EAST PALO ALTO
COMMUNITY AND ECONOMIC DEVELOPMENT
DEPARTMENT
STAFF REPORT
DATE: November 15, 2022
TO: Manushi Mathur, Associate Planner
FROM: ELENA LEE, PLANNING MANAGER
BY: Karen Camacho, Housing Project Manager
SUBJECT: Inclusionary Housing Alternative Compliance Option for 717 Donohoe St. (APN 063-374-350)
Recommendation
Conduct a public hearing and adopt a Resolution:
1. Finding that the proposed Alternative Compliance Option for the residential development project located at 717 Donohoe (APN 063-374-350) to provide on a vacant property one deedrestricted unit for a Median-Income Household and two deed restricted units for ModerateIncome Households fulfills the project’s inclusionary housing obligation under Section
18.37.080 of the East Palo Alto Municipal Code; and
2. Directing the City Manager to execute all required documents, in a form approved by the City Attorney, associated with the Inclusionary Housing requirements of the Project.
Alignment with City Council Strategic Plan
This recommendation is primarily aligned with:
Priority No. 6: Create a Healthy and Safe Community
Background
717 Donohoe Residential Development Project
The project located at 717 Donohoe St., APN 063-374-350 (“Project”), is a proposed residential development on a currently vacant lot of over 26,136 square feet. The Project applicant is Tom He representing 8M Property-4 LLC (“Applicant”). The Project area is zoned as Multiple-Family Medium Density Residential Zone-2 (“R-MD-2”). The proposal is to build fourteen two-story residential ownership developments, utilizing East Palo Alto Municipal Code Chapter 18.36, adopted to conform with State Density Bonus Law (Government Code Section 65915 - 65918) (together “Density Bonus Law”). Instead of providing the standard inclusionary housing obligation of two Inclusionary Units and an In-Lieu Fee Payment for 0.8 units, the developer is proposing to deed-restrict three units, one for a “Median-Income Household” and two for “Moderate-Income Households” as an Alternative Compliance Option.
An Alternative Compliance Options requires that City Council approve the Applicant’s Inclusionary Housing Plan prior to the development proposal. The purpose of this staff report is for Council to consider the Alternative Compliance Option under the Inclusionary Housing Ordinance (“IHO”). If the Inclusionary Housing Plan is approved, the project’s entitlements, which include a Design Review and Tentative Map, would be scheduled for approval by the Planning Commission once the project is ready for a decision.
See the Applicant’s Inclusionary Housing Plan and tentative design plan in Attachment 2.
The timeline of the project is:
Table 1. Project Timeline
December 11, 2020 Density Bonus Law Plan Submittal
December 11, 2020 Inclusionary Housing Plan Submittal
October 20, 2022 Inclusionary Housing Plan Resubmittal
Pending Planning Issuance of Compliance Letter
Pending Building Permit
Inclusionary Housing Requirement
All residential development projects are subject to the requirements of Chapter 18.37 of the East Palo Alto Municipal Code (“EPAMC”) Inclusionary Housing Ordinance (“IHO”), adopted by City Council on November 19, 2019.
The IHO requires an Inclusionary Housing Plan to be approved by the Housing Division prior to scheduling the project for Planning Commission action. The content of the Inclusionary Housing Plan is incorporated into the Housing Division conditions of approval.
In the Inclusionary Housing Plan, applicants must select from a list of options (“Inclusionary Housing Compliance Options”) that demonstrate how a project will meet the inclusionary requirement. Upon staff’s request, the Applicant agreed to select “Other” and proposes an Alternative Compliance Option, as shown in Attachment 2. Under the IHO, all alternative compliance options require City Council approval. This alternative is discussed in detail in the analysis section.
