HomeMy WebLinkAbout05 - In-Lieu Housing Fee - PA2005-062Agenda Item No. 5
May 11, 2010
CITY OF NEWPORT BEACH
SUPPLEMENTAL CITY COUNCIL STAFF REPORT
Agenda Item No. 20
April 27, 2010
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Planning Department
Jaime Murillo, Associate Planner
949- 644 -3209, imurillo(Snewportbeachca.gov
SUBJECT: AMENDMENT TO TITLE 19, "SUBDIVISIONS ", OF THE NEWPORT
BEACH MUNICIPAL CODE, CODE AMENDMENT NO. CA2005 -004
AND ADOPTION OF IN -LIEU HOUSING FEE (PA2005 -062)
Staff has made a minor revision to Section 19.54.080 (Affordable Housing Agreements) of
the draft ordinance. Attached is the revised language shown in bold.
Prepared by:
aime Murillo
Associate Planner
CC 1 Revision to Section 19.54.080
Page 19.54 -6
Inclusionary Housing
4. The units shall not already be subject to affordability income restrictions
unless such restrictions are set to expire in 3 years or less. In such cases,
the affordability covenant shall provide for 30 years in addition to any
existing covenant time.
C. Land Dedication. An applicant may propose to dedicate land to the City or to a
City- designated housing developer for the provision of affordable units in lieu of
constructing some or all of the affordable units required by this Chapter. The
dedicated land shall meet the following site suitability requirements:
1. The dedicated land shall be useable for its intended purpose and have the
appropriate General Plan and zoning designation for the development of
affordable housing, be free of toxic substances and contaminated soils, be
fully improved with infrastructure and adjacent utilities necessary to serve
the project, and shall have no title restrictions that would prevent the
development of the required number of affordable units.
2. Title to the dedicated land, or lease hold for the useful life of the housing
improvements, shall be conveyed to the City or City- designated housing
developer before a Building Permit is issued for any portion of the
residential subdivision project.
3. All property taxes, special taxes, fees, or other assessments shall be
current before the title is conveyed.
4. The dedicated land shall be sufficient in size to construct the number of
affordable units that the applicant would otherwise be required to
construct.
D. Findings and Decision. The review authority may approve or conditionally
approve, an AHIP that proposes alternative means of compliance with the
requirements of this Chapter after first finding all of the following:
1. The purpose of this Chapter would be served by the implementation of the
proposed alternative;
2. The units provided are located within the City and are consistent with the
requirements of this Chapter; and
3. It would not be feasible or practical to construct the units on -site.
19.54.080 Affordable Housing Agreement.
An applicant that chooses any option for satisfying the affordability requirements
of the Chapter, with the exception of the payment of in -lieu fees, shall enter into
an affordable housing agreement with the City. The Are affordable housing
agreement shall be executed in a recordable form prior to the issuance of a Building
Permit for any portion of a residential subdivision project subject to the requirements of
this Chapter.
CITY OF NEWPORT BEACH
CITY COUNCIL STAFF REPORT
Agenda Item No. 20
April 27, 2010
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Planning Department
Jaime Murillo, Associate Planner
949 - 644 -3209, Imurillo newportbeachca.gov
SUBJECT: AMENDMENT TO TITLE 19, "SUBDIVISIONS ", OF THE NEWPORT
BEACH MUNICIPAL CODE, CODE AMENDMENT NO. CA2005 -004
AND ADOPTION OF IN -LIEU HOUSING FEE (PA2005 -062)
ISSUE
Should the City Council approve an amendment to Title 19 (Subdivisions) of the
Newport Beach Municipal Code incorporating a new "Inclusionary Housing" chapter and
establishing an in -lieu housing fee?
RECOMMENDATION
1. Introduce Ordinance No. 2010 - amending Title 19, "Subdivisions ", of the
Newport Beach Municipal Code to incorporate Chapter 19.54 (Inclusionary
Housing) establishing inclusionary housing requirements and an in -lieu housing
fee (Attachment No. CC 1).
2. Adopt Resolution No. 2010 -_ setting the amount of the in -lieu housing fee at
$18,500 per market -rate unit and establishing an annual adjustment to the fee
(Attachment No. CC 2).
INTRODUCTION
The proposed chapter (Chapter 19.54) implements Housing Program 2.2.1 of the City's
Housing Element which requires that an average of 15 percent of the units in a new
residential development be affordable to persons of very low -, low -, or moderate -
income, or that an equivalent in -lieu fee be paid. This program was adopted to promote
construction of affordable dwelling units necessary to meet the "fair share" requirement
set by the Regional Housing Needs Assessment (RHNA) developed by the Southern
California Association of Governments.
Inclusionary Housing Ordinance —Title 19
April 27, 2010
Page 2
Housing Program 2.2.1 reads as follows:
Require a proportion of affordable housing in new residential developments or levy an in -lieu fee.
The City's goal over the five -year planning period is for an average of 15 percent of all new
housing units to be affordable to very low —, low -, and moderate- income households. The City
shall either (a) require the payment of an in -lieu fee, or (b) require the preparation of an
Affordable Housing Implementation Plan (AHIP) that specifies how the development will meet the
City's affordable housing goal, depending on the following criteria for project size:
1. Projects of 50 or fewer units shall have the option of preparing an AHIP or paying the in-
lieu fee.
2. Projects where more than 50 units are proposed shall be required to prepare an AHIP.
Implementation of this program will occur in conjunction with City approval of any residential
discretionary permits or Tentative Tract Maps. To insure compliance with the 15 percent
affordability requirements, the City will include conditions in the approval of discretionary permits
and Tentative Tract Maps to require ongoing monitoring of those projects. (imp 2.1)
In the past, in -lieu housing fees paid to fulfill inclusionary housing program requirements
have been in an amount negotiated with each developer. In an effort to calculate an
equitable in -lieu fee option for residential developers, the City retained the services of
Economic Planning Systems, Inc. (EPS) in 2004 to analyze and provide
recommendations on the fees a residential developer should have to pay in lieu of
providing affordable housing units. The City later retained the services of Keyser
Marston Associates (KMA) in 2009 to update the recommendations and to prepare a
financial constraints analysis to ensure the City's inclusionary housing requirements
would not result in a financial burden to housing production in the City (Attachment No.
CC 3).
Although Housing Program 2.2.1 is specific with regard to the criteria for when an in -lieu
fee may be paid, the Housing Program does not provide direction to staff or to
developers with regard to what an Affordable Housing Implementation Program entails,
methods for satisfying the affordability requirement, or how the in -lieu fee shall be
calculated. The proposed chapter provides the specific requirements necessary to
implement the Housing Program and provides the legal basis for the in -lieu housing fee.
DISSCUSSION
Basic Framework of Chapter 19.54 (Inclusionary Housin
Applicability
The proposed chapter will only apply to residential projects for which a parcel map or a
tract map is proposed (for -sale units). Residential projects proposed as rentals with no
parcel map or tract map will not be subject to the inclusionary housing requirements.
This distinction is based on a July 2009 court decision (Palmer /Sixth Street Properties
L.P., et al., v. City of Los Angeles) in which the inclusionary housing requirements for
Inclusionary Housing Ordinance — Title 19
April 27, 2010
Page 3
rental housing by the City of Los Angeles were invalidated. The court decided that the
Costa - Hawkins Rental Housing Act (State law establishing apartment landlords' rights to
set rents as they see fit) trumped the power of local authorities to require certain rental
units to be made available at certain prices.
Staffs research of market -rate rental prices in the City found that a majority of the larger
apartment complexes in the City were affordable to moderate- income households and a
few complexes were affordable to low- income households. Accordingly, the assumption
is that new residential projects proposed as rentals may be affordable to moderate -
income households. Even if the units are not affordable to moderate - income
households, rentals likely will provide more affordable options in the City than for -sale
units.
Affordability Requirement
Affordable units are defined as dwellings restricted to occupancy by very low -, low -, or
moderate - income households. Chapter 19.54 will require developers of residential
subdivisions to facilitate production of affordable units in numbers equal to 15 percent of
the number of for -sale market rate units produced. Affordable, for -sale units provided in
compliance with this Chapter will be required to be sold at prices affordable for
moderate - income households. If a subdivision proponent chooses to provide affordable
rental units to comply with the Chapter, the units shall be rented at a rate affordable for
very-low or low- income households. In all cases, the affordable units provided to meet
the requirements of the Chapter shall be legally restricted to occupancy by, and
affordable to, households of the income levels for which the affordable units were
designated for a minimum duration of 30 years.
In order to provide flexibility to developers and reduce the burden that this Chapter may
place on new residential subdivision projects, the following alternatives to the on -site
construction requirements of the Chapter have been included:
1. Off -Site Construction- A developer may propose to construct all or some of the
affordable units required by this Chapter at a location not physically within the
residential subdivision project; however, the units must be located within the City
boundaries.
2. Off -Site Renovation- A developer may propose to renovate and convert existing
off -site units in the City to affordable units in lieu of constructing the affordable
units required by the Chapter. The proposed units shall be subject to the
following requirements:
a. The interiors and exteriors of the units shall be substantially renovated to
improve the livability and aesthetics of the units for the duration of the
affordability period.
9
Inclusionary Housing Ordinance — Title 19
April 27, 2010
Page 4
b. Renovations shall include energy conserving retrofits that will contribute to
reduced housing costs for future occupants of the units.
c. The units shall be returned to the City's housing supply as decent, safe
and sanitary housing and meet all applicable housing and building code
requirements.
d. The units shall not already be subject to affordability income restrictions
unless such restrictions are set to expire in 3 years or less. In such cases,
the affordability covenant shall provide for 30 years in addition to any
existing covenant time.
It should be noted that the conversion of market -rate units into affordable units as
provided for by this Chapter would not be eligible to fulfill the City's RHNA "fair
share" requirements. State Housing Law does include provisions that would allow
for a portion of the RHNA requirement to be fulfilled through converted units;
however, certain conditions would have to be included in this Chapter that would
make implementation of this option difficult to implement (i.e., minimum
affordability duration of 55 years, only units committed within first two years of the
5 -year planning period are eligible, and specific relocation assistance
requirements).
3. Land Dedication - A developer may propose to dedicate land to the City or a City -
designated housing developer for the provision of affordable units in lieu of
constructing some or all of the affordable units required by this Chapter. The
Chapter includes specific site suitability requirements for the proposed land to be
dedicated. In projects where the land dedication option is proposed, the City
Council shall be the final review authority.
4. In -Lieu Housing Fee - For residential subdivision projects consisting of 50 or
fewer dwelling units, the requirements of this Chapter may be satisfied by paying
a fee in lieu of providing the required number of affordable units (on -site and /or
off - site). The in -lieu fee shall be paid for each market -rate unit within the
residential subdivision project and shall be paid prior to the issuance of a Building
Permit. As explained in detail in the In -Lieu Housing Fee Calculation section of
this report, the recommended in -lieu fee per market -rate unit has beer calculated
at $18,500.
The payment of an in -lieu fee alone or in combination with the provision of a
portion of the affordable units (on -site and /or off -site) may also be approved for
residential subdivision projects consisting of more than 50 units, through the
approval of an Affordable Housing Implementation Plan.
4
Inclusionary Housing Ordinance — Title 19
April 27, 2010
Page 5
Affordable Housing Implementation Plan (AHIP)
An Affordable Housing Implementation Plan (AHIP) provides a description of the
residential subdivision and the method of satisfying the affordable housing requirement.
An AHIP shall be processed concurrently with the tentative tract map or parcel map
application and shall be reviewed and approved by the applicable review authority for
such maps. An AHIP is also a means to grant flexibility in satisfying the affordability
requirement of this Chapter in one or more of the following ways:
• Providing very low- income units in exchange for a reduction in the number of
required affordable units.
• Modification of the duration of affordability covenants to more than or less than
30 years, depending on the affordability level and number of provided affordable
units.
• Project phasing.
• Providing a combination of affordable units on -site and off -site.
• Providing a portion of the affordable units (on -site and /or off -site) in combination
with in -lieu fees.
• Payment of in -lieu fees for projects consisting of more than 50 units.
Payment of in -lieu housing fees for residential subdivision projects consisting of 50 or
fewer units and consistent with all the provisions of the Chapter will not require an AHIP.
Affordable Housing Agreement
A condition of approval of an AHIP will include the recordation of an Affordable Housing
Agreement. This agreement will restrict units for occupancy only by very low -, low -, or
moderate - income households for a pre- determined number of years, as applicable.
Rental unit restrictions shall be in the form of a regulatory agreement recorded against
the applicable property. Owner - occupied units shall be subject to resale restrictions
recorded against the applicable property.
Affordable Housing Fund
All funds received through the payment of in -lieu housing fees will be required to be
deposited into an Affordable Housing Fund. The Fund shall be used in compliance with
the General Plan Housing Element and this Chapter to construct, rehabilitate, or
subsidize affordable housing or assist other governmental entities, private organizations
or individuals to provide or preserve affordable housing. Specific allowed uses of fund
monies are listed within proposed Chapter 19.54.
5-
Inclusionary Housing Ordinance — Title 19
April 27, 2010
Page 6
15 Percent Inclusionary Requirement
Prior to the 2006 General Plan Update, Housing Program 2.2.1 of the City's Housing
Element required that an average of 20 percent of the units in a new residential
development be affordable. During the preparation of the 2006 General Plan Update,
Housing Program 2.2.1 was revised, reducing the inclusionary requirement to 15
percent.
Attachment No. CC 4 provides an analysis that demonstrates that a 15 percent
inclusionary requirement is reasonable and is the minimum the City should consider to
assist in meeting its RHNA goals. In fact, the analysis illustrates that approximately 47-
percent of the City's expected development yield over the General Plan's remaining 21-
year horizon would need to be affordable to moderate and lower- income households in
order to achieve the estimated future RHNA goals. The estimated future RHNA is based
on an assumption that the City's future RHNA goals will remain similar to the past two
RHNA periods, with the second period reflecting a more aggressive adjustment by
SCAG for higher - income communities.
Financial Constraints Analysis
The State Department of Housing and Community Development (HCD) has issued a
letter (Attachment No. CC 5) stating that State housing element law is neutral relative to
the enactment of mandatory inclusionary housing provisions; however, HCD is now
requiring local governments to analyze mandatory inclusionary policies as a potential
governmental constraint on housing production when adopting or updating housing
elements.
