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Home My WebLink About2008/05/07 - Agenda Packet - SpecialAGENDA C1TY COUNCIL AND PLANNING COMMISSION SPECIAL JOINT MEETING Wednesday, May 7, 2008 ~ 5:00 p.m. Rancho Cucamonga Civic Center - Tri Communities Room 10500 Givic Center Drive ~ Rancho Cucamonga, CA 91730 A. CALL TO ORDER 1. Pledge of Allegiance 2. Roll CaII: Mayor Kurth Mayor Pro Tem Michael Councilmembers Gutierrez, Spagnolo and Williams Chairman Stewart Vice Chairman Fletcher Commissioners Howdyshell, Munoz, Wimberly B. ~ PUBLIC COMMUNICATIONS This is the time and place for the general public to address the City Council and Planning Commission on any item listed on the agenda. State law prohibits the Council and Commission from addressing any issue not previously included on the Agenda. The Council and Commission may receive testimony and set the matter for a subsequent meeting. Comments are to be limited to five minutes per individual or less, as deemed necessary 6y the Chair, depending upon the number of individuals desiring to speak. All communications are to be addressed directly to the Council and Commission, not to the members of the audience. This isaprofessional business meeting and courtesy and decorum are expected. Please refrain from any debate between audience and speaker, making loud noises, or engaging in any activity which might be disruptive to the decorum of the meeting. The public communications period will not exceed one hour prior to the commencement of the business portion of the agenda. During this one hour period, all those who wish to speak on a topic contained in the business portion of the agenda will be given priority, and no further speaker cards for these business items (with the exception of public hearing items) will be accepted once the business portion of the agenda commences. Any other public communications which have not concluded during this one hour period may resume after the regular business portion of the agenda has been completed. C. ITEM(S) OF BUSINESS 1. REVIEW AND DISCUSSION OF INCLUSIONARY HOUSING ORDINANCE D. ADJOURNMENT I, Debra J. Adams, City Clerk of the City of Rancho Cucamonga, hereby certify that a true, accurate copy of the foregoing agenda was posted on May 1, 2008, per Government Code 54954.2 at 10500 Civic Center Drive, Rancho Cucamonga, California. ~~ r_3} '' ~,8`-. ~. T H E Y C I T Y O F Rn~cno~ Cuc~nr~oecn Staff Report DATE: May 7, 2008 TO: Mayor and Members of the City Council Chairman and Members of the Planning Commission Jack Lam, AICP, City Manager FROM: James R. Troyer, AICP, Planning Director Linda D. Daniels, Redevelopment Director BY: Rina Leung, Senior Planner SUBJECT: INCLUSIONARY HOUSING ORDINANCE RECOMMENDATION: The City Council and Planning Commission are requested to review the staff reporUpresentation and provide feedback on the proposed Inclusionary Housing Ordinarice. Staff is recommending that .the item return to the Planning Commission and City Council for formal consideration. BACKGROUND: Over the last 25 years the City has grown in population, jobs, and housing units. In the early years of the City's growth, Rancho Cucamonga was viewed as a haven for affordable land and housing compared to Orange and Los Angeles County areas. While prices for land.and housing in the City remain lower than neighboring counties, the ability to purchase and rent housing has changed dramatically in recent years. The growth in the City has begun to expand the employment opportunities; thus, creating a need for workforce housing. The ability for people to live and work in the community has far reaching social and economic benefits to the City and the families/employees of needing affordable housing. In addition, in seeking ajob/housing balance, the State has required Cities to produce and set aside a certain number of housing units for affordable housing throughout California. This ordinance therefore facilitates the development of affordable workforce housing, which would be available for workers locally employed. Cities throughout California are struggling to meet the affordable housing requirements under State Law. While the City of Rancho Cucamonga has made great strides in addressing its affordable housing obligations a tremendous need still exists. The following summarizes .the Agency's State Housing Production Requirements as well as the City's Regional Housing Needs Assessment (RHNA) Production Requirements. P1 CITY COUNCIUPU~NNING COMMISSION STAFF REPORT Inclusionary Workforce Housing Ordinance Workshop May 7, 2008 Page 2 Affordable Housing RequirementslEfforts: Redevelopment Agency State Housing Production Requirements Based on the State Housing Production Requirements, the Redevelopment Agency has a responsibility of providing approximately 2,755 units of affordable housing in the Project Area. Although, the Agency has produced approximately 1,700 affordable units with an additional 396 coming on line within the next several years, there still is ari Agency shortfall of 659 units. Table 1: Affordable Housing Units Re uired b State Housin Production Re uirements Credit 1,700 Deficienc 659 Antici ated units in transition 396 Total Re uired 2,755 Regional Housing Needs Assessment (RHNA) Production Requirements State law requires that jurisdictions provide their fair share of regional housing units that benefit the very low to moderate income individuals and families. According to the Southern California Association of Governments (SCAG), the City of Rancho Cucamonga will need to produce 1,282 new units by June 30, 2014. The 1,700 .units already completed will not help the City meet its RHNA requirements. The following table outlines the SCAG Regional Housing Plan for the City. Table 2: Southern California Association of Governmental Regional'Housing Needs Allocation for the City of Rancho Cucamonga from January 1, 2006 to June 30, 2014 Number of very Number of low Number of Number of above Total low income income moderate income moderate income households households households households 317 216 245 504 1,282 • The Redevelopment Agency has expended or pledged million of dollars from its housing set aside fund in order to provide the affordable units cited in table 1. The Agency's resources are nearing capacity as the Project Area and tax increment reach the limits of the Redevelopment Plan. • Unlike the early 1980's when the City was seeing tremendous moderately priced housing growth, the majority of the units that are being constructed today are not considered to be affordable to low or moderate income families. The Agency can provide affordable housing by either obtaining covenants on either existing units or through the new construction of units. At the minimum, 50% of the units provided must be through new construction methods, and no more than 50% of the units can be acquired through covenants on existing projects. P2 CITY COUNCIL/PLANNING COMMISSION STAFF REPORT Inclusionary Workforce Housing Ordinance Workshop May 7, 2008 Page 3 ANALYSIS: Given the need to provide a balanced community and recognizing there are limited resources remaining to provide affordable housing (available land and- finances), the adoption of an Inclusionary Housing Ordinance is just one mechanism that would facilitate additional affordable housing opportunities. According to the research conducted by the Redevelopment Agency, over 130 jurisdictions in California currently include inclusionary housing programs as a component of their overall affordable housing development. Thus, many Cities are utilizing an inclusionary housing program to meet their affordability requirements. The purpose of an Inclusionary Workforce Housing Ordinance is to require private development projects to provide a share of housing that is affordable to low and moderate income households. These housing units are to be provided without financial assistance from local sources. After many meetings with the Housing Subcommittee (Members Councilmeri Gutierrez and Michael), it was suggested that staff facilitate the development of an Inclusionary Workforce Housing Ordinance that applies to projects that request the following types of discretionary approvals: • Aland use change from anon-residential land use to a residential or mixed use land use; • An increased density on residentially designated land; and • A map revision to allow a conversion from apartments to condominiums. The Subcommittee's reasoning. of the aforementioned approach is that a proposed rezoning could add value to the property. Also, the conversion of apartments to "for-sale" condominiums will remove rental units from the market and potentially increase rents of the remaining rental units in the area. The requirement for providing affordable housing when a land use chahge is proposed to convert a commercial site to a residential designation would provide additional housing opportunities to residents. The Inclusionary Workforce Housing Ordinance could compensate the community for the loss of affordable housing stock. The City obtained the assistance of Keyser Marston Associates to assist the City Council Subcommittee and staff in the development of an Inclusionary Workforce Housing Ordinance. The Subcommittee has met on several occasions with the Redevelopment Agency Staff and the City Attorney to discuss the inclusionary concept. They have reviewed and accepted the proposed Inclusionary Housing Ordinance and recommended that the Ordinance be forwarded for review and consideration. A copy of the entire Ordinance has been included as an attachment. Provisions of the Inclusionary Workforce Housing Ordinance: Requires 15% of any proposed residential development to include affordable housing units at various income ranges if a discretionary approval is required to allow: o An increase in density; o A change in zoning regulation that does not permit residential use to one that does permit residential use; and/or P3 o Conversion of rental units to condominium ownership. CITY COUNCIL/PLANNING COMMISSION STAFF REPORT Inclusionary Workforce Housing Ordinance Workshop May 7, 2008 Page 4 • Income and Affordability Restrictions would be applied as follows: Income level Ownershi Projects Rental Projects A artments Ver Low (50% Medium Income 7.5% Moderate 110% Medium Income 15% 7.5% • Provides exemptions for: o Applications deemed complete prior to the effective date of the ordinance; o Residential projects that have a Development Agreement which excludes the inclusionary requirements; o Projects that have an approved Regulatory Agreement with the Redevelopment Agency; and o Projects, which contain 5 residential units or less. • Provides the following alternatives to producing units within the project: o Constructing or substantially rehabilitating units on another site. o Purchasing equivalent affordable housing covenants for units in existing multi-family projects. o Payment of an in-lieu fee for projects with 20 or fewer units, and projects of more than 20 units upon approval of the City Council based on findings that the cost of providing the units on-site would substantially exceed the amount of the applicable in-lieu fee. CORRESPONDENCE: In addition, the Chamber of Commerce, Building Industry Association (BIA), non- profit housing organizations, and local developers were notified of this workshop. During the last hearing for this item on March 26, 2008 (Planning Commission hearing) the BIA submitted a letter in opposition of the proposed Ordinance (attached). Respectfully submitted, James R. Troyer, AICP Planning Director P4 Attachments: Inclusionary Workforce Housing Ordinance BIA letter in opposition of the proposed Ordinance ORDINANCE NO. AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF RANCHO CUCAMONGA ADDING TO THE CITY OF RANCHO CUCAMONGA DEVELOPMENT CODE CHAPTER 17.42 (DRC2008-00074) PERTAINING TO INCLUSIONARY HOUSING REQUIREMENTS FOR CERTAIN RESIDENTIAL PROJECTS AND ADOPTING A NEGATIVE DECLARATION OF ENVIRONMENTAL IMPACTS. A. Recitals. 1. On March 26, 2008, the Planning Commission of the City of Rancho Cucamonga conducted a duly noticed public hearing with respect to the above referenced Development Code Amendment and, following the conclusion thereof, adopted its Resolution No. 08-12, recommending that the City Council of the City of Rancho Cucamonga adopt said Development Code Amendment adding Chapter 17.42 to the Development Code and the related Negative Declaration of environmental impacts. Hereinafter the subject Development Code Amendment is referred to as the "application." 2. On ,the City Council of the City of Rancho Cucamonga conducted a duly noticed public hearing on the proposed Development Code Amendment. 3. Based on the State Housing Production Requirements, the Redevelopment Agency has a responsibility of providing approximately 2,755 units of affordable housing units in the Project Area 4. The City of Rancho Cucamonga has been allocated a total of 1,282 housing units by the Sduthern California Association of Governments Regional Housing Needs Allocation Plan from January 1, 2006 to June 30, 2014, which 778 df the 1,282 housing units are required to be very low to moderate income designations 5. The Redevelopment Agency has expended or pledged millions of dollars from its housing set-aside fund in order to provide the affordable units. The Redevelopment Agency's resources are nearing capacity as the Project Area and tax increment reach the limits of the Redevelopment Plan 6. Unlike the early 1980s when the City was seeing tremendous moderately priced housing growth, the majority of the units that are being constructed today are not considered to be affordable to low or moderate income families; thus, creating a need for additional affordable housing opportunities 7. There are limited resources remaining to provide affordable housing (available land and finances) in the City. 8. All legal prerequisites prior to the adoption of this Ordinance have occurred. B. Ordinance. P5 The City Council of the City of Rancho Cucamonga does ordain as follows: CITY COUNCIL ORDINANCE NO. DCA DRC2008-00074 . `*" 2008 Page 2 SECTION 1: This City Council hereby specifically finds that all of the facts set forth in the Recitals, Part A, of this Ordinance are true and correct. SECTION 2: Based upon substantial evidence presented to the City Council during the above-referenced public hearing on , 2008, including written and oral staff reports, together with public testimony, the City Council hereby specifically finds as follows: 1. The proposal will further Programs 9 and 10 of the Redevelopment Agency's Housing Plan of the Housing Element in the General Plan, which includes goals for investigating the feasibility of an affordable housing overlay zone and a mixed use overlay zone in order to create new opportunities for affordable housing; and 2. The proposed Inclusionary Workforce Housing Ordinance would provide the opportunity to create ajob/housing balance; and 3. The proposed amendment will not be detrimental to the public health, safety, or welfare or materially injurious to properties or improvements in the vicinity; and 4. The proposed amendment is in conformance with the General Plan. SECTION 3: Based upon the facts and information contained in the proposed Negative Declaration, together with all written and oral reports included for the environmental assessment for the application, the City Council finds that there is no substantial. evidence that the project will have a significant effect upon the environmental and adopts a Negative Declaration attached hereto, and incorporated herein by this reference, based upon the findings as follows: 1. Pursuant to the California Environmental Quality Act (CEQA), City staff has prepared and Initial Study of the potential environmental effects of.(he project. Based on the findings contained in the Initial Study, City staff determined that there would be no substantial evidence that the project would have a significant effect on the environment. Based on that determination, a Negative Declaration was prepared. Thereafter, City staff provided public notice of the public comment period and of the intent to adopt the Negative Declaration; and 2. The City Council has reviewed the Negative Declaration and all comments received regard the Negative Declaration and, based on the whole record before it, finds: (i) that the Negative Declaration was .prepared in compliance with CEQA; and (ii) there is no substantial evidence that the project will have a significant effect on the environment. The City Council further finds that the Negative.Declaration reflects the independent judgment and analysis of the City Council. Based on these finding, the City Council hereby adopts the Negative Declaration. SECTION 4: Anew Chapter 17.42, entitled Inclusionary Housing Requirements, is hereby added to Title 17 (Development Code) of the Rancho Cucamonga Municipal Code to read as follows: Chapter 17.42 INCLUSIONARY HOUSING REQUIREMENTS P6 17.42.010. Purpose 17.42.020. Definitions CITY COUNCIL ORDINANCE NO. DCA DRC2008-00074 **** 2008 Page 3 17.42.030. Additional Regulations 17.42.040. Applicability and Inclusionary Unit Requirements 17.42.050. Exempt projects 17.42.060. Alternatives to Units within Project 17.42.070. Housing Plan and Housing Agreement Required 17.42.080. Standards 17.42.090. Takings Determination , 17.42.100. Enforcement 17.42.110. Inclusionary Housing Trust Fund 17.42.120. Administrative Fees 17.42.010. Purpose This Chapter establishes standards and procedures to encourage the development of housing that is affordable to a range of households with varying income levels. The purpose of this Chapter is to encourage the development and availability of affordable housing by requiring the inclusion of affordable housing units within developments that involve an increase in the density otherwise available by City and State law; a change from a zoning regulation that does not permit residential uses to one that does permit residential uses; or the conversion of rental units to condominium ownership. 17.42.020. Definitions As used in this Chapter, the following terms shall have the following meanings "Adjusted for Household Size Appropriate for the Unit" means a household of one person in the case of a studio unit, two persons in the case of aone-bedroom unit, three persons in the case of atwo-bedroom unit, four persons in the case of athree-bedroom unit, and five persons in the case of afour-bedroom unit. "Affordable Housing Cost" means the total housing costs paid by a qualifying household, which shall not exceed the fraction of gross income specified, as follows, in accordance with Sections 50052.5 and 50053 of the Health & Safety Code: A. Very low-income households. Thirty percent of the income of'a household earning 50 percent of the San Bernardino County median income adjusted for family size appropriate for the unit. B. Low-income households. Thirty percent of the income of a household earning 70 percent of the San Bernardino County median income for for-sale units, and 30 percent of the income of a household earning 60 percent of the San Bernardino County median income for rental units, adjusted in either case for family size appropriate for the unit. C. Moderate income households. Thirty-five percent of the income of a household earning 110 percent of the San Bernardino County median income for for-sale units, and 30 percent of the income of a household earning 110 percent of the San Bernardino County median income for rental units, adjusted in either case for family size appropriate for the unit. P7 CITY COUNCIL ORDINANCE NO. DCA DRC2008-00074 **** 2008 Page 4 D. In the event of a conflict between the fractions specified in this definition and those found in Sections 50052.5 and 50053 of the Health & Safety Code, the fractions specified by State law shall control. "Developer" means any association, corporation, firm, joint venture, partnership, person, or any entity or combination of entities, which seeks City approval for all or part of a residential project. "Inclusionary Unit" means a dwelling unit that will be offered for sale or rent to low- or moderate-income households, at an affordable housing cost, in compliance with this Chapter. "Low-Income Households" means "lower income households" as that term is defined by Section 50079.5 of the Health & Safety Code. "Low-Income Units, Moderate-Income Units, and Very Low-Income Units" means inclusionary units restricted to occupancy by low, moderate, or very low-income households, respectively, at an affordable housing cost. units "Market Rate Units" means dwelling units in a residential project that are not inclusionary "Moderate-Income Households" means."persons and families of low or moderate income" as that term is defined by Section 50093 of the Health & Safety Code. "Planning Director" means the Planning Director of the City of Rancho Cucamonga or his or her designee. "Regulatory Agreement" means an agreement. entered into between the Rancho Cucamonga Redevelopment Agency and a developer by which the developer covenants to. keep certain housing units at an affordable housing cost for a specified period of.time. "Regulations" means the regulations adopted by the Council in compliance with Section 17.42.020(A) for the implementation and enforcement of the provisions of this Chapter. "Residential project" means any of the following: A. A subdivision. resulting in the creation of 5 or more residential lots or residential units; or B. The new construction of a project consisting of 5 or more multi-family units or single-room occupancy units; or C. The new construction of 5 or more separate houses or dwelling units. D. The conversion of 5 or more rental units to condominium ownership. P8 "Total Housing Costs" the total monthly or annual recurring expenses required of a household to obtain shelter. For a rental unit, total housing costs shall include the monthly rent payment and utilities. For an ownership unit, total housing costs shall include the mortgage CITY COUNCIL ORDINANCE NO. P9 DCA DRC2008-00074 *'*` 2008 Page 5 , payment (principal and interest), homeowners' association dues, mortgage insurance, taxes, utilities, and any other related assessments. "Very Low-Income Households" means "very low income households" as that term is defined by Section 50105 of the Health & Safety Code. 17.42.030. Additional Regulations The Council may by resolution establish additional regulations for the implementation of this Chapter. 