Analysis
Standard Inclusionary Housing Requirements
Pursuant to the City of East Palo Alto Municipal Code Chapter 18.37 - Inclusionary Housing, a developer of an ownership residential development with five or more units must provide twenty percent (20%) of the dwelling units in the residential development as Inclusionary Units upon the same site as the residential development, with 50 percent of the Inclusionary Units available at an affordable sales price to households at 70% of the Area Median Income (“Median-Income Households”) and 50 percent of the Inclusionary Units available at an affordable sales price to households at 110% of the Area Median Income (“Moderate-Income Households”). Fractions of an Inclusionary Unit shall be provided by the payment of an In-Lieu ee as established in Section 18.37.050.B.
The In-Lieu Fee for ownership/for-sale residential units for Fiscal Year 2022-23 is $190,000. 717 Donohoe Inclusionary Housing Requirement
The proposed Project consists of 14 ownership/for-sale units which requires the following: 1) two Inclusionary Units on-site, with one unit at an affordable sales price to a Median-Income Household and one unit at an affordable sales price to a Moderate-Income Household; and 2) an In-Lieu Fee Payment for 0.8 Inclusionary Units or $152,000.
Inclusionary Housing Alternative Compliance Options
Section 18.37.080 allows a developer to pursue an Alternative Compliance Option with approval by the City Council. The IHO identifies two Alternative Compliance Options:
1. Provide Inclusionary Units off-site equal to 25% of the units in the project at the lowest affordability level; or
2. Other Alternative Compliance Options as proposed by the applicant.
The applicant has chosen Option 2 and is proposing an Other Alternative Compliance Option for consideration by City Council that is further discussed below.
Inclusionary Housing Standards
Section 18.37.060 of the EPAMC describes the standards for Inclusionary Units. These standards are relative to the market-rate units in a project and include:
· Comparability in exterior appearance and overall quality of construction (to the marketrate unit) · Comparability in average bedroom mix and unit size
· Dispersion of Inclusionary Units throughout the project, rather than a single location · Same amenities (access to common open space, parking, storage, etc.) The purpose of these standards is to ensure that the Inclusionary Units are indistinguishable from the market-rate units and well-integrated into the project.
Proposed Alternative Compliance Option
If an applicant selects Option 1, providing units off-site, the requirement is to provide the equivalent of 25% of the total number of units. Any proposed “Other” Alternative Compliance Option should demonstrate equivalent or greater public benefit than Option 1, and this is the basis upon which the proposal is evaluated.
The Applicant proposes to provide three inclusionary housing units on-site, one to be sold at an affordable price for a Median-Income Household and two to be sold at an affordable price for Moderate-Income Households.
Table 2 below demonstrates the income limits for median and Moderate-Income Households based on the City’s 2022 household income limits.
Table 2. East Palo Alto 2022 Household Income Limits for Median- and Moderate- Income Households
Household Size 1 2 3 4
Median Income $91,350 $104,400 $117,450 $130,500
Moderate Income $139,450 $159,350 $179,300 $199,200
Based on the City’s 2022 household income limits and January 2022 market data, the FY 2022-2023 affordable sales price for the three-bedroom inclusionary units would be approximately $788,500 for Median-Income Households and just over $1.1 million for Moderate-Income Households. The market sales price would approximate $1.4 million. The future sales price will be based on most current available data (e.g. most current interest rates, homeowner association dues, utilities, and property insurance).
Density Bonus Law Applicability
The current proposed design of this Project, including the “Other” Alternative Compliance Option, is not compliant with the development standards for the Multiple-Family Medium Density Residential Zone (“R-MD-2”) zoning designation.
The R-MD-2 zoning allows for a wide range of multi-family residential opportunities, including duplexes, triplexes, quadplexes, rowhouses, townhouses, courtyard multiple-family buildings and small-scale multi-family buildings. This zone is intended to provide for an increase in housing units to meet affordability and other community goals and is located to provide a transition between higher density residential, mixed-use, and commercial areas and lowdensity residential neighborhoods.
East Palo Alto Municipal Code Chapter 18.36 is the City’s Density Bonus Ordinance.
