ACTION:
____________________________
Clerk/Secretary
Department: City Manager Item No: D3
Prepared by: Amanda Lee, Assistant City Manager Meeting Date: March 28, 2023 Approved by: John Conley, City Manager Agenda Location: Discussion SUBJECT: MIDDLE-INCOME HOUSING
RECOMMENDATION: Discuss Middle-Income Housing and provide direction to staff.
CORRELATION TO CITY COUNCIL GOALS: (1) Homelessness and Housing, (2) Fiscal Responsibility, and (3) A Cleaner Vista.
PRIOR ACTION: On September 27, 2022, discussed middle income housing and provided direction to staff to research and bring back more information (No Vote: Consensus).
STATEMENT ON THE SUBJECT: In September 2022, City Council discussed Middle-Income Housing and directed staff to research the subject matter and return with more information. Middle Income Housing proposals have become very popular and investors have shown an increased interest in these types of programs. In the last two years, Housing staff has been approached by investors to create middle income program partnerships. Staff contracted Keyser Marston Associates (KMA), a local financial analyst, to conduct an overview and analysis of the Middle-Income Housing Program and identified a recommended review structure for these proposals, included as Exhibit 1. Staff has provided the following details to elaborate on the topic for a more comprehensive discussion:
•Definition of Middle-Income Housing
•Middle Income Housing Program Overview
•Issues for Consideration
•Alternative Solutions
Definition of Middle-Income Housing. Households earning close to the median income of the region are statistically in the middle of the income distribution and are commonly referred to as “Middle Income Households” (MIH), or those with incomes in the 80 to 120 percent of the Area Median Income (AMI).
Below is a chart that lists family size and income levels for those that are considered Middle-Income Households in San Diego County:
San Diego County Income Limits
Effective April 18, 2022
Family Size 80 Percent of AMI Median Income 120 Percent of AMI 1 72,900 74,850 89,800
2 83,300 85,500 102,650
AGENDA
REPORT
CITY COUNCIL
COMMUNITY DEVELOPMENT COMMISSION
SUCCESSOR AGENCY
BUENA SANITATION DISTRICT
JOINT POWERS FINANCING AUTHORITY
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Discussed Middle-Income Housing and provided direction to staff. Vote: No vote
MEETING DATE: March 28, 2023
PAGE 2
SUBJECT: MIDDLE -INCOME HOUSING
3 93,700
96,200
115,450
4 104,100
106,900
128,300
5 112,450
115,450
138,550
6 120,800
124,000
148,850
7 129,100
132,550
159,100
8 137,450
141,100
169,350
Program Overview. The purpose of Middle -Income Housing for developers is to acquire existing market - rate apartment projects and then to subsequently restrict the units to households earning 120 percent of the AMI or less. The structure of a typical Middle -Income Housing Program includes the following elements:
1. No cash assistance is required from the local jurisdiction.
2. Units in the project must be rented at an affordable rate for households earning less than 120 percent AMI, actual restrictions are negotiated between the local agency and the investor.
3. Tax-exempt government bonds, known as Essential Bonds, finance the project. These bonds must be issued through a joint powers authority (JPA) of which the local agency is a member.
4. The Essential Bonds are issued for 30-35 years, and the local agency can require the investor to sell the project back to the local agency after year 15, at an agreed upon minimum sales price. But, there are exceptions that allow the investor to not sell the project back to the local agency.
5. The use of Essential Bonds entitles 100 percent of the project to be exempt from property taxes (aside from direct assessments).
6. The Middle -Income Housing Program requires a program administrator, which is the investor, or a party related to the investor, and the program administrator is entitled to a fee as agreed upon in the agreement with the local agency.
Issues for Consideration. There is a deficit of housing for various income levels including families and individuals in the middle of the area median income. The challenge for affordability includes all income levels, but the resources available cannot meet the full spectrum of the need, thus, many California cities are weighing the benefits of financing deed -restricted middle -income housing through bonds, against lost tax revenue that could be dedicated to housing at greater levels of affordability. Additional areas of concern include affordability levels, lack of additional units into the housing market, and financial structure issues. The following items are some of the highlights to consider when considering Middle -Income Housing.