17.42.040. Applicability and Inclusionary Unit Requirements A. The requirements of this Chapter shall apply to any residential projedt proposed in connection with an application to do any of the following: 1. Increase the permitted residential density of the subject property above the density allowed under City and State law at the time of the application. 2. Increase the permitted percentage of residential development allowed for a mixed-use development above the percentage under City and State law at the time of the application. 3. Convert commercial or industrial land to residential uses; including, but not limited to. the conversion of a hotel to residential use. 4. Convert rental units to condominium ownership. B. Units for sale. If the residential project consists of units for sale, then a minimum of 15-percent of the total number of units in the project shall be sold to moderate-income households. C. Rental units. If the residential project consists of rental units; then a minimum of 7.5-percent of the units shall be rented to low or very low-income households and 7.5-percent of the units shall be rented to moderate-income households. D. Allowable credits. The inclusionary unit requirements of this Section may be reduced as follows. 1. Very low-income units in lieu of low-income units. If very low-income units are provided in lieu of the required low-income units, then the project shall receive a credit of 1.5 affordable units for each unit actually provided. 2. Very low-income units in lieu of moderate-income units. If very low- income units are provided in lieu of required moderate-income units, then the project shall receive a credit of two units for each unit actually provided. CITY COUNCIL ORDINANCE NO. DCA DRC2008-00074 **** 2008 Page 6 3. Low-income units in lieu of moderate-income units. If low-income units are provided in lieu of required moderate-income units, then the project shall receive a credit of 1.5 units,for each unit actually provided. E. Rounding of quantities in calculations. In calculating the required number of inclusionary units, fractional units of 0.75 or above shall be rounded-up to a whole unit if the residential project consists of 5 to 20 units; and fractional units of 0.50 or above shall be rounded-up to a whole unit if the project consists of 21 units or more. F. Displacement of existing inclusionary units. Notwithstanding any other provision of this Chapter, any project subject to this Chapter that results in the displacement of very low, low, and/or moderate income household(s) shall be required to provide on-site inclusionary units as required by this Chapter. G. The requirements of this Chapter shat successors-in-interest, and assigns proposing a Paragraph A of this Section. All inclusionary units rented in compliance with this Chapter and the City's Chapter. 17.42.050. Exempt projects I apply to all developers and their agents, residential project within the scope of required by this Chapter shall be sold or regulations for the implementation of this The following are exempt from the requirements of this Chapter. A. Applications deemed complete as of the effective date of the ordinance. A residential project for which a development application has been deemed complete. B. Development Agreements. A residential project that is the subject of a development agreement that expressly provides for an exclusion to this Chapter or provides for a different amount of inclusionary units from that specified by this Chapter. C. Project with Regulatory Agreement. A residential project for which the Rancho Cucamonga Redevelopment Agency has executed a Regulatory Agreement, provided that the Regulatory Agreement is effective at the time the residential project would otherwise be required to comply with the requirements of this Chapter, and there is no uncured breach of the Regulatory Agreement before issuance of a Certificate of Occupancy for the project. 17.42.060. Alternatives to Units within Project The primary means of complying with the inclusionary requirements of this Chapter shall be the provision of on-site inclusionary units in accordance with Section 17.42.040. A developer may only satisfy the requirements of this Chapter by means of an alternative to on-site inclusionary units.in accordance with the requirements and procedures of this Section. P10 A. Off-site units. Upon application by the developer and at the discretion of the City Council, the developer may satisfy the inclusionary unit requirements for the project, in whole or in part, by any combination of the following means: CITY COUNCIL ORDINANCE NO. DCA DRC2008-00074 '"" 2008 Page 7 1. Constructing or substantially rehabilitating the required number of units on a site other than that of the affected residential project. For purposes of providing off-site units, substantially rehabilitating means rehabilitating a dwelling unit that has substantial building and other code violations, and has been vacant for at least 90 days, such that the unit is returned to the City's housing supply as decent, safe, and sanitary housing, and the cost of the work exceeds twenty-five percent of the market value of the unit after rehabilitation. 2. Purchasing equivalent affordable housing covenants for units in existing multi-family projects. All such units shall be: (i) reasonably dispersed throughout the multi- family project; (ii) located in an area or areas of the City as approved by the Planning Director; (iii) proportional in number of bedrooms, and location, to the market rate units included in the developer's residential project; and (iv) comparable to the market rate units included in the residential project in terms of design, materials, finished quality, and appearance. B. In lieu fee. 1. Twenty or fewer units. In the case of a residential project containing between five (5) and twenty (20) residential lots or residential units, the developer may elect to satisfy the inclusionary unit requirements for the project, in whole or in part, by payment of a fee in lieu of constructing some or all of the required units. 2. More than twenty units. In more thari 20 residential lots or residential units, constructing some or all of the required units, and and approval of the City Council, which may gra evidence supports a finding that the cost o1 substantially exceed the amount of the applicable the case of a residential project comprised of ~e developer may apply to pay a fee in lieu of such application shall be subject to the review nt such the developer's request if substantial providing inclusionary units on-site would in-lieu fee. 3. Calculation of fee. The amount of the fees allowed by this Section shall be calculated in accordance with the methodology set forth in the regulations adopted for the implementation of this Chapter. 4. Timing of payment. The developer shall pay any in-lieu fees allowed by this Section in full before issuance of a Building Permit for any portion of the residential-project, including any non-residential portions of a mixed-use development. 5. Housing Trust Fund. Fees collected in compliance with this Section shall be deposited in the Inclusionary Housing Trust Fund. 17.42.070. Housing Plan and Housing Agreement Required A. Submittal and execution. The developer shall comply with the following requirements at the times and in compliance with the standards and procedures in the City's regulations for the implementation of this Chapter. 1. Inclusionary Housing Plan. The developer shall submit an Inclusionary Housing Plan, in a form specified by the Planning Director, detailing how the provisions of this Chapter will be implemented for the proposed residential project. If the Inclusionary Housing Plan includes alternatives to on-site units that require the approval of the City Council, then the P11 CITY COUNCIL ORDINANCE NO. DCA DRC2008-00074 **** 2008 Page 8 Indlusionary Housing Plan shall be subject to the review and approval of the City Council. All other Inclusionary Housing Plans shall be subject to the approval of the Planning Director, subject to appeal to the City Council. Any such appeal shall be filed within fifteen (15) days of the Planning Director's decision in accordance with Section 17.02.080. 2. Housing Agreement. The developer shall execute and cause to be recorded an Inclusionary Housing Agreement. The Inclusionary Housing Agreement shall be a legally binding agreement between the developer and the City, in a form and substance satisfactory to the Planning Director and the City Attorney, and containing those provisions necessary to ensure that the requirements of this Chapter are satisfied, whether through the provision of inclusionary units or through an approved alternative method. B. Discretionary approvals. No discretionary approval shall be issued for a residential project subject to this Chapter until the developer has submitted an Inclusionary Housing Plan. C. Issuance of Building Permit. No Building Permit shall be issued for a residential project subject to this Chapter unless the Planning Director has approved the Inclusionary Housing Plan, and any required Inclusionary Housing Agreement has been recorded. D. Issuance of Certificate of Occupancy. A Certificate of Occupancy shall not be issued for a residential project subject to this Chapter unless the approved Inclusionary Housing Plan has been fully implemented. 17.42.080. "Standards A. Location within project, relationship to non-inclusionary units. All inclusionary units shall be: 1. Reasonably dispersed throughout the residential project; 2. Proportional, in number of bedrooms, and location, to the market rate units; 3. Comparable to the market rate units included in the residential project in terms of design, materials, finished quality, and appearance; and 4. Permitted the same access to project amenities and recreational facilities, as are market rate units. B. Timing of construction. All inclusionary units in a residential project shall be constructed concurrent with, or before the construction of the market rate units. If the City approves a phased project, a proportional share of the required inclusionary units shall be provided within each phase of the residential project. P12 CITY COUNCIL ORDINANCE NO. DCA DRC2008-00074 ****, 2008 Page 9 C. Units for sale. 1. Time limit for inclusionary restrictions. A unit for sale shall be restricted to the target income level group at the applicable affordable housing cost for a minimum of 55 years. 2. Certification of purchasers. The developer and all subsequent owners of an inclusionary unit offered for sale shall certify, on a form provided by the City, the income of the purchaser. 3. Resale price control. In order to maintain the availability of inclusionary units required by this Chapter, the resale price of an owner occupied inclusionary unit shall be limited to the lesser of the fair market value of the unit as established by a licensed real estate agent based- upon three comparable properties or the restricted resale price. For these purposes, the restricted resale price shall .be the greater of either the applicable Affordable Housing Cost or an amount equal to the sum of: a. The purchase price; b. A percentage increase in the purchase price equal to three (3) percent of any increase in the Consumer Price Index; and c. The adjusted amount of any capital improvements for which a building permit has been issued by the City of Rancho Cucamonga and a certification of .completion has been filed, or other improvements which adds assessed value to the unit; professional d. Any applicable transaction fee charged by a real estate e. If the occupant has allowed the unit to deteriorate due to deferred maintenance, the restricted retail price shall be discounted in an amount equal to the costs necessary to bring the unit into conformity with Title 15 or Title 16 of this Code. 4. Inheritance of inclusionary units. Upon the death of an owner of an owner-occupied inclusionary unit, title in the property may transfer to the surviving joint tenant without respect to the income-eligibility of the household. Upon the death of a sole owner or of all owners of an inclusionary unit and the inheritance of the property by one or more non-income eligible children or step-children of the decedent, the property shall be sold to an incdme eligible household within one year of the time when the decedent's estate is settled. Inheritance of an inclusionary unit by any other non-income eligible person or persons shall require the sale of the property to an income eligible person as soon as is feasible, but not more than 180 days after the decedent's estate is settled. 5. Forfeiture. If an inclusionary unit for sale is sold for an amount in excess of the resale price controls required by this Section, the buyer and the seller shall be jointly and severally liable to the City for the entire purchase price of the unit. Recovered funds shall be deposited into the Inclusionary Housing Funds. Notwithstanding the foregoing, it shall be within the discretion of the City Manager to allow the buyer and seller to cure any violation of the resale price controls within 180 days. P13 CITY COUNCIL ORDINANCE NO. DCA DRC2008-00074 "" 2008 Page 10 D. Rental units. 1. Time limit for inclusionary restrictions. A rental unit shall remain restricted to the target income level group at the applicable affordable housing cost in perpetuity. 2. Certification of renters. The owner of any rental inclusionary units shall certify, on a form provided by the City, the income of the tenant at the time of the initial rental and annually thereafter. 3. " Forfeiture. Any lessor who leases an inclusionary unit in violation of this Chapter shall be required to forfeit to the City all money so obtained. Recovered funds shall be deposited ihto the Inclusionary Housing Funds. E. The Planning Director may require the execution and recording of whatever documents required to ensure enforcement of this Section; including but not limited to promissory notes, deeds of trust, resale restrictions, rights of first refusal, options to purchase, and/or other documents, which shall be recorded against all inclusionary units. F. General Prohibitions. 1. No person shall sell or rent an inclusionary unit at a .price or rent in excess of the maximum amount allowed by any restriction placed on the unit in accordance with this Chapter. 2. No person shall sell or rent an inclusionary unit to a person or persons that do not meet the income restrictions placed on the unit in accordance with this Chapter. 3. No person shall provide false or materially incomplete information to the City or to a seller or lessor of an inclusionary unit to obtain occupancy of housing for which that person is not eligible. G. Principal Residency Requirement. 1. The owner or lessee of an inclusionary unit shall reside in the unit for not less than ten out of every twelve months. Notwithstanding this requirement, the owner or lessee may live elsewhere for a period up to 6 months every five (5) years on account of hardships including but not limited to medical reasons, the need. to assist family member in crisis or medical need, and relocation for employment purposes. 2. No owner or lessee of an inclusionary unit shall lease or sublease, as applicable, an inclusionary unit without the prior permission of the Planning Director. 17.42.090. Takings Determination A. Determination of a taking of property without just compensation. In accordance with the procedures provided by this Section, a developer may request a determination as to whether the requirements of this Chapter, taken together with the inclusionary incentives as applied to the residential project, would constitute a taking of property without just compensation under the California or Federal Constitutions. P14 CITY COUNCIL ORDINANCE NO. DCA DRC2008-00074 •••~ zoos Page 11 1. If an Inclusionary Housing Plan is subject to the approval of the Planning Director, the developer may request the Planning Director to make a takings determination within fifteen (15) days of the decision by the Planning Director to approve or disapprove the Inclusionary Housing Plan. The developer may file an appeal of the Planning Director's takings determination within fifteen (15) calendar days after the date of the decision in compliance with Section 17.02.080. 2. If an Inclusionary Housing Plan is subject to the approval of the City Council, the developer may request the City Council to make a takings determination at the time it acts to approve or disapprove the Inclusionary Housing Plan. B. Presumption of facts. In making the taking recommendation or determination, the Planning Director or City Council, as appropriate, shall presume each of the following facts: 1. Application of requirements. Application of the inclusionary housing requirement to the residential project; 2. Incentives. Application and utilization of all density bonuses and incentives available under State and local law; 3. Product type. Utilization of the most cost-efficient product type for the inclusionary units that would meet the standards of this Chapter; and 4. External funding. The reasonable availability of external funding. P15 C. Modifications to reduce obligations. ff it is determined that the application of the provisions of this Chapter would be a taking, the Inclusionary Housing Plan shall be modified to reduce the obligations in the inclusionary housing component to the extent, and only to the extent necessary, to avoid a taking. If it is determined no taking would occur though application of this Chapter to the residential project, the requirements of this Chapter remain applicable. 17.42.100. Enforcement D. Any violation of this Chapter constitutes a misdemeanor. E. Forfeiture of funds. Any individual who sells or rents an inclusionary unit in violation of this Chapter shall be required to forfeit all money so obtained. Recovered funds shall be deposited into the Inclusionary Housing Trust Fund. F. Legal actions. The City may institute any appropriate legal actions or proceedings necessary to ensure compliance with this Chapter, including actions: 1. To disapprove, revoke, or suspend any permit, including a Building Permit, Certificate of Occupancy, or discretionary approval; and 2. For injunctive relief or damages. CITY COUNCIL ORDINANCE NO. DCA DRC2008-00074 ****, 2008 Page 12 G. Recovery of costs. In any action to enforce this Chapter, or an Inclusionary . Housing Agreement recorded hereunder, the City shall be entitled to recover its reasonable attorney's fees and costs. 17.42.110. Inclusionary Housing Trust Fund There is hereby established a separate fund of the City, to be known as the Inclusionary Housing Trust Fund. All monies collected in compliance with Sections 17.42.060(6) (In lieu fee), 17.42.080(C)(5), 17.42.080(D)(3) (Forfeiture), or •17.42.100 (Enforcement), above, shall be deposited in the Inclusionary Housing Trust Fund. 17.42.120. Administrative Fees The Council may by resolution establish reasonable fees and deposits for the administration of this Chapter." SECTION 5: On or before the second, fourth, and sixth anniversaries of the effective date of this Ordinance, the Planning Director shall prepare and present to the City Council an evaluatioh of the effectiveness of Chapter 17.42, or ahy successor provisions, during the preceding (2) years and any recommendations for changes. SECTION 6: If any section, subsection, sentence, clause, phrase, or word of this Ordinance is, for any reason, deemed or held to be invalid or unconstitutional by the decision of any court of competeht jurisdiction, or preempted by legislative enactment, such decision or legislation shall not affect the validity of the remaining portions of this Ordinance. The City Council of the City of Rancho Cucamonga hereby declares that it would have adopted this Ordinance and each section, subsection, sentence, clause, phrase, or words thereof, regardless of the fact that any one or more sections, subsections, clauses, phrases, or words might subsequently be declared invalid or unconstitutional or preempted by subsequent legislation. SECTION 7: The City Clerk shall certify to the adoption of this Ordinance and shall cause the same to be published within 15 days after its passage at least once in the Inland Valley Daily Bulletin, a newspaper of general circulation published in the City of Ontario, California, and circulated in the City of Rancho Cucamonga, California. SECTION 8: The City Clerk shall certify the adoption of this Ordinance and cause its publication in accordance with applicable law. Signed and approved this _ day of , 2008. P16 Dr. Donald J. Kurth Mayor of the City of Rancho Cucamonga CITY COUNCIL ORDINANCE NO. DCA DRC2008-00074 "" 2008 Page 13 I HEREBY CERTIFY that the foregoing ordinance was adopted by the City Council at its meeting held , 2008, by the following vote: AYES: NOES: ABSENT: ABSTAIN: Published: P17 City Clerk, City of Rancho Cucamonga P18 BIA March 14, 2008 Mr. Jack Lam City of Rancho Cucamonga Rancho Cucamonga, CA RE: PROPOSED INCLUSIONARY ZONING ORDINANCE Deaz Mr. Lam Baldy View Chapter Ruiltlinc Indu Slrc .As,eociulinu iil Suwhcrn C;diforni::. Inc. 8711 Monroe Court, Suite B Rancho Cucamonga, California 91730 ph 909.945.1884 fx 909.948.9631 www.biabuild.com I read with interest that the City of Rancho Cucamonga is considering ari inclusionary zoning ordinance and would respectfully request that you forward this to the City Planning Commission staff to include our comments in their staff report presented to the city planning commission. Here are some preliminary comments from the BIA. I'm sure that as we get further into the process we will have more to say about this issue. As you know, California is currently facing a massive housing shortage statewide. Recent estimates indicate the Golden State suffers a chronic under-investment in residential construction, with a cumulative shortfall of more than 500,000 units since 1995, not to mention the current state of the economy. While we respect the City's efforts to seek out strategies for achieving greater affordable housing production, we feel that imposing a mandatory inclusionary zoning (IZ) ordinance is the wrong way to achieve this goal. We encourage the continuation of a collective and collaborative process that focuses on increasing housing supply at all levels through developer incentives and regulatory relief We respectfully request that you consider a number of recent research highlighted below that clearly demonstrates the problems associated with implementing IZ in Rancho Cucamonga... In addition, we ask that you consider our overview of the adverse impact of IZ on secondary money market issues related to housing. As you will see, the proposed IZ ordinance will only hinder housing availability and affordability in Rancho Cucamonga and contribute to the overall housing shortage in California. .,..: ^nd :hr C:d il~~nri~a li,ii LUne b¢!