
The public was provided notice of this agenda item by making the agenda and report available on the City’s website and at the San Mateo Co. Library located 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. March 15, 2022 Staff Report
2. David Rosen & Associates 2022 Report