• The term of affordability is limited to 30-35 years. In comparison, traditional deed -restricted affordable housing have a minimum of 55 years of affordability, but, often are deed -restricted up to 99 years.
• In many communities, the current market rents are substantially lower than the investor's 100% AMI and/or 120% AMI rent amounts. As such, a large percentage of the occupied units may already be rented to targeted income households and may continue to be rented to these targeted income households in the future.
• The City cannot count any Middle -Income Housing units towards it's RHNA obligation, as these investments do not add any new units to the housing stock. • The Middle -Income Housing Program's Financial Structure is based on aggressive underwriting with limited commitment from the investment partner. The investor does not provide any equity or capital into the project.
• The investor collects high fees through Middle -Income Housing transactions, including an upfront project administration fee followed by annual project administration fees that are typically around $200,000 per year.
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MEETING DATE: March 28, 2023 PAGE 3
SUBJECT: MIDDLE -INCOME HOUSING
• The City does not have monitoring rights with respect to the maintenance, building repairs, and on- going capital upgrades. If the property reverts to the City at the end of the bond term, the property will be conveyed in an "as is" condition, and the City may inherit deferred maintenance liabilities beyond its control.
Alternative Solutions. Many local agencies are looking at alternative solutions such as land use, building codes and regulatory reforms to stimulate new construction targeted towards middle -income households.
Locally, the City of San Diego established a series of recommended actions and policies to support the development of middle income and affordable housing development. Included in Exhibit 3 is the summary of recommendations, which are all specific to the City of San Diego but provided for reference. Most items included in the recommendations are longer term strategies to support the goal of increasing affordable housing. Longer term strategies include items such as state and regional advocacy for more affordable housing funding as well as tax measures such as implementing a vacancy tax that could be dedicated to fund middle income housing.
Staff Recommendation. The current structure of the Middle -Income Housing transactions does not provide public benefit commensurate with the lost tax revenue. Staff recommends following the recommended strategy by our financial analysis consultants, including the City conducting a thorough evaluation of each Middle -Income Housing proposal — similar to the financial evaluation that would occur for more typical affordable housing projects. This includes requiring the investor to provide a pro forma for the project for a formal review of project funding and sources, bond underwriting terms, affordability matrix, a 30 year cash flow projection, and full financial review of the project. The complete list of recommendations is included in Exhibit 1, page 12.
FISCAL IMPACT: There is no direct fiscal impact on the discussion of middle -income housing, but there can be a long-term impact on the city depending on what strategies are implemented. Any future strategies implemented will return to Council for approval.
EXHIBITS:
1. Middle -Income Housing Program Analysis
2. City of San Diego Recommendations
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ADVISORS IN:
Real Estate
Affordable Housing
Economic Development To
BERKELEY
A. Jerry Keyser
Timothy C. Kelly
Debbie M. Kern From:
David Doezema
Kevin Feeney
Los ANGELES
Kathleen H. Head Date:
James A. Rabe
Gregory D. Soo-Hoo
Kevin E. Engstrom Subject:
Julie L. Romey
Tim R. Bretz
SAN DIEGO
Paul C. Marra
KEYSER MARSTON ASSOCIATES.,
ADVISORS IN PUBLIC/PRIVATE REAL ESTATE DEVELOPMENT
MEMORANDUM
Amanda Lee, Assistant City Manager
City of Vista
Tim Bretz
Reena Patel
August 19, 2021
Overview of Middle Income Housing Program
In recent years, a number of financial entities have been submitting proposals to local jurisdictions to use tax-exempt bonds coupled with a property tax -exemption to secure rental housing for households earning up to 120% of the Area Median Income (AMI).
These programs are generally referred to as "Middle Income Housing Programs" (MIH Program). It is important to understand that the MIH Program terms vary from jurisdiction -to -jurisdiction based on negotiations between the parties.
The two primary financial entities (collectively "Investors") that have been proposing MIH Programs are:
1. The California Statewide Communities Development Authority (CSCDA); and
2. Catalyst Housing Group (Catalyst).
While there are some minor variations between the MIH Programs proposed by the Investors, the general program structures are the same. As such, this memorandum 500 SOUTH GRAND AVENUE, SUITE 1480 , LOS ANGELES, CALIFORNIA 90071 , PHONE 213.622.8095 WWW.KEYSERMARSTON.COM EXHIBIT 1
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provides an overview of the MIH Program as well as issues for the City of Vista (City) to consider when evaluating specific MIH Program proposals.
