City Council
Report
City Council Meeting: September 30, 2025
Agenda Item: 11.A
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To: Mayor and City Council
From: Jing Yeo, Director, City Planning
Subject: Off-site Affordable Housing Pilot Incentive Program Status Update Recommended Action
Staff recommends that the City Council:
1. Receive an update on the Emergency Ordinance establishing the Pilot Program for the City’s Affordable Housing Production Program (AHPP)
2. Provide direction to Staff on whether to terminate, extend, and/or amend the Emergency Ordinance.
Summary
On June 10, 2025, direction was provided that the City “establish a pilot program allowing market-rate housing projects more flexibility in how they provide affordable housing units off-site, while also allowing these housing projects to be eligible for density bonus, incentives/concessions, and modifications.” The purpose of this program was to incentivize market-rate housing projects that were entitled but not proceeding with building permits due to financial challenges in the development market.
On August 12, 2025, City Council approved the regulatory framework needed to establish the Off-Site Affordable Housing Pilot Program. The program allows approved market-rate housing projects to access several options for fulfilling the City’s affordable housing requirements as identified in the City’s Affordable Housing Production Program (AHPP), while simultaneously proceeding with construction of the market rate portion of the housing development. Participating projects would also be eligible for a local density bonus (which is not currently an option for new applications that choose to build affordable housing off-site) in an effort to expedite housing production in Santa Monica. 2 of 11
Under the approved pilot program, developers of sites with already approved projects have three alternative options if they opt out of constructing on-site affordable units:
• Option 1 – Build market rate units first, deposit a gap financing amount of $150,000 per unit into an escrow account, and develop the required affordable units off-site within four years.
• Option 2 – Rehabilitate existing units off-site that are deemed uninhabitable and, if they’re not already, deed-restrict these rehabilitated units as affordable.
• Option 3 – Pay an in-lieu fee that will go to the city’s Housing Trust Fund for future affordable housing developments.
Based on City Council’s review of the proposed pilot program, the City established parameters that allowed up to 1,000 units to participate in the program, based on applications received prior to September 30, 2025. Concurrently, staff was also asked to return to Council after conducting outreach with affordable housing providers and further consideration of the program’s terms.
To that end, this report has been prepared to provide an update on the results of the pilot program to date. In addition, details related to the City’s outreach efforts (including feedback received from affordable housing providers, the Planning Commission, and from community members) are outlined for consideration. After considering this information, staff is requesting direction on whether to terminate, extend, and / or modify the terms of the offsite affordable housing incentive program.
Discussion
Program Status Update
Subsequent to adoption of the Ordinance, the City received six applications for the pilot 3 of 11
program within the first week. These applications total 1,088 units, consisting of 916 market rate units and 102 affordable units as indicated in the table:
Project
Address (ENT)
Total
Units
# of
Previously
Approved
Market
Rate Units
# of
Previously
Approved
On-Site
Affordable
Units
# of
Revised
Market
Rate Units
Pilot
Program
Option
Chosen2
Option 1 OffSite PropertyOption 1 #
of Off-Site
Affordable
Units
Option 3
Project
SF
Option 3
Estimated InLieu Fee
1902 Wilshire
(23ENT-0156)
140 126 14 140 1 1333 7th St* 14 N/A -
1527 Lincoln
(23ENT-0161)
210 189 21 210 1 1143-1145 25th
St
21 N/A -
2501 Wilshire
(23ENT-0173)
170 153 17 170 1 1333 7th St* 17 N/A -
2025-2037
Wilshire
(23ENT-0178)
150 135 15 150 1 1333 7th St* 15 N/A -
1931 Wilshire
(24ENT-0183)
260 234 26 260 1 1143-1145 25th
St
26 N/A -
2906 Santa
Monica
(20ENT-0311)
88 79 9 88 3 N/A - 51,189 sf $2,247,708.99
Total 1,018 916 102 1,018 93
Of the six applications received, five elected to utilize Option 1 – Off-Site Affordable Housing, as follows:
1. 1902 Wilshire Blvd
2. 1527 Lincoln Blvd
3. 2501 Wilshire Blvd
4. 2025-2037 Wilshire Blvd
5. 1931 Wilshire Blvd
Two off-site affordable housing properties were identified for these projects, at 1333 7th Street and 1143-1145 25th Street. Both of these off-site properties are located outside of the Off-Site Affordable Housing Prohibition Area (which encompasses the Pico 4 of 11
neighborhood) [defined in SMMC Figure 9.64.060.A] and are not encumbered with prior entitlements.
