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HomeMy WebLinkAbout6/8/2022 Item 5a, Cohen – Staff Agenda CorrespondenceCity of San Luis Obispo, Council Memorandum City of San Luis Obispo Planning Commission Agenda Correspondence DATE: June 8, 2022 TO: Chair and Commissioners FROM: Rachel Cohen, Senior Planner Tyler Corey, Deputy Community Development Director SUBJECT: Item #5a - REPEAL AND REPLACE THE CITY OF SAN LUIS OBISPO’S MUNICIPAL CODE CHAPTER 17.138 (INCLUSIONARY HOUSING REQUIREMENTS) TO UPDATE REGULATIONS FOR CONSISTENCY WITH THE 6TH CYCLE HOUSING ELEMENT The SLO Chamber of Commerce submitted an agenda correspondence letter for the June 8, 2022, Planning Commission meeting regarding comments on the proposed Inclusionary Housing Ordinance Update. Staff has reviewed the comments and has prepared responses to key issue areas: 1. Nexus Study – The SLO Chamber of Commerce letter expresses concerns related to the context of the Nexus Study. The letter highlights the following concerns related to the Nexus Study; a. Proposed development will be serving a different market than the time studied. b. We cannot go back in time to know what would exist today if tools like 2A didn't exist. c. The feasibility study does not consider the burden of other local factors such as land costs, impact fees, time to market, entitlement process, and market risk when determining what is feasible. d. Outside forces including inflation, supply chain issues, processing delays and changes in Fed policy all impact our local housing market. e. The analysis has cherry-picked data and market factors from a very favorable period of time, which no longer exist, or would not exist over the term of the ordinance (assumed to be 10-20 years). Staff Response: • The Nexus Study was completed to establish a rational nexus between market - rate residential development and nonresidential development and the need for affordable housing in the City as required by law. The fees calculated in the Nexus Study are the maximum justifiable fees. The recommended commercial linkage fees and the in-lieu fees proposed as part of the Feasibility Analysis are much lower than the nexus-maximum fees. Planning Commission Staff Agenda Correspondence Page 2 • While incomes increased since the Nexus Study was completed, development costs increased more - that broadening gap would result in still-higher nexus- maximum fees. • EPS tested the feasibility of a range of inclusionary requirements and affordable housing fee levels by preparing financial pro formas reflecting the expected costs of new development, based on the Nexus Study and supplemental market research, and comparing those costs to the revenues that could be generated given various mixes of market-rate and affordable housing and/or fee levels. 2. Table 2A – “We recognize that 2A needs to be updated, however, the risks of eliminating it all together are too great. The demand for larger, more expensive housing is significant and without incentives like Table 2A, missing middle housing will be even less likely to be produced.” Staff Response: The SLO Chamber letter proposes modifying Table 2A rather than eliminating it. The letter provides a recommendation to provide a 10% inclusionary housing requirement for both rental and for sale projects and includes altered adjustment factors in Table 2A to continue to incentivize smaller units. • At the March 1, 2022, City Council Study Session, the majority of City Council members supported the removal of Table 2A from the Inclusionary Housing Ordinance based on the findings of the Nexus Study and the F easibility Analysis which both concluded that Table 2A is no longer achieving affordability in the current market. The Feasibility Analysis found that under current market conditions, smaller units are not affordable, even for moderate-income households. The SLO Chamber letter identifies projects that resulted in the development of smaller units, correlating the smaller units to Table 2A. • One of the examples identified is the project known as Vintage (West Creek), where (according to their website) one studio unit (500 square feet) rents for $2,385 per month, where the maximum allowed rent for a moderate-income studio unit is $1,426, which is based on a household income threshold of 80–120% of the Average Median Income (AMI). o For the Vintage studio apartment, a household would need to have an income of 140-170% of the AMI for the unit to be considered affordable (HCD threshold is a maximum 30% for housing costs). • Another example is the Harvest Lofts at San Luis Ranch, where (according to their website) a one-bedroom 436 square foot unit is for sale starting at $404,900.00; low-income maximum purchase price is $187,800 for a one-bedroom and $328,650 for the moderate-income category. • Heirloom, at San Luis Ranch, provides a three -bedroom, 1,564 square foot unit, for sale, starting at $786,385; low-income maximum purchase price is $244,200 for a three-bedroom and $427,175 for the moderate-income category. Planning Commission Staff Agenda Correspondence Page 3 • As stated in the Feasibility Analysis and confirmed price examples, housing being sold or rented in San Luis Obispo is no longer ‘affordable by design’, as was the intent of Table 2A. Most importantly, the Table 2A adjustments proposed by the SLO Chamber would provide fewer affordable units, which is contrary to the fundamental objective of the Inclusionary Housing Ordinance Update: a 100-unit residential project that has an average unit size of 1,000 square feet would only be required to provide 5 affordable units for the project. The staff recommended amendments would require that a 100 - unit residential project provide 10 affordable units for the project. 