Consistent with State law (Government Code Section 65915), the Density Bonus Ordinance provides a means for granting density bonuses, incentives, or concessions for the production of housing for very low income, lower income, Moderate-Income Households, or senior households. Currently under R-MD-2 zoning, the Applicant would be allowed to build 12 to 22 units per acre. The Applicant proposes to use the Density Bonus Ordinance to build fourteen units on one lot with three waivers from development standard. The requested waivers are described below. The Density Bonus Ordinance allows a density bonus, concessions, and other regulatory incentives when a developer proposes to provide at least the minimum number of ownership/for-sale housing affordable units to median or moderate-income residents as required by the City’s Inclusionary Housing Ordinance (20% for on-site units).
Planning and Housing staff have conducted an initial review to confirm the project could qualify for the Density Bonus Law.
Evaluation of 717 Donohoe Density Bonus Law Compliance
The proposed project is required to meet the development standards under EPAMC 18.10.030 - Development Standards for Residential Zones.
The Applicant is seeking the following three waivers under Density Bonus Law:
1. Increase in Floor Area Ratio (“FAR”). EPAMC allows for 65% FAR. The Applicant is seeking an increase to 78.5%.
2. Decrease in private open space. EPAMC requires a minimum of 200 sq ft of private open space. The Applicant is seeking a reduction to 160 sq ft in order to provide uniform units, as required in the IHO.
3. Decrease in front setback. EPAMC requires a front setback of 20 feet. The Applicant is seeking a decrease to one foot.
The above-mentioned requests qualify as “waivers” under the Density Bonus Ordinance.
EPAMC Section 18.38.110 defines a “waiver” as the suspension of requirements upon a finding and determination that doing so is the best interest of the City, based on several conditions, including hardship on the Applicant. Further, state Density Bonus Law mandates that waivers are required when a development standard would preclude the development. The applicant claims the proposed 14-unit development would not be feasible without these three waivers.
Evaluation of the 717 Donohoe Alternative Compliance Option Section 18.37.080 of the East Palo Alto Municipal Code describes that an “Other” Alternative Compliance Option can be approved by the City Council based on findings that the alternative will provide as many or more Inclusionary Units at the same or lower income levels or will otherwise provide greater public benefit than would provision of the Inclusionary Units on-site.
For the purposes of comparison, the market-rate units and Inclusionary Units are shown sideby-side in the chart below.
Table 3. Inclusionary and Market-Rate Unit Overview
Inclusionary Unit Market-Rate Units
Units 3 3-bedroom units (Units 1,
3 and 13)
9 3-bedroom units (Units 2, 4, 5, 6, 9, 10,
11, 12, and 14) 2 4-bedroom units (Units
7, 8)
Size 1,570 sq ft 1,570 sq ft (Units 2, 4, 5, 6, 9, 10, 11, 12, and 14) 1,793 sq ft (Units 7, 8)
AMI
Levels*
1 x Median Income 2 x
Moderate Income
All market-rate
*Note: The IHO defines “median income” as 70% of the Area Median Income (“AMI”) and “moderate income” as 110% AMI.
Code Required Number of Units. The number of Inclusionary Units required for this Project are two on-site Inclusionary Units and an In-Lieu Fee Payment for a fraction of a unit (0.8). The proposed Alternative Compliance Option exceeds that requirement by providing three Inclusionary Units on-site.
Bedroom Count and Size. The Inclusionary Units proposed would be three-bedroom 1,570 sq ft units, comparable to the nine other three-bedroom market rate units.
Comparability. The Inclusionary Units would contain identical or comparable exterior and interior finishes and amenities, with equal access to common areas and comparable private open space.
Affordability- AMI. As noted in Tables 2 and 3 above, one Inclusionary Unit would be restricted for sale to households at or below median income, and two Inclusionary Units would be restricted for sale to households at or below moderate income.
Staff evaluated whether the provision of the additional on-site moderate-income Inclusionary Unit is an equal or greater public benefit than a fee payment representing a fraction of a subsidized prototypical unit.