MIH PROGRAM OVERVIEW
The purpose of the MIH Program is to acquire existing market -rate apartment projects and then to subsequently restrict the units to households earning 120% AMI or less. To accomplish this, the MIH Program relies on the following structure:
1. No cash financial assistance is required to be provided by the participating local jurisdiction.
2. The units in the project must all be rented at an affordable housing cost to households earning less than 120% of AMI. The actual income restrictions to be applied to the project are the subject of negotiations between the Investor and the local jurisdiction.
3. All MIH Program transactions are financed through the use of tax-exempt government bonds. These tax-exempt bonds are referred to as Essential Housing Revenue Bonds (Essential Bonds):
a. The Essential Bonds must be issued through a joint powers authority (JPA) of which the local jurisdiction is a member.
b. The participating local jurisdiction has no liability or financial obligation for the Essential Bonds.
4. The Essential Bonds are typically issued for a 30- to 35-year term, but the local jurisdiction has the right require the Investor to sell the project (or the local jurisdiction can purchase the project) at any point between Years 15 and the end of the bond term:
a. If the local jurisdiction exercises the option, a minimum sales price is agreed upon between the parties. The minimum sales price is the amount necessary to cover the following costs:
i. The outstanding bond amounts;
ii. Any amounts due to the Investor; and
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iii. Any transactional fees and miscellaneous costs.
August 19, 2021
b. The Investor is then required to make best faith efforts to sell the project.
If a sale at or above the minimum sales price cannot be achieved, then the Investor is not required to sell the project.
C. To the extent the project is sold, and the sales proceeds exceed the minimum sales price, the remaining sales proceeds will be provided to the participating local jurisdiction and/or other taxing agencies.
5. The use of Essential Bonds entitles 100% of the units in the project to be exempt from property taxes (aside from direct assessments).
6. The Investor, or a party related to the Investor, acts as the Program Administrator of the MIH Program. In that role, the Program Administrator is entitled to fees that are defined in the agreements between the local jurisdiction and the Investor.
Issuance of Essential Bonds
As noted above, the Essential Bonds are issued through a JPA that has been formed by the Investor. Each local jurisdiction in which an Investor proposes to purchase an apartment project and carry out the MIH Program must become a member agency of that Investor's JPA.
The Essential Bonds typically have the following terms:
1. They are issued solely through a JPA formed by each individual Investor.
2. The Essential Bonds are typically issued as two tranches:
a. A Series A Bond is used to finance the acquisition costs, capitalized reserves, and other miscellaneous costs; and
b. A Series B Bond is used to compensate the Investor. The Series B Bond acts similarly to preferred equity provided by the Investor; however, no cash investment is actually contributed by the Investor.
3. The Essential Bonds carry a 30- to 35-year term.
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4. The local jurisdiction has no liability or financial obligations for the Essential Bonds.
5. The treatment of the project following repayment of the Essential Bonds is negotiated upfront by the parties when the agreements are executed. However, ownership of the property typically reverts to the local jurisdiction once all outstanding debt has been repaid. The property would be conveyed in an "as -is" condition and the City or future owner would be responsible for making any needed capital improvements.
Property Tax -Exemption
The financial structure of the MIH Program relies on the requirement that each apartment project becomes fully exempt from property taxes after acquisition (aside from direct assessments). This property tax -exemption is based on the property being publicly owned, and not based on the property tax welfare exemption accorded to non- profit entities that own and operate low-income apartment units. Thus, 100% of the units in the project will be exempt from property taxes — regardless of the income of each household.
To be considered publicly owned, a local jurisdiction must have the option to purchase the property after 15 years. The following must take place to comply with this requirement:
1. The local jurisdiction must become a member of the JPA.
2. The JPA and the Investor will own the project for the first 15 years.
3. The local jurisdiction and the Investor enter into an option agreement that allows the local jurisdiction to force a sale of the property between Year 15 and Year 35. The local jurisdiction can purchase the property at the minimum sales price described above during the option period.