¢;tr::\ssnrf n: n,n P19 RESEARCH Dmvd Paul Rosen & Associates (2003 A case in point (very similar to Rancho Cucamonga) is in the fall of 2002, the City of Los Angeles retained David Paul Rosen & Associates to prepaze a study to assess the feasibility of implementing an IZ program in the city. That report was released in Mazch 2003 and asserts that IZ is a feasible option for providing affordable housing in the City of Los Angeles. To date, this study has been used as guidance for policy makers in the debate surrounding IZ. Kos-nont Partners (June 2003 & March 2004 The City of Los Angeles was presented two academic studies on TZ prepazed by Kosmont Partners (Kosmont) by the Building Industry Association. The first Kosmont study is focused on the practice and theory of IZ. The study focuses ou six (b) IZ programs in jurisdictions within the State of California, four (4) programs in jurisdictions outside of California, and literature from both academic and professional trade journals that examines the impacts of such programs. The first study provides insight into the guidelines of ptogtartis throughout the country and the adverse impacts these programs appear to have on affordable housing development and housing development in general. Findings from the first Kosmont study indicate that an IZ program in Los Angeles will have serious negative implications for the City's housing supply because it will NOT produce enough housing, much less affordable housing, to be anything other than a constraint on housing supply. Findings from the second Kosmont study indicate that the two most significant assertions in the Rosen Report are unsupportable. According the second study, the following assertions cannot be relied upon as guidance in the debate over the appropriateness of IZ in Los Angeles. • Its implication that IZ is not likely to affect housing production in Los Angeles is based merely on a visual examination of baz char[ data from other jurisdictions rather than the sophisticated statistical analysis that would be required to adequately understand data that extends over several years of observations. • It omits any discussion of several critical aspects of how the real estate mazket and new housing development in Los Angeles would respond to the additional requirements of IZ 2 P20 • Its findings of feasibility for an IZ program are based on pro forma financial analyses that incorporate faulty assumptions for the costs and revenues associated with new housing development in Los Angeles. Reason Public Po&cv Institute (2004) Another study recently released (April 2004) by the Reason Public Policy Institute (RPPI) is also attached. This study provided four significant conclusions related to IZ including: • Inclusionary zoning is a negative housing trend • Inclusionary zoning does hot lead to more affordable housing • Inclusionary zoning hinders availability and affordability of the housing market • Inclusionary zoning has negative fiscal effects Conclusion One -Inclusionary zoning is a negative housing trend Many California communities suffer a shortage of affordable housing. A populaz response has been "inclusionary zoning" ordinances that mandate developers sell a certain percentage of the homes they build ai below market prices to make them affordable for people with lower incomes. Inclusionary zoning is spreading rapidly nationwide. For example, in California, between 1990 and 2003, the number of communities with inclusionary zoning more than tripled - from 29 to 107 communities -meaning about 20 percent of California communities now have inclusionary zoning. Conclusion Two -Inclusionary zoning does not Zead to more affordable housing • After passing an inclusionary zoning ordinance, the average city produces fewer than 15 affordable units per year. In the San Francisco Bay Area, where inclusionary zoning is most prevalent, inclusionary zoning produce only 4 percent of the region's estimated affordable housing need, and it will take 100 years for inclusionary zoning to meet the current 5-year housing need. Conclusion Three - brclusiona~y inning hinders availabilityand affordability of the housing market P21 • FEWER HOMES - Inclusionary zoning leads to fewer homes being built in a community- the average city produced 214 homes the year before inclusionary zoning but only 147 the year after. Similarly, the 45 San Francisco Bay area cities with inclusionary zoning ' examined in the study are losing a total of about 2,300 new homes per year. • INCREASED PRICES - Inclusionary zoning caused the price of new homes in the Median Bay Area city to increase by $22,000 to $44,000 per home. Conclusion Four - Inclusionary zoning has negative fiscal effects • Selling new homes at below-mazket rates costs builders in the average city $45 Million. These increases costs inevitably are passed on to other homebuyers increasing the overall cost for a new home. • By lowering the assessed value of homes and the resale value, inclusionary leads to substantial loss of state and local tax revenue. The total present value of lost state and local government revenue due to Bay Area inclusionary zoning ordinances is upwards of $553 million. Clearly, the aforementioned findings by RPPI demonstrate that IZ only contributes to California's housing shortage and hinders hopes of more residents attaining the "American Dream" of homeownership. As such, we offer the following observations on how to tackle the affordable housing problem. How to Tackle Affordable Housing Problems • It is a fundamental law of economics that price controls cause shortages and don't help increase supply. A recent Harvard study found that 90% of the difference physical construction costs and the market price of new homes can be attributed to land use regulation. • Most affordable housing is not new housing, but older homes. The only way to increase the supply of affordable older homes is to reduce restrictions on new home building and increase the overall supply of homes. 1NCLUSIONARY ZONING AND SECONDARY MONEY MARKET ISSUES In addition, we are concerned about how inclusionary zoning impacts the secondary money mazket. We are attempting to get' clarification from HUD, Freddie Mac and Fannie Mae because some of the major lenders have indicated that inclusionary housing units aze not marketable because of the deed restrictions. Overall, the following restrictions (see attachment I) are cause for concern. P22 Freddie Mac and Fannie Mae policy of Inclusionary Zoning • The affordability provisions for Inclusionary units shall apply in perpetuity from the date of occupancy, which shall be the date the city of Rancho Cucamonga performs final inspection for building permits is not acceptable to Fahnie Mae or Freddie Mac BIA, BALDY VIEW CHAPTER'S PERSPECTIVE There are clear legal issues related to this problematic policy. Inclusionary zoning is vulnerable to two major legal challenges, each emanating from a tight provided under an amendment to the U.S. Constitution. The first is the guarantee of fair compensation for publicly appropriated property, outlined in the Fifth Amendment. The second, set fourth in the Fifth and Fourteenth Amendments, is the right to fair and equal protection under the law. Before making any decisions, policy makers who are considering adopting IZ must clearly understand the extent to which IZ will have an impact of feasibility of residential development projects. Financial feasibility is the primary factor, which determines whether a project is undertaken. Although it is clear that a purely incentive-based Inclusionary zoning ordinance would face no significant legal risk, not being a regulation as such. An ordinance requiring the participation of developers receiving incentives would be found to advance a legitimate public interest in attempting to improve the availability of affordable housing; however, finding some measure of the economic impact of an IZ ordinance on developers is important because this valuation is an important determinant of legal risk and also gives and indication of the level of incentive necessary to induce participation in a voluntary program. Ifa project is not financially feasible it will not be built. It is that.simple. While it might be tempting to try and solve the community wide problem of affordable housing on the backs of new homebuyers and while it will allow elected officials to say they are doing something about affordable housing, IZ is not only inequitable, but also an inefficient means of providing affordable housing. Rather than seeking to put up barriers to housing production and placing the burden of subsidizing affordable housing on the backs of one small segment of the populations-new homebuyers, the City should be endeavoring to stimulate housing development and create an incentive based system for producing affordable units. P23 An IZ ordinance has superficial attractiveness because it appeazs to offer an expedient means of providing affordable housing, however such an ordinance will actually be counterproductive to the City's goals of improving housing affordability and will discourage housing production at all income levels. It fails to acknowledge that rents and home costs will escalate across the boazd. It fails to report that middle-income families, the strength of the city, will be severely hurt. Again, we look forwazd to working with the City to find a solution to the affordable housing needs. Sincerely, Frank Williams Chief Executive Officer cc: Members. of the Planning Commission Mayor & City Council Attachments: 1. Overview of Freddie Mac's and Fanriie Mae's policy on Inclusionary Zoning 2. Review of the David P. Rosen & Associates Report on Inclusionary Housing in the City of Los Angeles 3. Inclusionary Housing and its Impact on Housing and Land Mazkets, by David Rosen can be .. accessed at http://www.lacitv.ore/lahdlinclusio.htm 4. Inclusionary Housing Study, by Kosmont Partners 5. Housing Supply and Affordability: Do Affordable Housing Mandates Work? By Reason Public Policy Institute full study - http://www.rppi.org/ps318.pdf P24 ATTACHMENT 1 Freddie Mac's and Fannie Mae's policy on Inclusionary Zoning: "Copyright, 1989, 2002, Freddie Mac. All Rights Reserved 22.23; Inclusionary zoning (09/09/02) Freddie Mac considers inclusionary zoning to cover any subdivision or project where deed restrictions are placed on a specified number or percentage of the he units as a condition of securing zoning approval, density approval, building permits or conversion approval. Such deed restrictions may limit the rights of a Mortgage ]ender or subject the unit to sale or resale controls. Freddie Mac considers properties subject to such restrictions to be restricted units. Noncontrolled properties are considered "nonrestricted units." Freddie Mac will purchase Mortgages secured by u~uts in a subdivision or project covered by . inclusionary zoning if the requirements in Section 22.25 aze met. By submitting such Mortgages for purchase, the Seller warrants that the requirements have been met. 22.24: Purchase requirements for Mortgages secured by nonrestricted units (09/09/02) (a) General purchase requirement Freddie Mac purchase requirements, including al] applicable condominium and PUD warranties must be met. (b) Presale requirement If the unit is in a Condominium Project, the Freddie Mac presale requirement described in Chapter 42 applies separately to the nonrestricted and restricted units in the project, Freddie Mac will not purchase Mortgages secured by either nonrestricted or restricted units until the presale requirement is met forboth categories. (c) Market data analysis 111 the market data analysis section of the appraisal form, the appraiser must show analysis of three comparable sales, tow of which are outside the subdivision or project if it is in the initial sale stage. The three comparable sales must be sales of units with similar property rights. P25 (d) Homeowners association assessment If the unit is in a condominimn or PUD project, the homeowners association assessment nmst be based on the size of the unit or on the ratio of one to the total number of units in the entire project but may not be based on the sale price of the unit. Exterior maintenance must be the responsibility of the homeowners association and the charges for maintenance must be included in the monthly assessment. (e) Property insurance payment or condenmation award The mortgagee must have first claim to any property insurance payment or condemnation award. 22.25: Purchase requirements for Mortgages secured by restricted units (09/09/02) (a) Previous requirements The requirement in Section 22.24 must be met. (b) Any right of first refusal must run to the enabling authority or jurisdiction that imposed the inclusionary zoning requirement with time period not exceeding 90 days. In the event of foreclosure or deed-in-lieu of foreclosure any resale restrictions will cease to be effective for the mortgagee and subsequent purchasers of the property. (c) Ratio restricted total number of units The number or percentage of restricted units in the subdivision or project must not exceed 10 percent of the total number of units. (d) Resale controls The restricted units nmst have effective resale controls for a fixed period of time. The controls must be administered by a duly authorized authority (or agent thereof) of State, local or municipal government that has established mechanisms to provide applicant screening and processing on an ongoing basis. The controls may not be administered by the developer. (e) Property Insurance Property insurance coverage in the amount of the replacement cost is required. (f) Notice of default or foreclosure The mortgagee is not required to send notice of default or foreclosure to any third party. (g) Public land records Agreements or requirements, i.e. enacted ordinance, statute, published policy or imposed restrictions must appear in the public land records for the project in a mamrer discoverable by a routine title search. FNMA, Part XII, Chapter 6 XIL611: Condominiums Subject to Inclusionary Zoning Restriction (06/30/02) (also see Part VII, Section 102.09) When a condominium project is located in an area that has passed "inclusionazy zoning" restrictions as a means of providing affordable housing for low- and moderate-income persons, the project's declaration must address the following:. The source of the deed restrictions in the public land records; the subordination of the deed restrictions to a mortgage on the unit estate, and the priority of the mortgage holder's rights to any hazard insurance settlement or condemnation award; the number of restricted units; any provision of the deed restrictions that would impair a mortgage holder's legal rights to remedy a default under the mortgage or that would require the mortgage holder to send a notice of default or notice of foreclosure to any third party (including the zonng authority or local jurisdiction; and the terms of any resale controls that affect the restricted units. (We will not purchase or securitze mortgages secured by restricted units if our future sale of a unit that we acquire through foreclosure or acceptance of a deed-in-lieu of foreclosure will be subject to any resale restrictions.) VII, 102.09: Inclusionary Zoning Restrictions (04/30/02) To provide affordable housing for low- and moderate-income persons, some state and local govenunents have introduced the concept of "inclusionary zoning." We will purchase or secw itize first mortgages that are subject to this type of zoning restriction or land-use regulation. In such cases, the deed restrictions must be subordinate to our mortgage and we must have the first claim to any hazard insurance settlement or condemnation award. In addition, the restrictions cannot impair- our legal rights to remedy a default under the mortgage terms, nor should they require us to send a notice of default or foreclosure to any third party. The source of the deed restrictions must be included in the public land records so that it is readily identifiable in a routine title search. P26 Airy resale controls that affect the restricted units must ve for a fined period of any term up to 30 P27 years. They must be administered by an authorized govenunental unit that has established procedures for screening and processing applicants. The zoning authority or local jurisdiction may retain the "right of first refusal" to pw-chase a restricted unit that is being resold. This right must be exercised within 90 days after the property is listed for sale. However, the deed restrictions cam~ot obligate us to notify the zoning authority or local jurisdiction separately about a pending foreclosure sale of the restricted unit. When we acquire a restricted unit tluough foreclosure or acceptance of adeed-in-lieu of foreclosure, future sales of the unit must not be subject to any resale restrictions. [Page: 719 06/30/0?]" ~a_~IYi~F1~~~lc n''r P28 '~:~r ~, . ~~ :o REVIEW OF THE DAVID P. ROSEN & ASSOCIATES REPORT ON INCLUSIONARY HOUSING IN THE CITY OF LOS ANGELES PREPARED FOR: GREATER LOS ANGELES~VENTURA CHAPTER OF THE INDUSTRY ASSOCIATION OF 7 CALIFORNIA CL4TION OF LOS ANGELES MARCH 2004 Prepared by.• Kormont Partners 609 S. Figueroa Street Suite 330 Los Angeler, CA 90017 ph 213.623.8484 fay 213.623.8288 P29 Review of the David P. Rosen & Associates Report on Inclusionary Housing in the City of Los Angeles PREPARED FOR GREATER LOS ANGELES~VENTURA CHAPTER OF THE BUILDING INDUSTRY ASSOCIATION OF SOUTHERN CALIFORNIA AND CENTRAL CITY ASSOCIATION OF LOS ANGELES PREPARED BY KOSMONT PARTNERS March 2004 P30 TABLE OF CONTENTS I. Executiae Summarv ......................:.................................................................................................1 Overall Findings ..............................................................................................................................1 Production of New Housing .........................................................................................................2 Other Critical Issues ........................................................................................................................3 Feasibility of Inclusionary Housing ..............................................................................................5 II. Inclusionary Housing and Housing Production .......................................................................7 Introduction ................................................................:....................................................................7 Determining the Relationship Using a Typical Empirical Analysis .........................................7 Review of the Anal}sis in the Rosen Report ...............................................................................9 Useful Substitute for an Empirical Anal}'sis ...................................................................:..........11 III. Other Critical Impacts .......................................................................................:.......................13 Overview .........................................................................................................................................13 More Rapidly Increasing Housing Prices and Rents ................................................................13 Polarization of New Housing Pzoduced ....................................................................................14 Greater Deterioration of Existing Properties ............................................................................ ] 4 One Policy Does Not Fit All .......................................................................................................1 ~ IV. Financial Feasibility Analysis ..........................................................:..........................................16 Introduction ...................................................................................................................................16 Rosen Report Methodology to Assess Financial Feasibility ...................................................16 Summary of the Rosen Report's Findings Regarding Financial Feasibility ..........................17 Re~zew of the Rosen Report's Financial Feasibility Assessment ............................................18 Rrviem allhe DPRA Inrlnrionary Harting Report Brril(lins InAuftry Atroriation ~ P31 Central City A.rroaiation Alareb 2004 I. EXECUTIVE SUMMARY OVERALL FINDINGS The Los Angeles Housing Depaztment retained David Paul Rosen & Associates to provide technical guidance to City policy makers in their deliberation over the question of whether Indusionary Housing (IH) would be appropriate as a part of an overall housing policy in Los Angeles. David Paul Rosen & Associates issued a report (Rosen Report) in September 2002, which contains findings that are offered as guidance fox those policy makers. A review of the Rosen Report indicates that its two most important assertions are unsupportable and that it cannot be relied .upon as guidance in the debate over the appropriateness of IH in Los Angeles. The principal reasons for this are as follows: 1. Its implication that IH is not likely to affect housing production in Los Angeles is based merely on a visual examination of bar chart data from other jurisdictions rather than the sophisticated statistical analysis that would be required to adequately understand data that extends over several yeais of observations. 