MEMORANDUM
To: Manira Sandhir, City of San Mateo
From: Darin Smith and Andrew Williams
Subject: San Mateo Commercial Density Bonus; EPS #231040 Date: May 30, 2024
Mixed-use projects in the City of San Mateo ("City") have been seeking density bonus concessions for large commercial project elements, sometimes with minimal residential units proposed. To The Economics of Land Use create reasonable standards of residential to commercial space in density bonus contexts and explore the establishment of predictable incentives for such developments, the City seeks clarity from the California Department of Housing and
Community Development (HCD) on the application of the State Density Bonus Law (SDBL) (Gov. Code, § 65915.).
EPS
The City engaged Economic & Planning Systems, Inc. (EPS) to evaluate the City's current municipal code concerning compliance with the SDBL and to consider policy options of creating specific standards for mixed-use or primarily commercial projects. To accomplish this task, EPS reviewed site plans and the application of incentives, concessions, and waivers granted from the SDBL for recent commercial projects in the City. EPS identified projects with residential units that are proportionally minimal and appeared outside the intent of the SDBL. Upon reviewing the full extent of SDBL provisions, EPS contacted and spoke to HCD staff seeking guidance on differentiating the application of Gov. Code, § 65915. with commercial provisions underlined in Gov Code Sec. 65915.7. Given little precedent on this issue, HCD staff encouraged EPS and the City to write a letter to HCD detailing this issue and propose City guidelines for HCD consideration.
This memorandum describes recent mixed-use projects in the City, how current State policy is being interpreted by developers Economic & Planning Systems, Inc. and City staff for these projects, and proposes guidelines for 1330 Broadway local policy options. Given the residential to commercial space Suite 450
Oakland, CA 94612 issue has arisen in just a couple instances, and that the General 510 841 9190 tel Plan Update process may alter currently allowed densities and other project specifications for some properties, EPS understands Oakland the City may not want to create any new policies yet. However, Sacramento
Denver EPS anticipates this memorandum can be used by the City to Los Angeles start discussions around formulating new policies concerning www.epsys.com 231040_Commercial_Density_05_30_24_Final.docx Memorandum: San Mateo Commercial Density Bonus
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mixed-use projects and the SDBL, or perhaps just how mixed-use development should be defined in City regulations.
Key Findings
• The State Density Bonus Law provides general guidance that mixed-use developers may be granted a density bonus for the commercial component of their project if they meet certain affordability thresholds on the residential component. Specifically, Govt. Code Section 65915.7 states that a City may grant a developer up to a 20 percent density bonus (or other adjustments) on the commercial portion of a project by providing at least 15 percent affordable units in the residential portion. The law does not indicate how an appropriate level of bonus shall be determined, nor whether there is a minimum standard for the residential component as a proportion of the overall project.
• There is little precedent for the application of AB1551/Govt. Code Sec. 65915.7. An initial meeting between EPS and HCD staff indicated that HCD had not been asked by other jurisdictions to clarify any parameters for mixed-use or largely commercial projects receiving incentives and concessions with low ratios of residential units. As such, HCD staff suggested that the City of San Mateo prepare draft implementation guidelines that HCD could then review. • The City is concerned that developers will use the SDBL to increase commercial space without producing a meaningful number of residential units of affordability. One commercial project of note cited the SDBL to seek an increase in its floor area ratio (FAR) by meeting the minimum requirement established by the SDBL, despite the residential portion consisted of five units, representing only 16 percent of the project's total square footage, and only one of those units was affordable.
• EPS suggests additional tiered stipulations for the City and HCD to consider in its commercial provisions within the SDBL. These include requiring a qualified affordable housing partner and that the residential portion represent at least 25 percent of the total floor area of the overall project before a developer can be entitled to receive bonus incentives and/or concessions for non- residential aspects of a project. The City would benefit from discussing and adopting parameters on what it considers mixed-use and what a meaningful ratio of residential to commercial space would look like. Developers would receive incentives and/or concessions on tiered approach from the City, where mixed-use projects with larger residential portions of the overall project would receive a greater number or scale of incentives benefitting the commercial portion.
Establishing such standards would provide clarity and certainty for City staff, local developers, and the community.
Economic & Planning Systems
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To better understand the context of the SDBL's application within commercial projects in the City, this memorandum details the parameters of the SDBL with its commercial provisions and examines how the SDBL has been utilized in the City. To date, the developers' and City's interpretations of the SDBL have resulted in some commercial projects receiving bonuses or concessions with minimal residential use, raising larger questions about the intended focus of Gov Code Sec. 65915.7. and the proportionality of residential to commercial space.