It is important to note that the Investors typically target Class A market -rate apartment projects for the MIH Program. These types of projects are typically generating significant property tax revenue to the local jurisdiction and the other taxing agencies.
This factor should be considered when evaluating the financial characteristics of the MIH Program.
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III. EXAMPLE PROJECT
The following provides an example structure for a project undertaken with the MIH Program:
1. The local jurisdiction becomes a member of a JPA.
2. The JPA issues sufficient Essential Bonds to carry out the following:
a. Pay for the acquisition price of an existing market -rate apartment project (typically Class A apartments that require minimal or no rehabilitation); and
b. Pay for capitalized interest and debt service reserves, any necessary immediate repairs, and upfront fees for the Investor.
3. No existing tenants are displaced during the process. The MIH program relies on the natural turnover of units to replace market -rate units with income -restricted units.
4. The proposed affordability mix varies from jurisdiction -to -jurisdiction. A common affordability mix follows:
a. One-third of the units are restricted at 80% AMI;
b. One-third of the units are restricted at 100% AMI; and C. One-third of the units are restricted at 120% AMI.
5. The Investor typically proposes to utilize affordable rents that are partly based on the income limits published by the California Tax Credit Allocation Committee (TCAC) for the Low Income Housing Tax Credit program.
6. Annual rent increases are typically capped at around 4% per year.
7. The affordability covenant placed on the restricted units aligns with the repayment term of the Essential Bonds. As such, the affordability covenant terminates when the property is sold and/or the bonds are repaid in full, which is generally 30 to 35 years.
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8. The local jurisdiction may force a sale between Year 15 and the date in which all outstanding debt has been repaid:
a. The sales price must be sufficient to pay off all outstanding debt and proceeds due to any of the owners plus any financing costs. b. Any excess sales proceeds after the repayment of the items listed previously are distributed to the local jurisdiction and potentially to other taxing agencies.
9. If the sale option is not exercised, the treatment of the project at the end of the bond term is an issue to be negotiated upfront between the parties. However, the property typically reverts to the local jurisdiction after all outstanding debt has been repaid.
The following summarizes pertinent points regarding the economics of each transaction:
1. The Investor competes against other market -rate investors to purchase existing apartment projects:
a. The projects are typically Class A properties for which there is substantial competitive demand.
b. The Investor is able to offer a premium purchase price over that of other investors, because the Investor can take into consideration the value created by the property tax -exemption.
2. The Essential Bonds are typically underwritten at a 100%-110% debt service coverage (DSC) ratio. In other words, the debt service payments are equal to approximately 100% of the project's estimated net operating income (NOI):
a. During the first several years, the debt service is comprised of interest - only debt service payments.
b. The debt service payments escalate as the NOI escalates.
C. The use of a 100% DSC ratio and interest only payments in the early years implicitly requires rents to continually increase in order for the project to support principal payments in future years.
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3. The Essential Bond issuance amount exceeds the purchase price of the project by a significant amount. These "additional" bond proceeds are used to fund the following:
a. The creation of large debt service and interest reserve accounts to be used if the NOI is insufficient to cover the required debt service payments;
b. An upfront fee to the Investor, which is typically set at 2% to 5% of the bond issue amount;
C. Immediately required repair costs; and
d. Closing costs and miscellaneous fees.
4. The Investor does not provide any capital or equity to the project.
IV. BENEFITS OF MIH PROGRAM
The follow summarizes potential benefits of participating in the MIH Program:
1. The JPA is the entity that will issue the Essential Bonds. As such, there is no direct financial risk to the local jurisdiction if the Essential Bonds cannot be repaid.
2. The local jurisdiction is able to obtain income -restricted units for at least 15 years. If the local jurisdiction purchases the property during Years 15-35, or the bonds are fully repaid and the property reverts to local jurisdiction ownership, the local jurisdiction can extend the affordability covenants beyond the initial term of the MIH Program.
3. The sale of the property may generate excess sales proceeds that the local jurisdiction can use at its own discretion.
4. The proposed structure targets income levels between 80%AMI to 120%AMI, which are above the typical affordable housing program income targets of 80% AMI and below.