In order to determine if the structure of the recommended Inclusionary Housing Chapter
complies with State housing element law, KMA tested the financial burden associated
with the proposed income and affordability restrictions.
For -sale: Moderate Income Affordability Requirement
Pro forma analyses were prepared to determine the primary financial burden created by
imposing affordable housing requirements on for -sale units. The financial burden is
defined as the difference between the achievable market rate prices and the allowable
prices for the income restricted units. The pro forma analyses results indicate that the
requirement to provide 15- percent of for -sale units for moderate income households
reduces the supportable land value in the near term by 50- percent. A land value
reduction in this range can be considered an onerous burden that will be an
unreasonable constraint to residential development.
0
Inclusionary Housing Ordinance — Title 19
April 27, 2010
Page 7
Rental., Low - Income Affordability Requirement
To mitigate the financial burden on for -sale developments, the proposed Inclusionary
Housing Chapter provides the option for developers to fulfill the affordability
requirements by providing rental units affordable to low- income households. In this
case, the results of the pro forma analyses indicate that the proposed inclusionary
requirements decrease the supportable land value of a residential development by 10-
percent. This value decrease is much less than the primary financial burden typically
associated with an inclusionary housing ordinance and is, therefore, determined not to
be an unreasonable constraint.
Conclusion
The ability to provide rental units affordable to low- income households to fulfill the
inclusionary requirements for a for -sale development project significantly reduces the
financial burden to a level that does not constitute an unreasonable constraint. To
corroborate this finding, KMA surveyed over 100 jurisdictions in California that currently
impose inclusionary housing requirements and found that the primary financial burden
associated with the proposed Inclusionary Housing Chapter is consistent with that of
other inclusionary housing programs being implemented throughout the State. It was
also noted that the inclusionary housing programs recently adopted in several California
locations have been projected to generate land value reductions in the 30- percent
range.
In -Lieu Housing Fee Calculation
To calculate a recommended in -lieu fee amount, KMA translated the financial burden
generated by the inclusionary requirements into a per unit fee. Since it has been
determined that the proposed inclusionary housing requirements are supportable and
do not create an unreasonable constraint on residential housing development, KMA's
methodology implicitly results in a reasonable in -lieu fee.
The KMA analysis is based on the assumption that developers will choose to fulfill the
inclusionary housing requirements with rental units affordable to low- income households
since this option would generate a substantially smaller financial burden. Thus, the in-
lieu ,.fee analysis was based on a rental housing scenario. Based on the results of the
KMA analysis, the supportable in -lieu fee is equal to $18,500 per market rate for -sale
unit.
In -Lieu Housing Fee Adjustments
KMA has suggested an automatic annual adjustment to the in -lieu housing fee based
upon the annual percentage change in new home prices in Orange County (from
December to December) as published in the Real Estate Research Council report. This
will ensure that the fees, at the time of payment, keep pace with inflation and the future
M
Inclusionary Housing Ordinance — Title 19
April 27, 2010
Page 8
cost to construct affordable housing. The following illustrates the annual percentage
change in new homes prices in Orange County over the last 10 years:
f Y k
2008 - 2009
t Y %1 J 101
r^ N +1
+ 1.5 %0
st (" - W Y
FY
ptig
2004 —2005
+8.7%
2007 — 2008
- 16.2%
2003 —2004
+19.0%
2006 — 2007
- 13.6%
2002 —2003
+10.1%
2005 —2006
-1.6%
2001 —2002
+10.7%
Building Industry Association Comments
The introduction of this ordinance was originally scheduled for the City Council's review
on November 24, 2009. At the request of the Building Industry Association of Southern
California (BIA), the item was pulled from the agenda to allow the BIA additional time to
review the proposed ordinance and provide comment. On March 12, 2010, the BIA
submitted a comment letter raising concerns that the proposed ordinance may conflict
with State law (Attachment No. CC 6). The Office of the City Attorney has reviewed the
case law cited in the BIA letter and believes that the proposed ordinance is consistent
with applicable case law. The proposed inclusionary housing requirements strike a
balance between the needs of the BIA's members and the City's goal of providing a
wide range of housing options to our residents.
ENVIRONMENTAL REVIEW
The proposed action is not defined as a project and does not require environmental
review under the California Environmental Quality Act (CEQA) because it involves
general policy and procedure making activities not associated with a project and does
not have the potential for resulting in a direct physical change in the environment or a
reasonably foreseeable indirect physical change in the environment (Section 15378 of
the CEQA Guidelines).
PUBLIC NOTICE
Notice of this hearing was made by posting the Council Agenda on the City's official
notice bulletin board and posting the agenda and report on the City's Website. Notice of
the time and place of the hearing, including the address where the information could be
reviewed, was also posted on the City's official notice bulletin board, and mailed to the
Building Industry Association of Southern California, Orange County Chapter per their
written request not less than 14 days prior to the hearing. In addition, an e-mail
15
Inclusionary Housing Ordinance — Title 19
April 27, 2010
Page 9
notification of this meeting was sent to all interested parties on the City's Housing
Interest List.
ALTERNATIVES
1) The City Council may suggest changes to the proposed code amendment
and /or resolution establishing the in -lieu housing fee. Should the City
Council choose to do so, staff will return with a revised resolution and /or
ordinance incorporating these changes.
2) Deny the proposed code amendment and resolution
Submitted by: Prepared by:
D vid Lepo me Mu�rillo
Planning Director Associate Planner
Attachments:
CC 1 Draft Ordinance Amending Title 19
CC 2 Draft Resolution setting the amount of the in -lieu fee
CC 3 Keyser Marston Associates (KMA) Analysis of Inclusionary Housing Options
CC 4 Estimated Future RHNA Goals
CC 5 State Department of Housing and Community Development Letter
CC 6 Building Industry Association of Southern California Letter (March 12, 2010)
N
Attachment No. CC 1
Draft Ordinance Amending Title 19
a
ORDINANCE NO. 2010-
AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF
NEWPORT BEACH INCORPORATING A NEW
INCLUSIONARY HOUSING CHAPTER (CHAPTER 19.54)
INTO TITLE 19 OF THE NEWPORT BEACH MUNICIPAL
CODE.
WHEREAS, the City of Newport Beach ( "City') is a charter city, governed by a
charter adopted by the citizens of the City; and
WHEREAS, it is a public purpose of the City and a policy of the State to achieve
a diverse and balanced community with housing available for households of all income
levels; and
WHEREAS, economic diversity fosters social and environmental conditions that
protect and enhance the social fabric of the City and is beneficial to the health, safety
and welfare of its residents; and
WHEREAS, the lack of affordable housing has a direct impact upon the health,
safety and welfare of the residents of the City;
WHEREAS, State law pertaining to General Plans and the Housing Element of
the City General Plan require that City ordinances regulate land use development and
that the City otherwise use its authority in a manner that provides an adequate supply of
housing for all economic segments of the community; and
WHEREAS, the City is experiencing a shortage of housing affordable to very
low -, low- and moderate - income households and will not be able to fully contribute to
the attainment of the State housing goals or to retain a healthy environment without
additional affordable housing; and
WHEREAS, new residential development generally does not provide housing
opportunities for very low -, low- and moderate - income households due to the high cost
of land in the City; and
WHEREAS, an increasing number of persons in very low -, low, and moderate -
income households live in overcrowded or substandard housing and devote an overly
large percentage of their income to pay for housing; and
WHEREAS, the amount of land in the City available for residential development
is limited; and
WHEREAS, the consumption of this remaining land for residential development
without providing housing affordable to persons of all income levels would be contrary to
t2
housing, environmental and planning policies and have a substantial negative impact on
the environment and economic climate because (i) housing will have to be built
elsewhere, far from employment centers and, therefore, commutes will increase,
causing increased traffic and transit demand and consequent noise and air pollution;
and (ii) City businesses will find it more difficult to attract and retain the workers they
need; and
WHEREAS, new residential development in the City that does not provide for
affordable units aggravates the existing shortage of affordable housing by absorbing the
supply of available residential land, reducing the supply of land for affordable housing
and increasing the price of the remaining residential land; and
WHEREAS, at the same time, new residential development contributes to the
demand for goods and services in the City, increasing local service employment at
wage levels which often do not permit employees to afford housing in the City; and
WHEREAS, Federal and State funds for the construction of new affordable
housing are insufficient to fully address the problem of affordable housing within the
City; and
WHEREAS, the private housing market has failed to provide adequate housing
opportunities for very low -, low -, and moderate- income households; and
WHEREAS, the City is aware that there may be times when the inclusionary
housing requirements make market -rate housing more expensive; and
WHEREAS, in weighing all the factors, including the significant need for
affordable housing, the City Council has made the decision that the community's
interests are best served by the adoption of inclusionary housing regulations; and
WHEREAS, to implement the City's General Plan, to carry out the policies of the
State and Federal law and policy, and to ensure the benefits of economic diversity of
the residents of the City, it is essential that new residential development in the
remaining new growth areas of the City contain housing opportunities to households of
very low -, low- and moderate - income, and that the City provide a regulatory framework
which ensures development of an adequate supply and mix of new housing to meet the
future housing needs of all income segments of the community; and
WHEREAS, in July of 2006, the City Council adopted an update to the City's
General Plan, which includes a Housing Element that addresses issues, goals, and
policies related to ensuring an adequate supply of housing opportunities for all
residents; and
WHEREAS, with the intent of achieving the City's Regional Housing Needs
Assessment (RHNA) construction goals and to encourage the housing development
industry to respond to the housing needs of the community and demand for affordable
I3
housing, the City updated its longstanding inclusionary housing program and
incorporated it into the 2006 Housing Element Update (Housing Program 2.2.1); and
WHEREAS, Housing Program 2.2.1 is a statement of the City's inclusionary
housing policy and requires the preparation of an Affordable Housing Implementation Plan
(or the payment of an in -lieu fee) when the construction of new units are proposed; and
WHEREAS, the City Council finds that it is necessary to adopt an inclusionary
housing ordinance to implement Housing Program 2.2.1 and to address the City's
housing shortage; and
WHEREAS, notice of this hearing was made by posting the Council Agenda on
the City's official notice bulletin board and posting the agenda and report on the City's
Website. Notice of the time and place of the hearing, including the address where the
information could be reviewed, was also posted on the City's official notice bulletin
board, and mailed to the Building Industry Association of Southern California, Orange
County Chapter per their written request not less than 14 days prior to the hearing. In
addition, an e-mail notification of this meeting was sent to all interested parties on the
City's Housing Interest List.
NOW THEREFORE, the City Council of the City of Newport Beach, California,
hereby ordains as follows:
SECTION 1: Chapter 19.54 of the Newport Beach Municipal Code is hereby added
to Title 19 to read as shown in Exhibit 1, which is attached hereto and incorporated by
reference into this ordinance. All other provisions of Title 19 of the Newport Beach
Municipal Code shall remain unchanged.
SECTION 2: If any section, subsection, sentence, clause or phrase of this
ordinance is, for any reason, held to be invalid or unconstitutional, such decision shall
not affect the validity or constitutionality of the remaining portions of this ordinance. The
City Council hereby declares that it would have passed this ordinance, and each
section, subsection, clause or phrase hereof, irrespective of the fact that any one or
more sections, subsections, sentences, clauses and phrases be declared
unconstitutional.
SECTION 3: The proposed action is not defined as a project and does not
require environmental review under the California Environmental Quality Act (CEQA)
because it involves general policy and procedure making activities not associated with a
project and does not have the potential for resulting in a direct physical change in the
environment or a reasonably foreseeable indirect physical change in the environment
(Section 15378 of the CEQA Guidelines); and
SECTION 4: The Mayor shall sign and the City Clerk shall attest to the passage
of this Ordinance. This Ordinance shall be published once in the official newspaper of
the City, and the same shall become effective thirty (30) days after the date of its
(LA
adoption.
SECTION 5: This Ordinance was introduced at a regular meeting of the City
Council of the City of Newport Beach held on the 27th day of April, 2010, and adopted
on the 11th day of May, 2010, by the following vote, to wit:
AYES, COUNCIL MEMBERS
NOES, COUNCIL MEMBERS
ABSENT, COUNCIL MEMBE
MAYOR
Keith Curry
ATTEST:
Leilani Brown, City Clerk
APPROVED AS TO FORM,
C I ATTORNEY:
I� Itt)
Leonie Mulvihill, Acting City Attorney
for the City of Newport Beach
is
Page 19.54 -1
Inclusionary Housing
EXHIBIT 2
CHAPTER 19.54
INCLUSIONARY HOUSING
Sections:
19.54.010
Purpose
19.54.020
Definitions
19.54.030
Applicability
19.54.040
Regulations
19.54.050
In Lieu Fees
19.54.060
Affordable Housing Implementation Plan (AHIP)
19.54.070
Alternatives to On -Site Construction
19.54.080
Affordable Housing Agreement
19.54.090
Affordable Housing Fund
19.54.100
Adjustments, Waivers
19.54.010 Purpose
The purpose of this Chapter is to:
A. Provide a balanced residential community comprised of a variety of housing
types and opportunities for all social and economic segments, including very low-
, low -, and moderate - income households;
B. Promote the City's goal to add affordable housing units to the City's housing
stock in proportion to the overall increase in new housing units;
C. Offset the demand on housing that is created by residential development and
mitigate environmental and other impacts that accompany residential
development by protecting the economic diversity of the City's housing stock,
reducing traffic, transit and related air quality impacts, promoting jobs /housing
balance and reducing the demands placed on transportation infrastructure in the
region; and
D. Ensure that the limited remaining developable land in the City's planning area is
utilized in a manner consistent with the Housing Element.
19.54.020 Definitions
For the purposes of this Chapter and this Title, the following terms shall have the
meanings indicated:
A. Affordable Housing Agreement. The agreement entered into in compliance with
Section 19.54.080 which provides legal restrictions by which the affordable units
shall be restricted to ensure that the unit remains affordable to very low -, low -, or
moderate - income households, as applicable. With respect to rental units, rent
restrictions shall be in the form of a regulatory agreement recorded against the
applicable property. With respect to owner - occupied units, resale controls shall
t (o
Page 19.54 -2
Inclusionary Housing
be in the form of resale restrictions, deeds of trust, and /or other similar
documents recorded against the applicable property.
B. Affordable Housing Implementation Plan (AHIP). A plan prepared in compliance
with Section 19.54.060 which provides a description of the residential subdivision
and method of satisfying the affordable housing requirement.
