EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: May 3, 2022
TO: Honorable Mayor and Members of the City Council
VIA: Patrick Heisinger, Interim City Manager
BY: Karen Camacho, Housing Project Manager
Rachel Horst, Housing and Economic Development Manager
SUBJECT: Increased Gross Receipts Tax Ballot Measure for Affordable Housing Revenue Recommendation
That the City Council:
Adopt 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 to increase the gross receipts tax from 1.5% to 2.5% applied to all residential rental properties unless exempted, with a 3-year implementation delay for new units, to be placed on the November 8, 2022 general election ballot.
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, 2022,1the City Council reviewed a report by David Rosen & Associates on potential revenue sources to support affordable housing activities. 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&Format=Minutes&MediaFile Format=mpeg4.
On April 5, 2022,2 staff provided a follow-up report on the three options. City Council directed staff to no longer pursue the parcel tax or the Modified TOT options, and to further explore a general tax ballot measure for a Modified GRT that would 1) increase the GRT to 2.5%; 2) extend the GRT to all rental residential properties so there is no longer an exemption for fewer than five units; and 3) remove the existing 10-year delay after issuance of certificate of occupancy. Council also recommended maintaining 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.” On April 19, 2022,3 City Council discussed and provided further direction on the specific ballot measure concepts. Council directed staff to return on May 3, 2022 with draft ordinance language for consideration that would do the following:
· Apply a 2.5% tax on all rental residential properties, with specified exemptions; · Reduce the delay in collection of the tax from 10 years after a certificate of occupancy is issued down to 3 years;
· Exempt all nonprofits that provide affordable housing, not just those whose primary purpose is the provision of affordable housing;
· Ensure that income-restricted or inclusionary units are exempted; · Clarify that the intent is not to apply the gross receipts tax on the rental of single rooms in owner-occupied single-family homes nor accessory dwelling units (ADU’s); · Ensure the current language prohibiting the tax from being passed on to existing tenants in the form of rent increases or in any manner is strong enough to afford tenant protections; and
· Add rent relief to the advisory language on the potential uses of the tax revenue.
Analysis
The attached resolution includes a draft ordinance amending the City’s gross receipts business license tax and must be approved by at least four members of the City Council (a 2/3 vote) to be placed on the ballot for voter consideration. If approved, it authorizes the City Clerk to submit the ballot measure prior to the August 12, 2022 deadline.
The proposed GRT amendment requires a simple majority vote (50% of voters plus one additional voter) by the electorate in November 2022. If approved by voters, the Ordinance will amend Chapter 5.08 of the East Palo Alto Municipal Code.
The notable elements of the ordinance are as follows:
· Application: Remove 1-4 unit rental properties from the annual business license fee requirement (Section 5.08.120) and apply to the 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.
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&Format=Minutes&MediaFile Format=mpeg4.
3 A recording of the April 19, 2022 City Council meeting and all meeting materials can be viewed at http://eastpaloalto.iqm2.com/Citizens/SplitView.aspx?Mode=Video&MeetingID=1807&MinutesID=1526&Format=Minutes&MediaFile Format=mpeg4.
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, including residential rentals, except for those engaged in the business of renting or letting one five or more residential units within the city, that is exempted from the tax imposed under Section 5.08.125 by subdivision C 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 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.
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.
· Tax Imposed: Increase the City’s current gross receipts tax rate of 1.5% (1% increase 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 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. · Exemptions: Clarify and add exemptions to Section 5.08.125.C.4 a. Dwelling units owned by nonprofit corporations renting affordable housing whether or not that is the primary purpose of the organization.
5.08.125.C.1. Dwelling units owned by a nonprofit corporation whose primary purpose is the provision of renting affordable housing; 5 b. Ensure the language exempts income-restricted or inclusionary units.
5.08.125.C.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 eighty percent (80%) of AMI and whose tenants must be income-qualified;
5.08.125.C.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;
4 Note that entities exempted from the gross receipts tax in this section are still subject to the business license tax. 5 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:
Nonprofit organizations, or corporations, or charitable organizations, other than those charitable organizations defined in Section
5.08.280 complying with the provisions of this section, shall be granted the nonprofit fee rate per one thousand dollars ($1,000.00) of gross receipts as provided in Section 5.04.020, and subject to the minimum fee provided in the fee schedule established by the city.