2. It omits any discussion of several critical aspects of how the real estate market and new housing development in Los Angeles would respond to the additional requirements of IH. 3. Its findings of feasibility for an IH program are based on pro forma financial analyses that incorporate faulty assumptions for the costs and revenues associated with new housing development in Los Angeles. Each of these deficiencies is summarized below and described in more detail in separate sections of this review. Furthermore, a number of potential adverse effects of IH on the housing market in a mature built-out city such as Los Angeles are not disclosed. Compared to a Los Angeles housing market without IH, the imposition of IH in the City will result in the following impacts: 1. The value of existing properties as potential sites for new housing development will be reduced. 2. The ability of residential developers ro compete with non-residential developers (e.g. developers of industrial space, office buildings, or parking lots) for building sites in the City will be significantly reduced. 3. Underutilized properties or properties ~~dth existing improvements will have to decline in value further or deteriorate more before it becomes economicall}' rational for them to be converted into sites for new housing as property owners will continue to collect rent rather than sell the propext5~ to residential developers at a reduced cost. 1 Revieru of the DPRA !nrlutionar~~ Houring Report ~ ~ P3~ - BnilAiug Jurlrutry Attodalion Centrnl City A.rmeialion A1an$ 2004 4. .Over the near, intermediate and long-term, fewer properties in Los Angeles will be com~er[ed to sites for new housing projects, often perpetuating blight. 5. Fewer new housing projects will be built and the total number of new housing units produced in Los Angeles will be lower. 6. The new housing units that are actually produced in Los Angeles will consist of a mix that is more polarized in terms of value and rental rate with fewer units in the middle value range, impacting the availability of workforce housing. 7. Purchase prices and rental rates of existing housing units in Los Angeles will increase more rapidly and those units presently priced in the affordable range (and not restricted by law to remain so) kill more quickly rise above the affordable range when supply is constrained. 8. The lower total number, of housing units being produced, the more rapid increase in value or rents of the existing housing stock, and the shift of the new market rate units being produced to a higher value range will impede Los Angeles' ability to meet its regional housing goals. PRODUCTION OF NEW HOUSING The Housing Department was particularly interested in the potential impact of IH on the production of housing. The Rosen Report frames .this question in terms of whether a visual examination of bar graphs representing total housing production in various jurisdictions over a 20-year time period reveals a decline in housing production after the imposition of IH. The bar graphs are also visually inspected to determine if any correlation can be detected between housing production and several measurable economic indicators. The Rosen Report found no correlation between the level of housing production and the imposition of IH in 1~ jurisdictions. The Rosen Report did Fnd a correlation between two economic indicators (employment and housing prices). However, the presentation of the housing production data in the Rosen Report was not able to demonstrate any correlation between interest rates and housing production. The presentation of the Rosen Report's findings leaves the impression that housing production is not adversely affected by the imposition of IH. This is both an unsupportable conclusion and incorrect because of the following: Any meaningful investigation of the factors affecting something as complex as housing production in multiple jurisdictions over a 20-year time frame would require the use of complex and sophisticated multivariate time-series analysis. 2. What is characterized as an "analysis" in the Rosen Report is merely a superficial bar-chart tabulation of housing production figures for individual jurisdictions 2 Reniem of the DPAA LreGuionary Ho:uiug Reyor! F33 Building Industry Arroa'atron E CenFral City Auoa'ation Mnrrh 2004 coupled with the "eyeballing" of their relationship to other specified annual data or events, the most critical of which is ambiguously defined. 3. The Rosen Report's admission that its data presentation does not even demonstrate the well-documented relationship between interest rates and housing production means that any other conclusions based on that data presentation are extremely suspect at best and most likel}' invalid. In the absence of the ability, financial resources or will to perform the necessary sophisticated multivariate time-series anal}'sis, the question of whether IH is likely to have an impact on housing production must be addressed differently and in a way that is more meaningful to public policy makers. ' It would be of more use to public policy makers if the question were framed as follows: li'/ould the response of property markets to the imposition of IH in a jurisdiction.be likely to result in less total new housing being developed in any year than ifan IHprogram were notin place? The answer to this question is dependent on a number of factors. However, an absolutely critical factor is whether a jurisdiction that unposes IH is one that is essentially fully built- out. In a jurisdiction such as Los Angeles (which is a mature and essentially fully built-out city), it is a fact that virtuall}' all of the new housing development in the future will occur on land that is already in some other use. If IH is imposed in such a' jurisdiction withou[ incentives that fully offset its financial burden, new housing developers will be less able to pay prices for new project sites that exceed the value of those sites in their existing uses or compete for sites wi[h developers of other uses not subject to IH. As a result of this reduced ability on the part of housing developers to compete fox sites, fewer sites will be sold to residential developers, fewer new housing projects will be developed and fewer total new housing units will be produced than would be the case without the presence of IH. OTHER CRITICAL ISSUES It is necessar}' for public policy makers to be aware of and to understand several additional important issues, their impacts on the real estate market, and how' new housing development will react to the imposition of IH in a jurisdiction. The following axe among the critical issues related to IH that are often overlooked in the debate: 7. ~~~ith lower total new housing production, rents and prices for the entire market-. rare housing stock will increase to a level higher than would prevail without IH. 2. The new housing that is produced will be more polarized at the upper and lower ends of the rent and price spectrum. 3 Reirem oj[5e DPRA IuaGuionary Ho+uing Report P34 BuilAing lrsdu.rlry Ar.ro~iation E" Cents! Cite Anoainlion A9nrt6 2004 3. Deteriorated housing and other marginal land uses (e.g. retail strip centers, industrial buildings, parking lots, etc.) will persist for a longer tune, increasing the likelihood of unsightly blight in a jurisdiction with IH because those properries will continue to be more valuable in the existing uses than as sites for new housing development. 4. Because of the City of Los Angeles' vast size and the variety of development issues among its numerous neighborhoods, a single citywide inclusionary policy that does not consider this diversity will not be effective and is no[ feasible. More Rapidly Increasing Housing Prices and Rents Unless an IH program has significant incentives that offset the financial burden of compliance and exempts from IH requirements certain types of residential development for which these incentives are infeasible, the total amount of new housing built in a jurisdiction will be less than it otherwise would be as housing developers become uncompetitive in bidding for development sites. With a smaller amount of new housing developed than would be the case without IH and with a demand for housing that is constant or growing, the response in the housing market will be for rents and prices for. units not set aside as affordable to rise more quickly and to a higher level than would be the case without IH. Viewed another way, unless it is somehow possible to limit or reduce demand for housing in a jurisdicton at the same time IH is limiting the total amount of housing developed, rents and prices for market rate units will be higher than without IH. Polarization of New Housing Produced In practice, those developers of new housing who are able to acquire sites for new projects in jurisdictions with IH, will be faced with a decision as to what type of market rate units in each project should be eliminated to make room for the required number of affordable units. The basic economics of housing development will cause developers to eliminate market rate units with lower rents or prices and replace them with the IH units. The clear result of this will be for the total number of new housing units produced to become more polarized at the upper and lower levels of the rent and price spectrum. This is because developers who are required to build a certain number of IH units in a project will substitute them for units that otherwise would have been in lower or middle portion of the range for market rate units. A higher proportion of the market rate units will be in the high rent and price range. The adverse impact of this will fall most heavily on households that rely on units with rents or prices at the lower to middle range of the market and which do not qualify to occupy the IH units because of their income level. They will find that there are fewer units being produced fox them than would be the case without IH. 4 Reviem of the DPRA lutlruronnry Hauirsg Report F35 BxilAing InAurlr~~Arro~intion e~ Central Cig~Auoantion tYlarrh 2004 Greater Deterioration of Existing Properties Unless incentive packages are provided that fully offset the economic burden of complying with IH, new housing developers will necessarily have to pay less for sites for their projects than they could without IH. This means that someone selling a property to a developer as a site for a new housing project would receive a lower price than would be the case without IH. With properties worth less because of IH requirements, any properties with existing uses will have to decline further in value before it would be economically rational for the owners to sell them to developers as sites for new housing projects. Such a further decline in value before a property is sold for redevelopment would be accompanied by increased physical deterioration or greater obsolescence. Both of these tendencies are of very significant public policy interest. Furthermore, this effect all be particularly pronounced in a city such as Los Angeles; which is essentially fully built out. One Policy Does Not Fit All From the standpoint of the range of neighborhoods and real estate sub-markets, Los Angeles is perhaps the most diverse city in the country. As such, it has neighborhoods which vary enormously with respect to existing physical, economic, social and political issues. Those factors which differ so much across the different neighborhoods have a very large impact on both the local need for affordable housing and the practicality of any package of incentives or offsets that would be required to assure new housing is not stifled. Any serious consideration of an IH program in Los Angeles would need to clearly identify the different neighborhoods in the City and tailor its parameters to each. FEASIBILITY OF INCLUSIONARY HOUSING The Rosen Report asserts that a number of new housing development scenarios in Los Angeles will generally remain feasible if IH is imposed. It defines feasibility as the residual eland value for new housing development sites falling within a range of observed market values. Ten different prototype new housing developments were analyzed for three different ranges of land market values and combined with up ro four different IH "incentive" packages. The Rosen Report implies that the residual land value (RLV) will fall within an observed range of market ]and values fox 58 of 166 different scenarios of prototypes and incentive packages. The Report also implies that RLV for projects with IH and various incentive packages (including no incentives) will decrease compared to the market rate RLV in 74 out of the 96 pro formal that were created, increase in 20 out of the 96 pro formal, and remain approximately the same in 2 out of the 96 pro formal. These Findings are unsupportable and invalid because the pro forma financial analyses on which they depend are fatally flawed. Specifically, the Rosen Report's financial analyses base their findings on: Rexierv oflhe DPRA IncGrtiarary Houring Repor! P36 Brrilrtirr~ InAxrlry Auorialiarr Ei Cerrhnl Cit~~Armdaliors Marrb 2004 1. Ranges of land market value intended to define feasibility which axe so broad that they mask the fact that new housing projects would become infeasible in many areas of the City where they would otherwise be feasible urithout IH, 2. Development costs for prototype projects without IH that are significantly understated and not consistent with the actual development costs in Los Angeles, 3. Rents for finished rental housing products which are inconsistent with market values, along with sales prices 'and rents for the affordable units that may be overstated, and 4. Extremely unrealistic assumptions as [o the ability (physical, financial and political) io actually utilize IH incentive packages designed to offset the economic burden of complying with IH requirements. Each of these deficiencies has the effect of overstating the derived residual land value or understating the sales price that is required to make the project financially feasible for new housing development after the implementation of IH in Los Angeles and creates the false impression that many types of new housing development would remain feasible. In fact, the residual land values for the new housing development prototypes analyzed will be much lower than the Rosen Report suggests and their financial feasibility in the Los Angeles market will be significantly degraded. 6 Reuie~a o, f the DPRA Ineluriaiary Hoisting RrpoR BnilAing lnAurtry Altau~tion~ P37 Central Ci>~ Auoaation A-Innh 200J - II. INCLUSIONARY HOUSING AND HOUSING PRODUCTION INTRODUCTION Understanding the impact of IH on housing production should be a central concern to policy makers who are considering adopting IH. If IH has a negative impact on total housing production, that loss in housing produced would have to be weighed against any perceived benefits of potentially creating new affordable housing. In investigating IH, the Los Angeles Housing Department was particularly interested in the potential impact of IH on housing production and directed that the Rosen Report address that issue. The Rosen Report concluded on the basis of only a visual inspection of several graphs [hat there is no correlation between die imposition of IH and the level of housing production. This conclusion is both unsupportable and incorrect because the "methodology" used is deficient. Empirically determining a relationship of this kind based on the data presented in the Rosen Report requires a detailed multiple regression analysis. An analysis of this sort would be particularly challenging and difficult, particularly at the local housing market level. The following section describes in greater detail the type of analysis that would need to be performed. This is followed by a description of how [he Rosen Report attempted to determine the relationship between IH and housing production and an explanation of why its conclusions are unsupportable and incorrect. The section concludes with the presentation of an alternative method for determining the relationship based on a basic understanding of residential developers' ability to acquire land for new development in jurisdictions such as Los Angeles, which are essentially built-out. DETERMINING THE RELATIONSHIP USING A TYPICAL EMPIRICAL ANALYSIS Although not common, studies investigating the. relationship between specific economic activities and housing production have been conducted. A significant factor in the relatively small number of studies that have been done is the difficulty of obtaining the proper data sets and of modeling the relationship. When these studies have been done, a typical framework for empirical analysis is used. This framewok: is described as follows. Specification of a Question Like any scientific investigation, empirical analyses begin with a question. In this case, the basic question is as follows Is there a determinable relationship between [he imposition of an IH program and housing production? It must be noted that tlus type of analysis can only determine associations and no[ causality. It would be wrong to use a regression analysis to definitively determine whether the imposition of IH carnet a reduction in the total amount of housing being produced. 7 P38 INCLUSIONARY HOUSING STUDY . C~~~~ PREPARED FOR: CENTRAL CITY ASSOCIATION OF LOS ANGELES GREATER LOS ANGELES~VENTURA CHAPTER OF THE BUILDING INDUSTRY ASSOCIATION OF ~ SOUTHERN CALIFORNIA .TUNE 2003 Submitted by.• Karmant Partners 601 S. Figueroa Street .Suite 35>"0 Las Angeles, CA 90017 ph 213.623.8484 fax 213.623.8288 P39 Inclusionary Housing Study PREPARED FOR CENTRAL CITY ASSOCIATION OE LOS ANGELES AND GREATER LOS ANGELES~VENTURA CHAPTER OF THE BUILDING INDUSTRY ASSOCIATION OF SOUTHERN CALIFORNIA PREPARED BY i1OSb1ONT PARTNERS June 2003 P40 TABLE OF CONTENTS I. I ntroduction .......................:..........._..............._.._...................................... ...................................... 7 Purpose ....................................................................................................... ...................................... 7 Background ....:.........................................................:.................................. ...................................... 7 Sotuces of Data and ]nformadon ............_ ....................._...................... ......................................7 Orgarvzation of the Report ...................................................................... ......................................7 II. L-xeartiee Sturvnary ............._................_....__.........................._....._...... ......................................2 ]mplicarions for t]~e Cit}' of Los Ange]es ............................................... ......................................2 Findings from Survey of Jurisdictions .................................................... ......................................3 Findings from Literature Survey ...................................... .......... ...................................... 5 Ill~aliforna ]urisdictions .......................................................................... .......................................7 iry of Carlsbad ....................................................................................... ....................................:..7 G ~ 1 '~ity of Pasadena ....................................................................................... .....................................1 ] v L City of Sacramento ................................................................................... ...................................:.7G ~ ~~ City of San Diego ....................................._...._........................................ .....................................20 ~s City of Santa Rosa .................................................................................... ~~ .....................................24 ~~ City of Sunn},vale ...................................................................................... i .....................................28 IV.]urisdictions Outside of Califoniia ...................................................... .....................................32 City of Boston, Massachusetts ........... ................................................. ........:............................32 Cin' of Denver, Colorado ........................................................................ .....................................35 Montgomen' Count}, Maryland ............._._........................................... .....................................47 State of New]ersey .................................................................................. .....................................45 V. Survey of Literattue on Inclusionary Housing ..:................................. ..................:..................49 Introduceion .............................................................................................. .....................:. 49 ........... Oven~ie~ti of Literattue ............................................................................ .....................................49 Appendix 1 - Surrimaries of Key Articles LrrGaionarp Hmuin~ Shrdp California Bnildiu~ Indu.rtryAuanubon P41 Crenter Laa An~elrt/ Vull+~ra CGopler }rrne 2003 I. INTRODUCTION PURPOSE At the request of the Central City Association of Los Angeles ("CCA") and the Greater Los Angeles/Ven0.tra Chapter of i]te Southern California Btrilding Industr}' Association ("B IA"), I{osmont Partners ("1{P") tutdertook a study. of inclusionary housing' ("]H"), both in practice and it theory. The scope of this study is described in the I{P proposal dated March 78, 2003. The stud}' focuses on su (6) IH programs it juriscctions unthin the State of California, four (4) programs in jurisdictions outside of California, and literature from both academic and professional trade journals that examines the impacts of such programs. The stud}' provides insight into the guidelines of programs throughout the country and the impacts these programs appear to have on affordable housing development and housing development in general. BACKGROUND In 2000, the City of Los Angeles retained David Patil Rosen & Associates ("DPRA") to prepare a stud~+ to assess Vie feasibility of implementing an IH program itm Vie city. That report was released vi March 2003 and asserts that IH is a feasible option For providing affordable housing in the City of Los Angeles. The BIA.is concerned that the City of Los Angeles will pass an IH ordinance without folly examining the potential negative impacts of such a program.. SOURCES OF DATA AND INFORA9ATION The data used in this snid}' comes from several primary and secondary sources. The information on the various cities analyzed in the survey came From conversations with city staff, city documents, newspaper amides, local trade organizations, and online research. The information used in the literature survey came from academic journals, trade publications, professional studies, and online research. ORGANIZATION OF THE REPORT An executive summary of the implications of the implementation of an IH ordinance for the City of Los Angeles, finding's from the city survey, and findings from the literature review is presented in Section IL Section III presents the information on the California jurisdictions examined in the survey and Section IV presents information on the jurisdictions from outside of California. The complete findings of the literature review are presented in Section V. Summaries of key articles used in the literature are provided in the Appendix. t Indusionary housing (also known as indusionary zoning) is defined as a mandatory or voluntary requirement chat calls fora minimum percentage of lowez and/ot moderate-income housing to be provided in new residential development. 7 InrGuionar~• Hontin~ Snn)~ P42 Californin Bni/dingy lndntlr~~Atroaio;ion Gna;rr Lni Avgeler/ L'erl+oa Chapter . ~++ne 2009 II. EYECUTIVE SUn~1Iv1ARY T}us Executive Summ~n~ presents the conclusions regarding 'the implications of an inclusionarp housing ordinance on die City of Los Angeles. It also presents t]~e findings of a surve~~ of jurisdictions (both inside and outside California) that have inchtsionary housing as well as a stove} of relevant literature. The findings of t]aose stuveys are the basis for the conclusions reached. IMPLICATIONS FOR THE CITY OF LOS ANGELES If an inclusionary housing program is implemented i~ Los Angeles, the key implications are: 7. The values of properties to be used as sites for new residential development will be permanendy lower than they would be without dae implementation of an u~clusionary housing ordinance. 2. Because t}te valve of properties to be used as sites for new residential development will be lowered with the implementation of an i~clusionary housing ordinance, new residential projects will be ii a less competitive position in the market compared to alternative (or even existing) land uses. 3. ~ylida new residential development at a competitive disadvantage, there will be less new residential development than dtere would be without an inclusionar}' housing ordinance because fewer properties vaill be acquired as sites for new residential projects. 4. Existing uses on sites that wotild be storable for new residential development will remain in place longer (and may deteriorate further) before being redeveloped as new residential projects. In some cases, this will contribute to blight conditions in the City. 5. Los Angeles is particularly vulnerable to this effect because there are few large unused sites available for new residential development and most new residential development will concentrated in areas that previously have been fully built-out. 6. In other jurisdictions, many so-called incentive programs do not materially reduce the financial burden associated with- then inclusionary housing requirements. Any inclusionary housing ordinance in Los Angeles would need to offer genuine relief from the financial burden it would otherwise impose and to do so in such as way as to avoid triggering prevailing wage requirements. 7. The City's residential market will become increasingly polarized at the high and low ends of the spectrum. Middle-income families whose income is orily marginally higher than households that aze eligible for indusionary trttits will have to pay a larger percentage of then income for housing ox move out of the City. 8. When the residential market softens, as it was in the first half of the ]990s, these impacts ~z-ill be magnified and the disincentives to develop new housing will increase. 7nd:u;oncr)~ Honing Stn,lj~ Ga/fon;m Eui/dnr~ L;rl:rr'r~•Arioaclion P43 Greaser Los ~Angeln/ l'en;;rra Chopler ]xne ?003 FINDINGS FRO, 1 SURVEY OF JUR]SD1CT10NS The surve~~ of 7H programs in six jurisdictions in California and fotu jtrisdictions elsewhere in the United States prosdded a number of insights into the operations of [hose programs. It also gave an indication of dteir impacts on residential development ut die jtuisdictions in wlvch the} are located. The following is a sunvmn' of the overall findings from the survey. I. Inchtsionary Housing in California's Largest Cities While cit}'wide IH programs are found L~ a number of smaller cities throughout the state, most of die largest cities do not have such programs. San Francisco is a notable exception which does have a citynvide IH program.' At the time the survey of jurisdictions was initiated, no city similar in size to dte Cit}' of Los Angeles had acity-wide program that could be used as a direct comparison. Since then, the Ciry of San Diego has implemented a citywide program. 2. Amount of Affordable Housing Produced Inclusionary housing programs are not an affordable housvtg panacea. Less than half of the ten jurisdictions comprehensive]}' track the ntunber of affordable units produced by then IH programs. None took a definitive position that more affordable housing is being produced dean would have been produced without ]N. One city noted that the new housing stock was becotnptg polarized at opposite ends of the value spec[nun and not enough middle-income housirig`is-being produced. 3. Alternatives fo Building On-Site Units Among the jtaisdictions in this survey, the payment of nt-lieu fees was die most common alternative compliance option selected. Developers always elect to pay an in-lieu fee when it is detemuned to be more cost effective than providing the units. 4. Incentives to Offset the Burdens of IncJusionary Housing Developers are rarely able to take advantage of density bonuses and parking reductions because they have aheady maximized these aspects of their developments based on physical and construction constrautts and the marketability of the units located within then projects. This renders most incentive programs ineffectual. Incentives such as fee waivers could in fact increase overall development costs by triggering prevailing wage requirements. ~ The City of San Francisco w•as no[ selected for this survey because of the sigrilficant differences between the regulatory atmosphere and the built environment in comparson to Los Angeles. San Frandsco has a high residential density and a relatively ]ow percentage of single-family housing. As a point of reference San Francisco passed its indusionarp housing program in Apal 2002. 7t requires that l0% of newlc developed residrntial units must be set-aside as indusionan• units. rlltemative compliance options include provision of indusionary units off-site or payment of an in-lieu fee. InrGuiorver~~ Horrtin~ Shulr P44 Cnli~mniv Bvi(ilinw Indrutr~•Ar.ronvtian Grenler Lol An~elet/Venture ChePter )unr ?003 5. Burden of Inchtsionary Housing Programs Residential developers will not btuld if they believe that a project will not produce the required rate of return. 'The costs of an IH program are usually slufted to landowners by means of developers paging lower prices for sites. In some cases the burden may be s}ufted to market rate renters through higher rental rates. ]urisdictions bear a significant administration cost associated with ]H programs. 6. Total Housing Units Produced Although it is difficult to determine whether or not IH programs restilt in the development of fewer housing units than'wotild have been produced without the program, residential developers believe that IH programs result in a' different mix. of product types being produced. Instead of a more normal mix of units across the pricing spectrum, developers tend to produce a mix of high-end utLts and affordable units with significantly fewer middle- iricome units. 7. Periodic Evaluation of Inclusionary Housing Programs Inclusionary housing programs impose a heavy economic burden on a portion of tie private sector. Nonetheless, jurisdictions wide IH rarely undertake periodic comprehensive exanunatons of how man; ututs are being produced and at what total cost. Consequenty, IH represents a very expensive public policy program that is seldom evaluated to determine the level of efficiency at which it operates. 8: Administrative Burden IH programs require significant administrative efforts that result in increased costs to the jurisdiction. After a program is created, the jtuisdicton must monitor bot~ the Inclusionary units and the occupants to ensure compliance with all of the program's affordability guidelines. 9. Greenfield Development' Versus Infill Development Production of Inclusionary housing units, becomes increasingly difficult when development occurs on Infill property rather than greenfield property. Infill development is often riskier, more costy, and takes place on smaller parcels than greenfield development. These factors make it more difficult to obtain financing or secure federal and state subsidies for affordable housing in an Infill setting. Residential Infill projects must also compete with existing uses for land. The factors combine to make Inclusionary requirements more burdensome in Infill environments. a Greenfield development is defined here as development on virgin land primarily located on the urban fringe. 4 Lrduionnrp Horiin+~ Sordj• Colforn;a BnilAin~ Lubrt/rJ~A„ariatiorr P45 Gnalrr Loe.9nge(et/ l~enMra Che~Irr (rmr ?003 10. Relationship Between Income and Home Prices Indusionarp housing becomes more burdensome to provide as increases in home prices outpace increases in median income. If the median home price is only marginally higher than a median income household can afford to pay, the economic burden of providing Inclusionary housing ma~~ be .relatively small. However, when the median home price is sigttificandy.higher than a median income household can afford to pay, the economic burden of providing Inclusionary housing may be very large. FINDINGS FROAf LITERATURE SURVEY Literature in both academic journals and trade publications were reviewed. Some articles asserted that IH is beneficial wider some circumstances. However, many articles highlighted inherent problems with IH as a solution to a perceived shortage of affordable housing. The following is a listing of sane of t]ae key drawbacks to IH that were cited in those articles. 1. Total Housing Units Produced IH makes new housing developers less competitive in bidding for sites against developers of other types of properties or even evstv~g uses. Consequendy, less land can be expected to be made available for new housing development than would be the case without IH. 2. BeneSciaries ofInchtsionary Housing IH programs tend to benefit only the moderate-uxome fast time homebu}rexs at the expense of die neediest of the needy. The nwnbers of households t17at have benefited from ]H have been very small compared to the total need and studies have shown drat at most 10% of the total affordable housing needs will be met through IH. 3. Incentives to Offset the Burdens of Inclusionary Housing Many IH programs offer a range of "incentives" intended to offset the economic burden of compliance and to encourage the development of housing. In most cases however, other land use regulations, physical limitations and the natute of the housing market make those incentives ineffective or only partially effective at best. 4. Burden of Inclusionary Housing Programs Demand and supply factors, and the efficiency of the housing market will determine who bears the cost of IH. Developers will try to shift the cost to the land seller or pass it on to the tenant/homebuyer. Failing that, they will have to operate at a lower margin or suffer losses. This would result in lowered land values, increased prices of market rate units, and/or certain strata of population being priced out of the market. There is also the possibility of developers opting not to build and w-ithdraw-ing from the market thereby limiting housing supply. S Indntianar~•Ha,tino,Slud~~ P46 col forria Buililins I n~lr,tlry Atton~fiou ~, renter l~tA oelet/L'o,/s,ro Lbafiter ~,,»e 2003 5. Maintaining Long-Term Affordability Costs are incurred by owners of both rental and for-sale affordable housing units in Cindvw~ siutable replacements. Ceilings on resale prices or profit sharing could also act as a disincentive for propert~~ mau~tenanee and lead to reduction in affordable housing stock. 6. Administrative Burden IH programs have significant costs of supervision b} government agencies and are time consuming, complicated and cumbersome. 7. EfScient Allocavon of Scarce Resources It ma}' be more efficient to increase the amount of affordable housing by providing subsidies to specialized non-profit developers rather dean ieyuuutg for-profit developers to build affordable units. 8. Alternatives to Inclusionary Housing Builder/developers who can efficiently assemble low cost Fv~ancing using the Low-vxome Housing Tax Credit program may be more efficient producers of affordable housing. Demand side meastues like Section 8 vouchers and certificates make housing affordable to greater sections of the population. 6 DAVID PAUL ROSEN & ASSOCIATES HouslNC, coMMUNIrv ~ P47 .,.'S:.'~.t.~s e ECONOMIC DEVELOPMENT 3B<1 HENDRIX STREET IRVINE, CALIFORNIA B281C-0037 TEL: B48/658~5060 FAX: 048/558-5706 CITY OF LOS ANGELES INCLUSIONARY HOUSING STUDY Prepared for: . Los Angeles Housing Department 111 North Hope Street Room 769, 7`" Floor Los Angeles, CA 90012 Prepared by: David Paul Rosen & Associates 1330 Broadway, Suite 937 Oakland, CA 94612-2509 510.451.2552 draoakland@aol.com 3941 Hendrix Street Irvine, CA 92614-6637 949.559.5650 nlakebrown@aol.com September 25, 2002 yt:o-fi ~ DAVID PAUL ROSEN & ASSOCIATES =~' a{~ Table of Contents City of Los Angeles Inclusionary Housing Study PAGE Exe cutive Summary A. Background ....................... . ................................................ ................................1 B. Methodology and Data Sources ........................ .................. , 2 , ,,,,,,,,...,,..._..,,...._ .... C. Advisory Committee Review Process ................................. . 3 . ................................ D. Baseline Development Costs of Housing Prototypes .....:...... ................................4 1. Housing Prototypes ..:........... .................................. 2 P t i l D .................. ..............4 . ro otyp ca evelopment Costs ................ . ................................7 E. Estimated Costs of Alternative Affordability Standards .......... .................. ...16 F. Estimated Value of Economic Incentives .............................. ..............................21 G. Comparison of Affordability Costs and Cost-Savings from In centives .................28 H. Comparison of Affordability Costs and Cost-Savings from Alternative Compliance Measures ................... ............ ..................... .........35 I. Residential Building Permit Activity ..................................... ..............................49 ). Economic Impact of Alternative Inclusionary Standards ....... ..............................58 Appendices Appendix A: List of Advisory Group Members/Participants, Meeting Agendas, Notes Appendix B: Costs of Alternative Affordability Requirements Apperdix C: Evaluation of Potential Economic .Incentives Appendix D: Prototype Density Bonus Feasibility Evaluation Appendix E: Assessment of Economic Impacts of Affordability Requirements App.~,ndix F: Residential Building Permit Activity f P48 Los Angeles Inclusionary Housing Study September 25, 2002 final Report Page i ~~~, `1~~ ~~ DAVID PAUL ROSEN & ASSOCIATES List of Tables City of Los Angeles Inclusioriary Housing Study Final PA~~ 1 Renter Housing Prototype Projects ............:........ ................................................. 5 2 Owner Housing Prototype Projects .............................. ........................................ 6 3 Per Square Foot Land Acquisition Cost Assumptions by Zoning and Prototype ..................... .......................................... ........... 7 TABLE ITL 4 Per Square Foot Hard Construction Cost Assumptions by Prototype .................:...8 5 Residential Development Impact Fees ................... ............................................10 6 Estimated Prototype Development Costr, Renter Housing Prototypes .................12 7 Estimated Prototype Development Costs, Owner Housing Prototypes ................14 8 Affordability Standard Alternatives ....................... .........:...................................17 -' 9' Affordable Monthly Housing Expense .......................... ......................................18 10 Affordability Gap on Inclusionary Units, Rental Housing Prototypes ..................19 11 Affordability Gap on Inclusionary Units, Owner Housing Prototypes .................20 , 12 Total Economic Value of incentives, Excluding Density Bonus, Renter Housing Prototypes ........................................29 13 Total Economic Value of Incentives, Excluding Density Bonus, Owner Housing Prototypes ..................................:....30 14 Total Cost Savings from Incentives, with Density Bonus, Renter Housing Prototypes ...................................... ..........31 15 Total Cost Savings from Incentives, with Density Bonus, Owner Housing Prototypes ...............................................32 ea P49 Page ii ;~~. TM4 DAVID PAUL ROSEN & ASSOCIATES List of Tables (Continued) pity of Los Angeles Inclusionary Housing Study TABLE TITI is PAGE 16 Comparison of Affordability Costs and Cost Savings from Incentives, with Density Bonus, Renter Housing Prototypes ................................................33 17 Comparison of Affordability Costs and Cost Savings from Incentives, with Density Bonus, Owner Housing Prototypes: .............:................................34 18 Cost Savings, Alternative Product Type .................... ........................... ..... ..........36 19 Cost Savings, Offsite New Construction, Rental Prototypes ................. ...............37 20 Cost Savings, Offsite New Construction, Owner Prototypes .......:........ ...............38 21 Net Affordability Costs, .Offsite New Construction, Rental Prototypes . ...............39 22 Net Affordability Costs, Offsite New Construction, Owner,Prototypes ...............40 23 Per-Unit Acquisition Cost Assumptions, Existing Multifamily Rental Properties ............: .......:......................................... .............:........: ...............41 24 - Cost Savings, Acquisition/Rehabilitation, Rental Prototypes....:........ ... ............... 4 3 25 Cost Savings, Acyuisition/Rehabilitation, Owner Prototypes ............... ...............44 26 Net Affordability Costs, Acquisition/Rehabilitation, Rental Prototypes . ...............45 27 Net Affordability Costs, Acquisition/Rehabilitation, Owner Prototypes ...............46 28 Cost Savings, Additional Bedroom Credit, Rental Prototypes .............. ..........:.:..47 29 Cost Savings, Additional Bedroom Credit; Owner Prototypes ............. ...............48 30 City of Los Angeles Market Rent Data ...:............................................. ...............59 31 Estimated Market Home Sales Prices,.Owner Housing Prototypes ....... ............... 60 P50 Final ,.•.. #`"`' DAVID PAUL ROSEN & ASSOCIATES P51 ,.:.; . ~',,,~. List of Tables (Continued) City of Los Angeles Inclusionary Housing Study TABLE TITLE I'B~E 32 Residual Land Value Per Square Foot Site Area, Renter Housing Prototypes with Alternative Inclusionary Housing "Packages," Inclusionary Scenario 1: 10% of Units Affordable at 45% of Area Median Income ...............62 33 Residual Land Value Per Square Foot Site Area, Owner Housing Prototypes with Alternative Inclusionary Housing "Packages," Inclusionary Scenario 1: 10% of Units Affordable at 90% of Area Median Income ............... 63 34 Residual Land Value Per Square Foot Site Area, Owner Housing Prototypes with Alternative Inclusionary Housing "Packages," Inclusionary Scenario 2: 15% of Units Affordable at 90% of Area Median Income ............... 64 •35 Residual Land Value Per Square Foot Site Area, Owner Housing Prototypes with Alternative Inclusionary Hotising "Packages," Inclusionary Scenario 3: 20% of Units Affordable at 90% of Area Median Income ............... 65 Lus ringeles Inclusionary Housing Study September 25, 2002 Final Report Page iv €'"'°t ~ DAVID PAUL ROSEN & ASSOCIATES „F r. List of Charts City of Los Angeles Inclusionary Housing Study CHART ITL PAGE 1 State of California Total Residential Building Permit Activity .........:....... :...........54 2 City of Carlsbad Total Residential Building Permit Activity .................:... ...........55 3 City of Los Angeles Total Residential Building Permit Activity ................ ...........56 P52 Los Angeles Inclusionary Housing Study September 25, 2002 Final Report Page v ~~:_ DAVID PAUL ROSEN & ASSOCIATES P53 <. {~ " ~~. LOS ANGELES INCLUSIONARY HOUSING STUDY EXECUTIVE SUMMARY BACKGROUND What is Inclusionary Housing? Inclusionary housing programs require- residential developers to provide a percentage of total units at below market rents or sales prices in conjunction with the market-rate units in the project. Inclusionary housing is used by approximately 110 communities in California to increase the production of housing affordable to very low, low and/or moderate income households. Why Now? In recognition of the critical shortage of affordable housing. in the City of Los Angeles, and the importance of affordable .housing to the overall local 'economy and livability of the City, Los Angeles policymakers commissioned David Paul Rosen & Associates (DRA) to examine inclusionary housing as one of the strategies the City can pursue to meet its affordable housing needs. What Effect Has Inclusionary Housing Had on Housing Production in Other Communities? DRA compiled data on arinual housing starts over a twenty year period in California to determine if inclusionary housing programs negatively affect housing production. For the period 1981-2001, DRA reviewed annual new construction residential building permit figures for 28 cities -with and without inclusionary housing programs -located in Los Angeles, Orange, San Diego, San Francisco, and Sacramento counties. DRA also analyzed housing start data for the State of California for the same period. The analysis includes separate tabulations for single family and multifamily housing starts. The annual housing start data were then compared to passage of the 1986 Tax Reform Act (which significantly reduced favorable tax treatment .for- the construction of investment property), and key economic indicators: the prime rate, the 30 year mortgage rate, the unemployment rate, and area median home price. An analysis of these data shows that for the jurisdictions surveyed, adoption of an inclusionary housing program is not associated with a negative effect on housing production. In fact, in most jurisdictions as diverse as San Diego, Carlsbad, and Sacramento, housing production increased, sometimes dramatically, after passage City of Los Angeles Inclusionary Housing Study ~ ~ September 25, 2002 Executive Summary Page ES-1 ~~~- ,~~- ~ty+s'r. DAVID. PAUL ROSEN & ASSOCIATES of inclusionary housing ordinances. Rather, increases and decreases in housing starts most closely track the unemployment rate. While in no case did the adoption of an inclusionary housing program slow housing production, the 1986 Tax Reform Act clearly was associated with a sharp decline in housing starts in most California communities. Chart 1 summarizes building permit figures over time for the State of California. Chart 2 shows the figures for the City of Los Angeles, and Chart 3 displays trends in the City of Carlsbad (one city with inclusionary housing program). (All 28 charts are included in the full DRA report.) APPROACH AND METHODOLOGY Why This Study? Inclusionary housing imposes a prospective cost on development which can be partially to completely offset with economic incentives and alternative compliance options. DRA conducted an economic analysis which measures the cost of alternative inclusionary requirements against the value of incentive "packages" to offset costs or otherwise provide incentives to market-rate housing. This analysis will assist policymakers in making informed decisions about inclusionary housing for Los Angeles. DRA analyzed the potential impact . of alternative inclusionary housing requirements and incentives based on how housing actually gets built in Los Angeles today. The cost to build market-rate housing in Los. Angeles today was carefully analyzed with the help of a panel of housing developers active in the current Los Angeles market. The study. process used a group of for-profit and nc~npraGi developers to review, revise and validate assumptions about development costs, and to provide assumptions on developer profit and overhead. This collaborative process (detailed in Appendix A of the DRA study) produced the economic assumptions, development prototypes and incentives used in the study. Ten housing prototypes were developed in conjunction with the developer group, representing typical rental and owner housing currently or prospectively being built in Los.Angeles. Table ES-1 describes the six rental housing prototypes used in the economic analysis. Table E5-2 describes the four owner housing prototypes analyzed. e-ity of Los Angeles Inclusionary Housing Study September 25, 2002 Executive Summary Page ES-2 P54 8 N g e ~ m Zd o~ y d ZJ ~ J ~N ~i~2' 41 $' 1 I I l 31Va e e e o S 8 8 8 $ $ 8 fD Q N O m ~D < CI oS O N pO~I O1 0 O A A Ol A m in rn w m n m m N W pp^1 } 01 m~ m. m' obi m rn w O a a O a C m J ~ O tFy d O J N 5 U J ~ ~ LLC 0 9 E~ oc ~om C1 rJ ~g ~~ r` ~ ~ ~~ B' v'Q ~ c c v ~ c 0 ~gv ou 2~a=z N ~m ~ ~ a g~~U mWEE~ m~ Om~~d 22 m m a t~8i~o as c ~ c 2 0 0 3 ~ o m ~ 2 r8 n~ c 3E ~ ~'-° m ~ ~~a~~ N J O N P55 s ~ ~ ~ ~ ~ ~ s ~ s ~ ' slian do a3ewna g N S $ p A T 9 ~ O ~ U ((pp~~~~ j mm -pD r~ ~ ~ ~C ~ C ~ C ~S Z~ a ~~s ~~a h~~~ 1 I 31VH g g o g g g g ^ ^ ^ W fD O (Y g O 8 8N O QmN~ m q~ Qq OI Nq OI q~ Q1 qN Q ^ ~ ~i ~, ~+ a 0 a 3 B OC d J D ~ q[[ 0 O r N c U m f J_ r g 4 E 9 $ ~~ ~~ ~m ~$ _~ r ` ~ ~' C ~ "'o Ba ~v ~s og ~cB=~ ?~me~ ~g~z8~ LL ~W~Ot~ c O m ~ ~ am t m € ~q~ `_~, ~~. q 1m~~ C a¢ ry C V t m 1_0 - N ~ ~ KJ1.9i~ 0 N P56 O ~ N O N O ~!1 O N O N ~ SL NO i083HWf1N o m ~ v ma ' E fL p 3'a4 „ m `m ~ m Z c cZ,c a = ~ m2~ i=m g a'$~ i~ a` ~~~ REa 9c~fx 1 °o O N . °o W a O r g O r °o N .- 31tlN ° p r ° ~ 0 O tO g p g N S O ^~p N S O N m m ~'i r $'i ~i m N Ol O+ T q W q O ~ m 0 u } o q T a w ~i ' m P rn m m c C 0 C Q [ T. C[ m o C C J ~ m c ~{ A E ~a m O J m m C ? 9 h m Y a_ g ~ o xm ~K n oU eE m$ ~m c m og C ~ ~. t ~ ~ W c m go C p J C m C C m ~ O ovEm4 2 m B = 2 L~ m @ c4$~~c4 m `~,~m8 '°`- ma ~ m Lo K ~~~~~ O ~~ <; m g ~ m ms~ mZ ~etY~ K~Rr4iE N P57 °s a °s °s ~ ~ ~ ,. M ~ N N - Vl O IA S11N0 d0 N39Wf1N Table F5.1 Rental Housing Prototype Projects Los Angels Indusionary Housing Analyse PROTOTYPE Renter 1 T V Low Renter 2 T e V Medium Renter 3 T e V Hi h Rcumr'•1 T e 111 htodiiiecl Renus 5 Typel>7S' Iii h Rise Renkr 6 Ada Hive Rcusc. Total Unit CouN 30 Units 60 Units 60 Units 100 Units 100Units 70 Units Zoning ~ RD 1.5 R3 R4 k4 RS Existing FAR 0.53 0.77 1.98 2.32 3.~t7 2.06 Tenure Rental ~ Rental Rental Rental Rental Rental Resident Population Family Family Family Family Family Family Product Type - Stacked Flats Stacked Flats Spoked Flats Stacked Flats Stacked Flats Conversion of 2 Stories 3 Stories 4 Stories 5 Stories 6 Stories Exist. Bldg. Comtmction Type ~ Type V Type V Type V Type III Type I _ Fxisdng Density (DU's/Acre) 25.0 35.0-. 85.0 ~ 100.0 150.0 100.0 Land Area (Acres) 1.200 Aaes 1.714 Aaes 0.706 Aces ~ 1.OD0 Arses 0.667 Ayes 0.700 Acres Units by BR Count Loft ~ One Bedroom 0 6 0 12 0 ~ 12 0 ~ 0 69 Two Bedroom/1 Batlr 5 9 9' 20 15 20 0 Two BedroorN2 Bath 1 B 35 35 59 15 59 0 0 Three Bedroom 0 3 3 ~ S 5 Mamger!s (2 BR/2 BA) 1 ~ 1 1 0 t t 1. Unit Size (Net SF) (L°ks) Lofb _ One Bedroom 0 625 0 625 0 625 0 625 0 625 7S0 p Two Bedroom/1 Bath 860 850 850 850 ~ B50 0 Two Bedroom/2 Bath 900 900 900 900 - 90D 0 Three Bedroom ' ~ 0 1,100 1,100 ~ 1,100 1 100 0 Manager s Avenge 900 - 837 900 848 900 848 900 , 900 ~ 750 848 848 750 Building Square Feet Nel Living Area 25,100 50,850 50,850 84,750. 84,750 52 500 Common Space _ 0. 1,W0 1,1100 7,000 t,00D , 1 000 Total Net Bldg. SF 25,100 51,850 51,850 85,750 85,750 , 53,500 Type of Parking Covered 1 Level 2 Levels 2 levels 3 Levels. ExistinPJ At Grade Podium Subterranean Subterranean Subterranean Of(-Site No. of Parking Spaces 50 101 101 168 168 105 - Amenities Community Community C«nmuniry Community (1.5 per unit) - Room Room Room Room P58 Source: David Paul Rosen & Associates Table ES-2 Owner Housing Prototype Projects Los Angeles Inclusionary Housing Analysis fROTUTl9'E t"Jwncr 1 SinRlc-Family Detached ln(iIi T}wner 2 Altaehed Townhnmes Owner 3 T e V Condos Owner 4 Type 1>75' Condos Tutial Unit Count 40 Units 30 Units 700 Units 100 Units Znning. RD3. RU3, 127 R4 RS FAR 0.54 0.62 1.97 3.88 tenure Chvncr C7vvncr Owner Owner Resident Population Family Farnily Family Family Proclucl T1q}e SFD To4,mhomes Stacked Flats, Stacked Flats, 2 Story, PUD 2 Stones 4 Stories 6 Stories Constrirctiori Type Typt: V Type V Type V Type I Density (DtJ`slAcre) 15 20 BO 150 Ne{ Si4e Area (Acres) 2.6G7 Ades- L.500 Acns 1.250 Acres 0.667 Acres Streets; etc 47 %o of Gross: 20.00% 20:00°.~; 0.00% 0.00% Gross Site Area 3,."s59 Acres 1:8.'5 ACPes 1.250 Acres 0.667 Acres Uriits k,y Bit Caunt One Bedroom i) 0 20 30 Twa Radroom/2 Bath 0 - 9 ~ 60 50 Three Bedroom 16 78 20 20 Fnur Bedroom 24 3- 0 - 0 Unit Size (Net SF) One Bedroom 0 0 750 750 Two BedrooM2 Bath 0 925 925 925 Three Bedroom 1,400 1,300 1,300 1,300 Four Bedroom 1,700 1,500 0 0 Avc. (Exclud. Mgr`s} 1,580 J,2Ud 96> 948 Building Square Feet. Net Living Area 63„lOD 36,225 96,500 94,750 Community Space 0 0 D 7,000 Total Net Bldg. SF 63,200 36,225 96,500 95,750 Type of ParkinG C;arages Covered 2 Levels 3 Levels At Grade Subterranean Subterranean No. of Parking Spaces 9U 63 175 170 Amenities tJnne Pool or Spa Pool/Spa Pool/Spa, Small Community Room P59 Source: David Paul.Rosen & Associates. P60 t ~ DAVID PAUL ROSEN & ASSOCIATES _~"^. yt~}J rR~ How is "Affordable" Housing Defined? The focus of this study is on housing affordable to working people and retired people on modest fixed incomes. Los Angeles is home to a large number of low-wage workers. Decent affordable housing is out of reach for most of these workers. This study uses an affordability standard for renters based on a household earning 45 percent of the current area mediari income in Los Angeles County, or approximately $25;000 for a family of four in 2002. Some of the occupations earning less than this amount in Los Angeles are: fast food workers, garment workers, cashiers, nurses aides, security officers, janitors, telemarketers, dental assistants, truck drivers, receptionists, data entry clerks, sales agerits and bookkeepers. The affordability standard for owners is based tin a household earning 90 percent of the current area median income in Los Angeles County, or approximately $50,000 for a family of four in 2002. Some of the occupations earning -less than $50,000 in Los Angeles are: firefighters, police officers, bank tellers; City clerks and registered nurses. The study employs the commonly accepted federal and State affordable housing legal standard of renter households spending 30 percent of their gross income for rent and utilities. For owners, the legal standard employed is 35 percent of gross income for principal, interest, property taxes, insurance, utilities and maintenance. Affordable housing incomes, wages, rents and sales prices in Los Angeles based on the definitions used in the study are summarized .in Table ES-3 below. Measuring the Cost of Inclusionary Housing in Los Angeles Inclusionary housing imposes a cost on residential development. The DRA study takes care to quantify the cost of imposing an Inclusionary obligation on housing developers in Los Angeles. The study also measures the economic value of various incentives and alternative compliance options the City may provide to offset this cost. City of Los Angeles Inclusionary Housing Study September 25, 2002 Executive Summary Page ES-5 DAVID PAUL ROSEN & ASSOOIATES Table ES-3 Affordable Housing Incomes, Wages, Rents and Sales Prices in Los Angeles 2002 Percent of Area Median 45%AMI 90%AMI Income (AMI): Annual Income, Family of $24,800 $49,600 four (2002)' Hourly ~h~age, Two; Wage- $6.00 $12.00 Earners. Hourly Wage, One Wage- $12.00 $24.00 Earner Affordable-Rent' $563 Not Applicable AfforclableHome Not Applicable $758,000 Purchase Price' Sample Occupations Bank teller, hotel desk Police officer, firefighter, (eamrn~ that annual. clerk, cashier, .janitor, County clerk, licensed income} dental assistant, truck vocai.ional nurse; ' driver, receptionist, sales registered nurse, teacher agent, bookkeeper 'Based on HUD 2002 median income of $55,100 fpr Los Angeles County for a family of four persons. 'Assumes 30 percent of gross income spent on housing costs (rent plus utilities), less a $S7 monthly utility allowance (gas and electric) for atwo-bedroom apartment. 'Assumes 35 percent of gross income spent on housing costs (principal, interest, property taxes, insurance, utilities and maintenance), a 7.5 percent mortgage interest rate and a 10 percent downpayment. Source: City of Los Angeles; David Paul Rosen & Associates City of Los Angeles Inclusionary Housing Study Executive Summary September 25, 2002 Page ES-6 P61 P62 LAND RESIDUAL VALUES HOW TO READ THESE CHARTS LOS ANGELES INCLUSIONARY HOUSING ANALYSIS Wltat Is Land Residual Analysis and Why Should We Care? Land residual analysis is commonly used by real estate developers and investors to evaluate development financial feasibility. The land residual methodology calculates the value of a development based on its income potential and subtracts the costs of development and developer profit to yield the underlying value of the' land. An alternative that generates a negative land value, or a value below the price land sellers are willing to accept, is not financially feasible. What Are the Incentive/Compliance Options? DRA analyzed the various combinations of inclusionary requirements, incentives, and compliance options listed in the chart key based on the following definitions: • All options require 10% of total units to be affordable to households at 45% of area median income for renters and 20% of total units to be affordable to households at 90% of area median income for owners, or approximately $25,000 and $50,000, respectively, for a family of four in Los Angeles in 2002. • No offsets means the developer provides the required affordable units through tin-site consiruction identical to the market-rate units, with no offsets, incentives, or alternative compliance options. • 25% and 50% density bonuses add units onto the base density of the prototype. The affordability requirement is assumed to equal 10 percent of the higher post-bonus unit count. • Fee deferrals refer to delaying the payment of development impact fees from the start of construction. to construction completion, thereby lowering construction loan interest costs to the developer. ES-7 City of Los Angeles Inclusionary Housing Study September 25, 2002 Executive Summary Page ES-9 P63 Affordable unit modifi ationt assume affordable units incorporate the following cost-saving modifications to market-rate units: reduced unit sizes (to 540 square feet for aone-bedroom, 750 square feet for atwo-bedroom, 1,000 square feet for athree-bedroom, and 1,100 square feet for afour- bedroom); reduced interior finish quality; and reduced bathroom count (from two baths to one bath in two-bedroom/two-bath and three-bedroom market rate unitr). 9ff-site rompllance assumes the developer is allowed to develop the affordable units off-site, to benefit from lower land prices in different locations in the City. Acqui ition/r habilitation compliance assumes the developer is allowed to meet the affordable housing requirement by acquiring, rehabilitating and preserving in perpetuity existing multi-family rental units in place of new construction..Substantial rehabilitation and relocation costs are assumed. . What Do the Bars Represent? Market land sales comparables are the actual per square foot sales prices for sites with comparable zoning to the prototype which received building permits for new residential development in the City of Los Angeles in 2001. Lowest, middle and highest third rent land values. The market land sales comparables were divided into thirds based on price per square foot. The range of each third is shown by the corresponding bar in the chart. For the rental land residual analysis, DRA used "low," "middle" and "high" average data to calculate rents far three (low, middle and high) rent/land values scenarios. What Do the Numbers and Dots Represent? The bulls-eye dots represent the residual land value per square foot of site area for. the housing prototypes assuming 100 percent market units, providing a benchmark for the feasibility of that housing type in today's market as reflected by the range of market land values. City of Los Angeles Inclusionary Housing Study September 25, 2002 Executive Summary Page ES-10 ;._ ',, DAVID PAUL ROSEN 8 ASSOCLATES ~. _. The numbered dots represent residual. land values for alternative incentive/compliance options. DRA re-calculated the land residual assuming various "packages" of inclusionary housing requirements, incentives and alternative compliance measures designed to lessen the cost of inclusionary housing. When the bulls-eye and numbered dots fall within the bar areas, the residual land values generated by the prototype and "package" option are within the range of recent land sales comparables in Los Angeles, and should generally be reviewed as financially feasible. What Do the Photographs Depict? The photographs on each chart depict an actual housing development in Los Angeles .representing the key characteristics of the baseline prototype in terms of density, construction type and parking to provide a visual picture of the kinds of housing analyzed in this study. City of Los Angeles Inclusionary Housing Study September 25, 2002 Executive Summary ~ ~ - _ Page ES-11 P64 P65 P66 P67 P68 P69 P70 P71 P72 P73 P74 April ? 00~ ;; ,; ~~~~ HOUSING SUPPLY AND AFFORDABILITY: DO AFFORDABLE HOUSING MANDATES WORK? By Benjamin Powell, Ph.D and Edward Stringham, Ph.D Project Director: Adrian T. Moore, Ph.D ~'w ~, P75 SItS r~ J r Reason Public Policy Institute /~ division of the Los Angeles-based Reason Foundation, Reason ublic Policy Institute is a nonpartisan public policy think tank promoting choice, competition, and a dynamic market economy as the foundation for human dignity and progress. Reason produces rigorous, peer-reviewed research and directly engages the policy process, seek- ing strategies that emphasize cooperation, flexibility, local knowledge, and results. Through practical and innovative approaches to complex problems, Reason seeks to change the way people think about issues, and promote policies that allow and encourage individuals and volun- tary institutions to flourish. Reason Foundation Reason Foundation's mission is to advance a free society by develop- ing, applying, and promoting libertarian principles, including indi- ~~idual liberty, free markets, and the rule of ]aw. We use journalism and public policy research to influence the frameworks and actions of poli- cymakers,journalists, and opinion leaders. Reason Foundation is atax-exempt research and education organiza- tion as defined under IRS code 5oi(c)(3). Reason Foundation is sup- ported by voluntary contributions from individuals, foundations, and corporations. The views are those of the author, not necessarily those of Reason Foundation or its trustees. P76 Copyright ©2004 Reason Foundation. Photos used in this publication are cop}a'ight ©i996 Photodisc, Inc. All rights reserved. P77 Policy Study N o. 3 1 II H®usin~ Supply and Alf®railitye Aff®rable ®using Mandates iN®rk? ~~ 8enjar~rin Pcwe~l, Ph.D. and Edward Stringhar~t, Ph.C Project Director: Adrian T. Moore, Ph.D Executive Summary California and many urban areas nationwide face a housing affordability crisis. New housing production has chronically failed to meet housing needs, causing housing prices [o escalate. Faced with demands to "do something" about the housing affordability crisis, many local governments have [umed to "inclusionary zoning" ordinances in which they mandate that developers sell a certain percentage of the homes they build at below-market prices to make them affordable for people with lower incomes. The number of cities with affordable housing mandates has grown rapidly, to about 10 percent of cities over 100,000 population as of the mid-90s, and many advocacy groups predict [he trend will accelerate in the next five years. Califomia was an early leader in the adoption of inclusionary zoning, and its use there has grown rapidly. Between 1990 and 2003, the number of Califomia communities with inclusionary zoning more than tripled-from 29 to 107 communities-meaning about 20 percent of Califomia communities now have inclusionary zoning. Inclusionary zoning attempts to deal with high housing costs by imposing price controls on a percentage of new homes. During the past 20 years, a number of publications have debated the merits of inclusionary zoning programs. Nevertheless, as a recent report observed, "These debates, though fierce, remain Iareely theoretical due to the lack of empirical research." This study attempts to fill the research void. In this paper we use data from communities in the San Francisco Bay Area region to evaluate theeffects of inclusionary zoning and examine whether it is an effective public policy response to high housing prices. We chose the Bay Area because inclusionary zoning is panicularly prevalent there; today more than 50 jurisdictions in the region have inclusionary zoning. These communities have various sizes and densities with different income levels and demographics, so they provide a good sample to tell us how inclusionary zoning is probably working nationwide. P78 These are our findines: Inclusionary Zoning Produces Few Units Since its inception, inclusionary zoning has resulted in few affordable units. The 50 Bay Area cities with inclusionary zoning have produced fewer than 7;000 affordable units. The average since 1973 is only 228 units per year. After passing an ordinance, the average city produces fewer than 1 s affordable units per year. Inclusionary zoning cannot meet the area's affordable housing needs. At current rates, inclusionary zoning will only produce 4 percent of the Association of Bay Area Governments' estimated affordable housing need. This means inclusionary zoning will require 100 years to meet the current five-year housing need. Inclusionary Zoning Has High Costs Inclusionary zoning imposes large burdens on the housing market. For example, if a home eeuld be sold for $500.000 dollars but must be sold for $200,000, the revenue from the sale is $300,000 less. In half the Bay Area jurisdictions this cost associated with selling each inclusionary unit exceeds $346,000. In one fourth of the jurisdictions the cost is greater than $500,000 per unit, and the cost of inclusionary zoning in the average jurisdiction is $45 million, bringing the total cost for all inclusionary units in the Bay Area to date to $2.2 billion. Inclusionary Zoning Makes Market-priced Homes More Expensive Who bears the costs of inclusionary zoning? The effective tax of inclusionary zoning willbe borne by some combination of market-rate homebuyers, landowners, and builders. How much of the burden is borne by market-rate buyers versus landowners and builders is determined by each group's relative responsiveness [o price changes. We estimate that inclusionary zoning causes the price of new homes in the median city to increase by $22,000 to $44,000. In high market-rate cities such as Cupertino, Los Altos, Palo Alto, Portola Valley, and Tiburon we estimate that inclusionary zoning adds more than $100,000 to the price of each new home. Inclusionary7_oning Restricts the Supply of New Homes Inclusionary zoning drives away builders, makes landowners supply less land for residential use, and leads to less housing for homebuyers-the very problem it was instituted to address. In the 45 cities where data is available, we find that new housing production drastically decreases the year afer cities adopt inclusionary zoning..The average city produced 214 units the year before inclusionary zoning but only ]47 units the year after. Thus, new construction decreases by 31, percent the year following the adoption of inclusionary zoning. In the 33 cities with data for seven years prior and seven years following inclusionary zoning. 