DATE: January 6, 2025
TO: Mayor and Members of the City Council
VIA: Stefan Chatwin, City Manager
Marlene Subhashini, Assistant City Manager
FROM: Sofia Mangalam, Community Development Director
DEPARTMENT: Community Development
SUBJECT: AUTHORIZATION TO CITY STAFF AND CALIFORNIA PUBLIC
POLICY GROUP TO DRAFT A SPOT BILL TO AMEND LABOR
CODE SECTION 1720(c)(5)(C)
RECOMMENDATION
It is recommended that the City Council, by Minute Order, provide policy direction to authorize City staff and consultant California Public Policy Group (CPPG) to draft a spot bill to amend Labor Code Section 1720(c)(5)(C) to expand the existing prevailing wage exemption to include assistance for the construction, conversion, reconstruction, rehabilitation, and/or repair Accessory Dwelling Units (ADUs) and/or Junior Accessory Dwelling Units (JADUs) on single-family properties.
EXECUTIVE SUMMARY
The Housing Element 2023-31 identifies the community’s housing needs, states the community’s goals and objectives for housing production, rehabilitation, preservation, and conservation to meet those needs, and defines the policies and programs that the community will implement to achieve the stated goals and objectives. It includes seven (7) goals, 37 policies, and 106 programs to be implemented over an 8-year period.
On September 3, 2024, the City Council authorized staff to submit the application for $4,675,000 for Notice of Funding Availability (NOFA) for the 2024 California Local Housing Trust Fund (LHTF) Program. The City Council also approved matching funds to be transferred from the City’s Commercial Linkage Fees Fund (Fund 137) to the City’s
Local Housing Trust Fund (Fund 145) for the implementation of three (3) Housing Element programs, including Multi-Family NOFA Program (H-A-5-e), Accessory Dwelling Unit Loan Program (H-D-4-b), and Low-Income Homeowner Rehabilitation Loan Program (H- B-2-a).
California Labor Code section 1720 defines the term “public works.” Subsection (c)(5)(C) of section 1720 provides an exemption from prevailing wage requirements for the construction or rehabilitation of privately owned residential projects where assistance is provided to a household as either mortgage assistance, downpayment assistance, or the rehabilitation of a single-family home.
A requirement for prevailing wage to apply to the construction of ADUs and JADUs will make LHTF funds from being used for this purpose extremely challenging, even though it is specifically included as an allowed use in the program guidelines for the LHTF Program offered by the California Department of Housing and Community Development (HCD).
Staff seeks approval from the City Council to authorize city staff and consultant CPPG to explore a legislative fix, including potentially introducing city-sponsored legislation to amend Labor Code Section 1720(c)(5)(C) to expand the existing prevailing wage exemption to include assistance for the construction, conversion, reconstruction, rehabilitation, and/or repair Accessory Dwelling Units (ADUs) and/or Junior Accessory Dwelling Units (JADUs) on single-family properties.
BACKGROUND
On July 9, 2024, the HCD issued a Notice of Funding Availability (NOFA) for the 2024 LHTF Program for $53 million in matching grants to established LHTFs. Applications were due by September 17, 2024. LHTF Program requirements include that the funds be used to provide construction loans and/or permanent financing loans to pay for the construction or rehabilitation of affordable rental housing projects, emergency shelters, transitional housing, or affordable homebuyer/homeowner projects. Funding may also be used to assist income-eligible occupants, as well as to construct, convert, rehabilitate, and/or repair ADUs or JADUs.
As part of the Housing Element implementation in 2024, staff identified three (3) programs that needed significant financial resources and were eligible for the HCD LHTF grant. On September 3, 2024, the City Council authorized staff to submit the application for the HCD LHTF grant. The Housing Element programs and the HCD LHTF grant application details are as follows:
•H-A-5-e: NOFAs for Affordable Housing. Develop a funding program and outline criteria and objectives for affordable housing developers to apply for Notices of Funding Availability (NOFAs) funded by the City’s Affordable Housing Funds.
HCD LHTF grant application
Below Market Rate (BMR) Multifamily Rental Development Loan Program.
Construction or permanent loans to non-profit or for-profit developers for new multi- family rental construction projects with rent and income restrictions of units at less than 30% of Area Median Income (AMI) and/or or less than 60% of AMI. The maximum loan amount is $5,557,500. This program uses the Uniform Multifamily Regulations (UMRs) as the loan guidelines, underwriting standards, and procedures for approving and managing loans.
•H-D-4-b: ADU/JADU Financial Incentive Program.
Provide or partner with another organization to provide a financial incentive program for single-family homeowners to construct an ADU/JADU that is restricted for lower-income households for 10-15 years, with an additional incentive amount for units subject to a preference for identified categories of special needs people who would benefit from coordinated onsite services, including but not limited to people with developmental disabilities.
HCD LHTF grant application
Below Market Rate (BMR) Accessory Dwelling Unit Loan Program Construction loans to homeowners to construct new ADUs, either attached or detached, or JADUs. ADUs shall be rent and income-restricted to households earning less than 60% of AMI or 30% of AMI for ten years. The maximum loan amount is $100,000, and a maximum of one loan per property owner. Interest on the loan would be 3% for ADUs restricted to 60% of AMI or 0% for ADUs restricted to 30% of AMI. The program uses the City’s BMR Accessory Dwelling Unit Loan Program Underwriting Guidelines for approving and managing loans.