The language currently in the code is sufficient to address City Council’s concern that income-restricted or inclusionary units, as well as Section 8 units, which are set at affordable rates, are clearly exempt.
c. Reduce the 10-year exemption to 3 years.
5.08.125.C.4. Any dwelling unit during the first ten (10) three (3) years after the issuance of a certificate of occupancy;
In order to ensure that new housing production is encouraged, the 10-year exemption was reduced to 3 years rather than completely eliminated. This can provide new housing developers enough time to stabilize before starting to pay the gross receipts tax.
d. Exempt individual room rentals.
5.08.125.C.5. An individual room without kitchen facilities rented in a residential dwelling unit
Language was added to clarify that individual room rentals within single family homes and other residential properties are exempt.
e. Exempt ADU and JADU rentals.
5.08.125.C.6. An Accessory Dwelling Unit (ADU) or Junior Accessory Dwelling Unit (JADU) as defined in Section 18.96.020.
Language was added stating that Accessory Dwelling Unit (ADU) and Junior Accessory Dwelling Unit (JADU) rentals are exempt.
· 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; adds that revenues collected also be dedicated and used for rent relief and assistance.
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, including the provision of rental assistance, in light of the city's budget cycle and other relevant funding cycles.
· Tenant Protections: Strengthen tenant protections language.
Section 5.08.120.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. Any violation of this provision shall be a defense for a tenant in an unlawful detainer action. A violation of this provision shall be enforceable by an affected tenant.
Proposed Ballot Measure
The ballot measure cannot exceed 75 words (“City of East Palo Alto” is considered one word) and must be in a Yes/No format.
Staff recommends the following question:
“Shall the current City of East Palo Alto business tax of 1.5% of gross receipts on landlords with five or more residential rental units, which cannot be passed on to tenants, be set at 2.5% of gross receipts for all residential rental units, until terminated by voters or reduced by Council, raising approximately $1,480,000 annually for general government use, such as programs to increase affordable housing, provide tenant rental support and protect local residents from homelessness, be adopted?” Effective Date of New Tax
At the April 15 meeting, the City Council asked when the tax would take effect and when revenues would be collected.
Assuming the measure is passed by the voters in November, the tax would take effect when the City Council adopts the resolution declaring the results of the election, sometime in early December 2022. Amending the tax rate, however, does not alter the timeline for the collection of taxes.
In any given year, the tax owed by a landlord is based upon the gross receipts of the preceding fiscal year. As a result, the City will not see revenue from the revised tax rate until January 2024.
Ballot Measure Subcommittee
Staff recommends 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.
Projected Revenue
The chart below 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 $2.05M, and the potential increase in annual revenue is $1.48M.
Table 1
Average
Annual
Revenues
from Measure
Estimated Annual Revenues from
Modified Gross
O GRT
(FY2018/19-
FY2021/22)
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 $38,497,032 $5,255,155 $82,055,521
1.5% Tax $574,550 $577,455 $78,827 $1,230,833
2.5% Tax $957,583 $962,426 $131,379 $2,051,388
Increase from 1.5% to
2.5%
$383,033 $384,970 $52,552 $820,555
Potential Increase in
Revenue from Modified
GRT 6
$383,033 $962,426 $131,379 $1,476,838
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 94.3% occupancy rate based on 2020 American Community Survey 5-Year Estimate on the rental vacancy rate in East Palo Alto, with margin of error of +/- 3.7. 6 Potential increase in revenue assumes full compliance and full recovery from COVID-19 pandemic.
Next Steps
A resolution calling the election, specifying the ballot measure, and ordering submission to the electors is attached.
If approved, the City Clerk will submit the resolution with the ballot measure language to the County Elections Official by August 12, 2022. The question will appear on the November 8, 2022 ballot.
Fiscal Impact
A 2.5% Modified GRT on all rental properties equals approximately $1.48M 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-related 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 gross receipts tax 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. Resolution
2. Exhibit A