C. Affordable Housing Price. A sales price that is no more than 3 times the
maximum income level for very low -, low -, and moderate - income households. In
determining the maximum household income for a given affordable unit, it shall
be assumed that each bedroom is occupied by two persons, except for efficiency
units (one person).
D. Affordable Rental Price. An annual rent that does not exceed 30 percent of
maximum income level for very low -, low -, and moderate - income households, as
adjusted for household size. In determining the maximum household income for
a given affordable unit, it shall be assumed that each bedroom is occupied by
two persons, except for efficiency units (one person).
E. Affordable Unit. An ownership or rental- housing unit, including senior housing,
affordable to households with very low -, low -, and moderate - incomes as defined
in this Chapter.
F. Conversion. A change of a dwelling unit to a condominium, cooperative, or a
similar form of ownership, or to a nonresidential use.
G. Low - income. Income between 50% and 80% of the Orange County median
income, adjusted for actual household size, as determined by the California
Department of Housing and Community Development.
H. Moderate - income. Income between 80% and 120% of the Orange County
median income, adjusted for actual household size, as determined by the
California Department of Housing and Community Development.
I. Very low- income. Income 50% or less of the Orange County median income,
adjusted for actual household size, as determined by the California Department
of Housing and Community Development.
19.54.030 Applicability
Residential subdivision projects that result in a net increase in the number of units on
the property shall comply with the requirements of this Chapter, unless granted an
adjustment or waiver in compliance with Section 19.54.100 (Adjustments, Waivers). The
provisions of this Chapter shall not apply to nonresidential subdivisions, nor to
condominium projects or stock cooperatives which consist of the subdivision of air
space in an existing apartment building which, at the time of tentative map filing, is five
or more years old.
11
Page 19.54 -3
Inclusionary Housing
19.54.040 Regulations
A. Affordability Requirement.
1. Residential subdivision projects subject to this Chapter shall include the
construction of 15% of the net increase number of dwelling units within the
residential development project as affordable units restricted for
occupancy by very low -, low- or moderate - income households.
Notwithstanding the construction requirements, alternatives to on -site
construction may be provided pursuant to Section 19.54.070 (Alternatives
to On -Site Construction). A lower percent of affordable units may be
approved as part of an AHIP if the project includes units for very low -
income households.
2. The affordability requirement shall apply only to the net increase of
residential units on the property. In the event that the residential
subdivision project includes the demolition or conversion of existing
residential units, except as provided in Chapter 20.86 of the Zoning Code
(Low and Moderate Income Housing within the Coastal Zone), the
affordability requirement shall only apply to the net increase of residential
units on the property.
3. Affordable units required to be replaced under the provisions of Chapter
20.86 of the Zoning Code (Low and Moderate Income Housing within the
Coastal Zone) shall not be eligible for fullfilling the number of affordable
units required under the provisions of this Chapter.
4. The number of affordable units required for a residential subdivision
project shall be determined by the review authority prior to tentative or
parcel map approval.
5. To determine the number of units required when new affordable units are
to be provided, any decimal fraction less than 0.50 shall be rounded down
to the nearest whole number, and any fraction greater than or equal to
0.50 shall be rounded up to the next whole number. Provided, in no case
shall the affordability requirement be zero.
B. For -Sale Price. Rent. of Affordable Units. For affordable for -sale units provided in
compliance with this Chapter, the applicant shall sell the units at a housing price
affordable for moderate - income households. If the applicant chooses to provide
affordable rental units to comply with this Chapter, the applicant shall rent the
units at a rental price affordable for very low- or low- income households.
C. Duration of Affordability Requirement. Affordable units required by this Section
shall be legally restricted to occupancy by, and affordable to, households of the
income levels for which the affordable units were designated for a minimum
duration of 30 years, or as provided in an approved AHIP.
Page 19.54 -4
Inclusionary Housing
D. Timing. Affordable units shall be provided and offered for occupancy concurrently
with or prior to the occupancy of the market -rate units. For projects that are
phased over time, affordable units shall be provided in accordance with an
approved AHIP.
19.54.050 In Lieu Fees
A. General Requirements.
1. For residential subdivision projects of 50 or fewer dwelling units, the
requirements of this Chapter may be satisfied by paying a fee in lieu of
providing all or a portion of the affordable units, unless otherwise provided
by an approved AHIP.
2. For residential subdivision projects of 51 dwelling units or more, the
applicant may not pay a fee in lieu of constructing the required affordable
units, unless otherwise provided by an approved AHIP.
B. In -Lieu Fee Payment. When a fee is being paid in lieu of providing affordable
units, the in -lieu fee shall be paid for each market -rate unit within the residential
subdivision project.
C. Timing of Payment. Payment of the in -lieu fee shall be made prior to the
issuance of a Building Permit, unless otherwise provided by an approved AHIP.
D. Amount of Fee. The amount of the in -lieu fee shall be set by resolution of the
Council.
19.54.060 Affordable Housing Implementation Plan (AHIP)
A. When Required.
1. Residential subdivision projects of 51 dwelling units or more shall be
required to submit an AHIP.
2. Residential subdivision projects of 50 or fewer dwelling units shall have
the option of submitting an AHIP or paying an in -lieu fee.
B. Contents. The AHIP shall contain the following information:
1. A description of the residential subdivision, including the number of market
rate and affordable units proposed, and the basis for the calculation of the
number of required affordable units;
2. The method of satisfying the affordable housing requirement, including the
income level(s) and tenure of the affordable units to be provided;
3. A phasing plan, if the applicant proposes a phased project, that provides
for the timing of development of the affordable units;
Page 19.54 -5
Inclusionary Housing
4. Information necessary to establish compliance with criteria provided in
Subsection 19.54.070.13 (Off -Site Renovation Projects) or Subsection
19.54.070.0 (Land Dedication), if applicable; and
5. Any additional information requested by the Planning Director to assist in
the evaluation of the AHIP.
C. Approval.
1. The review authority for the project shall approve, conditionally approve,
or deny the AHIP on the basis of the application, plans, materials, and
testimony submitted.
2. If the AHIP proposes the dedication of land in compliance with Subsection
19.54.070.0 (Land Dedication) the City Council shall be the final review
authority. In these cases, the Planning Commission shall first recommend
and the City Council shall approve, conditionally approve, or deny the
AHIP.
D. Appeal of review authority's decision. The decision of the review authority may
be appealed in compliance with Chapter 20.95 (Appeals).
19.54.070 Alternatives to On -Site Construction
The following alternative means of compliance with this Chapter may be considered as
part of an AHIP.
A. Off -Site Construction Projects. An applicant may propose to construct some or
all of the affordable units required by this Chapter at a location not physically
within the residential subdivision project; however, the affordable units shall be
located within the City boundaries.
B. Off -Site Renovation Projects. An applicant may propose to renovate and convert
existing off -site units in the City to affordable units in lieu of constructing some or
all of the affordable units required by this Chapter. The proposed units shall meet
the following requirements:
1. The interiors and exteriors of the units shall be substantially renovated to
improve the livability and aesthetics of the units for the duration of the
affordability period.
2. The units shall be returned to the City's housing supply as decent, safe
and sanitary housing and meet all applicable housing and building code
requirements.
3. Renovations shall include energy conserving retrofits that will contribute to
reduced housing costs for future occupants of the units.
0
Page 19.54 -6
Inclusionary Housing
4. The units shall not already be subject to affordability income restrictions
unless such restrictions are set to expire in 3 years or less. In such cases,
the affordability covenant shall provide for 30 years in addition to any
existing covenant time.
C. Land Dedication. An applicant may propose to dedicate land to the City or to a
City- designated housing developer for the provision of affordable units in lieu of
constructing some or all of the affordable units required by this Chapter. The
dedicated land shall meet the following site suitability requirements:
1. The dedicated land shall be useable for its intended purpose and have the
appropriate General Plan and zoning designation for the development of
affordable housing, be free of toxic substances and contaminated soils, be
fully improved with infrastructure and adjacent utilities necessary to serve
the project, and shall have no title restrictions that would prevent the
development of the required number of affordable units.
2. Title to the dedicated land, or lease hold for the useful life of the housing
improvements, shall be conveyed to the City or City- designated housing
developer before a Building Permit is issued for any portion of the
residential subdivision project.
3. All property taxes, special taxes, fees, or other assessments shall be
current before the title is conveyed.
4. The dedicated land shall be sufficient in size to construct the number of
affordable units that the applicant would otherwise be required to
construct.
D. Findings and Decision. The review authority may approve or conditionally
approve, an AHIP that proposes alternative means of compliance with the
requirements of this Chapter after first finding all of the following:
1. The purpose of this Chapter would be served by the implementation of the
proposed alternative;
2. The units provided are located within the City and are consistent with the
requirements of this Chapter; and
3. It would not be feasible or practical to construct the units on -site.
19.54.080 Affordable Housing Agreement.
An affordable housing agreement shall be executed in a recordable form prior to the
issuance of a Building Permit for any portion of a residential subdivision project subject
to the requirements of this Chapter.
2t
Page 19.54 -7
Inclusionary Housing
A. Contents. Affordable housing agreements shall include the following where
applicable:
1. A description of the residential subdivision project, how the affordable
housing requirements will be met by the applicant, and whether the
affordable units will be rented or owner - occupied;
2. The number, size, and location of each affordable unit;
3. Incentives provided by the City (if any) for density bonus;
4. Limits on income, rent and sales price of affordable units;
5. Procedures for tenant selection and the process for qualifying prospective
households for income eligibility;
6. Provisions and /or documents for resale restrictions, deeds of trust, rights
of first refusal for owner - occupied units, or restrictions for rental units;
7. Provisions for monitoring the ongoing affordability of the units;
8. Performance guarantees (e.g., a cash deposit, bond, or letter of credit) as
required by the review authority; and
9. Provisions for the enforcement and penalties for violation of the
agreement.
B. Recording of Agreement. Affordable housing agreements in a form acceptable to
the City Attorney shall be recorded against the owner - occupied affordable units
and the projects containing rental affordable units. Additional rental or resale
restrictions, deeds of trust, rights of first refusal and /or other documents shall
also be recorded against owner - occupied affordable units. In cases where the
requirements of this Chapter are satisfied through the development or renovation
of off -site units, the affordable housing agreement shall simultaneously be
recorded against the property where the off -site units are located.
19.54.090 Affordable Housing Fund
A. Fund Revenues. The fund shall receive all in -lieu fees paid under Section
20.34.050 (In -Lieu fees) and may also receive monies from other sources.
B. Purpose and Limitations. Affordable Housing Fund monies shall be used in
compliance with the General Plan Housing Element and this Chapter to
construct, rehabilitate, or subsidize affordable housing or assist other
governmental entities, private organizations or individuals to provide or preserve
affordable housing. The fund may be used for the benefit of both rental and
owner - occupied housing. Allowed uses of fund monies include:
1. Assistance to housing development corporations;
2 2L
Page 19.54 -8
Inclusionary Housing
2. Equity participation loans;
3. Grants;
4. Pre -home ownership co- investment;
5. Predevelopment loan funds;
6. Participation leases;
7. Other public - private partnership arrangements;
8. The acquisition of property and property rights;
9. Construction of affordable housing including costs associated with
planning, administration, and design, as well as actual building or
installation;
10. Costs of rehabilitation and maintenance of existing affordable housing
when needed to preserve units that are at risk of going to a market rate or
at risk of deterioration;
11. Other costs associated with the construction or financing of affordable
housing;
13. Reasonable administrative charges or related expenses; and
14. Reasonable consultant and legal expenses related to the establishment
and /or administration of the fund.
19.54.100 Adjustments, Waivers
The City Council may waive, wholly or partially, the requirements of this Chapter and
approve alternative methods of compliance with this Chapter if the applicant
demonstrates, and the City Council finds that either:
A. Taking. There is no reasonable relationship between the impact of a proposed
development and the requirements of this Chapter and applying the requirements
of this Chapter would take property in violation of the United States or California
Constitutions; or
23
Page 19.54 -9
Inclusionary Housing
B. Special circumstances. There are special circumstances unique to the residential
development that justify the granting of an adjustment or waiver; the residential
development would not be feasible without the modifications; a specific and
financial hardship would occur if the modification was not granted; and no
alternative means of compliance are available that would be effective in attaining
the purpose of this Chapter than the relief requested.
Attachment No. CC 2
Draft resolution setting in -lieu fee amount
210
TI
RESOLUTION NO. 2010-
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
NEWPORT BEACH SETTING THE AMOUNT OF THE
AFFORDABLE HOUSING IN -LIEU FEE PURSUANT TO
SECTION 19.54.050(D) OF THE NEWPORT BEACH
MUNICIPAL CODE
WHEREAS, in July of 2006, the City Council adopted an update to the City of
Newport Beach's ( "City ") General Plan, which includes a Housing Element that
addresses issues, goals, and policies related to ensuring an adequate supply of housing
opportunities for all residents; and
WHEREAS, with the intent of achieving the City's Regional Housing Needs
Assessment construction goals and encouraging the housing development industry to
respond to the housing needs of the community and the demand for affordable housing,
the 2006 Housing Element Update (Housing Program 2.2.1) incorporates the City's
longstanding inclusionary housing policy; and
WHEREAS, Housing Program 2.2.1 is a statement of the City's inclusionary
housing policy and requires the preparation of an Affordable Housing Implementation
Plan, or the payment of an in -lieu fee, when the construction of new units is proposed; and
WHEREAS, Chapter 19.54 of the Newport Beach Municipal Code implements
Housing Program 2.2.1 and establishes an affordable housing requirement requiring
that 15- percent of the total number of dwelling units required in conjunction with
residential subdivisions be affordable to very low -, low- or moderate - income
households; and
WHEREAS, to increase the flexibility in the means of fulfilling inclusionary
housing requirements, Chapter 19.54 provides the option of paying a fee in lieu of
providing the affordable units within residential subdivision projects; and
WHEREAS, in an effort to provide an equitable in -lieu fee option to residential
developers, the City retained the services of Economic Planning Systems, Inc. (EPS), in
2004 to analyze and provide recommendations on the fees a residential developer
should have to pay in lieu of providing affordable housing units; and
WHEREAS, the City retained the services of Keyser Marston Associates (KMA)
in 2009 to update the EPS in -lieu fee recommendations and to prepare selected
analyses of the financial burden associated with income and affordability restrictions
that may be imposed under the requirements of Chapter 19.54 (Exhibit A); and
z3
WHEREAS, such financial analyses indicated the inclusionary housing
requirements can be fulfilled without creating an unreasonable constraint on residential
development; and
WHEREAS, the KMA in -lieu fee analysis is based on the assumption that the
City will provide developers with the option to fulfill the inclusionary requirements with
either ownership or rental units; and
WHEREAS, the analysis further indicates that the provision of affordable rental
units generates a substantially smaller financial burden than the provision of affordable
ownership units, and, accordingly, the in -lieu fee analysis is based on a rental housing
scenario; and
WHEREAS, KMA projected the financial burden imposed on a typical new
residential subdivision by the inclusionary requirements into an equivalent per unit in-
lieu fee; and
WHEREAS, the results of the in -lieu fee analysis indicate that the financial
burden incurred providing low- income rental units pursuant to the provisions of Chapter
19.54 translates to an in -lieu fee of $18,500 per market rate ownership unit; and
WHEREAS, the City Council has reviewed the financial analyses and
methodology used to establish the in -lieu housing fee, and determines the in -lieu fee to
be appropriate; and
WHEREAS, the proposed action is not defined as a project under the California
Environmental Quality Act (CEQA) because it involves general policy and procedure
making activities not associated with a project or a physical change in the environment
(Section 15378 of the CEQA Guidelines); and
WHEREAS, notice of this hearing was made by posting the Council Agenda on
the City's official notice bulletin board and posting the agenda and report on the City's
Website. Notice of the time and place of the hearing, including the address where the
information could be reviewed, was also posted on the City's official notice bulletin
board, and mailed to the Building Industry Association of Southern California, Orange
County Chapter per their written request not less than 14 days prior to the hearing. In
addition, an e-mail notification of this meeting was sent to all interested parties on the
City's Housing Interest List.