•H-B-2-a: Lower-Income Homeowner Rehabilitation Loans. The City will provide or partner with a regional program to provide rehabilitation loans, energy improvements such as weatherization or solar, disaster assistance programs, and proactive outreach to lower-income homeowners.
HCD LHTF grant application
Low-Income Homeowner Rehabilitation Loan Program Loans to low-income homeowners with incomes of less than 60% or less than 30% of AMI to rehabilitate their existing homes. The maximum loan amount is $100,000, and a maximum of one loan per property owner. Interest on the loan would be 3% for owners with incomes of less than 60% of AMI or 0% for owners with incomes of less than 30% of AMI. The program uses the City’s Low-Income Homeowner Rehabilitation Loan Program Underwriting Guidelines for approving and managing loans.
Table 1 below shows the allocation of program funds, including matching funds from the City.
The loan program facilitates the creation of ADUs and JADUs with or without the HCD LHTF grant funds. The ADUs and JADUs created under this program would require that the units are affordable for a minimum of 10 years or the term of the loan, whichever is longer. The program aims to expand housing opportunities for all income levels throughout single-family neighborhoods.
For the purpose of implementation of the loan programs, staff prepared guidelines for the three (3) loan programs and noted the requirement to meet prevailing wage requirements.
Prevailing wage refers to the rate of pay that outside contractors and suppliers must offer their employees when doing business with a government agency. “Under prevailing wage requirements, construction contractors are required to pay employees specified wages and benefits that reflect the levels most “common” in a specific geographic area. Prevailing wages are often required as part of publicly-funded projects (see Terner Report from August 2, 2024).”
Staff requested an interpretation from the Department of Industrial Relations (DIR) whether a loan program providing assistance to single-family homeowners to construct a new accessory dwelling unit (ADU) or junior accessory dwelling unit (JADU) is subject to prevailing wage requirements under Labor Code Section 1720(c)(5)(C). DIR advised City staff that it does not appear that the exception under 1720(c)(5)(C) would apply since the loan assistance to construct a new ADU or JADU does not seem to constitute “mortgage assistance, downpayment assistance, or for the rehabilitation of a single-family home.”
ANALYSIS
Labor Code Section 1720(c)(5)(C) currently provides an exemption from prevailing wage requirements for the construction or rehabilitation of privately owned residential projects where “Assistance is provided to a household as either mortgage assistance, downpayment assistance, or for the rehabilitation of a single-family home.” There is no logical distinction between the type of work on a single-family home vs. work on an ADU or JADU. Staff believes that extending the prevailing wage exemption to the construction or rehabilitation of ADUs and JADUs would significantly boost their production by facilitating financial assistance programs. In other words, a financial assistance program for ADUs and JADUs would be much more effective if the exemption to the prevailing wage requirement were implemented. However, this will require a change in the Labor Code section 1720(c)(5)(C) to include the construction and rehabilitation of ADUs and JADUs.
All laws in California are enacted by the passage of bills. Bills may seek to make new laws, to amend existing laws, or to repeal existing laws. The process through which a bill becomes a law is complicated and lengthy.
CPPG provides State legislative advocacy services to the City. In 2021, CPPG, previously known as RPPG, assisted the City of Foster City in sponsoring Assembly Bill (AB) 1029, which added the “preservation of affordable housing units” to the list of “pro-housing local policies” that entitle jurisdictions to priority access to state housing funds.
On December 11, 2024, staff met with Dane Hutchings from CPPG to discuss the issue of the applicability of prevailing wage as it would apply to the grant/loan granted by the City for the construction of ADUs and JADUs.
Mr. Hutchings suggested that CPPG, on behalf of the City of Foster City, explore sponsoring a piece of legislation amending the Labor Code Section 1720(c)(5)(C). A "sponsored bill" is a legislative bill that is primarily being led by the City in conjunction with the State lawmaker who agrees to carry the legislation. The intent behind this sponsored bill is to craft a narrowly tailored proposal to make minor, non-substantive changes to existing law that would enable the City to effectuate its program.
Staff is recommending the following revisions to the Labor Code section, which currently reads:
“Assistance is provided to a household as either mortgage assistance, downpayment assistance, or for the rehabilitation of a single-family home.” To read:
“Assistance is provided to a household as either mortgage assistance, downpayment assistance, or for the rehabilitation of a single-family home including but not limited to construct, convert, reconstruct, rehabilitate, and/or repair Accessory Dwelling Units (ADUs) or Junior Accessory Dwelling Units (JADUs) on single-family properties.” Once the measure is prepared CPPG will work to try and secure an author to carry the legislation. If successful, the measure will be introduced on or before February 21, 2025, which is the last day that new legislation may be introduced for the 2025 legislative session. Assuming the legislative proposal is well received, the proposal would advance through the applicable policy and fiscal committees and would advance to the Governor for consideration no later than Friday, September 12, 2025.
California Environmental Quality Act
Not Applicable
FISCAL IMPACT
There is no fiscal impact.
CITY COUNCIL VISION, MISSION, AND VALUE/PRIORITY AREA
Smart Planning, Development, and the Local Economy
ATTACHMENTS:
None