The SDBL and Commercial Concessions
The SDBL has been instrumental in incentivizing developers to produce affordable housing and additional market-rate units in California. Table 1 below outlines the SDBL key provisions for residential projects generally under Government Code Section 65915 as well as its provisions more specific to mixed-use projects under Government Code Section 65915.7. It is important to note that the commercial portion of the law operates within the larger SDBL. For example, if a mixed-use project incorporates residential units, that project could still receive residential bonus units per the SDBL schedule even if no bonus were granted to the commercial component. Section 65915.7 provides a few distinctions when it comes to the commercial land use application of the SDBL.
Further, there are multiple other laws related to the SDBL that could also impact commercial concessions. For example, AB 1287 enables developers to receive an additional density bonus up to 100 percent and added concessions for projects exceeding certain affordability standards. AB 1763 created additional development bonuses and concessions for 100 percent affordable projects. However, the focal point of this analysis is to gauge the use and impacts of Government Code 65915.7 in San Mateo, which has specific reference to the incentives and concessions granted to commercial spaces within mixed-use sites.
Memorandum: San Mateo Commercial Density Bonus
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Table 1 The State Density Bonus Law and Its Residential and Commercial Provisions SDBL Provisions
AB1551/Govt. Code Sec.
SDBL Elements Govt, Code Sec, 65915 65915,7
Criteria Residential projects Commercial projects with
affordable housing; must include a
partnership between the
commercial and housing
developer
Minimum Unit 5% to very-low-income rental; 15% to very-low-income or 30% to Threshold (five or 10% to low-income rental; or low-income househo ds more units) 10% to moderate-income for
sale
Residential Bonus Increase in residential units per The same bonus schedule per Units state density bonus schedule Gov Code Sec. 65915.
Incentives Number of concessions Mutually agreed upon; up to 20% /Concessions dictated by percentage of increase in either maximum affordable units; reduction in allowable intensity in General site standards; approval of Plan, FAR, height requirements, mixed-use zoning, other
incentives/concessions that
result in cost reductions
Source: California Govt. Code Sec. 65915 and 65915.7; Jon Goetz and Tom Sakai, Guide to the California Density Bonus Law, January 2023, https://www.meyersnave.com/wp-content/uploads/California-Density- Bonus-Law_2023.pdf
Affordable Housing Partnership
First, a commercial project that seeks to utilize the SDBL must have a partnership with a housing developer. The language of Section 65915.7(a) states that a commercial developer may qualify for a bonus "when an applicant for approval of a commercial development has entered into an agreement for partnered housing ... to contribute affordable housing" (italics added). Section 65915.7(c) further states "the agreement for partnered housing shall be between the commercial developer and the housing developer" and Section 65915.7(h) says "a commercial developer shall partner with a housing developer." Section 65915.7(k) requires that the City submit to HCD as part of an annual report "the terms of the agreements between the commercial developer and the affordable housing developer, and the developers and the local jurisdiction." Section 65915.7(l) makes the language most clear, stating:
For purposes of this section, "partner" means formation of a partnership, limited liability company, corporation, or other entity recognized by the state in which the commercial development applicant and the affordable housing developer are each Economic & Planning Systems
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partners, members, shareholders or other participants, or a contract or agreement between a commercial development applicant and affordable housing developer for the development of both the commercial and the affordable housing properties.
This text suggests that the commercial developer and affordable housing developer are expected to be separate entities. EPS believes it is therefore reasonable for the City to consider what qualifications constitute an "affordable housing developer" for purposes of granting a commercial density bonus. Proposed guidelines are offered later in this memo.
Affordability Standards
Section 65915.7 also requires a higher affordable percentage threshold to achieve a density bonus on the commercial component, requiring 15 percent of the units for very low-income or 30 percent for low-income households. By contrast, an entirely residential project or the residential component of the mixed-use project could be granted additional residential density with as few as five percent of the units being very low income. Thus, Section 65915.7 establishes that a higher standard of affordability is required for the commercial component of the project to receive a density bonus. EPS deems this clear expectation of higher levels of affordability a relevant factor when considering the potential ratio of commercial vs. residential space in the project. Further, the City has an inclusionary program that requires projects over 10 units to provide 15 percent of their total units as below market rate, and compliance with the City's inclusionary standards would automatically make such projects eligible for the standard SDBL incentives.
Bonus Standards
The incentives and concessions also appear to be discretionary, where any incentives or concessions must be mutually agreed upon. Examples given from the law's text at Section 65915.7(b) include "up to" a 20 percent increase in maximum allowable intensity in a jurisdiction's general plan, floor area ratio, or height requirements, or "up to" a 20 percent reduction in parking standards. EPS believes this language clearly encourages jurisdictions to use their discretion in determining the appropriate level of incentives that a given project should be granted for its commercial component, whereas the density bonus standards for residential-only projects or the residential portion of a mixed-use projects are much more specifically prescribed.