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V. ISSUES FOR CONSIDERATION
The following are issues for the City to consider when evaluating specific MIH Program proposals:
Affordability Issues
The following outlines issues regarding the proposed affordability restrictions:
1. The issuance of Essential Bonds through the JPA is a form of acquisition financing. As such, the MIH Program nominally re -purposes existing rental housing rather than producing new units.
2. The Investor's affordable rents may not be aligned with the local jurisdiction's affordability standards. For instance, CSCDA typically calculates affordable rents for their MIH Program based on the assumption that a household spends 35% of their income on housing costs. In contrast, TCAC and most other affordable housing programs calculate affordable rents based on the assumption that households spend 30% of their income on housing costs. This difference causes CSCDA's affordable rents to be significantly higher than TCAC rents for corresponding income levels. Furthermore, the Investors do not deduct a utility allowance from the Investor's affordable rents as do other affordable housing programs.
3. In many locations, the property's current market rents are substantially lower than the Investor's 100% AMI and/or 120% AMI rent amounts. As such, a large percentage of the occupied units may already be rented to targeted income households and may continue to be rented to these targeted income households in the future.
4. The Investors will set a cap on annual rent increases for households earning 120% AMI and below at no more than 4% per year. However, over -income tenants will not be subject to a cap on annual rent escalations. In addition, it appears that any unit that is vacated will be able to set the rent for the new tenants at the maximum allowable affordable rent — regardless of the 4% cap on annual rent growth.
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5. The affordability restrictions terminate when the Essential Bonds (both Series A and Series B bonds) are fully repaid —typically between 30-35 years —unless a sale is completed earlier. In contrast, most typical affordable housing projects have a 55-year affordability covenant.
6. While the Investors agree to income -qualify tenants on an annual basis, there is no enforcement mechanism for the local jurisdiction to utilize if the Investor does not comply with this requirement.
7. Under current Regional Housing Needs Assessment (RHNA) requirements, the City will not be able to count any of these units towards its RHNA obligation.
Financial Structure Issues
The following outlines a variety of issues regarding the MIH Program's financial structure:
1. It is important to note that the structure of the MIH Program is based on very aggressive underwriting assumptions:
a. The Essential Bonds are unrated.
b. The Investor does not provide any capital or equity to the project.
C. The Essential Bonds typically equate to approximately 105% of the acquisition cost of the project. In contrast, conventional affordable housing projects typically utilize an 80% loan -to -cost (LTC)/loan-to-value (LTV) ratio.
d. The Essential Bonds are underwritten based on a DSC ratio of 110% or less. In addition, the debt service escalates annually. In comparison, conventional affordable housing projects typically utilize level debt service payments that are based on a 115%-120% DSC ratio. e. The MIH Program is structured so that only the bondholders are liable in the event of failure. Neither the Investor nor the JPA are responsible for the repayment of the Essential Bonds. In contrast, most typical real estate transactions involve both a development entity with at least 03/28/2023
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partial financial responsibility as well as a major lender or financial institution.
2. As noted above, the MIH program caps annual rent increases for affordable households at no more than 4% per year. However, the local jurisdiction's financial benefits are predicated on a sale of the property that fully repays any outstanding debt. As such, variations in rent growth or operating expenses will have an impact on the potential sales proceeds in Years 15-35.
3. Since the Investor does not provide any capital or equity to the project, there is very limited development risk. However, the Investor collects high fees through the MIH Program, which are not tied to the Investor's performance or development risk. The fees are summarized as follows:
a. A large upfront project administrator fee;
b. An annual project administrator fee (typically around $200,000 per year) that is escalated at 3% per year; and
C. The Series B Bond acts similar to deferred developer fee for the Investor.
The Series B Bond typically carries a 10% interest rate, and this interest is anticipated to be paid annually from net cash flow. The principal amount of the Series B Bond does not start being repaid until the Series A Bond is repaid in full. However, the Series B Bond must be fully repaid prior to the local jurisdiction taking ownership of the property or receiving any net sales proceeds.
4. The City will not have oversight or monitoring rights with respect to the maintenance, building repairs, and on -going capital upgrades. If the property reverts to the City at the end of the bond term, the property will be conveyed in an "as is" condition, and the City may inherit deferred maintenance liabilities beyond its control.