Based on the methodology of the Ownership In-Lieu Fee calculation, the fee payment of $152,000 represents 0.8 times the gap financing for an “average” unit. Providing one additional 3-bedroom Inclusionary Unit that will sell at approximately $1.1 million for ModerateIncome Households, compared to $1.4 million for a market-rate three-bedroom unit, could immediately provide a “subsidy” of approximately $300,000.
Staff finds this Alternative Compliance Option preferable in terms of both subsidy amount and timing, as the additional Inclusionary Unit will become available when construction of the Project is completed, rather than funds accumulating in the Affordable Housing Fund to support affordable units at a later time. In addition, this additional Inclusionary Unit would increase the City’s affordable housing stock of moderate-income units and will help the City advance on its 6th Regional Housing Needs Allocation cycle (“RHNA 6”) requirements, as it will be deed-restricted in perpetuity for Moderate-Income Households. The City’s 2023-2031 Housing Element has identified a strong need to meet moderate-income unit requirements in East Palo Alto. City efforts to build moderate-income units will be key to meet RHNA 6 goals.
Staff Recommendation
Based on the above considerations, staff believes the Applicant's proposal to provide one deed-restricted unit for a Median-Income Household and two for Moderate-Income Households fulfills the requirements of Section 18.37.080 and recommends the City Council approve this Alternative Compliance Option.
Construction of Units in Alternative Compliance Option
If the City Council approves the provision of the Inclusionary Unit as an Alternative Compliance Option for the Project, the standard requirements of the IHO will apply. Prior to the issuance of a Building Permit, the City would execute an Inclusionary Housing Agreement that holds the developer responsible for constructing the Inclusionary Units concurrently with the market-rate units in the project and for selecting a qualified buyer. This Inclusionary Housing Agreement is recorded against the entire Project.
Prior to issuance of a certificate of occupancy, a deed restriction would be recorded against the Inclusionary Unit to ensure that it remains affordable in perpetuity, in accordance with the requirements of the IHO for ownership units.
The City or its designated entity, such as EPACANDO, would be responsible for ongoing compliance monitoring. As with all units created and income-restricted under the Inclusionary Housing program, these units would remain part of the City’s Below Market-Rate (“BMR”) portfolio.
Next Steps
If the City Council determines that the proposed Alternative Compliance Option is sufficient to fulfill the Project’s inclusionary obligation, City staff will incorporate the Inclusionary Housing Plan into the permit issuance process.
Staff will also prepare the required documents and work with the developer to execute and record an Inclusionary Housing Agreement on the Project. As noted above, the Project, including the Inclusionary Units, will be subject to the planning entitlement process, including the approval of a Design Review and Tentative Map. A Final Map would be required afterwards to complete the subdivision process.
The Inclusionary Housing Agreement will ensure the Project complies with Section 18.37.070 of the EPAMC, which requires concurrent construction and issuance of final inspection or certificates of occupancy for the Inclusionary Units and market-rate units.
In accordance with Chapter 3 of the IHO Guidelines, the Affordable Sales Price will be calculated within 90 days before the date of the first close of escrow for an Inclusionary Unit and the values of the Affordable Sales Price and Fair Market Value, as defined in the IHO, will be updated every 90 days thereafter.
Fiscal Impact
There is no immediate fiscal impact associated with this staff report.
As noted previously, if the City Council approves the Alternative Compliance Option, the Applicant would not provide two Inclusionary Units and pay an In-Lieu Fee of $152,000, the equivalent of 0.8 units, but instead would provide one on-site Inclusionary Unit for a MedianIncome Household and two on-site Inclusionary Units for a Moderate-Income Household.
All BMR units are managed by the City’s current BMR Administrator, EPACANDO. Addition of units to the portfolio will not generate additional administrative costs, as these are funded through a combination of Housing TOT (Transient Occupancy Tax, F207) and Housing Successor (F220) funds under the Agreement with EPACANDO, which is effective through May 2023.
Public Notice
The public was provided notice by publishing a notice in the November 4, 2022 Palo Alto Daily News and by posting the agenda and report on the City’s website and at the City Hall 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
A. Resolution
B. Inclusionary Housing Plan