10,662 fewer homes were produced during the seven years after the adoption of inclusionary zoning. By artificially lowering the value of homes in those 33 cities, $6.5 billion worth of housing .vas essentially destroyed. P79 Considering that over 30 years inclusionary zoning has only yielded 6,836 affordable units, one must question whether those units are worth the cost in terms of fewer and higher-priced homes. Inclusionary Zoning Costs Government Revenue Price controls on new development lower assessed values, thereby costing state and local govemments lost tax revenue each year. Because inclusionary zoning restricts resale values for a number of years, the loss in annual tax revenue can become substantial. The total present value of lost government revenue due to Bay Area inclusionary zoning ordinances is upwards of $553 million. PriceLontrols Do Not Address the Cause o(the Affordability Problem Price controls fail to get to the root of the affordable housing problem. Indeed by causing fewer homes to be built they actually make things worse. The real problem is government restrictions on supply. From ] 990 through 2000, the Bay Area added nearly 550,000 jobs but only about 200,000 new homes. The California Department of Finance recommends ].5 newjobsper new home-the Bay Area produced only Ss percent of the suggested amount of housing. I Supply has not kept up with demand due to artificial restrictions. One recent study found that 90 percent of the difference between physical construction costs and the market price of new homes can be attributed to land use regulation. The solution is to allow more construction. When [he supply of homes increases, existing homeowners often upgrade to the newly constmcted homes. This frees up their prior homes for other families with Power income. Inclusionary zoning restricts this upgrade process by slowing or eliminating new construction. With fewer new homes available; middle- and upper-income families bid up the price of the existing stock of homes, thus making housing less affordable for everyone. Conclusion Inclusionary zoning has failed to produce a significant number of affordable homes due to the incentives created by the price controls. Even the few inclusionary zoning units produced have cost builders, homeowners, and governments greatly. By restricting the supply of new homes and driving up the price of both newly constructed market-rate homes and the existing stock of homes, inclusionary zoning makes housing less affordable. Inclusionary ordinances will continue to make housing less affordable by restricting the supply of new homes. if more affordable housing is the goal, govemments should pursue policies that encourage the production of new housing. Ending the price controls of inclusionary zoning would be a good start. P80 P o l i c y Study N o. 3 1 B 1"able ®f C®ntents Introduction ..........................................:..................................................................1 The Housing Market and Inclusionary Zoning in the Bay Area ............................".......3 Economics of Inclusionary Zoning .............................................................................8 Costs Associated with Below-Market Units ......................................................:.......10 A. Estimating the Effects of Price Controls by City ..............................................................................14 B. Who Bears the Burden of Inclusionary Zoning? .............................................................................16 C. The Effect of Price Controls on Housing Construction ...................................................................20 The Fiscal Cost of Price Controls to State and Local Government .............................22 The Effect of Long-Term Affordability Controls ............................. ...........................25 A. Incomes Change ...........:............................................................................ ..................................25 B. Incentives for Mobility and Improvements .................................................. ................:.................26 C. Inclusionary Zoning is Costly to Administer and Police ................................ ..................................27 The Debate on Inclusionary Zoning ............................................ ..........................:.29 A. How Effective are Density Bonuses? ........................................................... ..................................29 B. Iriclusionary Zoning and Housing Costs ....................................................... ..................................30 C. Socioeconomic Integra[ion ......................................................................... ..................................32 D. Increasing Supply is the Key to Housing Affordability .................................. ..................................32 r~~ j~~.H.; ~~~ B}: ~tF$ Si. 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LL Q 0 -f~-+ .~ Ca ~, 0 ~, .~ :~ U ~ L ~~ ~~ ~o o~ U c~ ~_ ~X N .~ L .~ 0 U ~~ ~ U ~~ ~o o~ ~~ ~, ~~ . ~ CCS 4- ~, L ~~ ~~ .~ 0 +-~ a--+ .~ ~ ~~ ~ o >°o V •~ ~ o _~ o U ~ M ~ •~ .. o ~ ~ > o 0 Z ~ O ~ ~ ~ ~ C~ ,.,_, ~ ~ ~p ~ c~ O = v ~--+ o ~' ~ o ~~ c~ ~ ~ ~ ~ ~ ~ ~ Q a~ a~ ~ ~ Z ~ ~ ~ ~ _. U ~ ~ ~ O ~_ ' U O ~ ~ M -~ ~ _ ~ ~ ~ ~ J ~ ~ Q O V ~ ~ a~ ~~ ~ ~ L ~ ~ U '` Z ~ o ~ _ ~ ~ ~~ - "~ • • a--+ a~ c~ a~ ~ ~ ~ ~ >, ~ . o ~ ~ U ~ ~ ~ ~ .~ ~ L ~ ~ ~ a--+ ~_ ca ~ a ~ ~ ~ .~ ~ ~° ~ .~ C6 U ~ ~ ~ O ~ U U ~ ~ ~ ~ ~ N +~ U X ~ ~_ ~ ~ U ~ Z O .. .-_..r~'~il~ ~~'q~ :~ r p1 O oV ~ _ - ._ YU~;. a r .r ^~r i ~' ;a. ~ -°'° ~ ~' ' CBIA is... The principle advocate at the state Capitol for policies that increase housing production and homeownership opportunities in California - with aSacramento-based lobbying team of profes- sionalswith over 100 years in housing public policy experience. Afull-service trade association, representing the working men and women of over 7,000 compa- nies involved in development and homebuilding in California, including the nation's largest homebuilding companies - represented by the California Major Builders Council (CMBC). @ Thousands of volunteers helping to define the prin- ciplesand public policies that make California's homebuilding industry the most innovative and productive in the nation. ~ Builders like Ray Becker of DMB Associates, developers ofmaster-planned and new-town com- munities. Says Ray about chairmanship of CBIA in 2008, "Like its members, CBIA is becoming more active in the process of change: responding to new consumer demands and pursuing policies that cre- ate balanced and affordable new communities in California." ...the Trusted Voice of Housing in California. 2008 Principles and Policies of California Homebuilders If ~'10U51119 is a priority... Congress and the President showed government can act when it is. nitially it was conversational -that the nation's Ihousing markets were faltering. New home produc- tion was reaching all-time lows and foreclosures were on the rise. Home sales and corresponding values were sliding. Expectations were that it was simply cy- clical and a rebound was not far off. Then, it got worse. In California, 2007 finished with new housing starts at a level half of what's needed. In some markets, foreclosures exceeded the number of monthly home sales. The state's unemployment rate jumped 10 percent in December to afour-year high and, as the Sacramento Bee said in January, "the root cause behind the growing economic misery remains the dismal real estate market." These conditions were enough to get the attention of Congress and President Bush. Pressed by California Governor Schwarzenegger, homebuilders, realtors and others, lawmakers and the White House huddled in late December and emerged in earlyJanuary with agreement on an economic stimulus package that included along-overdue increase in what is called the "conforming loan limit "The conformingloan limit is set by the federal government as the maximum amount to be guaranteed through the purchase of underlying mortgage loans by lending giants Fannie Mae and Freddie Mac. This loan-purchase mechanism is an important feature of credit markets -allowing private capital to support increased "liquidity" and attract better- priced home loans (see box). The recent federal action is expected to encourage would-be homebuyers - forced to pay as much as a full percentage point more for non-conforming ("jumbo") loans - to return to housing markets with at lower rates and greater purchasing power. CBIA has long argued that the current federal limit -set at $417,000 - is too low to bene&t states like California with pervasive high housing costs and, in past appeals to Congress has argued for increases to help improve affordability and homeownership in the state. Unfortunately, it took a train wreck in housing to get Washington to act. But, along the way, poli- ticians, policy-makers Government gibberish or real and pundits came to help for homebuyers? recognize that housing does matter -that it's an important element of national and state economies and that homeownership doesn't happen spontaneously and just because (most) Americans want to own a home. Indeed, what government does about housing -good and bad -does profoundly matter. To know that and be willing to act on the economic and social imperative of homeownership for those who want to buy should be basic training for California lawmakers and policy makers. Their words say it's a priority -their actions should follow. GSEs? Fannie Mae? Freddie Mac? FHA? Liquidity? What does it all mean and how does it do anything to help people buy homes? True, the acronyms are mind-numb- ingand, seemingly, just more bureaucratic gibberish. In actual fact, the structure in place to help homebuyers afford their purchases represents some pretty good work by government. The Depression-era Fannie Mae (Federal National Mortgage Association) and its sister agency Freddie Ma< (Federal Home Loan Mortgage Corpora- tion)were created for one purpose: keep enough private capital in mortgage markets to make home purchasing easier and more affordable. Sounds simple enough, and it is. Mortgage markets perform like any other markets in the U.S. economy -when there's an adequate supply of products, prices stabilize or go down. When supply is insufficient, prices go up. Affirming that homeownership is a national priority, Congress created Fannie Mae and Freddie Mac to buy loans on home purchases - return- ing precious mortgage capital to the originating lenders, allowing them to lend again - to ensure families that wanted to own could easily acquire the financing to buy. Although time and innovation have made the process more complicated -now involving Wall Street and terms like securitization and mortgage-backed investment instruments -it's still the same, success- fulprogram as it was 70 years ago. Government can be proud of this one ... If Homeownership Is a Priority ~f homeownership is a priority... uality of life defines the California ezpe- Qienceand central to that experience is homeownership. It is the American Dream. It's what most Californians want more than anything - par- ticularlynew Californians who view homeownership as a top priority (by a three-to-one margin over all residents). It's asource ofpride, ameasure ofachieve- mentand areservoir ofwealth. Importantly, that wealth is a source of consumer confidence and corre- spondingeconomic activity. A recent study by UCLA reveals that a dollar increase in home equity generate three tunes as much consumer spending than a dollar increase in stock value. Lawmakers and policy leaders laud homeownership and embrace its ideal as the life's goal of their con- stituents. At arecent policy summit organized around homeownership, Assembly Member Joe Coto, Chair- man ofthe Latino Legislative Caucus, after reporting that Latino homeownership in California was 36 per- centbelow the national rate, asked summit attendees, "What can we do to change that?" 'Ihe best answer is to increase the supply of homes to buy. Doing so will have an immediate impact on affordability. Indeed, for years, housing production in California has been well below the need. While the Department of Housing and Community Develop- mentsays that the state should be building about 220,000 housing units ayear - homes to both buy and rent -production hasn't reached that level in 18 years. Instead, annual housing production since 1990 has averaged around 135,000 new units a year. Shortages, of course, create all sorts ofproblems - the worst being price inflation. California has the du- biousdecoration ofhaving the highest housing costs in the nation and, consequently, the lowest levels of affordability. Even aher adouble-digit percentage decline the state's median-priced home, most Cali- fornians -probably more than four infive -don't earn enough money to buy. In many job centers, the income of an average family would have to triple to reach the median-priced home there. Those families are the ones left out, and left behind. Those are the people about whom Assembly Member Coto was speaking. Those are the constituents of the state's lawmakers and policy leaders -the ones who can do something about it. And, what greater duty is there of an elected of- fieial than t~~ respond to his or her constituents? There's another reason why government should act - to make housing and homeownership a priority. Housing is both a powerful economic engine and a foundation for state and local fiscal health - a prolific gen- erator of tax revenues. According to a recent study, for example, every new home built in Cali- forniaproduces $16,000 in net income to the state and $3,000 to local treasuries (see box). This comes on top of the $70 billion in economic ac- tivitynew housing gener- ates and the half-million new jobs it produces. When housing is being built, government's bills get paid. When itisn't - well,ask acity manager or the state treasurer. Housing pays After decades of claims that "housing doesn't pay for it- self" adefinitive study was published in 2007 that shows new home production to be a fiscal winner. The study, 'The Housing Bottom Line -Fiscal Impact of New Home Construction on California Governments", published by the California Homebuilding Foundation, found that both state and local treasuries directly and substantially benefit from new home construction. For example: • New homes provide none-time positive fiscal benefit to cities, counties and the state. - The average city nets $3,017 inone-time benefits, ranging from $2,353 in the San Diego area to almost 56,800 in the Bay Area. County governments net an average of 51,706 for counties, ranging from 51,332 if the home is located in an incorporated area and 52,323 if it's in the unincorporated part of the county. - The state receives an average of $15,858 in corporate and sales tax revenue from the sale of a median-priced new home. • New housing pays for itself year aher year. -Anew home provides a net ongoing revenue stream of $771 to cities, ranging from 5287 in Orange County to 51,107 in the Central Valley. - County governments net an average of nearly 5200 a year for a new home. - The state nets almost 53,500 for each new home. To download a copy of the full study, please visit www.cbia.org and click on the link to the study. 2008 Principles and Policies of California Homebuilders tke the story on page 3 shows, the federal govern- Lmentacted as apositive force For housing and homeownership. Now, as the pain of one of the state's most severe housing slumps begins to spread, is the time for California's government to do the same. There's much that can be done and in the following pages you will find several legislative and policy recom- mendationsdesigned to restore homeownership as a priority and a realistic opportunity for more Califor- nians.These initiatives also include proposals to help California accomplish many of its other goals, such as reducing so-called greenhouse gas emissions; building more housing downtown; making new communities more fire-safe; and promoting greenbuilding statewide. But first, state government needs to help get the homebuilding industry back on its feet and can take action in the following areas to do so: Economic stimnlns. Home sales and production have dropped off sharply as consumers wait for mar- kets "to reach bottom "But, the longer homebuyers re- main on the sidelines, the more quickly °the bottom° erodes. In 1975, the federal government instituted a temporary tax credit for homebuyers designed to stop the hemorrhaging and begin to clear away surplus inventory. What worked in the '70s is needed now. In addition, while Congress and the President raised the federal conforming loan limit to help stimulate sales, the increase expires at the end of this year. CBIAs AJR 45 (Coto) asks Congress and the Presi- dent to extend the increase and make it permanent. Ptan for recovery. The steep decline in new home construction in California is expected to continue through 2008 and possibly into 2009. To ensure a steady and seamless recovery, state government needs to take action to ensure that the needed housingproj- ect "entitlements° -best represented by subdivision maps - are in place when things turn around. Many of these subdivision maps are set to expire and CBIA is sponsoring SB 1185 (Lowenthal), legislation CBIA-sponsored bills to extend them for at The following are legislative proposals sponsored by least two years. CBIA in 2008 -all designed to help increase housing supply and expand homeownership opportunities: Do no harm. While state SB 7185 (Lowenthal) - 2-year extension of expiring government is encour- subdivision maps. aged to act aBirma- SB 7210 (Dutton) -legal reforms to promote infill lively to stabilize housing housing development. markets and stimulate se 7237 (Correa) -establishment of fire-safe a recovery, it must also development standards. take care to avoid inflict- SB 7473 (Calderon) - establishment of statewide ing any more wounds greenbuilding standards. than have already been AB 2219 (Parrs) -promote water conservation in sustained. There's no newly built homes. end to the demands of or AB 2309 (DeSaulnier) - plan to reduce carbon restrictions on new hous- emissions from existing homes. ing called for by myriad AB 2604 (Torrico) - deferral of impact fee payment. legislative and regulatory AJR 45 (Coto) -resolution asking Congress and proposals. Homebuilders the President to permanently increase federal find that while most of lending limit. these proposals are well- intended they frequently call on new housing to finance or accomplish broader- basedpublic policy objectives. These include: • Land-use limits that unnecessarily restrict new development; • Unworkable and, in some cases, unsafe building standards mandated on new construction; • Higher fees for financing countless community improvements; and Eaccessive and inefficient water quality regulations These are not benign requirements. All add substan- tialnew costs to already stratospheric prices or simply make it harder to build. IEhomeownership istruly the priority our leaders in Sacramento say it is, then government will start to go to work today to help make it happen. ...then 110W is the time for action. If Homeownership Is a Priority If homeownership is all @COIlOlY11C priority... Then state policies should be made to work. alifornia homebuying is in a downward spiral C-dragging with it home values, consumer confidence and credit availability. Somethingneeds to be done to stop it. Consumers are smart. They don't want to buy when prices are declining. But, that condition feeds on itself and the more buyers pull back, the farther down prices go. Homebuilders, who have already substan- tiallydiscounted standing inventory, report both increasingly diminished traffic and sales falling out of escrow. Indeed, consumers remain uncertain about whether still more discounting is on the way, keeping them on the homebuying sidelines. A dynamic such as this one can be devastating for the California economy. According to Sacramento State University's Sacramento Regional Research Institute (SARI), a fit and well-performing homebuilding in- dustrygenerates over $70 billion in economic benefit a year and produces over ahalf-million jobs. But, the current slump has cut those economic benefits nearly in half while consumer confidence sinks, people stop spending, and both incomes and important tax revenues go down. As the "Housing Bottom Line" study, featured on page 4, tells us more than $2 billion instate revenues were foregone in 2007 thanks to the was taken at the federal level during an equally serious downturn in the '70swith significantly positive results. A tax credit is not a price discount or just a financial incentive, it's a powerful signal to consumers that buying a home is a good thing and what someone disposed to do so ought to do. And, by making the credit temporary, would-be buyers will know time is limited for used by California's local governments used to "entitle" land for new housing development. This entitlement process takes into account the preferences and needs of a local community -implementing the growth ambitions of the community laid out in its general plan. Since there's no free ride for land developers and homebuilders, subdivision maps-authorized instate law -set forth all the conditions that those "land users" have to meet before their projects go forward. And, since in California new land uses are scrutinized for a variety of impacts on the community and the environment, much time and deliberation goes into the completion of subdivision maps. In today's markets where little housing production is occurring, these maps lie dormant though the clock on their terms is ticking. To avoid sending homebuilders - and market recovery - back to square one 56 1185 is designed to keep maps alive long enough to be used to support that recovery. them to enjoy the benefit and will help to precipitate stabilizing activity almost immediately. To help bring about a seamless and uninterrupted recovery of the homebuilding market, the California legislature should do what it did in 1996, which is to act to extend the expiring terms of subdivision maps - the principal vehicle used by local govern ment to grant °entitlements" to development projects. With- out an extension, the housing contained in those maps will be taken out of the marketplace, forcing homebuilders to start the time-consuming entitle- ment process all over again and delaying an awaited Housing recovery. In 2008, CBIA is sponsoring SB 1185 (Lowenthal) to extend these subdivision maps for a period of two additional years (see box). 