3. Fees – The SLO Chamber letter includes the following recommendations related to fees; a. Commercial linkage fee of $2.5 per square foot (SF) for industrial and warehouse uses, and $5/SF for all other non-residential uses. b. Residential in-lieu fees should be appropriately tiered based on the size of the unit, where the price per square foot is reduced for smaller units. c. The IHO should apply to all market rate residential units, not just developments of 5 or more units. Staff Response: • As described in the Planning Commission Staff Report, staff is recommending a commercial linkage fee of $5/SF for indu strial and warehouse, an $6/SF for all other non-residential uses. Proposed fees are justified through the Nexus Study, have been determined to be financially feasible through the Feasibility Analysis, and are consistent with fees paid by recent commercial development projects. • The residential in-lieu fee that is proposed in the report is consistent with the Feasibility Analysis recommendations. Furthermore, a tiered in-lieu fee approach is not necessary to incentivize smaller units as the proposed in-lieu fee is already based on square footage, where smaller units will pay less in fees due to the size of the units. • As recommended, developments of less than 10 units would be eligible for the fractional application of the in-lieu fee under Section 17.138.080.A, that effectively reduces the burden of the fee on smaller in-fill development. • Staff agrees with the SLO Chamber’s proposal that the IHO should apply to all market rate residential units and not just developments of 5 or more units. The Nexus Study and the Feasibility Analysis both support applying the IHO to development projects of less than 5 units. Residential projects of 10 or fewer units will have the ability to pay a fraction of the in -lieu fee or provide one Moderate income unit. Staff recommends that an amendment be made to the proposed IHO to remove the exemption of residential developments of less than 5 units , and consequently remove language regarding residential subdivisions since this revision would address custom homes in new residential tract map developments. The amendments will be presented to Planning Commission at the hearing. Planning Commission Staff Agenda Correspondence Page 4 4. For Sale Units – The letter recommends modifying the inclusionary housing requirement for projects that include for-sale units, by changing the requirement from 5% low and 5% moderate to all 10% moderate. Staff Response: The SLO Chamber letter contends that it is more difficult for low - income households to qualify to purchase a home. • This assumption is in not currently supportable as qualifying low-income households earn between 50% to 80% of the Average Median Income, based on household size, and are just as capable for qualifying for purchasing a home as moderate-income households. Additionally, the City’s new Below Market Rate Housing Administrator has stated that it is their experience that low -income units were easier to sell than moderate-income units. • It is important to look at what is affordable for families. For example, HCD SLO County max low-income households earning $78,750 to $87,500 with estimated affordable payments at $1,968.75-$2,187.50 are looking at an estimated current market median rent of $2,335 for 2-bedrooms and $3,575 for 3-bedrooms (whether it's for-sale or for-rent is irrelevant because affordable payments are strictly calculated using incomes). While HCD SLO County maximum moderate-income households earn $117,950 to $131,050 with estimated affordable payments at $3,440.21 to $3,822.29 and the estimated current market rental median is more achievable. Improving the City’s low-income homeownership stock will help reduce the disparity for home ownership opportunities for low-income earners. • Alternatively, developers may choose to pursue a density bonus rather than provide the inclusionary housing requirement, where providing 10% moderate - income units also provides the added benefit of a 5% density bonus, as well as other standard housing incentives (Section 17.140.040). 5. Standards – “We can preserve the spirit of this section and build more units of both affordable and market rate housing when we allow inclusionary units to be consolidated into a product type rather than dispersed throughout a residential or mixed-use development. When we mandate homogeneity, we lose out on opportunities for increased efficiency, leveraging state and federal funding sources, and better support services. This opportunity cost is not worth it.” Staff Response: The SLO Chamber letter proposes several amendments to Section 17.138.050, to provide greater flexibility for the placement, size, and type of units dedicated as affordable. The proposed ordinance requires inclusi onary housing units to be dispersed throughout each development rather than concentrated together, as well as requiring an appropriate mix of unit type that reflects the market rate unit mix. SLO Chamber is recommending eliminating the requirement to have the units intermixed within the project and include exemptions for projects that are designed to meet specific affordable housing programmatic constraints. Planning Commission Staff Agenda Correspondence Page 5 • Staff does not support the Chamber’s proposal because it is contrary to Housing Element Policy 4.1 that states that affordable units should be intermixed within a project rather than concentrated together. • The proposed exemption for projects with programmatic constraints, is not an objective standard. • Flexibility from the IHO standards regarding intermixed units and the unit type mix are available through Chapter 17.128 (Development Agreements), or through the Density Bonus Law as reflected in Section 17.140.070 (Alternative or Additional Incentives). • Additionally, tax credit financed projects, for which City in-lieu fees are used to help fund, are not constrained by these standards as the projects are generally consolidated and built to address program and funding needs. 6. Additional Funding Sources – The letter also recommends that the City continue to explore other funding sources for affordable housing rather than relying on the IHO. Staff Response: The Chamber letter identifies several alternative funding sources to increase funding for affordable housing for which staff will continue to explore but are outside of the purview of consideration of the IHO. • As described in the staff report, the IHO is only one tool that the city uses to achieve housing objectives. Other tools include: o Density bonus that allows for higher density development with the inclusion of affordable units; o Streamlined development review process for housing projects that reduces the number of public hearings and lowers the level of review based on the number of units in a project; o Objective Design Standards that allow eligible residential projects to be reviewed through a ministerial process; o Ministerial review and reduced fees for ADUs and JADUs; o Tiered impact fee structure that provides substantial reductions in cost for smaller residential projects and units. o Fractional density allowances based on unit size and number of bedrooms; o Minimum density allowances based on Zoning designations; and o Implementation of SB 9 (California H.O.M.E Act) • The City is also currently working on three additional programs, Missing Middle, Downtown Flexible Density, and amendments to the subdivision regulations, to encourage and enable a wider range of housing types within the City.