PISMO BEACH CITY COUNCIL STAFF REPORT
Agenda Item #12.B
Meeting Date: October 7, 2025
TITLE:
Housing In-Lieu Fund Revenue Discussion
RECOMMENDATION:
1. Receive an overview of potential revenue options to support the City’s housing in- lieu fee funds.
2. Provide direction on potential changes to housing in-lieu fund revenue sources/options.
DISCUSSION:
On July 1, 2025, the City Council reviewed the City’s Inclusionary Housing Requirements and Affordable Housing Incentives and directed staff to return at a future meeting with potential options that could help sustain and increase revenue for the Housing In-lieu Fund. The current Housing In-lieu Fund balance is estimated to be approximately $510,000 at the end of Fiscal Year 2026.
The provisions for both Inclusionary Housing and Affordable Housing Incentives can be found in Chapter 17.26 of the Pismo Beach Municipal Code (PBMC), adopted by the City Council in 2000. Sections 17.26.020, 17.26.022 and 17.26.050.D of the PBMC outline methods for meeting the City’s inclusionary housing requirements, including use of in-lieu fees for new residential and commercial development. Relevant municipal code sections related to the City’s inclusionary housing policies are provided below, followed by options for generating additional revenue for the in-lieu fund.
Relevant Municipal Code Sections
17.26.020 Inclusionary housing requirements.
The provisions of this chapter shall apply to all new residential and commercial projects within, and to be annexed to, the city.
A. Methods of Meeting Inclusionary Housing Requirements. New development projects shall satisfy the inclusionary housing requirement, as specified in Section 17.26.022 contained herein. To meet the inclusionary housing requirements, the developer shall comply with one or more of the following methods:
1. Construct the required number of affordable housing units, as specified in this chapter; or
2. Pay an in-lieu fee as described in this chapter; or
3. Dedicate existing dwelling units for affordable housing equal to or greater than the equivalent value to the applicable in-lieu fee which would otherwise be required by this chapter and table; or
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4. Dedicate real property for affordable housing equal to or greater than the equivalent value to the applicable in-lieu fee which would otherwise be required by this chapter; or
5. Use a combination of the above methods subject to the approval of the city council.
17.26.022 Applicability.
The provisions of this chapter shall apply to the following types and numbers of development projects:
A. Residential Developments. Residential development shall provide housing as set out below.
Fraction units less than 0.5 shall be rounded down to the first whole number unit, and fractional units of 0.50 percent or greater shall be rounded up to the next higher number unit.
For residential projects consisting of custom built dwelling units which are to be constructed subsequently to the completion of the subdivision, building valuation shall be determined by using the average building permit value of five recently constructed comparable dwelling units. Under circumstances where recent construction values cannot be used, the average value of constructed dwelling units listed as property improvements on the assessor's roll shall be used in calculating in-lieu fees.
1. For each ten residential units provide one affordable unit; or
2. For five or more residential units provide in-lieu fees equal to or more than five percent of building permit value; or
3. For each ten residential units dedicate one used dwelling or real property equal to or more than the applicable in-lieu fee; or
4. A combination of the above methods subject to city council approval;
5. Projects which involve subdivision of residential lots only shall be required to either:
a. Dedicate a number of lots equal to ten percent of the total, or an equivalent land area, to the city for future development of low and moderate income housing; or
b. Pay in-lieu housing fees established by the city ordinance; or c. A combination of the above methods subject to city council approval; d. Residential projects in which the total development on the property is more than one unit but less than twenty units shall be require to either provide affordable units on the same percentage bases specified in item 1 or to pay in-lieu fees as established by city ordinance. If affordable units are to be provided, the city may permit those units to be developed elsewhere at other appropriate sites within the city.
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e. The percentages of this housing set aside shall apply to the total development project and be proportionally included in annual phasing.
B. Commercial Developments in the City and for Annexed Properties Designated for Commercial Use. Commercial developments in the City or to be annexed shall:
1. For each five thousand sq. ft. of commercial area, provide one affordable unit; or
2. For a commercial building five thousand sq. ft. or greater, provide in-lieu fees equal to or more than two percent of building permit value; or
3. For each five thousand sq. ft. of commercial building provide one used dwelling or real property equal to the value of, or more than, the applicable in-lieu fee; or
4. A combination of the above methods subject to city council approval.
17.26.050.D In-lieu fee method/procedures.