2008 Principles and Policies of California Homebuilders If homeownership for all is a priority... Then land-use policies should respond to the need. For years, California homebuilders have been • Require that new housing development be confined attempting to gain improvements to land-use to urban areas only; planning and decision making.'Ihat's simply because Fence off from development large parcels of in today environment -particularly withchtonically housing-suitable land; low levels of housing production -housing Bevel- Intensify environmental scrutiny of infilldevelop- opmentstrategies have become a bit of a crap shoot. ment; and Homebuilders and housing investors look to make safe punish non-compliant communities bywithhold- bets on development in certain areas but ever-changing ingstate transportation funding. rules serve to increase investment risk. All of this in order to, as the sponsors of SB 375 say But, through collaborations with their local govern- -without one iota of ment partners, particularly the League of California evidence, scientific or Cities, homebuilders have tested zoning and project- otherwise, that thew What's a regional blueprint? approval concepts that would both deliver certainty to scheme will work - Increasingly, policy-makers are looking at taking a more housing investors and producers while accomplishing reduce vehicular travel regional approach to planning. Regional °blueprints" more land-efficient development patterns along with and, correspondingly, have become the models for this alternative focus a greater degree of both higher-density and urban- greenhouse gas emis- transportation and land-use. Here's a brief definition of centric housing. sions. In the same spirit, the concept: " " SB 375 sponsors ignore Where they exist, blueprints are voluntary With the emergence of so-called regional blueprints the collateral impacts undertakings that serve as the linkage or bridge i t ti t b l l i -long-term planning models that better integrate on an already signifi- etween reg ona transpor on sys em p ann ng, a development and management decisions and transportation planning with land-use forecasts - ' cantly damaged housing focal land use planning, zoning and development CBIA s planning reforms are making even more sense situation in California - activities. while producing various corresponding benefits to something the state can't Blueprints are done in conjunction with the federal communities and the environment. Though not all re- afford government requirement of each region to prepare a gional blueprints are as far along in their gestation as . regional transportation plan (RTP). are others - such as the model plan of the Sacramen- Helping to accomplish Blueprints serve as the land allocation methodology to Area Council of Governments SACOG -the ( ~ Y the state's AB 32, green- by which transportation investments will be made over a 20-year period to implement the federally are moving in a positive direction and need a little house gas emissions goal required RTP.The land allocation plan must fully push from the Legislature to spur them to completion doesn't have to come at accommodate all the projected housing, commercial, of their work. the expense of meeting retail and industrial land use allocation for the planning period f20 years; updated every four years). Unfortunately, others are using regional blueprints the state's housing goals. CBIA is in the process of Adopted blueprints identify land-use designations, densities, and building intensities for areas of the to promote traditional growth-control ambitions and developing an alternative region sufficient to accommodate the region's recently have sponsored state legislation that would to SB 375, utilizing the regional housing needs assessment (RHNA) use the cover of °global warming" to accomplish their `re Tonal blue tint" con- g p obligation and account for consumer housing preferences. development-limiting objectives. Their bill, SB 375 cept (see box), with the (Steinberg) would: hope that a compromise Regional blueprints are not, nor should they be,growth-control mechanisms orbroad-scale • Establish new top-down, state-based criteria for agreement can be reached resource-protection plans. land-use planning and approvals; sometime this year. If Homeownership Is a Priority • If Ih ~~ homeownership is a priority... Then state policies should be made to work. If California lawmakers and policymakers really want to see more infill development occur, on a scale that seriously addresses a larger segment of the state's mounting housing demand, they must be willing to take one principal and well-guarded institution which is the single-biggest deterrent to building downtown - CEQA. As the quotation above indicates, even one of greatest champions of the California Environmental Quality Act (CEQA) was frustrated by the law's interference with his ambitions to build as many as 10,000 units of housing in downtown Oakland. The mayor's experience is what has homebuilders concerned about the future of infill. Infill housing -the new apartments, townhomes and other higher-density construction built in and around already-developed areas of acommunity -has the potential of becoming a first choice for more and more Californians in the coming years. Downtown living offers to a variety people and households -young and old -attractive lifestyles and intelligent housing choices. And, the potential benefits to the environment are noteworthy. The Governor and lawmakers understood this when theyworked together in 2006 to craft a $37 billion bond package that includefirst-time-ever funding for making improvements to aging and inadequate infra- structure indowntown areas. As Senate President pro tem Don Perata said at the time, "With this funding, we intend to attract transformative development projects that will meet a growing demand for downtown living near retail and job centers, accessible to public transit and capable of attracting new, private investment to emerging neighborhoods " Important as the infrastructure funding is to nurtur- inginfill housing, however, the threat of so-called NIMBY lawsuits can nullify the state's new investment. Ironically, the N1MBYs legal weapon ofchoice -that can systematicallyblockhigher-density, more ~~Llttle did t know that 1 urban-centric housing - is CEQA. Because Was going to find CEQA of CEQA's broad reach, amulti-million-dollar project can be brought to a grinding halt by a lurking around every $ I75 check and filing a complaint in municipal COrnel CO Stop 111 e.~~ court. And, it's not just housing. Hospitals, high schools and power plants are among CEQA's -Honorable Jerry Brown, CA Attorney General and recent victims. former mayor of Oakland But, attempts at an honest debate over these abuses - whichare increasingly showing up in places like the editorial page of the Sacramento Bee -are always met with shrill charges by environmental groups about ef- forts to "gut CEQA" which, of course, is not true. Only a minor change in the state's premier environ- mentallaw is needed to Wha! is being said about CEQA end the abuse. Mayors and housing producers aren't the only ones con- cerned about abuse of CEQA. The following are excerpts Indeed, CBIA believes from a recent Sacramento Bee editorial on the subject: the fundamental purpose • "With shameless abandon, lawyers and of CEQA is upheld - monied players are abusing the state's premier even enhanced - by the environmental law -the California Environmental adoption of a "short form Quality Act." EIR." The short-form `Over the years, various interests have hijacked EIR says two environ- this law for non-environmental purposes, and conservation groups have looked the other way." mental reviews should be done: a broader one that "Labor unions are an even larger abuser of CEQA. In recent years, labor groups have used environmental encompasses and assesses lawsuits, or the threat of such suits, to stop or slow the impacts of all new down power plant construction, hospital expansions growth and development and housing developments " in a region and a smaller, "Critics call this practice greenmail,' a polite term focused analysis of only for legal extortion. The combined effect is to drive up the cost of new houses, hospital beds the impacts that individ- and other projects, with Ilttle or no benefit for the ual projects - so long as environment." they are consistent with "Defenders of CEQA should be outraged. Oddly, the broader environmen- environmental leaders in California have remained mum on this hijacking of environmental law. Their tal review -have on silence reflects a marriage of convenience between the environment. Such a labor and environmental groups and, possibly, some reform is contained in SB financial entanglements' 1210 (Dutton). 2008 Principles and Policies of California Homebuilders ~f affordable homeownership is a priority... f the state's estimates about housing needs are cor- Irect,California needs to produce tens ofthousands of housing units every year that are affordable to low and moderate-income families. What that typically means is that to provide shelter to these families either market costs have to be deeply discounted or subsi- dized, or incomes must be supplemented. Either way, it's a big number -probably somewhere in the range of $2 billion to $3 billion a year to get at everybody. The best that California has done to address this need is to every so often win approval of state general obligation bonds that appropriate funds to support increasingly expensive state housing pro- grams. Those funds are stretched to cover not only the housing needs of the very poor, living in urban areas but to farmworkers in rural, agricultural areas, as well. The worst that California has done to deal with this problem is to adopt the practice of squeezing as much money as possible out of private, market-rate housing developments as possible to help a relatively small number ofneedy families. This practice is called "inclusionary zoning." In its simplest form, inclusionary zoning is anincome-transfer program. But, the "income" that ittransfers -from the market- ratehome to the subsidized home -comes from a hike in the price of the market-rate home. Which means, only rich people and poor people benefit from inclusionary zoning, and middle-class buyers remain locked out of housing markets. While inclusionary zoning offends on a number of levels, its greatest sin is that it helps so few for such a high cost. Even its most fervent advocates can't ignore their own report on the last 30 years of the program which shows only 34,000 "affordable" units have been produced. At that rate, says a recent study from San Jose State University, it will take over 100 years for California to catch up to its current affordable hous- ingneed. Meanwhile, the study showed, market-rate Then all Californians should help fund it. buyers were forced to pay an extra $37,000, on aver- BEGIN age, for their homes and as Building Equity and Growth in Neighborhoods (BEGIN) much as $100,000 more.' was an experiment in the'90's and now is among the best of California's public/private partnerships: But, California home- builders are "housers"and s BEGIN was started in 1993 as a pilot program to demonstrate how regulatory reform could help believe that every effort increase local homeownership opportunities. It should be made to meet is now a fully authorized and fully funded state 100 percent of the state's housing program. housing needs - includ- BEGIN rewards local governments for lowering ing those of modest means. regulatory costs with down-payment assistance for first-time homebuyers in the community. And, state government needs to play the lead role. • BEGIN partnership concept has worked throughout California because there's money Specifically, homebuilders to be saved through even modest amendments believe a reliable source of to zoning policy, parking requirements and fees regular funding needs to charged on new housing. Those savings translate i l h i h nto ower ome pr ces and new omeowners. be brought to bear on Cali- fornia'schronic affordable housing needs. And, this money should be put to good use. Unfor- tunately, most of Cal ifornia's affordable housing pro- gramshave high costs, low benefit yields and tend to ignore market economies and efficiencies. To stretch whatever funding California can amass to meet this challenge, it must produce more housing for each dol- larspent that what occurs today. Finally, money by itself won't solve the problem. With more and more communities practicing "exclusionary zoning" (land-use policies that make it hard to build affordable housing) or charging fees for all housing, not based on impacts but what the "market' will bear - some well exceeding $100,000 per housing unit - somethingelse has to give. State and local governments have the power to make it easier and more economical to build much-needed affordable housin .Models such g ~ Ben)amin Powell, Ph.D. and Edward Stringham, Ph.D., as California's BEGIN program (see box) exist today Housing Supply And that can be used to launch even more substantial af- Afl`ordabiNty: DoA/fordabk Housing Mandates Worlrt, San fordable housing partnerships. Jose state unwerstty; pow. If Homeownership Is a Priority ~ftomorrow's homeownership is a priority... Then needed infrastructure should be built today. j ~ ]hen Governor Schwarzenegger announced his ~/ ~/ Strategic Growth Initiative in 2006, there were high hopes that the moment marked a turnaround point in California's history. The Governor s soaring oratory that January evening spoke to both the past and the future. He spoke ofvisionary and courageous governors that preceded him, who in the face of"massive change and huge challenges, they built the foundation of California's prosperity. They built the schools and the universities that became the envy of the world. They built the bridges and the aqueducts, the highways and the hospitals that made California the economic powerhouse it is today.° And, he reminded the lawmakers present that night that "a new California is coming whether you plan for it or not." The Legislature responded, thanks to the leadership of Senate pro tem Don Perata and Assembly Speaker Fabian Nunez. By May 1 of that year, lawmakers had cobbled together and approved an infrastructure financing package -covering roads, rail, schools and levees -totaling nearly $40 billion. Voters over- whelminglyapproved the plan in November. Finally, a significant down payment on California's future. It was just a downpayment, however, and California, after decades of neglect, needs tens of billions more to simply catch up. Some will argue that now, with a grim budget situation, is not the time for making ma- jor public investments. But, "if not now when?"asked a former California governor. 'If not us, who?° And, as Governor Schwarzenegger noted about the trying times his predecessor-builder governors faced, 'They (built) it, through wars and recession, year in and year out, for decade after decade." No infrastructure improvement is more important to California's future than storage facilities for water. While billions of cubic feet of water wash out to sea "Cp~lfOfnlp needs aker every storm and during the Sierra snowmelt ev- Wp[ef nOW. We ery spring, California's growing demand for this vital need wilier ~0 30 resource is going unmanaged and unmet. In the past , three decades, no significant new infrastructure has and 50 years been built to keep up with the state's growing popula- frOrll nOw.~~ lion -which grows by half a million new people every year and is expected to be 49 million by 2030. -Governor Arnold Schwarzenegger Now, the most vital link in California's water delivery chain is in crisis. The San Joaquin Delta, the hub of California's water system which transports water to millions of residents, businesses and farmland in California, is being challenged by among other things, sinking islands, surging seawater and invasive species. All of this and more add up to water deliveries to 25 million Californi.ui+ at risk. California homebuilders have joined others in the state - including Governor Schwarzenegger -who want to do something about California's water future. In addition to continuing to push for legislation that would authorize a bond What we want that includes a variety The water supply concept being advanced by the bond of strategies to increase measure sponsored by Californians for Clean and Reli- thestate's supply and able Water seeks the following: reliability a coalition of 53.5 billion in funding for new surface water storage water storage advocates facilities. -Californians for Clean 52.7 billion in funding for conservation, recycling and and Reliable Water- clean water projects. ismoving to place its 52.4 billion for ecosystem protection and own water bond on the preservation in the Delta. November, 2008 baAot S1.1 billion for pollution clean-up projects. (see box). 51.6 billion for groundwater management projects. • S.5 billion for various facility management and To fail to act is to deny recycling activities. the quality of life for All of these proposals are consistent with the water- futuregenerations of supply objectives of the Governor's Strategic Growth Californians that previ- Initiative. ous ones gave to us. 10 2008 Principles and Policies of California Homebuilders ~f green homeownership is a priority... Then all homes should participate. State lawmakers and policy-makers continue to turn to new homebuilding to produce their environ- mental objectives. But, the returns are diminishing .. . • New California homes are already recognized as being more energy-efficient, water-eff cient, transit-oriented and generally environmentally friendly than all other homes in California, and the nation. Most of California's housing inventory (approach- ing 13 million units) was constructed long before energy, water and other resource efficiencies were established as residential standards, meaning there's more to be gained from improving existing versus new homes. Indeed, a dollar spent improving an older, existing home yields five to 10 times more in energy savings than a dollar spent in a new home. If reducing greenhouse gas (GHG) emissions by a certain level by 2020 is the goal, pursuant to AB 32, °The Global Warming Solutions Act', then simply mandating that new housing do more won't cut it - a11 homes can and need to make a contribution. And, lawmakers and policy-makers have only to look at the success that homebuilders have had in the past decade or so to reduce energy use in homes and, thereby reduce GHG. In 2004, CBIA launched the now-successful Califor- nia Green Builder (CGB) program. CGB incorporates straightforward measures dealing with, among other things, energy efficiency, water conservation and rep `~. cling. The results are compelling. For example, CGB of greenhouse gases will be released into the Earth's Global cooling homes atmosphere each year (see box As reported, newly built California homes are by for more). far and away the nation s and the world's most en- ergy efficient. And, as a recently completed study California homebuilders have shows, new homes should be the standard against been equally successful in what the energy efficiency of all homes ought to achieving meaningful water be measured. conservation. Thanks to the New housing represents 0.1540 of existing use of things like low-bow carbon emissions. toilets and state-of--the-art Homes built in 2005 use 47401ess heating and technology to regulate out- cooling than homes built in 1978. door water use, CGB homes Energy use in new homes is 26% less than save at least 20,000 gallons of homes built in 1990. water a year compared to non- The carbon footprint of a home built in 2005 is 2496 smaller than one built in 1990. CGB homes. That works out to a 20 percent reduction in water 50, if you want to reduce GHG emissions, buy a use per household - tops in new California home. the nation. To further promote this greenbuilding effort, this year CB1A is sponsoring SB 1473 (Calderon) to support the establishment by the Building Stan- dardsCommission of CGB standards as those to follow for greenbuilding in California. In addition, homebuilders will promote the use of even mare effective water-conservation in new subdivisions through AB 2219 (Parra). Finally, to ensure that existing homes -all 12.5 million of them -are doing their part to help green California, CB[A is spdnsoringAB 230'9 (DeSaul- nier), abill topursue the use of'~energy audits" so that e contributions to reducing GHQ emissions from ex~i3~tinghomes can be determined. es are 15 percent to 20 percent more energy effi- . .:._. cient t the toughest-in-the-nation standards of the Getting to gidett ai California y Commission (CEC). In addition, is possible, if lawm each CGB home ores that 1,000 fewerpounds right choices. ,,,~,~-~T--- "''r _ - --- ifHomeownership Is a Priori y-^=-'~ = ~~ promoting housing affordability ers are prepared to make the k, . ;:~. _- ,~n ~. M- Il