NOW THEREFORE, the City Council of the City of Newport Beach, California,
hereby resolves as follows:
SECTION 1: The in -lieu housing fee pursuant to Section 19.54.050 (D) of the
Newport Beach Municipal Code is set at Eighteen Thousand Five Hundred Dollars
($18,500).
2-c€
SECTION 2: The in -lieu housing fee shall be increased automatically, based
upon the annual percentage change in the new home prices in Orange County (from
December to December) as published in Real Estate Research Council report in order
to ensure that the fees keep pace with inflation and the cost to construct affordable
housing.
SECTION 3: This Resolution passed and approved at a regular meeting of the
City Council of the City of Newport Beach held on the 27th day of April, 2010, by the
following vote, to wit:
AYES, COUNCIL MEMBERS
NOES, COUNCIL MEMBERS
ABSENT, COUNCIL MEMBERS
MAYOR
Keith Curry
ATTEST:
Leilani Brown, City Clerk
n, o
EXHIBIT A
Keyser Marston Associates Analysis of Inclusionary Housing
Options
(To Be Inserted)
�E
Attachment No. CC 3
KMA Analysis
22
/�2
AeNIAOI49.I N.
REAL: ESPrE
REDEVELOPMENT
ArrogmnE HOI#1Nci
ECkNI)WC. DFVOOPMENT
SAN 1 R ANC*<,11
A, IkRKY KEYSER
TlmM W C. KFLLY
KKIE EARLL FUNK
DIUM V 41. PRN
RouRT 1.LVErM('RE
R LEDT: KAIYAHA"
W, ANGF. U'S
�XArEMEEN N. H FAV
TAMES A. RARE
PAUL C:. AN'DMON
GREGORY D. SOO-FI00
KEVIN E ENcsrKam
)DUE I,
'DENISE, 61C.CERS'IAFF
t
KEYSER MARSTON ASSOCIATES-
ADVISORS IN'PLI&LICflB1VA'rE REAL ESTATE DEVELOPMENT
MEMORANDUM
To: Sharon Wood, Assistant City Manager
City of Newport Beach
From: Kathleen Head
Date: September 17, 2009
Subject: Analysis of Inclusionary Housing Options
At your request, Keyser Marston Associates, Inc. (KMA) prepared selected financial
analyses pertaining to the City of Newport Beach (City) Inclusionary Housing Program.
These analyses can be described as follows:
brt4 1)IPf; <,
GERAII) M.TRIMbtE
RAW C. MARRA
2.
The inclusionary housing requirements are proposed to be imposed on new
ownership residential development. Market rate rental projects are not proposed
to be subject to the Inclusionary Housing Program requirements.
The proposed Program will allow the income and affordability requirements to be
fulfilled in any of the following ways:
a. On -site development of units within the proposed market rate ownership
residential development; or
b. Development of income restricted rental units; or
C. Payment of a fee to the City in lieu of developing any income restricted
housing units.
3. KMA tested the financial impacts associated with income and affordability
restrictions that may be imposed under the Inclusionary Housing Program.
Based on that analysis, KMA identified an Inclusionary Housing Program
structure that does not create an onerous burden on residential development.
The recommended structure is intended to comply with the State of California
(State) Housing Element requirement that the program should not create an
unreasonable constraint on residential development.
5005Ou'rti GRAN U AVENUE. SUITE 1480 *LOS ANGELES. CALiFORNIA90077 r PHONE.: 2136228093 b FAX;2136225204
W WW. KEYS E RM A RSTO N.COM.
0905025_2.doc: NB: KHH: NYM: gbd
16091.0011012
EA
To: Sharon Wood, City of Newport Beach September 17, 2009
Subject: Analysis of Inclusionary Housing Options Page 2
BACKGROUND STATEMENT
The City has applied an inclusionary housing requirement on a case -by -case basis for
new residential development for more than 20 years. This requirement is currently being
formalized into an ordinance that w ill impose specific restrictions on future new
ownership residential development. As part of the process, the City engaged Economic
& Planning Systems, Inc. to prepare an "Inclusionary Housing In -Lieu Fee Study" (EPS
Study). This study was completed in October 2008.
KMA was recently engaged by the City to test the financial impacts associated with the
proposed requirements. The ultimate objective of the KMA analysis is to create
Inclusionary Housing Program terms that fulfill the City's affordable housing objectives
without eliminating the developer's economically beneficial use of the property.
KMA tested the following baseline inclusionary housing obligations:
Threshold requirement: 15% of the units in market rate ownership residential
development are subject to income and affordability restrictions.
Household Income Restrictions:
a. If ownership units are provided to fulfill the obligation, the restricted units
must be allocated to moderate income households.
b. If rental units are provided to fulfill the obligation, the restricted units must
be rented to low income households.
KMA prepared pro forma analyses of prototypical product types to estimate the financial
impact created by imposing the identified inclusionary housing requirements. The
analyses compare baseline market rate project pro formas to pro formas for projects that
meet the inclusionary standards. These comparisons are used to quantify the financial
impacts created by the requirements being tested.
KMA also reviewed the characteristics of inclusionary housing ordinances currently in
place throughout California. The purpose of this survey is to provide further assistance
in determining whether the requirements being considered by the City fall within the
range of other existing ordinances.
PRO FORMA ANALYSIS ORGANIZATION
A summary of the analysis is presented in Table 1. The supporting pro f orma analyses
are organized as follows:
0905025_2.doc; NB: KHH: NYM:gbd
16091.001/012
,�,5
i
To: Sharon Wood, City of Newport Beach September 17, 2009
Subject: Analysis of Inclusionary Housing Options Page 3
Appendix A: Affordable Housing Cost Calculations
Appendix B: Ownership: Baseline Market Rate Project
Appendix C: Ownership: Moderate Income Inclusionary
Appendix D: Rental: Baseline Market Rate Project
Appendix E: Rental: Low Income Inclusionary
ANALYSIS ASSUMPTIONS
Ownership Assumptions
KMA reviewed ownership residential projects that have recently been submitted to the
City's Planning Department to identify the product type to use as the baseline market
rate project scenario. Based on the available information, KMA created a prototype
project with the following characteristics:
1. The development site is set at two acres.
2. The prototype project includes 32 units, which represents a density of 16 -units
per acre.
3. The average unit size is set at approximately 2,100 square feet.
The pro forma analyses are based on the following assumptions:
1. The construction costs, excluding land acquisition costs, are estimated at $1.2
million per unit.
2. The average sales price for the market rate units is projected at $1.8 million per
unit.
3. Based on the affordable housing cost calculation methodology defined in the
City's Housing Element, the 2009 affordable purchase price for a three - bedroom
unit is approximately $360,000 (See Appendix A -Table 1).
4. The threshold developer prof it is set at 15% of the project's construction costs.
Rental Assumptions
The rental prototype being tested in the KMA financial analysis is based on a survey of
apartment complexes in Newport Beach. The key components of the prototype project
are:
0905025_2.doc; N B:KH H: NYM:gbd
16091.001/012
?C�
To: Sharon Wood, City of Newport Beach September 17, 2009
Subject: Analysis of Inclusionary Housing Options Page 4
1. The development site is set at two acres.
2. The prototype project includes 36 units, a density of 18 -units per acre.
3. The project includes the following unit mix:
a. 40% one - bedroom units;
b. 40% two- bedroom units; and
C. 20% three - bedroom units.
The following assumptions are used in the rental scenarios:
1. The construction cost estimates are based on the assumptions applied in the
EPS Study. The construction costs, excluding land acquisition, are estimated at
$154,000 per unit.
2. Projected Market Rents
a. One - bedroom unit: $2,100 per month;
b. Two - bedroom unit: $2,700 per month; and
C. Three - bedroom unit: $3,000 per month.
3. Affordable Rent Inclusionary Housing Units
a. The affordable rents are based on the calculation methodology identified
in the City's Housing Element.
b. The 2009 low income rents are:
i. One - bedroom unit: $1,441 per month;
ii. Two - bedroom unit: $1,802 per month; and
iii. Three - bedroom unit: $2,065 per month.
4. The threshold stabilized return on total investment for the rental housing projects
is set at 6.6 %. This return rate is approximately equal to the rate applied in the
EPS Study.
0905025_ 2.doc;N B: KH H:NYM:gbd
16091.0011012
13-1
To: Sharon Wood, City of Newport Beach September 17, 2009
Subject: Analysis of Inclusionary Housing Options Page 5
FINANCIAL CONSTRAINTS ANALYSIS
Ownership: Moderate Income Inclusio nary
The primary financial impact created by imposing affordable housing requirements on
ownership units is the difference between the achievable market rate prices and the
allowable prices for the income restricted units. However, there are also some minor
differences in cost categories that are driven by the revenues generated by an
ownership project. The pro forma analyses in Appendices B and C illustrate the
estimated impact created by providing the inclusionary units within a market rate project.
The pro forma analyses results indicate that the requirement to set aside 15% of the
units for moderate income households acts to reduce the supportable land value i n the
near term by 50% (Appendix C — Table 3). A land value reduction in this range can be
considered an onerous burden that will act as a constraint to residential developm ent.
Rental: Low Income Inclusionary
To mitigate the financial burden, the proposed Inclusionary Housing Program provides
the option for developers to fulfill the requirements by constructing affordable rental
units. This section of the analysis evaluates the financial impact associated with
providing the required inclusionary units in rental projects.
The financial impact associated with imposing income and affordability restrictions on
apartment development is largely related to the decrease in supportable investment
created by the reduction in the achievable rents. However, the revenue reduction is
offset to some degree by the fact that the property taxes for the income restricted project
will be lower than the property taxes for a market rate project. The pro forma analyses in
Appendices D and E illustrate the impact created by providing low income rental units.
The results of the comparative pro forma analysis indicate that the proposed inclusionary
requirements act to decrease the supportable land value by 10% (Appendix E) This
value decrease falls well within the typical range for an inclusionary housing ordinance.
0905025_2.doc; N B:KH H:NYM:gbd
16091.001/012
99
To: Sharon Wood, City of Newport Beach
Subject: Analysis of Inclusionary Housing Options
Development Constraints Conclusions
September 17, 2009
Page 6
The results of the ownership residential analysis indicate that the identified inclusionary
housing requirements impose an onerous burden on developers. However, the option
for developers to fulfill the requirements by providing affordable rental un its mitigates the
detriment sufficiently to eliminate the constraint to residential development. Thus, it can
be concluded that the inclusionary housing requirements do not create an unreasonable
constraint on ownership residential development.
ORDINANCE COMPARISON
The financial analyses undertaken by KMA indicate that the inclusionary housing
requirements can be fulfilled without creating an unreasonable constraint on residential
development. To crosscheck this finding, KMA surveyed over 100 jurisdictions in
California that currently impose inclusionary housing requirements. The results of this
survey indicate that the identified requirements fall within the norm of the standards
imposed by inclusionary housing programs being implemented throughout the state.
The courts have held that affordable housing is a "public benefit", and that locally
imposed inclusionary housing ordinances are a legitimate means of providing this public
benefit. The courts have further found that the requirem ents cannot deprive an owner of
,,all economically beneficial use" of the property. However, to date, no definition of all
economically beneficial use has been provided. For reference purposes, it should be
noted that inclusionary housing programs recently adopted in several California locations
have been projected to generate land value reductions in the 30% range.
As discussed previously in this analysis, the inclusionary housing obligations being
tested are projected to create a financial detriment that is significantly less than a 30%
decrease to the supporta ble land value. As such, it can be concluded that the proposed
inclusionary housing requirements do not create an unreasonable constraint on
residential development.
SUPPORTABLE IN -LIEU FEE
To increase the Program's flexibility, the inclusionary housing obligations can be fulfilled
through the payment of an in -lieu fee. To establish a recommended in -lieu fee amount,
KMA translated the financial impact generated by the inclusionary requirements into a
per unit fee. Since it has been determined that the identified inclusionary housing
requirements are supportable, this methodology implicitly results in a reasonable in -lieu
fee.
0905025_2. doc: NB:KHH:NYM:gbd
16091.001/012
gci
To: Sharon Wood, City of Newport Beach September 17, 2009
Subject: Analysis of Inclusionary Housing Options Page 7
The KMA analysis is based on the assumption that the City will provide developers with
the option to fulfill the inclusionary requirements with either ownership or rental units.
The analysis further indicates that the provision of affordable rental units generates a
substantially smaller financial impact than the provision of affordable ownership units.
Thus, the in -lieu fee analysis is based on a rental housing scenario.
The following methodology was used to establish the recommended in -lieu fee amount:
As shown on Appendix E — Table 3, the financial impact is estimated at $591,000
for the 36 -unit prototype apartment project being evaluated.