Area Context
Table 2 below lists recent density bonus projects in the City from 2020 to October of 2023. Most projects deliver a significant portion of residential units. However, there are two cases where the proportion of residential units is miniscule compared to the rest of the projects. The City welcomed one project because it delivered all its units as low- income while the second project created a concern because of the disproportionality of residential space and number of affordable units planned.
Memorandum: San Mateo Commercial Density Bonus
Table 2 Proposed San Mateo Density Bonus Projects from 2020 to October of 2023 Net Leasable Space (Saft)
Project Address Project Name Residential Commercial Residential Ratio 222 E 4th Ave 222 E 4th Ave 8,997 122,212 7%
435 E 3rd Ave 435 E 3rd Ave 6,364 33,529 16%
445 S B St Bespoke 68,117 162,542 30%
668 E 3rd Ave Post + Beam 60,441 131,635 31%
500 E 3rd Ave Block 21 89,378 179,560 33%
500 E 4th Ave Block 20 74,255 142,046 34%
1 Hayward Ave One Hayward 15,315 4,495 77%
477 9th Ave 477 9th Ave 118,249 29,901 80%
616 S B St Nazareth Vista 58,911 9,199 86%
640-690 Concar Drive Concar Passage 810,910 41,420 95%
1885 S Norfolk St Fish Market 268,546 1,200 100%
Source: City of San Mateo; Economic and Planning Systems, Inc. 222 E 4th Ave
The first project at 222 E 4th Ave included 104,554 square feet of office space and 17,758 square feet of retail space, combining to a total of 122,212 square feet of commercial space. The project is set to deliver ten affordable units for low-income households and zero market-rate units, with the total residential program representing seven percent of the net leasable space. The 222 E 4th project requested and received one concession to reduce the retail frontage from 75 percent to 47 percent. Further, this project received a set of waivers granted through the SDBL including:
• Exceeding maximum bulk standards from 150' to 197'-6" for linear building dimension and from 170' to 256'-7" for diagonal dimension • Increasing the distance for the street wall build-to-line standards from the 0' setback requirement (to build up to the property line) to a 4'-6" setback • Increasing the build-to-line exception from 25% to 30% along Ellsworth Ave frontage
• Increasing the maximum FAR from 3.0 to 3.1
• Not providing the required off-street loading spaces on private property Despite the low proportion of residential units that are planned, the 222 E 4t project was attractive to the City given all the project's residential units were set aside as low- income. Even with potential additional stipulations from the SDBL and its commercial components, the City would have sought to accommodate and approve this project.
Project at 435 E 3rd Ave
The second project at 435 E 3rd Ave included 33,529 square of office space. However, the 435 E 3rd Project also proposed five residential units, with one unit set aside as low- Economic & Planning Systems
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income. The residential component represented 16 percent of the net leasable area of the project, and only about three percent of the entire project square footage is affordable housing. Technically, the project meets the commercial incentive standard by providing one of the five units (20 percent) as very low-income, exceeding the 15 percent minimum threshold under Government Code Section 65915.7. Consequently, the 435 E 3rd Project requested and the City granted one incentive to increase the FAR from 3.0 to
3.66, a 22 percent increase in allowable development.
Impacts
With cases such as the 435 E. 3rd Ave Project, the City is concerned that other developers will propose similar projects where the number of residential units proposed is the bare minimum of five units and will seek to greatly increase the commercial component of the project, perhaps even adding more "bonus" commercial square footage than the amount of residential space delivered. The City believes such an outcome would fall short of the intent of the law to incentivize affordable housing in mixed-used projects.
Further, the City is seeking to increase the residential capacity in what was traditional commercial-office districts. In light of this, the City would like to impose more stringent standards for a higher threshold of residential space if a commercial developer wishes to invoke the SDBL for non-residential project incentives and/or concessions.
Proposed Guidelines
The City of San Mateo wishes to establish clear guidelines for its staff, local developers, and community with respect to what attributes of mixed-use projects will be rewarded with bonus incentives. In the absence of clear direction from the SDBL and encouragement from HCD, EPS with City guidance has drafted the following conditions that commercial developers would need to comply to receive SDBL non-residential incentives and concessions. The other stipulations currently detailed in Govt. Code Sec. 65915.7 would still apply.
Housing Partner Qualification
The commercial provisions of the SDBL indicate the commercial developer must enter into an agreement with a housing developer to qualify for a development bonus (Govt.