D. Affordable Housing Fund. An in-lieu fee paid and collected pursuant to this chapter shall be deposited into an affordable housing fund. The affordable housing fund shall be administered by the city's finance director, and shall be used exclusively to provide funding for the provision of affordable housing and for reasonable costs associated with the development of affordable housing, at the discretion of the city council.
In-Lieu Fund Program Uses
Housing in-lieu funds have been used for the following programs in the recent past:
• Construction/Rehabilitation: Building new affordable housing units, creation of special needs housing, transitional housing or renovating existing affordable units ensuring they remain safe, habitable and affordable.
• Local Matches: Contributing to the local match requirements for federal affordable housing grants.
• Property/Unit Acquisition: Purchasing property to build affordable housing or purchasing units to convert to or maintain as affordable housing • Supporting San Luis Obispo County Housing Trust Fund: In-lieu fees assist the Housing Trust Fund to increase the supply of affordable housing for very low, low and moderate income households, including households with special needs.
Other programs/uses for the funds:
• Smart Share Housing Solutions (SSHS). Program connects people and homes.
SSHS is a non-profit that administers three programs: HomeShare SLO, ADU SLO and Co-Living Collaborative.
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• People’s Self-Help Housing Solutions. Provides safe, healthy housing, and quality supportive health service for low-income residents and helps prevent homelessness among city residents.
• CAPSLO Energy Services Home Repair program. Provides low-income residents with minor home repairs so they can stay in their homes. • Rental Assistance. Funds can be used to establish a rental assistance program for low-income residents that are having difficulty making their rent payments. • Housing in-lieu funds may be disbursed, collateralized, or otherwise employed, but not limited to the following purposes: assistance to housing development corporations, equity participation loans, grants, pre-home ownership co- investment, pre-development loan funds, participation leases, or other public/private partnership arrangements. The affordable housing fund may be applied to the benefit of rental or owner-occupied housing or housing services. • Administration Costs. Funds may also be used to cover reasonable administrative expenses not reimbursed through processing or other fees, including: reasonable consultant and legal expenses related to the establishment and/or administration of the affordable housing fund; reasonable expenses for administering the process of calculating, collecting, and accounting for in-lieu and housing impact fees, and city administrative costs for the development, permitting, and the ongoing monitoring of affordable housing projects constructed with affordable housing fund moneys.
Housing In-Lieu Fund Revenue Options
Revenue for affordable housing can be generated from a number of sources, including developer fees, demolition taxes, bond elections, tax increment financing, and the federal Community Development Block Grant (CDBG) program. Each of these items are discussed in greater detail below.
Developer Fees
Linkage fees and inclusionary zoning fees can be charged to commercial and residential development to support affordable housing needs. As noted above, the City has an inclusionary ordinance that applies to both residential and commercial development.
Linkage fees are also called impact fees and represent an alternative to traditional inclusionary housing policies. They are called linkage fees because they link the production of market rate development to the production of affordable housing. Linkage fees are not the same as in-lieu fees. Linkage fees have traditionally been applied to non- residential development and are typically charged on a per-square-foot basis. As an example, the City of San Luis Obispo charges a linkage fee of $6.42 per square foot for office, retail and hotel development and $5.35per square foot for industrial and manufacturing development.
Pros: Fees are flexible and can be easily changed over time as part of the annual update to the City’s fee schedule.
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Cons: Implementation of linkage fees for commercial development would require a nexus study and if implemented would require amendment of the zoning code to remove the existing commercial in-lieu fee ordinance. In other words, implementation of a linkage fee would replace an existing program that already generates revenue as part of new commercial development over 5,000 square feet. Also, depending on the amount the fee is set at, it could serve to increase permit costs.
Demolition Tax: A demolition tax is a fee imposed by a local jurisdiction on property owners who tear down residential buildings, usually applied to older more affordable homes/units. The main goal of demolition taxes is to offset the loss of low-cost housing and discourage developers from replacing affordable homes/units with higher-priced properties. Demolition tax programs often contain exemptions for owner-occupied properties or for demolition carried out by affordable housing developers. Funds are typically collected by a city’s building division prior to issuance of a demolition permit and deposited into an affordable housing fund to support new housing initiatives. The tax can be based on a flat fee, or square footage, age of the structure or valuation of the home/unit.
Pros: Can generate a new revenue stream to help maintain the affordable housing fund. Encourages preservation of existing affordable housing.