5. Regardless of the legal and ownership structure outlined above, the local jurisdiction will be the most public -facing entity of the transaction:
a. If property maintenance or other issues arrive, tenants will likely seek assistance from the local jurisdiction.
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b. While the local jurisdiction has no direct responsibility to cure any financial issues with the project, the local jurisdiction may be coerced into providing financial assistance in order to avoid a foreclosure on income -restricted units.
C. To date, it does not appear that there have been any legal challenges involving the MIH Program. However, the City should discuss with their legal counsel the potential risk of any legal liability associated with the MIH Program.
6. If multiple transactions are carried out through the MIH Program, this could have the effect of inflating the local real estate market as sellers may seek higher than market -rate offers that are made possible by a prospective property tax exemption. This concern has been voiced from the real estate investment community.
Loss of Property Tax Revenue
The following summarizes issues related to the loss in property tax revenue:
1. The MIH Program's structure requires that the property become exempt from property taxes while the Essential Bonds are outstanding. As such, both the City as well as all other taxing entities would receive no property tax revenue from the property during this time.
2. The MIH Program assumes that the loss in property tax revenue to the City will be outweighed by any excess sales proceeds upon sale of the property:
a. This relies on the assumption that real estate values will always increase. b. The local jurisdiction/JPA establishes the property tax exemption and the other taxing entities automatically forfeit their share of the property tax revenue from the project. No approval is required from other taxing entities.
3. In some of the MIH Program transactions proposed to date, the loss in total property tax revenue actually exceeds the proposed reduction in market -rate 2107001v2.VI5TA:TRB
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rents. Thus, the total foregone property tax revenue is greater than the affordability benefit being received.
VI. CITY FINANCIAL ANALYSIS
KMA recommends that the City conduct a thorough evaluation of each MIH proposal — similar to the financial evaluation that would occur for more typical affordable housing projects. This financial evaluation should include the following:
1. Identify the property proposed to be acquired under the MIH Program.
2. Require the investor to provide a pro forma for the project that includes, but not limited to, the following information:
a. The project's sources and uses including:
i. The acquisition price; and
ii. The bond issuance amount.
b. The bond underwriting terms;
C. The proposed affordability mix; and
d. A 30-year cash flow.
3. The current market rents at both the identified property as well as the surrounding neighborhood.
4. The estimated amount of property tax revenue to be lost during the bond term.
5. A capital needs assessment/property condition report that assesses the property's maintenance needs over the entire bond term.
6. An appraisal for the property that does not assume a property tax exemption.
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8. An evaluation of the public policy benefits gained by the MIH proposal versus the potential risks/property tax revenue loss to the City.
VII. SURVEY OF OTHER JURISDICTIONS
KMA conducted a limited survey of other jurisdictions that have discussed participating in the MIH Program. The following describes the results of this survey:
Jurisdictions Participating in MIH Program
The following jurisdictions have agreed to participate in the MIH Program:
• Anaheim • Hayward
• Antioch • Larkspur
• Carson • Livermore
• Chula Vista • Long Beach (one pilot project)
• Dublin • Monrovia
• Encinitas • Pasadena
• Escondido • Santa Rosa
• Fairfield • Walnut Creek
• Glendale
Jurisdictions Not Likely to Participate in MIH Program
The following jurisdictions will likely not participate in the MIH Program:
• Oakland • San Jose
• San Francisco • San Mateo
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VIII. LIMITING CONDITIONS
1. KMA is not advising or recommending any action be taken by the City with respect to any prospective, new or existing municipal financial products or issuance of municipal securities (including with respect to the structure, timing, terms and other similar matters concerning such financial products or issues);
2. KMA is not acting as a Municipal Advisor to the City and does not assume any fiduciary duty hereunder, including, without limitation, a fiduciary duty to the City pursuant to Section 15B of the Exchange Act with respect to the services provided hereunder and any information and material contained in KMA's work product; and
3. The City shall discuss any such information and material contained in KMA's work product with any and all internal and/or external advisors and experts, including its own municipal advisors, that it deems appropriate before acting on the information and material.
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MIDDLE -INCOME HOUSING WORKING GROUP
SUMMARY OF RECOMMENDATIONS
Charge: What can the city and other stakeholders in San Diego do to encourage the development of new housing affordable to middle -income residents?