2. The inclusionary housing obligation is applicable to market rate ownership
housing development. As such, the in -lieu fee analysis is based on the
inclusionary requirement for the 32 -unit prototype ownership that was tested
previously in this analysis:
a. The 32 -unit ownership project generates a requirement for five income
restricted units.
b. When the $591,000 gap is divided by the five affordable units, the
supportable in -lieu fee equals approximately $118,200 per affordable unit.
3. The affordability gap can also be divided by the total number of market rate
ownership units to arrive at a supportable in -lieu fee per market rate unit. Based
on the results of the KMA analysis, the supportable in -lieu fee is equal to $18,500
per market rate ownership unit ($591,000 / 32 units).
CONCLUSIONS
Based on the results of the financial analysis, KMA reached the following conclusions:
The Inclusionary Housing Program structure evaluated by KMA does not deprive
an owner of "all economically beneficial use' of the property, nor does it create
an unreasonable constraint on residential development as defined by State
Housing Element requirements.
2. The inclusionary option selected by developers will vary depending on the actual
scope of development being proposed. However, the financial analysis
demonstrates that there is a strong f inancial incentive for developers to select the
in -lieu fee option. Nonetheless, it is possible that some developers may find it
preferable to fulfill the inclusionary housing requirements by constructing
affordable rental units.
0905025_ 2.doc;NB: KH H: NYM:gbd
16091.001/012
Lila
TABLE 1
AFFORDABLE HOUSING CASE STUDIES
INCLUSIONARY HOUSING ANALYSIS
NEWPORT BEACH, CALIFORNIA
I. OWNERSHIP - SITE 87.120 SF
MARKET RATE RENTAL: LOW INCOME
SCENARIO I N CLUSIONARY
Number of Units
36
OWNERSHIP:
Density (Units /Acre)
MARKET RATE
IMODERATE INCOME
Affordable Housing
SCENARIO
I NCLUSIONARY
Number of Units
32
32
Density (Units /Acre)
16.0
16.0
Affordable Housing
None
5 Units - 15% Moderate
Requirements
Income
Affordable Housing Cost
N.A.
Housing Element
Standards
Land Cost
$167 /SF
$167 /SF
Supportable Land Value
$84 /SF
% (Decrease) /Increase in Land Value
-50%
MARKET RATE RENTAL: LOW INCOME
SCENARIO I N CLUSIONARY
Number of Units
36
36
Density (Units /Acre)
18.0
18.0
Affordable Housing
None
5 Low Income Units a
Affordable Housing Cost
N.A.
Housing Element
Standards
Land Cost 2
$68 /SF
$68 /SF
Supportable Land Value
$61 /SF
% (Decrease) /Increase in Land Value
-10%
III. ISupportable In -Lieu Fee If Market Rate Unit 4 $18,500 /Unit
' The land cost is based on the residual land value supported by the market rate scenario.
2 The land cost is set at $69/ SF based on the EPS Inclusionary Housing Study, 1017/2008.
s Based on the number of inclusionary units required by the ownership residential project.
4 The in -lieu fee is based on the affordability gap associated with fulfilling the obligation with rental units. See
APPENDIX E.
Prepared by: Keyser Marston Associates, Inc.
File name: NB Incl_9_17_09.xis; Summary
Al
APPENDIX A
AFFORDABLE HOUSING COST CALCULATIONS
Prepared by: Keyser Marston Associates, Inc.
File name: NB Ind _9_17_09. %Is; Afford Cost
vi�2—
APPENDIX A -TABLE 1
AFFORDABLE HOUSING COST CALCULATIONS
OWNERSHIP UNITS
INCLUSIONARY HOUSING ANALYSIS
NEWPORT BEACH, CALIFORNIA
I. Income Assumptions
Income Level
Number of Bedrooms
Benchmark Household Size
Household Income for Calculation Purposes 1
Affordable Housina Price Calculation
Household Income
Multiplier 2
Total Affordable Housing Price
Moderate
Three - Bedrooms
Six Person
$119,850
$119,850
3.0
$359,600
Based on the 2009 area median income published by the California Housing & Community Development
Department. The household size is set at the number of bedrooms in the unit multiplied times two.
2 Based on the methodology defined in the City's Housing Element.
Prepared by: Keyser Marston Associates, Inc.
File name: NB Incl 9 17_09.xls; Afford Cost
143
APPENDIX A -TABLE 2
AFFORDABLE HOUSING COST CALCULATIONS
RENTAL UNITS
INCLUSIONARY HOUSING ANALYSIS
NEWPORT BEACH, CALIFORNIA
1. Income Level
Law
II. One- Bedroom Units
$86,300
Benchmark Household Size
Two Person
Household Income for Calculation Purposes '
$59,500
% of Income Allotted to Housing Costs
30%
Annual Income Available for Housing Costs
$17,850
Monthly Income Available for Housing Costs
$1,488
Less: Utilities Allowance
47
Total Affordable Rent
$1,441
III. Two - Bedroom Units
Benchmark Household Size
Four Person
Household Income for Calculation Purposes '
$74,400
% of Income Allotted to Housing Costs
30%
Annual Income Available for Housing Costs
$22,320
Monthly Income Available for Housing Costs
$1,860
Less: Utilities Allowance
58
Total Affordable Rent
$1,802
IV. Three - Bedroom Units
Benchmark Household Size
Six Person
Household Income for Calculation Purposes '
$86,300
% of Income Allotted to Housing Costs
30%
Annual Income Available for Housing Costs
$25,890
Monthly Income Available for Housing Costs
$2,158
Less: Utilities Allowance
93
Total Affordable Rent
$2,065
1
Based on the 2009 household incomes published by the California Housing & Community Development
Department. The household size is set at the number of bedrooms in the unit multiplied times two.
Prepared by: Keyser Marston Associates, Inc.
File name: NB Incl_9_17_09.z1s; Afford Cost
1 `\
APPENDIX B
OWNERSHIP: BASELINE - MARKET RATE PROJECT: 32 UNITS (16 UNITS /ACRE)
Prepared by: Keyser Marston Associates, Inc.
File name: NB Incl_9_17_09.xis; Own Base
US
I.
APPENDIX B -TABLE 1
i
ESTIMATED CONSTRUCTION COSTS
OWNERSHIP: BASELINE - MARKET RATE PROJECT: 32 UNITS (16 UNITS /ACRE)
AFFORDABLE HOUSING CASE STUDIES
INCLUSIONARY HOUSING ANALYSIS
NEWPORT BEACH, CALIFORNIA
I. Direct Costs
Site Work Costs 87,120 Sf Land Area
Building Costs 1 67,952 /Sf GBA
Total Direct Costs
II. Indirect Costs
/Sf Land Area
General Indirect Costs 2
13% Direct Costs
Permits & Fees
32 Units
Insurance
32 Units
Developer Fee
3% Sales Revenues
Total Indirect Costs
III. Financing /Closing Costs
$20,000
Interest During Construction /Absorption 3
640,000
Loan Origination Fees 4 $35,380,000 Loan Amount
Closing & Sales; & Warranties 5
480,000
$40.00
/Sf Land Area
$3,485,000
$285
/Sf GBA
19,366,000
$22,851,000
$2,971,000
$20,000
/Unit
640,000
$15,000
/Unit
480,000
1,769,000
$5,885,000
2.5 Points 885,000
3,108,000
$5,860,000
Total Financing /Closing Costs $9,878,000
IV. ITotal Construction Costs 32 Units $1,206,000 /Unit $38,589,000
Average unit size equal to 2,124 square feet. GBA includes a 0% allowance for non - livable area.
2
Includes architecture, engineering & consulting; taxes, legal & accounting; marketing; and soft cost contingency.
3 Construction and absorption period interest set at a 10.2% blended return on debt and equity. Carrying costs are based on an 18
month development period. Absorption rate is set at 4 units /month.
4 Based on a 60% loan to value ratio.
5 Based on 5% of sales revenues plus $5,000 /unit for warranties costs.
Prepared by: Keyser Marston Associates, Inc.
File name: NB Ind _9_17_09.xts; Own_Base
�1 b
APPENDIX B -TABLE 2
PROJECTED SALES REVENUES
OWNERSHIP: BASELINE - MARKET RATE PROJECT: 32 UNITS (16 UNITS /ACRE)
AFFORDABLE HOUSING CASE STUDIES
INCLUSIONARY HOUSING ANALYSIS
! NEWPORT BEACH, CALIFORNIA
i
MARKET RATE SCENARIO'
I. ITotal Sales Revenues 32 Units @ $1,842,700 /Unit $58,966,000
1 Sales Price at $868 /sf of net livable area.
Prepared by: Keyser Marston Associates, Inc.
File name: NB Ind _9_17_09.xis; OWT_Base
APPENDIX B - TABLE 3
RESIDUAL LAND VALUE ANALYSIS
OWNERSHIP: BASELINE - MARKET RATE PROJECT: 32 UNITS (16 UNITS /ACRE)
AFFORDABLE HOUSING CASE STUDIES
INCLUSIONARY HOUSING ANALYSIS
NEWPORT BEACH, CALIFORNIA
I. Total Sales Revenues See APPENDIX B - TABLE 2 $58,966,000
II. Project Costs
Total Construction Costs See APPENDIX B - TABLE 1 $38,589,000
Threshold Developer Profit 15% of Total Construction Costs 5,788,000
Total Project Costs $44,377,000
III. IResidualLandValue 87,120 Sf Land Area $167 1Sf Land Area $14,589,000
Prepared by: Keyser Marston Associates, Inc.
File name: NB Incl_9_17 09.xls; Own Base
L4
APPENDIX C
OWNERSHIP: IMODERATE INCOME INCLUSIONARY: 32 UNITS (16 UNITS /ACRE)
Prepared by: Keyser Marston Associates, Inc.
File name: NB Incl 9_17 09.xis; Own Inc
4R
APPENDIX C - TABLE 1
ESTIMATED CONSTRUCTION COSTS
OWNERSHIP: (MODERATE INCOME INCLUSIONARY: 32 UNITS (16 UNITS /ACRE)
AFFORDABLE HOUSING CASE STUDIES
INCLUSIONARY HOUSING ANALYSIS
NEWPORT BEACH, CALIFORNIA
I. Direct Costs
Site Work Costs 87,120 Sf Land Area
Building Costs 1 67,952 /Sf GBA
Total Direct Costs
II. Indirect Costs
General Indirect Costs 2 13% Direct Costs
Permits & Fees 32 Units
Insurance 32 Units
Developer Fee 3
Total Indirect Costs
III. Financing /Closing Costs
Interest During Construction /Absorption 4
Loan Origination Fees 5 $35,380,000 Loan Amount
Closing & Sales; & Warranties 6
Total Financing /Closing Costs
$40.00 /Sf Land Area $3,485,000
$285 /Sf GBA 19,366,000
$2,971,000
$20,000 /Unit 640,000
$15,000 /Unit 480,000
1,769,000
$6,073,000
2.5 Points 885,000
2,738,000
$22,851,000
$5,860,000
$9,696,000
IV. Total Construction Costs 32 Units $1,200,000 /Unit $38,407,000
1 Average unit size equal to 2,124 square feet. GBA includes a 0% allowance for non - livable area.
z
Includes architecture, engineering & consulting; taxes, legal & accounting; marketing; and soft cost contingency.
3 See APPENDIX B - TABLE 2 - The Developer Fee is set equal to the amount calculated in the market rate scenario.
4 Construction and absorption period interest set at a 10.2% blended return on debt and equity. Carrying costs are based on an 18
month development period. Absorption rate is set at 4 units /month.
5 Based on a 60% loan to value ratio.
s Based on 5% of sales revenues plus $5,000 /unit for warranties costs.
Prepared by: Keyser Marston Associates, Inc.
File name: NB Incl_9_17_09.x1s; O Inc
S0
APPENDIX C -TABLE 2
PROJECTED SALES REVENUES
OWNERSHIP: IMODERATE INCOME INCLUSIONARY: 32 UNITS (16 UNITS /ACRE)
AFFORDABLE HOUSING CASE STUDIES
INCLUSIONARY HOUSING ANALYSIS
NEWPORT BEACH. CALIFORNIA
I. Market Rate Units 1 27 Units @ $1,842,700 /Unit $49,752,900
II. Moderate Income Units - 3 Bd z 5 Units @ $359,600 /Unit 1,798,000
III. ITotal Sales Revenues $51,550,900
1 Sales price at $868 /sf of net livable area for Three-Bedrooms and $0 /sf of net livable area for Five - Bedrooms.
2 See APPENDIX A -TABLE 1 for the affordable housing cost calculations.
Prepared by: Keyser Marston Associates, Inc.
File name: Na met _9_17_09.xls; Own_lnc
Sl
APPENDIX C - TABLE 3
LAND VALUE IMPACT ANALYSIS
OWNERSHIP: IMODERATE INCOME INCLUSIONARY: 32 UNITS (16 UNITS /ACRE)
AFFORDABLE HOUSING CASE STUDIES
INCLUSIONARY HOUSING ANALYSIS
NEWPORT BEACH, CALIFORNIA
I. Total Sales Revenues
II. Project Costs
Total Construction Costs
Land Cost'
Threshold Profit 2
Total Project Costs
III. Affordability Gap
IV. Effective Land Value
Land Cost
Affordability Gap
Effective Land Value
% Land Value Decrease
V. Supportable In -Lieu Fee
Total Fee
Fee/ Affordable Unit
Fee/ Market Rate Unit
See APPENDIX C - TABLE 2
See APPENDIX C - TABLE 1
See APPENDIX B - TABLE 3
See APPENDIX B - TABLE 3
87,120 Sf Land Area $84 /Sf Land Area
$51,550,900
38,407,000
14,589,000
5,788,000
$58,784,000
($7,233,000)
$14,589,000
(7,233,000)
$7,356,000
-50%
' Land Cost is based on the Residual Land Value generated by the market rate scenario in APPENDIX B.
2 Threshold Profit is based on the amount of profit generated by the market rate scenario in APPENDIX B.
Prepared by: Keyser Marston Associates, Inc.
File name: NS Incl_9_17_09.xis :Own Inc
$7,233,000
$1,446,600 /Unit
$267,900 /Unit
S2
APPENDIX D
RENTAL: BASELINE - MARKET RATE PROJECT: 36 APARTMENT UNITS (18 UNITS /ACRE)
Prepared by: Keyser Marston Associates, Inc.