The last application received was for 2906 Santa Monica Boulevard, whereby the applicant elected Option 3 – Payment of In-Lieu Fees. Based on the floor area of this project, the City would receive approximately $2.2 million in-lieu of nine affordable units on-site. Payment of the fees would be required prior to the issuance of a building permit for the project.
A new website for the pilot program has been created and lists all applications received at https://www.santamonica.gov/status-of-development-projects (click on Status of Offsite Affordable Housing Pilot Program). These six eligible projects have until their entitlement expiration dates (ranging between July 2027 to December 2028) to pull their building permits for construction. Also, as required under the newly adopted pilot program, upon the issuance of the building permit for the first market rate project, the project applicant would have 48 months (with a possible 12-month extension) to pull a building permit for the off-site affordable housing.
As the total 1,000-unit cap has been reached with the submittal of the six applications, the pilot program is no longer available to other projects unless the Ordinance is amended and extended.
Public Comments Received
Following Council direction, staff invited affordable housing providers to a virtual workshop on the AHPP. On September 17, 2025, the City hosted the workshop to solicit input from representatives of the following providers:
• Community Corporation of Santa Monica
• Hollywood Community Housing
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• EAH Housing
• Thomas Safran & Associates
• Venice Community Housing
• Abode Communities
All of the housing providers were generally in favor of the pilot program and its overall intent in providing flexibility to meet the City’s AHPP requirements. However, there were concerns regarding the implementation of the program, particularly as to the offsite affordable housing option (Option 1).
Participants in the discussion brought up the following:
• Eligibility of At-Risk Units: Potential for expanding Option 2 to include affordability for at-risk units (i.e., affordable-deed restricted units with covenants at risk of expiring (e.g. at year 55) and converting to market rate) • Moderate Income Housing
o Potential for expanding Option 1 to allow for moderate income units (or similar housing type such as workforce housing) for projects that do not utilize tax credits
o Potential for allowing fees collected from Option 3 to be used to fund moderate income units
• Option 1 Gap Financing: Overall concern that estimated gap financing amount of $150,000 is too low. Based on past projects, participants indicated that the gap financing amount does not appear to be sufficient when assuming 4% tax credits.
This means that additional funding sources could still be necessary to construct the affordable housing project.
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• Competition for Financing: Concern that the program could add more competition into an already competitive financing landscape and concern about how competitive these developments would be without the public subsidy leveraging points from TCAC.
Staff also received written public comments from Santa Monicans for Renters’ Rights (SMRR). The comments generally focused on creating more certainty around the construction of the required affordable units. Some of the key recommendations are as follows:
• Require Completion of Milestones for Off-Site Affordable Housing: Require new milestones to be achieved before issuance of a building permit and the Certificate of Occupancy for the market-rate housing to provide greater assurance that the off-site affordable housing project will be constructed. These milestones for the off-site affordable housing may include requirements such as submittal of an entitlement application, plan check submittal, construction contracts, and tax credit application.
• Increase Option 1 Gap Financing: Increase the gap financing amount for Option 1 of the program. SMRR states that the $150,000 per unit gap financing amount is not sufficient as it does not account for construction cost escalation, provision of on-site parking, accurate unit sizes, and prevailing wage requirements (should the developer fail to construct the off-site affordable housing and the City exercises its option agreement to receive the gap financing and land).