Cons: Adds additional cost to development and may disincentivize new housing development. Also, a successful program may generate limited revenue if properties are not being redeveloped.
General Bond Elections: General obligation (GO) bonds are government-issued bonds that are repaid from state or local general funds or a dedicated property tax. The issuing entity (e.g., the city, county, or state) places its full faith and credit in paying back the purchasers of the bond.
The proceeds can be used to build affordable housing, preserve existing affordable housing, support infrastructure for these developments and provide subsidies for affordable housing projects or fund other affordable housing programs.
GO bonds are authorized by voter approval and would typically require two-thirds majority vote to pass.
Pros: Can provide a tax-exempt low-cost revenue source to increase production of affordable housing or preservation of existing affordable housing.
Cons: Likely requires a two-thirds majority vote to pass and would therefore require a considerable public outreach effort and would likely need to be associated with a specific tangible project versus a more nebulous affordable housing program.
GO bonds also serve to increase property taxes, which can make them unpopular.
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Tax Increment Financing: Tax increment financing (TIF) can fund affordable housing through Enhanced Infrastructure Financing Districts (EIFDs), allowing local governments to capture future property tax increases for projects and housing in specified areas. TIFs use a defined portion of increased tax revenues to fund desired development, including affordable housing, in areas that benefit from these investments.
Established by SB 628 (2014), EIFDs allow cities and counties to finance infrastructure and other projects, including affordable housing for low- and moderate-income families, using tax increment revenue.
TIFs works by freezing the property tax revenues that flow from a designated project area to the city, county, and other taxing entities at the “base level” in the current year.
Additional tax revenue in future years (the “increment”) is diverted into a separate pool of money, which can be used either to pay for improvements directly or to pay back bonds issued against the anticipated TIF revenue.
EIFDs are currently able to fund infrastructure maintenance and housing development, economic development, transportation infrastructure, sewage treatment, and climate adaptation projects, among other uses. EIFDs are governed by a Public Financing Authority (PFA) made up of 5 members of at least 3 elected officials and 2 local community members who live or work in the district area. The PFA oversees the creation of the District’s Infrastructure Financing Plan (IFP), which outlines the specific projects the District will fund.
Pros: Generates funding without raising taxes and EIFDs can have a long-life span, up to 45 years. EIFDs can fund a broad range of projects and only require 55% voter approval to implement.
Cons: The City is built out, limiting revenue generation. Ideally, EIFDs are located in areas where future development will take place capturing the increase in property tax value after development. EIFDs are complicated, and have significant upfront costs for consultants, legal counsel, feasibility studies and public outreach.
Community Development Block Grant: The most common Federal funding source for affordable housing is Community Development Block Grant (CDBG) program.
CDBG is primarily funded by the US Department of Housing and Urban Development (HUD) through Federal allocations to states and local governments. HUD funding provides financial assistance in the form of grants in three program areas: Public Services, Development of Affordable Housing and/or Public Facilities and Program Administration/Capacity Building.
Currently, the City receives limited CDBG funding through the County’s Urban County Program, with the current 2025 funding set at $28,873.
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The City could opt out of the Urban County Program and in doing so would be able to apply directly to HUD for an increased amount of CDBG grant funding. However, a community's proposed activities must meet one of three "national objectives," which include benefiting low- and moderate-income persons, eliminating slums or blight, or addressing urgent community needs. While not every community must have a disadvantaged community, the activities must primarily serve individuals or areas that meet the program's income and need criteria, as outlined by HUD. The City of Pismo Beach does not currently have any identified disadvantaged community neighborhoods, making it unlikely the City would be successful in receiving any CDBG grant funding directly from HUD.
Recommendation
While there are several revenue sources identified above to augment the current affordable housing in-lieu fund, each option has issues, including serving to increase the cost of development permits, being difficult to implement, or having limited revenue potential.
Staff recommends that the City Council provide direction on any desired changes or additions to the revenue sources that sustain the City’s housing in-lieu fee fund. This may include modification of the existing ordinance, adopting a future resolution that outlines the policy direction of the City Council, or other actions as directed by the City Council.
FISCAL IMPACT:
There is no direct fiscal impact related to the discussion items. If the City Council directs staff to pursue other or new housing in-lieu fund revenue options, the fiscal impact of the action will be analyzed at the time the item is presented to the City Council for action.
Submitted by:
Scot Graham, Community Development Director
City Manager Approval:
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