File name: NB Incl 9 17 09.xis; Apt Base
53
APPENDIX D - TABLE 1
ESTIMATED CONSTRUCTION COSTS
RENTAL: BASELINE - MARKET RATE PROJECT: 36 APARTMENT UNITS (18 UNITS /ACRE)
AFFORDABLE HOUSING CASE STUDIES
INCLUSIONARY HOUSING ANALYSIS
NEWPORT BEACH, CALIFORNIA
II. Direct Costs 1
One - Bedroom 14 Units
Two - Bedrooms 14 Units
Three - Bedrooms 8 Units
Total Direct Costs
III. Indirect & Financing Costs 30% Direct Costs
$88,450 /Unit $1,238,000
$128,100 /Unit 1,793,000
$152,500 /Unit 1,220,000
$4,251,000
$1,275,000
V. ITotal Construction Costs 36 Units $153,500 /Unit $5,526,000
1 Direct Casts are based on Economic & Planning Systems' Construction Costs from "Inclusionary Housing In -Lieu Fee Study', dated
October 7. 2008.
Prepared by: Keyser Marston Associates, Inc.
File name: NB Incl 9 17 09.xis; Apt_Base
Sy
APPENDIX D - TABLE 2
STABILIZED NET OPERATING INCOME
RENTAL: BASELINE - MARKET RATE PROJECT: 36 APARTMENT UNITS (18 UNITS /ACRE)
AFFORDABLE HOUSING CASE STUDIES
INCLUSIONARY HOUSING ANALYSIS
NEWPORT BEACH. CALIFORNIA
I. Rent Income
One - Bedroom
14
Units @
$2,100
/Month
$352,800
Two - Bedrooms
14
Units @
$2,700
/Month
453,600
Three - Bedrooms
8
Units @
$3,000
/Month
288,000
Gross Income
$1,094,400
Vacancy & Collection Allowance
5%
Gross Income
(54,700)
Effective Gross Income
$1,039,700
11. Operating Expenses
General Operating Expenses
36
Units @
$4,200
/Unit
$151,200
Property Taxes 2
36
Units @
$3,680
/Unit
132,500
Total Operating Expenses
36
Units @
($7,880)
/Unit
($283,700)
III. Net Operating Income
$756,000
i Market rent= $2.83/sf for One - Bedroom; $2.53/sf for Two - Bedrooms; and $2.44/sf for Three - Bedrooms.
2 Based on the project value at a 6.0% capitalization rate and a 1.05% tax rate.
Prepared by: Keyser Marston Associates, Inc.
File name: NB Incl 9_17 09.xis; Apt Base
.S5-
APPENDIX D - TABLE 3
RESIDUAL LAND VALUE ANALYSIS
STABILIZED NET OPERATING INCOME
RENTAL: BASELINE - MARKET RATE PROJECT: 36 APARTMENT UNITS (18 UNITS /ACRE)
AFFORDABLE HOUSING CASE STUDIES
INCLUSIONARY HOUSING ANALYSIS
I. Warranted Private Investment
Net Operating Income See APPENDIX D - TABLE 2 $756,000
Threshold Return on Total Investment 1 6.6%
Total Warranted Investment $11,455,000
II. Total Construction Cost See APPENDIX D -TABLE 1 $5,526,000
III. lResidual Land Value 87,120 Sf Land Area $68 /Sf Land Area $5,929,000
Return on Total Investment is based on a 6.0% capitalization rate and 20% profit as a percentage of construction costs.
Prepared by: Keyser Marston Associates, Inc.
File name: NB Ind-9-17 09.xis; Apt Base
5
APPENDIX E
RENTAL: LOW INCOME INCLUSIONARY : 36 APARTMENT UNITS (18 UNITS /ACRE)
Prepared by: Keyser Marston Associates, Inc.
File name: NB Ind _9_17_09.xis; Apt_Low
S-1
APPENDIX E - TABLE 1
ESTIMATED CONSTRUCTION COSTS
RENTAL: LOW INCOME INCLUSIONARY : 36 APARTMENT UNITS (18 UNITS /ACRE)
AFFORDABLE HOUSING CASE STUDIES
INCLUSIONARY HOUSING ANALYSIS
NEWPORT BEACH, CALIFORNIA
I. Direct Costs 1
One - Bedroom
14 Units
Two - Bedrooms
14 Units
Three - Bedrooms
8 Units
Total Direct Costs
II. Indirect & Financing Costs
30% Direct Costs
$88,450 /Unit $1,238,000
$128,100 /Unit 1,793,000
$152,500 /Unit 1,220,000
$4,251,000
$1,275,000
III. ITotal Construction Costs 36 Units $153,500 /Unit $5,526,000
1
Construction Casts are based on Economic & Planning Systems' "Inclusionary Housing In -Lieu Fee Study ", dated October 7, 2008.
Prepared by: Keyser Marston Associates, Inc.
File name: NB Incl 9 17 09.x1s; Apt_Low
APPENDIX E - TABLE 2
STABILIZED NET OPERATING INCOME
RENTAL: LOW INCOME MCLUSIONARY : 36 APARTMENT UNITS (18 UNITS /ACRE)
AFFORDABLE HOUSING CASE STUDIES
INCLUSIONARY HOUSING ANALYSIS
NEWPORT BEACH, CALIFORNIA
I. Rent Income
Market Rent 1
2 Units @
One - Bedroom
12 Units @
Two - Bedrooms
12 Units @
Three - Bedrooms
7 Units @
Low Income 2
One - Bedroom
2 Units @
Two - Bedrooms
2 Units @
Three - Bedrooms
1 Unit @
Gross Income
Vacancy & Collection Allowance
5% Gross Income
Effective Gross Income
$2,100 /Month $302,400
$2,700 /Month 388,800
$3,000 /Month 252,000
$1,441 /Month $34,600
$1,802 /Month 43,200
$2,065 /Month 24,800
$1,045,800
(52,300)
$993,500
II. Ooeratina Expenses
General Operating Expenses 36 Units @ $4,200 /Unit $151,200
Property Taxes 3 36 Units @ $3,480 /Unit 125,300
Total Operating Expenses 36 Units @ ($7,680) /Unit ($276,500)
III. I Net Operating Income $717,000
1 Market rent = $2.83/sf for One - Bedroom; $2.53/sf for Two - Bedrooms; and $2.44/sf for Three - Bedrooms.
2 See APPENDIX A -TABLE 2 for the affordable housing cost calculations.
3 Based on the project value at a 6.0% capitalization rate and a 1.1% tax rate.
Prepared by: Keyser Marston Associates, Inc.
File name: NI3 Incl_9_17_09.xis; Apt Low
59
APPENDIX E -TABLE 3
LAND VALUE IMPACT ANALYSIS
RENTAL: LOW INCOME INCLUSIONARY : 36 APARTMENT UNITS (18 UNITS /ACRE)
AFFORDABLE HOUSING CASE STUDIES
INCLUSIONARY HOUSING ANALYSIS
NEWPORT BEACH, CALIFORNIA
I. Warranted Private Investment
Net Operating Income
See APPENDIX E - TABLE 2
$717,000
Threshold Return on Total Investment 1
6.60%
Total Warranted Investment
$10,864,000
II. Total Construction Cost
See APPENDIX E - TABLE 1
$5,526,000
III. Residual Land Value
$5,338,000
IV. Effective Land Value
Land Cost From Mkt Scenario
See APPENDIX D - TABLE 3
$5,929,000
Supportable Land Value 87,120
Sf Land Area $61 /Sf Land Area
$5,338,000
Decrease in Land Value
$591,000
% Land Value Decrease
10%
V. Supportable In -Lieu Fee
Total Fee
$591,000
Fee/ Affordable Unit
$118,200
/Unit
Fee/ Market Rate Unit in the Market Rate Ownership
Project 2
$18,500
/Unit
1 Threshold Return on Total Investment is based on a 6.0% capitalization rate and 20% profit as a percentage of construction costs.
2 The Market Rate Ownership Project includes 32 units.
Prepared by: Keyser Marston Associates, Inc.
File name: NB Inc/ 9 17 09.xis; Apt Low
/0O
(01
Attachment No. CC 4
Estimated Future RHNA Goals
G2
(13
Estimated Future RHNA Goals
Background (2006 Analysis)
Prior to the 2006 General Plan Update, Housing Program 2.2.1 of the City's Housing
Element required that an average of 20 percent of the units in a new residential
development be affordable to persons of very low -, low -, or moderate - income, or that an
equivalent in -lieu fee be paid. During the preparation of the 2006 General Plan Update,
the Planning Commission requested that staff estimate the City RHNA goals over the
25 -year horizon of the General Plan Land Use Element (estimated at 2,842 affordable
units), and relate the 25 -year RHNA goal to a percent of the new residential units
included in the draft Land Use Element (15,000 units). The analysis illustrated that to
achieve the estimated 25 -year RHNA goal, 19 percent of the total units would have to
be affordable; however, it was acknowledged at the time that this analysis used highly
speculative assumptions as the basis for projecting future RHNA goals. It was also
acknowledged that it is unrealistic to assume that the theoretical build -out capacity of
15,000 units would be realized. An alternative analysis was prepared using a realistic
development scenario of 7,129 new units (Table 3). Using this figure, it was estimated
that as many as 40 percent of the units would have to be affordable to meet our
estimated RHNA goals over the 25 -year horizon. Although the analysis at the time
indicated that the 20 percent inclusionary requirement was reasonable, to strike a
proper balance between promoting affordable housing construction and not impeding
market rate housing construction, Housing Program 2.2.1 was revised reducing the
inclusionary requirement to 15 percent. Included in deliberations as to the appropriate
inclusionary requirement was the fact that Housing Program, 2.2.1 was only one
component of an overall strategy for meeting RHNA goals.
Revised 2010 Analysis
Since 2006, the City has received new RHNA goals for the 2006 -2014 planning period
that are substantially higher than what was previously anticipated. Also, the number of
new housing units that was ultimately approved in the 2006 General Plan Update was
less than what was originally proposed. Therefore, staff has updated the 2006 analysis
by revising the estimated RHNA goals for the remaining 21 years of the General Plan
horizon (using current and past RHNA goals) and relating that goal to the current
realistic development yield. The results of the updated analysis illustrate that to achieve
the revised RHNA goal (2,212 affordable units), 47 percent of the total realistic
development yield (4,675 units) would have to be affordable.
Calculations
The analysis relies on the assumption that the City's future RHNA and income
distributions will remain similar to the combined 2000 -2005 and 2006 -2014 planning
periods. The following tables provide the calculations for the estimated RHNA goals
over the General Plan horizon, realistic development yields, and affordable
percentages.
(,N
2006 -2014
389
319
359
702
1769
60%
(includes Newport
ners e
=13
=5
Total 1 -year RHNA Goal
245
Coast
284
Newport Coast
x21
x25
21 -Year RHNA Goal
2000 -2005
25 -Year RHNA Goal
7,105
Affordable Percent
x.41
Affordable Percent
x.40
Newport Beach
86
53
83
254
476
RHNA Goal
Newport Coast
95
0
0
850
945
Total
181
53
83
1104
1421
22%
Total
570
372
442
1806
3190
43%
Average
41%
Approximately 41 % of the total housing need is for very low -, low- and moderate - income
households.
2010 Estimate
2,200
2006 Estimate
3,300
Combined 13 -year RHNA Goal
3190
Total 5 -Year RHNA Goal
1,421
ners e
=13
=5
Total 1 -year RHNA Goal
245
Total 1 -year RHNA Goal
284
Newport Coast
x21
x25
21 -Year RHNA Goal
5145
25 -Year RHNA Goal
7,105
Affordable Percent
x.41
Affordable Percent
x.40
Estimated Affordable
2,212
Estimated Affordable
2,842
RHNA Goal
RHNA Goal
"Area
2,200
Formula
3,300
2010 Analysis
1,375
2006 Analysis
1,375
ners e
300
454
Newport Center
450
600
Newport Coast
250
400
West Newport Mesa
100
1000
Total Likely Units
4,675
7,129
61!�_
Formula
Affordable RHNA Goal / Realistic Development Yield = Affordable
Percent
2010 Analysis
2,212/4,675= 0.47 47%
2006 Analysis
2,842/7,129= 0.40 40%
61!�_
Attachment No. CC 5
HCD Letter
(�6
�1'1
STATF OF AI IEQRNIA -RI ISINFSS TRANSPORTATION ANQ HQI ISINQ AQFNCV ARN01 ❑ SCHWAR]FNRGGER. Gnvemn
DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT
OFFICE OF THE DIRECTOR
1800 Third Street, Room, 450 y ,a
Sacramento, CA 95811 1
(916) 4454775
Fax (916) 324-5107
w .hcd.ca.00v
August 26, 2009
Mr. Stephen D. Madison
Executive Vice President
Building Industry Association
of Central California
1401 F Street, Suite 200
Modesto, CA 95354
Dear Mr. Madison:
Thank you for your recent inquiry regarding inclusionary ordinances. The Department is
pleased to provide information on the requirements of State law and its policy. For your
information, neither State law nor Department policy requires the adoption of any local
inclusionary ordinance in order to secure approval of a jurisdiction's housing element.
State law does require incentives for voluntary inclusionary development (State density
bonus law), pronounces housing element law neutral relative to enactment of mandatory
local inclusionary provisions, and circumscribes the responsibilities of local governments
which do enact inclusionary policies. The relevant sections of the Government Code are
described below.
Government Code Section 65915 -17, State density bonus law, requires local governments
to make incentives available to residential developers that voluntarily propose to reserve
specified portions of a proposed development for occupancy by low- or moderate - income
households, and indicates that local governments are not to undermine implementation of
this provision. Every local government is required to adopt an ordinance establishing how
it will implement State density bonus law, including setting forth the incentives the local
government will provide.
State housing element law requires jurisdictions to plan for their existing and projected
housing needs, identify adequate sites to accommodate their share of the regional housing
need, and, among other things, analyze local policies, regulations or requirements that
have the potential to constrain the development, maintenance or improvement of housing
for all income level. The law also requires programs to "assist in the development of
adequate housing to meet the needs of low- and moderate - income households ".