• Increase Option 3 In-Lieu Fee: SMRR indicates that the fee is not sufficient to fully cover the cost of constructing an affordable unit. Therefore, the in-lieu fee should be adjusted to reflect the actual cost of construction. 7 of 11
The Planning Commission also held a discussion on the pilot program at its meeting on September 17 and was broadly supportive of the program. The Commission voted 7-0 to advise Council on suggested minor amendments to the program, as follows:
• Extend the pilot program to the end of the 6th Cycle Housing Element period, at which point the program could be re-evaluated to ensure that it is not overly expansive.
• Allow the pilot program to include moderate income units. • Actively monitor the progress and success of the pilot program.
Next Steps and Council Policy Questions
The purpose of the pilot program developed was to allow market-rate housing projects more flexibility in how they provide affordable housing units off-site, as a means to incentivize and spur overall housing production levels for approved market rate projects that were unable to proceed due to economic uncertainty.
Of note, this goal as articulated through the way the offsite affordable housing incentive program was developed diverges from the stated goals of certain community organizations, who have asked that the City prioritize the production of affordable housing units. It should be recognized that the two goals may be in conflict where a policy of increasing affordability requirements could result in less ability to develop market rate housing through decreased financial feasibility and / or increased risk for securing commercial financing.
Based on community input and recognizing the potential conflicts between incentivizing market rate housing development and securing developer funded affordable housing, staff is seeking further Council direction on the following:
Policy Question 1: Extension of Program
Background: As the total 1,000 unit cap has been reached with the submittal of the 6 8 of 11
applications, the pilot program is no longer available to other approved projects.
There are approximately 30 housing projects representing approximately 3,000 housing units that could be eligible for the program.
Question:
Should the program be extended beyond the 1,000 unit cap that was established on August 12?
➢ Yes, continue the program and allow additional market-rate projects approved as of August 12, 2025 to utilize this program
➢ No, do not continue the program.
➢ Alternatively, continue the program and establish a new cap or other limit for the program.
Policy Question 2: Expansion of Option 1 to Allow Moderate Income Units Background:
Public comments were received that the program should be flexible to allow for the construction of moderate (and / or workforce units) in the off-site affordable housing if a developer elects to not utilize tax credit funding.
Question:
Should Option 1 be modified to allow moderate units?
➢ Yes, the ordinance would be amended to require that off-site affordable units be deed-restricted for lower income or moderate income households. ➢ No, the ordinance would continue to require that off-site affordable units only be for lower-income households.
Policy Question 3: Option 1 Milestones
Background:
There is general concern in written public comments that the program does not provide enough assurance that the off-site affordable housing will be constructed through sufficient requirements and milestones.
Question:
Should permitting milestones for the off-site affordable housing project be required for Option 1?
➢ Yes, the ordinance would be amended to establish milestones that may include:
o Prior to building permit for the first market rate project, require submittal of a complete entitlement application for the off-site affordable housing project
o Prior to Certificate of Occupancy for the market rate project, require that the plan check process for the off-site affordable housing project be completed. The City could also include a provision for expedited, priority 9 of 11
process of off-site affordable housing projects to ensure that delays are not attributable to the City.
o Allowing the City to exercise its option on the off-site property, draw down on the gap financing, and receive an assignment of architectural and construction plans for the off-site housing development early if the developer does not complete the plan check process within a certain timeline of pulling a building permit on the market rate project ➢ No, the timeline requirements for the off-site affordable housing project would remain unchanged.
Policy Question 4: Option 1 Gap Financing Amount
Background:
Public comments were received that the gap financing amount of $150,000 per unit is too low to cover the gap for the off-site affordable housing. Comments point out that this is particularly true if the land is given to the City (in a situation where construction of the off-site affordable housing has not commenced within required timelines) and the affordable housing project then becomes a prevailing wage project that also includes on-site parking. Increasing the gap financing amount is a Council policy decision and would increase the costs to the market rate project that could potentially jeopardize feasibility.