Middle -income is defined as 80-150% of Area Median Income. In San Diego, this means household incomes of between approximately $75,000 and $140,000, depending on household size.
Recommended Actions for Consideration
Near -Term (Less than 2 Years)
Catalogue Publicly and Institutionally Owned Land I Housing developers cannot easily identify appropriate properties suitable for middle -income housing developments. The City should better catalogue all publicly and institutionally owned land that could be made available for middle -income housing, including opportunities to provide housing and air rights above existing public facilities.
Staff Response: The Department of Real Estate and Airport Management (DREAM) recommends engaging a consultant to verify information currently available to establish an up-to-date inventory of public lands that could be made available for housing, subject to funding availability. Additionally, in February 2022, the City submitted an application to SANDAG's Housing Acceleration Program to fund a study of City -owned facilities to determine the viability of housing development. The focus of the study would be on the City's operation yards, surface parking lots, and other sites that could yield housing near transit.
Revise Fee Structure I Existing City development fee structures result in delays, inequitable investments, and inefficient processes. The City should update various fees, including development impact fees, water and sewer fees, and the Regional Transportation Congestion Improvement Program, especially in TPAs.
Staff Response: In August 2021, the City Council adopted Mayor Gloria's Parks for All of Us initiative, which included a new Citywide Park Development Impact Fee to replace community - specific fees that present significant barriers to the efficient delivery of infrastructure. This effort is continuing with Build Better SD, which includes new Citywide fees for mobility, fire, and library improvements. Build Better SD also includes amendments to the City's General Plan to align with the City's equity and climate goals, by prioritizing investments in the areas with the greatest needs and that further the City's Climate Action Plan implementation. The Citywide fees also include scaled fees that are more reflective of the true impact of development, rather than a one -size -fits -all approach. Where appropriate, fee discounts or reductions will be considered to align with the City's housing, equity, and climate goals. The Planning Department will work with the Middle -Income Housing Working Group to collect feedback about Build Better SD.
In addition, the Planning Department will retain an economic consultant to more fully evaluate the impacts of City fees on the production of housing.
EXHIBIT 2
03/28/2023 D3 18 of 21
Expand Complete Communities I The existing Complete Communities requirements do not adequately incentivize middle -income housing. The City should consider a 100% Middle -Income alternative to Complete Communities with a higher percentage of base density units dedicated towards middle -income households without very low- and low-income requirements.
Staff Response: The Planning Department will evaluate ways that the Complete Communities program can be leveraged to provide potential additional options for moderate -income housing to include in future Homes for All of Us Housing Action Packages.
Reform Stormwater Compliance Programs I Existing stormwater regulations limit the amount of developable land that can be constructed because permits require a lot of land. The City should consider stormwater reform to focus on larger basins and mitigation to encourage small projects and prepare a robust alternative compliance program.
Staff Response: The City will continue to work with the Regional Water Quality Control Board to implement stormwater regulations, and the Development Services Department will continue to provide education on stormwater compliance. Additionally, the Stormwater Department is currently developing an alternative compliance program to allow for more flexible compliance with stormwater requirements.
Modernize Construction Materials and Technology Code I New construction materials and modern technology have the potential to reduce housing construction costs. The City should update local code to account for new construction materials and technology, such as panelization, mass timber, and full pre -fabrication.
Staff Response: The Land Development Code largely allows for new materials and technology with no additional code changes. We encourage building industry professionals (and all members of the public) to submit suggested improvements to the Land Development Code to the Planning Department's portal. The Development Services Department will also be reaching out to industry professionals for additional recommendations and input.
Improve Historic Review Practices I Existing historic preservation criteria are generous and slow the pace of middle -income housing development. The City should provide a ministerial solution for historic review, allow ministerial mitigation for non -architectural historic resources, and consider other process improvements that balance historic preservation and housing development.
Staff Response: The Planning Department will work to develop an action plan to streamline the historic review process with a goal of reducing process levels and processing time. Additionally, the Department will evaluate all historic regulations and develop a historic resources regulation reform program.