Many local governments adopt mandatory inclusionary programs as one component of a
comprehensive affordable housing strategy and have demonstrated success in increasing
the supply of housing affordable to low- and moderate - income households. However,
some inclusionary programs may have the potential to negatively impact the overall
development of housing. As a result, local governments must analyze mandatory
inclusionary policies as potential governmental constraints on housing production when
adopting or updating their housing elements, in the same way that other land -use
regulations must be evaluated as potential constraints.
�R
Mr. Stephen D. Madison
Page 2
For example, local governments must analyze whether inclusionary programs result in
cost shifting where the cost of subsidizing the affordable units is underwritten by the
purchasers of market -rate units in the form of higher prices. Such increases can be a
barrier to some potential homebuyers who already struggle to qualify for a mortgage, and
earn too much to qualify for government assistance. Local governments must also
analyze their inclusionary policies to evaluate whether sufficient regulatory and financial
incentives are offered to facilitate compliance with the requirements.
In addition, it is important to note that the adoption of mandatory inclusionary zoning
programs do not address housing element adequate sites requirements to accommodate
the regional housing need for lower- income households. Inclusionary programs are not a
substitute for designating sufficient sites with appropriate zoning, densities and
development standards as required by Government Code Section 65583(c)(1).
Finally, Government Code Section 65589.8 specifies that nothing in housing element law
shall be construed to expand or contract the authority of a local government to adopt an
ordinance, charter amendment, or policy requiring that any housing development contain a
fixed percentage of affordable housing units. It further states that a local government
which adopts such a requirement shall permit a developer to satisfy all or a portion of that
requirement by constructing rental housing at affordable monthly rents, as determined by
the local government.
California has been for many years in the midst of a severe housing crisis; there are
simply not enough homes for the number of residents who need them. Continued
undersupply of housing threatens the State's economic recovery, its environment, and the
quality of life for all residents. Effectively addressing this crisis demands the involvement
and cooperation of all levels of government and the private sector. Both the public and
private sector must reexamine existing policies, programs and develop new strategies to
ensure they operate most effectively and provide an adequate housing supply for all
Californians. The Department is committed to working with its public and private sector
partners in this effort for the benefit of California's growing population.
If you need additional information, please call me at (916) 445-4775 or Cathy Creswell,
Deputy Director, Division of Housing Policy Development, at (916) 323 -3177.
Sincerely,
*-li5l )Z-----
Lynn L. Jacobs
Director
a
Attachment No. CC 6
BIA Letter
-7o
-7(
March 12, 2010
via US. Mail and Electronic Mail
David R. Hunt, Esq.
City Attorney
City of Newport Beach
3300 Newport Blvd.
Newport Beach, CA 92663
Re: Building Industry Association Comments on Proposed
Inclusionary Housing Requirements
Dear Mr. Hunt,
As the Vice President and General Counsel of the Building Industry Association of
Southern California, Inc., I am writing on behalf of its Orange County Chapter
(`BIA/OC ") to express our concerns with the city's proposed Inclusionary Housing
Proposed Ordinance (the "Proposed Ordinance "). Specifically, the Proposed
Ordinance may conflict with California law, which is becoming increasingly clear
and prohibitive of undue local government impositions on those who develop or
redevelop property.
BIA/OC and its members are among the most steadfast supporters of housing
availability in general, and are proponents of appropriate measures at both the State
and local levels to increase the availability of housing that is affordable to all
California residents and to persons at all levels of income. BIA/OC, its members
and affiliates actively support legislation and local policies that encourage the
provision of housing, or remove or reduce barriers to the construction of affordable
housing. On the other hand, BIA/OC strongly opposes policies that unduly inhibit
development of affordable housing or that may unlawfully burden its members.
Recent decisions by the California Courts of Appeal have invalidated local
inclusionary housing requirements similar to those included in both the Proposed
Ordinance and the City's current inclusionary housing policy. Specifically, in light
of the appellate court decisions in Building Industry Assn v. City of Patterson (2009)
171 Cal.App.4d' 886, and in Palmer /Sixth Street Associates v. City of Los Angeles
(2009) 175 Cal.App.4 h 1396, it may be appropriate or necessary for the City to both
(i) forgo the Proposed Ordinance, and (ii) review and reconsider its current
inclusionary housing policy to determine whether the latter is legally valid and
compliant with California law, as clarified by the opinions in these cases.
The recent case law on affordable housing makes clear the following key points:
1. A CITY MUST SHOW "INCLUSIONARY HOUSING" EXACTIONS
OR FEES TO BE REASONABLY RELATED TO "DELETERIOUS
IMPACTS OF NEW DEVELOPMENT" — SIMILAR TO OTHER
DEVELOPMENT FEES AND EXACTIONS
An Affiliate of the National Association of Home Builders and the California Building Industry Association
Building
Industry
Association
of Southern
California
17744 Sky Park Circle, Suite 170
Irvine, Cahforrua 92614
949.553.9500
fax: 949.769.8942/Exec. Office
fax: 949.769.8943 /BLS /Mbrship.
http: //w .biasc.org
--7 Z
David R. Hunt, Esq.
March 12, 2010
Page 2 of 6
In Building Industry Association et al. v. City of Patterson, which was decided in March
2009, the Court of Appeal held that the imposition of neither affordable housing mandates
nor fees in lieu thereof was legally justified, because the city attempted to make such an
imposition without making an evidentiary showing that the mandate or in lieu fee was
"reasonably related" to, and did not exceed, offsetting the affordable housing needs caused
by the new development.
Specifically, in Patterson, the unanimous Court of Appeal invalidated the City's affordable
housing in lieu fees (which were to be imposed at the rate of nearly $21,000 per new home).
The amount of the in lieu fee was based on the assumption that the city's need for additional
affordable housing units (those identified in its regional housing needs analysis) should be
met exclusively by saddling new and prospective development — without any showing of
exactly how much, if any, of such the societal needs for affordable housing were in fact
caused by the new and prospective market -rate residential development (e.g., as opposed to
reflecting an existing deficiencies of affordable housing or a deficiency caused by other
factors).
In Patterson, the developer had a development agreement with the City. In the agreement,
the developer had contracted to pay the city its revised, generally - applicable affordable
housing in lieu fees (which were not yet known) — provided that the revised fees were
"reasonably justified." The Court of Appeal held that this contractual provision necessarily
implied that the fees would need to "conform to existing law." The Court also held that
"existing law" in California required that the City must justify its affordable housing in lieu
fees in conformity with "the legal standards generally applicable to development fees" --
including the "reasonable relationship" requirement as stated in the Mitigation Fee Act (at
Government Code section 66001(b)), and as described by the Supreme Court in San Remo
Hotel v. City & County of San Francisco (2002) 27 Cal.4a' 643. Importantly, San Remo
Hotel reflects the California Supreme Court's most recent discussion of the standard of
review that California courts should use when reviewing "legislatively- adopted"
development fees of all types (as opposed to ad hoc exactions). In San Remo Hotel, the
Supreme Court had explained that, even under the most deferential standard of judicial
review, a fee "is not `reasonably justified' ... unless there is a reasonable relationship
between the amount of the fee, ... and `the deleterious public impact of the development. "
The City of Patterson had amended its housing element and changed its affordable housing
policy to an "inclusionary" approach, requiring 15% of new homes be set aside as
"affordable" units, or pay in lieu fees. The City provided no evidence, however, to relate its
purported need for affordable housing to any particular impacts of new residential
development in the City, nor to any identified needs for housing caused by the particular
development project. The Court explained:
The evidence presented in this case reveals that the amount of the fee was not
calculated based on the cost of City's affordable housing need attributable to
the [the development at issue] .... Neither was it based on the affordable
housing need attributable to the ... [projected future development in the City].
David R. Hunt, Esq.
March 12, 2010
Page 3 of 6
The Patterson Court thus rejected the City of Patterson's method for setting the in lieu
affordable housing fees because they were not based on any evidence demonstrating the
reasonable relationship between the amount of the fee and the costs related to addressing any
deleterious impacts on the City's needs for affordable housing caused by the particular
project, or reasonably attributable to new residential development in general:
The Patterson opinion is seemingly the first published California appellate court opinion that
directly addresses affordable housing fees or exactions "on the merits" and how they must be
calculated and justified. Properly applied to the issues at and in the City of Newport Beach,
Patterson has several implications for inclusionary housing policies and exactions
concerning mandatory set - asides and /or in lieu fees, including the following:
A. Requirements for Dedication or Set -Aside of Affordable Housing Are
"Exactions" and Are Subject to Constitutional and Evidentiary Requirements: Prior to
the Patterson case, no published California appellate decision had squarely addressed what
kind of evidentiary justification (if any) is required in order to legally mandate "affordable
housing" units or exact in lieu fees from new development. The holding is that affordable
housing policies will be treated like other types of development exactions; and thus they must
be shown — at a minimum — to be "reasonably related" to the impacts or community needs
caused by new development. Although the legal standard applied is generally considered a
very deferential standard (the "reasonable relationship" test), unfairly burdening new and
prospective development and redevelopment with the burden of addressing a broader need
for affordable housing does not meet the legal test.
B. Legal Standards Generally Applicable to Development Fees Apply Even If the
Fee Is Not Imposed to Finance "Public" Facilities: The Patterson decision holds that non-
traditional or quasi- optional fees or mandates imposed on new development, such as
"affordable housing in lieu fees," are governed by the legal standards applicable to other
types of development fees and mandates for financing public facilities. The trial court had
noted that these fees were to be used for privately -owned affordable housing, rather than for
publicly -owned facilities, but the Court of Appeal held that did not lessen the City's burden
to factually justify the exactions.
C. Even "Legislatively- Enacted" Fees — Those Which Are Not Ad Hoc Exactions —
Must Have Sufficient Evidentiary Justification: Patterson recognized that current case
law holds that legislatively- enacted fees of broad application — as distinguished from project -
specific (ad hoc) or discretionary exactions — are generally not subject to the relatively
"heightened scrutiny" of Nollan and Dolan (a "rough proportionality" standard). Instead,
the Court in Patterson explained that even generally applicable "formulaic, legislatively -
mandated" fees or exactions (like an affordable housing ordinance) must be supported by
evidence and analysis demonstrating a "reasonable relationship" to an adverse public impact
or resulting cost that is shown to be caused by new development. Patterson quoted the
Supreme Court's San Remo Hotel decision: "As a matter of both statutory and constitutional
law, such fees must bear a reasonable relationship, in both intended use and amount, to the
deleterious public impact of the development."
--7LJ
David R. Hunt, Esq.
March 12, 2010
Page 4 of 6
D. Patterson Calls Into Questions the Earlier Napa Opinion — and Other
Assumptions About Affordable Housing Exactions: The Court of Appeal in Patterson
expressly questioned the continuing relevance of the one older case that had rejected a
challenge to a city's inclusionary ordinance -- HBANC v. City of Napa (2001). That case was
dismissed at an early stage (on the pleadings), without a careful review of the merits of the
ordinance, because the court held that a "facial" challenge to the ordinance was not "ripe."
Although unnecessary to the court's decision, the Napa court's opinion also included some
observations that were complimentary of policies reasonably aimed at promoting "affordable
housing," which were viewed by some as a broad endorsement for the "inclusionary zoning"
or "inclusionary housing" approach.
The 2001 Napa opinion had been viewed by some advocates of mandatory, privately -
subsidized affordable housing as "validating" inclusionary programs on their merits, despite
the narrow procedural basis of the decision. The Patterson opinion, however, in contrast to
the Napa opinion, involved a careful review of the evidence concerning the City of
Patterson's affordability mandate and in lieu fee option, , and held that such mandates and
fees must be based on an evidentiary showing that new development causes a need for
additional affordable housing in a community. Importantly, the Court in Patterson noted that
Napa "was decided about 9 months before the Supreme Court decided San Remo Hotel" —
implying that the Napa opinion is suspect because it was issued without the benefit of the
California Supreme Court's reasoning concerning the "reasonable relationship" standard.
E. "Affordable Housing" Exactions Require a "Nexus" -- Patterson also requires
that local governments demonstrate a reasonable nexus between new market -rate
development and the imposition of mandatory affordable housing set - asides or fees in lieu
thereof. Following Patterson, such mandatory set - asides or in lieu fees must be justified by
evidence demonstrating a reasonable relationship between development and affordable
housing needs, rather than on the basis of arbitrarily selected set -aside percentages, or needs
assessed with a view to the community as a whole. As a consequence, many legal
commentators and attorneys have concluded that inclusionary zoning programs need to be
reviewed, re- assessed and substantially changed.
There are, however, great difficulties inherent in demonstrating any "reasonable relationship"
or nexus between (i) any approval of market -rate housing development or redevelopment,
and (ii) the need for more affordable housing. More thoughtful commentators have long
been understood and appreciated the illogic of inclusionary zoning. (See, e.g., Ellickson, The
Irony ofinclusionary Zoning (1981).) The likely significance of the Patterson opinion's
demand for evidence demonstrating the reasonable relationship was emphasized in a
commentary by two prominent land use scholars, published in the State Bar's REAL
PROPERTY LAw REPORTER (vol. 32, May 2009):
Prof. Roger Bernhardt: The great issue for me is, how can a city show "the
deleterious public impact" on a housing development in terms of creating a
need for affordable housing? One can see the linkage between the industrial
or commercial development and affordable housing, but where is the nexus
when the new development is residential instead?
-?S
David R. Hunt, Esq.
March 12, 2010
Page 5 of 6
Prof. David Callies: That's the point: The city can't show a deleterious impact
on affordable housing resulting from a residential development. There isn't
any. I think these mechanisms won't hold up in court anywhere, and
following the Patterson decision and the Supreme Court's Lingle decision, I
don't think they're constitutional in California either.
Similar views have been expressed by public agency attorneys and by legal counsel for
proponents of inclusionary housing mandates, regarding the need for cities to reconsider their
approach to such housing exactions.
2. THE COSTA - HAWKINS ACT PREEMPTS LOCAL ATTEMPTS TO
REGULATE THE INITIAL RENTAL RATES FOR HOUSING THROUGH
INCLUSIONARY HOUSING MANDATES
In July 2009, another Court of Appeal opinion held that large portions of the City of Los
Angeles' inclusionary housing program were preempted by State law and were invalid —
Palmer /Sixth Street Properties, L.P., et al., v. City of Los Angeles. Specifically, the Palmer
court concluded that the city's attempt to impose its inclusionary housing restrictions on the
rents to be charged on new housing conflicts with, and is preempted by, the statewide rent
control provisions of the Costa- Hawkins Rental Housing Act.