Question:
Should the gap financing amount be modified?
➢ Yes, the gap financing amount should be increased. If increased, what amount should be established? If there is interest in feasibility considerations, staff can also return to Council with additional analysis on the gap financing amount by adjusting assumptions regarding on-site parking and unit types and providing information regarding the effect of prevailing wages. ➢ No, the gap financing amount of $150,000 per unit as currently established in the ordinance would remain unchanged.
➢ Alternatively, keep the gap financing amount at $150,000 per unit but remove the 5% annual cap on escalation and replace with the requirement that the amount would be reviewed and updated annually by Council resolution, based upon the construction cost index.
Policy Question 5: Expansion of Option 2 (Rehabilitation) to Include At-Risk Units
Background:
Public comment was received that the program should be expanded to allow deed restricted units with affordability covenants that are set to expire and are at-risk of market rate conversion.
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Question:
Should Option 2 be expanded to include At-Risk units?
➢ Yes, the ordinance would be amended to include At-Risk units. ➢ No, no changes to the ordinance would be made. At-Risk units would not be covered.
Policy Question 6: Option 3 In-Lieu Fees
Background:
Public comments were received that the in-lieu fee is too low to fully cover the cost of constructing off-site affordable units. An updated nexus study would likely be required to establish what the new in-lieu fee should be. Additionally, the City would also need to conduct feasibility analysis to determine impacts on market rate projects. Council should be aware that establishing a fee that is too high may undermine the feasibility of this option.
Question:
Should the in-lieu fee payment be modified?
➢ Yes, the in-lieu fee should be modified. If modified, a new nexus study would be required. The nexus study would require cost and time, estimated at several months.
➢ No, the in-lieu fee would remain unchanged (only modified annually according to construction cost index).
Minor Correction
If the ordinance is extended, Staff has identified the following necessary correction to Section 9.64.065(D)(3) of the ordinance. This correction addresses requirements for the off-site affordable housing project, which are typically determined by the funding source:
Requirements for Affordable Units. The affordable units in the 100% affordable housing project shall be rental units and shall comply with the provisions of subsections (E)(2)-(5) of Section 9.64.050, unless modified pursuant to Section
9.64.065(G).
Environmental Review
The ordinance for the pilot program has been analyzed as part of the 2021-2029 6th Cycle Housing Element Environmental Impact Report (EIR) [SCH No. 20212269242021] that was certified by Council on October 12, 2021, with an Addendum to the EIR approved on October 11, 2022. These amendments implement 11 of 11
Program 2.C that was described and analyzed in the 6th Cycle Housing Element EIR.
Additionally, pursuant to Section 21080.085(a) of the California Public Resources Code, the ordinance is statutorily exempt from CEQA. Under PRC Section 21080.085(a), CEQA does not apply to actions contained in an approved housing element pursuant to subdivision (c) of Section 65583 of the Government Code. The ordinance implements the certified 6th Cycle Housing Element. Therefore, the ordinance is statutorily exempt and no further environmental review under CEQA is required.
Financial Impacts and Budget Actions
There is no immediate financial impact or budget action necessary as a result of the ordinance. Staff will return to Council if specific budget actions are required in the future.
While the program will require extra staff time to implement, no new staff are being requested at this time and it is anticipated that the workload can be accommodated by staff. Since this is a pilot program, staff will monitor the workload and return to Council if any changes to staff is necessary. The effect of additional in-lieu fees on the City’s Housing Trust Funds is unknown and will be dependent on which eligible projects elect to utilize Option 3 of the pilot program.
Prepared By: Rachel Kwok, Environmental Planner
Approved Forwarded to Council
Attachments:
A. Written Comments
B. PowerPoint Presentation