Code Sec. 65915.7(h)). EPS suggests that the commercial component of a mixed-use project would qualify for the density bonus if the commercial developer enters a contractual relationship with a non-profit or for-profit development company with a proven track record of constructing and/or managing affordable housing projects in California. A "proven track record" shall include an active portfolio of not fewer than 100 affordable units being managed by the affordable housing developer partner within the nine-county San Francisco Bay Area region, or 300 such affordable units being actively managed by the housing partner within the State of California.
Memorandum: San Mateo Commercial Density Bonus
Proportion of Residential to Commercial
Given the very small amount of residential space within some commercial projects that have sought incentives and concessions in the City, EPS suggests a sliding scale of SDBL bonuses. Projects that are greater than 50 percent residential (measured by total floor area of the residential component compared to the entire project) may be entitled to a full 20 percent increase in density, FAR, or building height for their commercial component, in addition to bonuses available to the residential portion, Projects that are 25 to 50 percent residential may receive up to a 10 percent increase density, FAR, or building height for their commercial component. Projects that are less than 25 percent residential may not be entitled to a specific set of bonuses for non-residential incentives and/or concessions, though some could be granted at the City's discretion based on the specific merits of the project. In each case, projects may still use the density bonus schedule provided by the State to produce additional residential units. Table 3 below models how this program would work with recent mixed-use SDBL projects proposed in the City. Only two projects would not receive or have minimal benefits from the commercial program, four would receive half of the commercial program concessions, and five would receive full benefits. The City would have discretion to allow for project- by-project exceptions, such as the 222 E 4th Project that set aside 100 percent of its units as affordable.
The City could also explore establishing a baseline minimum residential density for mixed use projects with a residential component in targeted mixed-use zones. Currently, San Mateo does not require either a minimum number of residential units or a percentage threshold of residential square footage in mixed-use projects. The prevalence of mixed- use projects in the development pipeline indicates market interest in including residential components in mixed-use projects and suggests that requiring a minimum amount of residential could be a viable policy option. Currently, there are eleven mixed-use projects in the San Mateo pipeline, the residential components of which range from nine to 75 units per acre, averaging 66 units per acre with many taking advantage of the State density bonus. If the City wishes to pursue minimum residential standards, factors such as where this policy would be targeted, minimum thresholds that would not preclude new development, and other metrics deemed appropriate from the Housing Element or City Council direction should be further explored through additional analysis and outreach with developers.
Economic & Planning Systems
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Table 3 Application of Proposed Parameters on Recent San Mateo Mixed-Use SDBL Projects _Net Leasable Space (Sqft) 11],
Max Base Calculated
Site Area Density Resulting Existing Residential Commercial Incentive via Section Project Address Project Name Density [1] Max FAR New FAR Residential Commercial Ratio 65915.7 222 E 4th Ave 222 E 4th Ave 1.13 50 3.0 3.10 8,997 122,212 7% Does not meet threshold/minimal incentives 435 E 3rd Ave 435 E 3rd Ave 0.25 50 20 3.0 3.66 6,364 33,529 16% Does not meet threshold/minimal incentives 445 S B St Bespoke 1.16 50 61 3.0 4.95 68,117 162,542 30% Receives 10% of commercial incentive 668 E 3rd Ave Post + Beam 0.98 50 70 3.0 4.50 60,441 131,635 31% Receives 10% of commerciall incentive 500 E 3rd Ave Block 21 1.51 50 74 3.0 4.10 89,378 179,560 33% Receives 10% of commercial incentive 500 E 4th Ave Block 20 1.16 50 74 3.0 4.28 74,255 142,046 34% Receives 10% of commercial incentive 1 Hayward Ave One Hayward 0.29 22 62 2.0 1.98 15,315 4,495 77% Receives full 20% of commercial incentive 477 9th Ave 477 9th Ave 1.60 50 75 2.0 3.00 118,249 29,901 80% Receives full 20% of commercial incentive 616 S B St Nazareth Vista 0.64 50 75 3.0 3.01 58,911 9,199 86% Receives full 20% of commercial incentive 640-690 Concar Drive Concar Passage 14.50 50 66 3.0 2.22 810,910 41,420 95% Receives full 20% of commercial incentive 1885 S Norfolk St Fish Market 3.46 50 75 1.0 3.49 268,546 1,200 100% Receives full 20% of commercial incentive Source: City of San Mateo; Economic and Planning Systems, Inc. [1] Note project dimensions are subject to change and the values represented here are a snapshot of each project. Each project is still in an approval process for the City and has not reached the construction phase. However, the final version of each project is predicted to closely resemble what is displayed in this table.