The Costa - Hawkins Act provides in relevant part that all residential landlords have the legal
right to "establish the initial rental rate for a dwelling or unit." Civ. Code §1954.53(a). The
City of Los Angeles' inclusionary housing ordinance conflicted with the State law; and the
fact that its ordinance gave developers the "option" of paying a fee (in lieu of setting aside
rent - restricted units) did not save the from invalidation by preemption. The Palmer court
held that the in lieu fee option was "inextricably intertwined" with the City's preempted
affordable housing rental rate requirements. Specifically, the ordinance confronted
developers with two supposed "options" — but both options effectively conflicted with State
law because neither would allow the developer or owner to establish the initial rental rate for
the units.
Importantly, although the Palmer opinion focused on inclusionary housing as it relates to rent
control, the opinion logically has similar ramifications concerning inclusionary housing
mandates aimed at for -sale housing as well. Indeed, there is seemingly no legitimate
governmental interest in dictating that newly developed or redeveloped property may not be
rented — pursuant to the Costa - Hawkins Act, at market rates — and must instead be sold.
Given that, it seems that for -sale inclusionary housing schemes are called into question as
well by the Palmer opinion.
3. TAKEN TOGETHER, THE PATTERSON AND PALMER OPINIONS
INDICATE THE NEED TO REMOVE THE CITY'S PRESENT POLICY AND
FORGO THE PROPOSED ORDINANCE
The net result of these two recent appellate court opinions is this: Any requirements imposed
on new development or redevelopment to provide some portion or percentage of housing
units in a development as "affordable" units to be sold or rented to selected income - restricted
7h
David R. Hunt, Esq.
March 12, 2010
Page 6 of 6
occupants at below- market terms (or be required to pay fees in lieu of providing such
housing units) will be treated like any other "exactions" and must be justified by evidence
demonstrating a reasonable relationship between the impacts caused by the new development
and the amount of affordable housing or in lieu fees exacted from the development.
Therefore, BIA/OC requests that the City of Newport Beach reject the Proposed Ordinance,
and consider rescinding its existing policy in light of recent decisions.
BIA/OC and its members look forward to working constructively with the City to provide
housing opportunities to all, and to removing barriers to housing supply and affordability. To
this end, BIA/SC would welcome additional opportunities to provide input and otherwise
help to assure that City ordinances reflect sound and lawful policies.
Thank you for your consideration.
Sincerely,
Andrew R. Henderson
Vice President and General Counsel
Building Industry Association of Southern California, Inc.
on behalf of its Orange County Chapter
cc: City Council Members
David Kiff, City Manager
David Lepo, City Planning Director
Cathy Creswell, Dep. Director, California HCD
Kristine Thalman, CEO, BIA/OC
Bryan Starr, BIA/OC
-1 -1
May 11, 2010
[SENT VIA EMAIL]
Honorable Mayor Keith Curry and Council Members
City of Newport Beach
3300 Newport Blvd.
Newport Beach, CA 92663
"RECEIVED AFTER AGENDA
PRINTED' -WS 5-11'10
Re: Building Industry Association Comments on Proposed Inclusionary
Housing Ordinance and Proposed Adoption of In -Lieu Housing Fee
Honorable Mayor and City Council Members:
I am writing on behalf of the Building Industry Association of Southern California,
Inc., Orange County Chapter ( "BWOC ") to address key deficiencies in the City of
Newport Beach's ( "City") proposed Inclusionary Housing Ordinance ( "Proposed
Ordinance"). We raised concerns related to these deficiencies in our letter to the City
Attorney dated March 12, 2010. As we did In our previous letter, we now
respectfully request that the City reject the Proposed Ordinance and delay any
further action until a decision has been rendered in litigation related to
inclusionary mandates, specifically CBIA v. San Jose.
The key deficiencies relate to the Proposed Ordinance's conflict with two recent
California Court of Appeal decisions regarding exaction law and affordable rental
units.
I. The Proposed Ordinance Fails to Show a Reasonable Relationship
Between the Affordable Housing Requirements and the Impacts of
Residential Development in the City
In Building Industry Association of Central California v. City of Patterson, the
California Court of Appeal ruled that any requirement for a project to set aside units
for affordable housing or pay in -lieu fees to subsidize affordable housing (collectively,
"affordable housing requirements ") must be reasonably related to the project's
impacts.' Citywide need for affordable housing does not provide a reasonable
relationship to justify imposing affordable housing requirements on a project.]
Patterson is consistent with the requirement under California law that an agency
document a reasonable relationship between any exaction imposed on a project and
that project's impacts.3
The Proposed Ordinance and its supporting documentation, including the Keyser
Marston Associates Analysis of Inclusionary Housing Options, fail to document a
reasonable relationship between the affordable housing requirements and the impacts;
Bldg. Indus. Assn of Cent. Cal. v. City of Patterson, 171 Cal. App. 4th 886,
(2009).
Id. at 898 -99.
See, e.g., Ehrlich a City of Culver City, 12 Cal. 4th 854, 860 (1996).
Orange County
Chapter
sdwuts W&—y ' -- --' -'-
of5uah. Caldaai,
17744 Sky Park Crrck
suitc no
Irvine, Califamia 97614
949.553.9590
fax 949.553.9507
11w .bieoc.coenfl
BE. Aewbo gcacaadf
Your ud�y', comprd miye Wine Fade
to dew komn
PIEACfM
owE a.rtni,r
an00R4aD n0,l9
yxe msseoo,r
Pru r�wacez
nude moan
Y°yaY Pap19Blr
ucnuiuwvw
o.na�wes
P1al! IDeESNH M86
sFnaTary
w� au,noe
$,a1OY1�PaflElaaa:i
a,E�An Pti9T rta9aoon
P/aa,oeaesa,
auvn easmu wo
a„Pa m,vuc,vmwu.,
�yama
Dame w'sr ouaeaq
A540f.L.lE NGE PaP9oa'rrt
eavue..F,sere
a ouioe, un
e4 T,
dal wan
e�rw9oDmwOewaae,
,Eeaen.al..a9e
URE3�
was,.E n«i4rae
o
= m
M
— a
of residential development in the City. Instead, the Proposed Ordinance and supporting
documentation base the affordable housing requirements on the goal of fulfilling
citywide need for affordable housing without creating an unreasonable constraint on
residential development.
Patterson and related California law on exactions prohibit this approach, and the
Proposed Ordinance is legally deficient. BIA/OC therefore urges the City to reject the
Proposed Ordinance and to conduct additional analysis that identifies the impacts of
residential development in the City and the affordable housing requirements that would
be reasonably related to those impacts.
II. The Proposed Ordinance Impermissibly Applies Rental Rate Restrictions to
Rented Condominium Units Covered by the Costa - Hawkins Rental
Housing Act
The California Court of Appeal recently confirmed in Palmer /Sixth Street Properties,
L.P. v. City of Los Angeles the Costa - Hawkins Rental Housing Act ( "Costa- Hawkins
Act ") preempts inclusionary housing ordinances that require provision of affordable
rental units or in -lieu fees to subsidize affordable rental units (collectively, "rental rate
restrictions ") 4 The Costa- Hawkins Act establishes that despite any other provision of
law, such as a local rent control law, a property owner can establish the initial and
subsequent rent on any unit that "is alienable separate from the title to any other
dwelling unit or is a subdivided interest in a subdivision.s5 The units covered by the
Costa - Hawkins Act include rented condominium units, as long as the condominium
units have been sold separately by the subdivider to a bona fide purchaser for value and
certain situations regarding termination of preceding tenancies do not apply.6
Accordingly, the Costa- Hawkins Act's preemption of rental rate restrictions covers
rented condominium units, as long as the condominium units have been sold separately
by the subdivider to a bona fide purchaser for value and certain situations regarding
termination of preceding tenancies do not apply. The Proposed Ordinance applies
rental rate restrictions to all residential projects, including rented condominium projects,
for which a parcel map or a tract map is proposed. The Proposed Ordinance conflicts
with Palmer by failing to recognize the Costa - Hawkins Act's preemption of rental rate
restrictions for certain rented condominium units. Revisions to the Proposed Ordinance
are necessary to exempt rented condominium units covered by the Costa- Hawkins Act
Palmer /Sixth Street Properties, L.P. v City of LA., 175 Cal. App. 4th 1396, 1411
(2009).
Cal. Civ. Code § 1954.52(a)(3)(A). The specifications for subdivisions covered
by the Costa- Hawkins Act appear in California Business and Professions Code
section 11004.5(b), (d), and (f).
Cal. Civ. Code § 1954.52(a)(3)(A) -(B); see also City of W. Hollywood a 1112
Invs. Co., 105 Cal. App. 4th 1134, 1144 -45 (2003). The Costa- Hawkins Act
does not apply to rented condominium units when the preceding tenancy has
been terminated by the owner by notice under California Civil Code section
1946.1 or has been terminated on a change in the terms of the tenancy noticed
under California Civil Code section 827. See Cal. Civ. Code §
1954.52(a)(3)(13)(i).
and to confirm that affordable housing requirements apply only to owner - occupied
units, rather than to all residential projects for which a parcel map or a tract map is
proposed.
In sum, key deficiencies in the Proposed Ordinance relate to: (1) failure to document a
reasonable relationship between the affordable housing requirements and the impacts of
residential development in the City and (2) impermissible rental rate restrictions on
rented condominium units covered by the Costa - Hawkins Act. Given these
deficiencies, BIA/OC respectfully requests that the City reject the Proposed
Ordinance.
Thank you for your consideration of our concerns, and please let us know if you would
like additional information. We look forward to working with the City on developing a
legally sound inclusionary housing ordinance that provides a wide range of housing
options to the City's residents.
Sincerely,
Kristine E. Thalman
Chief Executive Officer
cc: Leonie Mulvihill, Acting City Attorney, City of Newport Beach
David Kiff, City Manager, City of Newport Beach
David Lepo, City Planning Director, City of Newport Beach
Cathy Creswell, Deputy Director, California Department of Housing and
Community Development
Andrew Henderson, Vice President and General Counsel, Building Industry
Association of Southern California, Inc.
Bryan Starr, Deputy Executive Officer, Building Industry Association of
Southern California, Orange County Chapter
Authorized to Publish Advertisements of all kinds including public ranices he
Decree of the Superior Court irl Orange County. California Number A 6_' 11_
September 29, 1961, and A -24831 June 11. 1963 R EC E NE D
PROOF OF PUBLICATION n YAY
STATE OF CALIFORNIA)
ss.
COUNTY OF ORANGE )
I am a Citizen of the United States and a
resident of the County aforesaid: I am
over the age of eighteen years, and not a
party to or interested in the below entitled
matter. I am a principal clerk of the
NEWPORT BEACH - COSTA MESA
DAILY PILOT, a newspaper of general
circulation, printed and published in the
City of Costa Mesa, County of Orange.
State of California. and that attached
Notice is a true and complete copy as
was printed and published on the
following dates:
May 1, 2010
I declare, under penalty of perjury, that
the foregoing is true and correct.
Executed on May 5, 2010 at
Costa Mesa, California.
�tZO
Signatur
0 11.11 97 01
11f
'Y CLEFK
'CRT BEX,'H
PUBLIC NOTICE
ORDINANCE SUNII1fARY
the Qty Council of the City of Newport
Beach. Catifonva, introduced an
Ordinance entitled ordinance no 20109
ORDINANCE OF THE CITY COUNCIL
THE CITY OF NEWPORT BEACH
ORPORATING A NEW INCLUSIONARY
]SING CHAPTER (CHAPTER 19.54)
O TITLE 19 OF THE NEWPORT BEACH
41CIPAL CODE
This ordinance x,.Old add a new chapter that
'implement, Housing Program 2 2 l of the Citde
Housing Element which requires that an average
of ISR of unit, in a new residential development
he affordable to persons of very low, low, or
moderate -mmme, or that an equn•akot in
lieu fee be paid This program was adopted to
promote construction of affordable dweBinR units
necessary to meet the Ymr share' reyurement
set by the Regional Housing Needs Assessment
developed by the Southern Cali ornu Association
of Government,
Developers of residential subd vO"O_ wdl !i<
required to facilitate production of .111. able
unite in numbers equal to 15 percent of the
number of forade market rate uruts produced.
Affordable, for -sale units will bs required m he
said at prices affordable for moderate - income
households Ifasubdivramnproponentchoeaesto
provide affordable rental units, the umta shall be
.rented at a rate affordable for very -low or low.'''
income households In all canes. the offordoblci
units shall be legally restricted to occupancy by.
and affordable in. household, of the income levels
for which the affordable amts were designated
for a minimum duration of 30 yeam In order!
to prmnde flexibility to developers and reduce
'the burden that this Chapter may place on new I
residential subdivision prolecu, alternatives to
on-sne construction requirements of the Chapter
base been included for aflame eonstrucUan, off
site renovation, land dedication. and son in lieu
housing fee
An Affordable Housing Implementation
Plan iAHIP', will be required to he processed
,concurrently with the tentative tract map or
parcel map application and shall be reviewed and
appem•ed by the applicable review authority for
such maps The AHIP will provide a descripuan
of the project and the method of satufymg the -i
.affordable housing requirement The AHIP
will also provide a mean to gran[ fievbdrty in
satisfying the affordability requirement of they
Chapter
All funds received through the payment of nn.
lieu housing fees will be required to be deposited
into an Affordable Housing Fund The Fund,
shall be used in compliance with the General
Plan Housing Element and the' Chapter in
'construct, rehabilitate. or subsidize affordable
housing or asset other governmental entities,
Private organi"Umis or individuals in provide or
Ipreserve affordable houaing
ll any section. subsection, sentence. clauav or
phrue of this ordinance u. for any reason. held
b bs invalid or unconstitutional, such decision
shall not affect the validity or constitutionality
of the remaining portion- of this ordinance
The City Council hereby declares that it would
have passed this ordinance, and each section,
subsection, clause or phrase hereof. irrespective
of the fact that any one or more seanom,
subaections, sentences. clauses, and phrases be
'declared unconstnutiorud
71s Msror shall sign and the City Clerk shall
attest to the passage of this ordiruixc. The City
Clerk shall cause the same m bs published once in
the official newspaper of the Qty. and it shall be
effective thuty Mi days after ita adopuan
Dated this 28- day of April, 2010
(.loin 1 Brown, City Clerk
City. of Newport Beach__
rd