Medium -Term (Over 2 Years)
Transform Development Services Department I The Development Services Department is in critical need of additional resources. Staff has made commitments to fill positions and address the backlog, but without priority attention and assistance on this department, San Diego cannot and will not deliver housing at the scale and impact levels we need. 03/28/2023 D3 19 of 21
Staff Response: The Development Services Department (DSD) is in the process of working with the Mayor and the Municipal Employees Association to hire outside contractors to backfill permitting services. DSD is working diligently to fill 130 Department vacancies due to retirement, promotions, attrition, and the Great Resignation. Additional staff resources have been requested for the FY 23 budget. DSD has a goal to triple permitting capacity from 5,000 units per year to 15,000 units per year in the next two years through hiring, training and technology advances.
Implement Vacancy Tax I Many housing units across the City sit vacant. The City should consider a vacancy tax and revenue should be dedicated to providing funding for middle -income housing.
Staff Response: The San Diego Housing Commission studied this issue in 2021 ("Residential Vacancies in the City of San Diego"), and found that there are not as many vacant units as previously thought. Based on these findings, staff recommends prioritizing efforts on other recommendations to increase middle -income housing.
Identify Additional Revenue for Housing I The City does not have an adequate revenue stream to subsidize middle -income housing development. The City should consider new funding sources, including trash fees, to subsidize deed restricted middle -income housing.
Staff Response: Staff agrees that additional funding would be pivotal in providing middle -income housing development in the City, and will work to identify funding, as well as priorities and actions for such a funding stream.
Recommended Mayoral Advocacy
Advocate for:
• Creation of a Construction Loan Guarantee Program
• Property tax abatements or reductions for middle -income housing, including a potential welfare real estate tax exemption for middle -income
• Robust Community Land Trusts
• Additional construction defect liability reform for condominiums • Philanthropic funds to acquire middle -income housing • Adapted State Density Bonus Laws to encourage more middle -income housing • Training and apprenticeship programs focused on implementing new technologies • San Diego Housing Commission to set aside and/or create funds for Middle Income Housing Loans through the Mayor's original AB 1637 program (expired January 1— sunset extension in process) • Deep financial analysis/case study to show effectiveness of MIHWG proposals Staff Response: The Department of Government Affairs will consider each of these requests for legislative advocacy as part of its ongoing efforts to seek opportunities to support these measures through legislation that meets these goals in the current session. The Department will also work to more clearly include these concepts in next year's legislative platform and consider developing these concepts for potential City sponsored legislation. 03/28/2023 D3 20 of 21
Recommended Mayoral Convening
Convene:
• Stormwater alternative compliance workshop
• Developers, designers, contractors, and labor regarding new construction materials and technology • Philanthropy, business, and other stakeholders around middle -income housing fund • Developers and SDG&E on expediting housing projects
• MIHWG quarterly to discuss implementation of MIHWG recommendations Staff Response: Staff will consider each of these recommended convenings and incorporate members of the Middle -Income Housing Working Group in ongoing or anticipated convenings. 03/28/2023 D3 21 of 21
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In September 2022 , the City Council directed
staff to research Middle-Income Housing and
bring back information for City Council
consideration .
1• Middle-income Housing
CITY• Middle-income rental housing projects are funded by tax-exempt bonds
• City enters a Joint Powers Authority (JPA)
• Bonds are typically structured in two parts, a Series A Bond and a Series B Bond
• The A Bond pays for acquisition, financing, reserves, and related costs
• The B Bond serves as a form of equity for the project administrator
• The bonds provide 100 percent project financing, including all financing and transaction fees
D3 - Middle-income Housing
CITY OF VISTA
• No cash assistance is required from the local jurisdiction .
• Income restricted units for up to 35 years • Proceeds from sale go to the City
• Targets income group with little or no
financial assistance available
D3 - Middle-income Housing
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The maximum rent typically been set at 35% of the maximum income, as opposed to the 30% of maximum income required by federal and state housing programs.
The affordability restrictions terminate at year 30 to 35 years - unless a sale is completed earlier. In contrast, affordable housing projects have a minimum of a 55-year affordability covenant.
No enforcement mechanism for the local jurisdiction to utilize.
Not able to enforce maintenance of property
1• Middle-income Housing
CITY Provide a pro forma for the project for a formal review of project funding and sources, bond
underwriting terms, affordability matrix, a 30-year cash flow projection , and full financial review of the project.