HomeMy WebLinkAbout2020 Nexus Study DAV I D P AU L RO S E N & A S S OC I ATE S
D EVELOPMENT, FINANCE AND POLICY ADVISORS
Affordable Housing Nexus Study
City of San Luis Obispo
February 12, 2020
Final Report
City of San Luis Obispo February 12, 2020
Affordable Housing Nexus Study
City of San Luis Obispo Affordable
Housing Nexus Study
PREPARED FOR:
City of San Luis Obispo
PREPARED BY:
David Paul Rosen & Associates
1330 Broadway, Suite 937
Oakland, CA 94612
510-451-2552
510-451-2554 Fax
david@draconsultants.com
www.draconsultants.com
3941 Hendrix Street
Irvine, CA 92614
949-559-5650
949-559-5706 Fax
nora@draconsultants.com
www.draconsultants.com
City of San Luis Obispo February 12, 2020
Affordable Housing Nexus Study
Table of Contents
Executive Summary .................................................................... 1
Introduction ..................................................................................... 1
Target Income Levels and Affordable Housing Cost ........................ 2
Affordability Gap Analysis ............................................................... 3
Nexus Analysis ................................................................................. 5
Recommendations ........................................................................... 9
1. Background and Introduction .............................................. 12
1.1 Target Income Levels ............................................................... 12
2. The Nexus Rationale ............................................................ 13
2.1 The Relationship Between Job and Population Growth ........... 14
2.2 The Relationship Between Construction and Job Growth ........ 14
3. Summary of Housing Market Trends .................................... 16
3.1 Affordable Rents and Home Prices .......................................... 16
3.2 Housing Inventory ................................................................... 18
3.3 Rental Housing Market Conditions .......................................... 18
3.4 For-Sale Housing Market Conditions ....................................... 21
4. Residential Nexus Analysis ................................................... 23
4.1 Impact Methodology and Use of the IMPLAN Model .............. 23
4.2 The IMPLAN Model ................................................................. 24
4.3 Disposable Income of New Households .................................. 25
4.4 Projected Employment Generation .......................................... 26
4.5 Projected Household Growth .................................................. 27
4.6 Projected Low and Moderate Income Households ................... 27
5. Non-Residential Nexus Analysis ........................................... 28
5.1 Overview of Non-Residential Nexus Methodology .................. 28
5.2 Non-Residential Nexus Methodology and Assumptions ........... 29
6. Affordability Gap Analysis ................................................... 32
6.1 Methodology ............................................................................ 33
6.2 Housing Development Costs .................................................... 34
6.3 Calculation of Per Unit Subsidy Amounts ................................ 34
7. Policy Recommendations ..................................................... 34
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7.1 IHO Set-Asides ........................................................................ 35
7.2 Affordable Housing Standards ................................................. 36
7.3 Geographical Variation ........................................................... 38
7.4 Project Size Adjustments ......................................................... 39
7.5 Residential In Lieu Fees and Annual Adjustments .................... 39
7.6 Methods of Securing Residential IHO Requirements ............... 41
7.7 Effective Date of Ordinance .................................................... 41
7.8 Non-Residential Nexus Fees .................................................... 41
Appendix A: Residential Nexus and Gap Analysis Tables
Appendix B: Non-Residential Nexus Tables
Appendix C: Inclusionary Housing Program Survey
Appendix D: Assessment of City’s Existing IHO Program
List of Tables
ES-1. Affordable Housing Income Limits by Percent of
Area Median Income and Household Size, City of
San Luis Obispo, 2019 ................................................... 3
ES-2. Per Unit Affordability Gaps by Income Level,
Housing Prototypes ........................................................ 5
ES-3. Maximum Justifiable Nexus Fees Per Unit and Per
SF, Residential Prototypes, Assumes Construction
of Rental Housing ......................................................... 6
ES-4. Per Square Foot Maximum Justifiable Nexus Fees,
Non-Residential Land Uses ............................................ 8
ES-5. Examples of Non-Residential Per Square Foot
Nexus Fees in Other Jurisdictions, 2016 to 2019 ........... 8
ES-6 Recommended Residential In Lieu Fees, City of
San Luis Obispo ........................................................... 11
1. Affordable Rents by Percent of AMI and Unit
Bedroom Count, City of San Luis Obispo, 2019 ........... 17
2. Affordable Home Prices by Percent of AMI and
Unit Bedroom Count, City of San Luis Obispo,
2019 ............................................................................ 17
3. Housing Units by Type, City of San Luis
Obispo, 2010 to 2019 ................................................. 18
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Affordable Housing Nexus Study
4. Distribution of Rental Housing Units by Rent
Paid, City of San Luis Obispo, 2017 ............................. 19
5. Average Asking Rents, City of San Luis Obispo,
2012 to 2019 ............................................................... 19
6. Annual Increase in Average Asking Rents City
of San Luis Obispo, 2012 to 2019 ................................ 20
7. Comparison of Average Market and Affordable
Rents, City of San Luis Obispo, 2019 ........................... 20
8. Trends in Median Home Values, City of San
Luis Obispo, August 2010 to August 2019 ................... 21
9. Summary of Single-Family Home Sales Prices
by Unit Bedroom Count, City of San Luis
Obispo, June 2019 to November 2019 ........................ 22
10. Summary of Condominium Sales Prices by Unit
Bedroom Count, City of San Luis Obispo, July
2019 to October 2019 ................................................. 22
11. Inclusionary Housing Set-Aside and Threshold
Size Provisions, Selected California
Inclusionary Housing Programs ................................... 38
12. Recommended Affordable Rent Standards ................... 42
13. Recommended Affordable Home Price
Standards ..................................................................... 43
14. Estimated Prototype Development Costs ...................... 44
15. Renter In Lieu Fee Calculation ..................................... 45
16 Owner In Lieu Fee Calculation .................................... 46
A-1 Housing Prototypes ..................................................... A-1
A-2 Estimated Disposable Household Income of
New Homebuyers ....................................................... A-2
A-3 Estimated Disposable Household Income of
New Renter Households ............................................. A-3
A-4 Estimated Employment Impacts by Industry
Sector, Prototype 1, SFD ............................................. A-4
A-5 Estimated Employment Impacts by Industry
Sector, Prototype 2, Owner Townhomes ..................... A-5
A-6 Estimated Employment Impacts by Industry
Sector, Prototype 3, Rental Apartments ....................... A-6
A-7 Estimated Households by Income Level,
Prototype 1, SFD ......................................................... A-7
A-8 Estimated Households by Income Level,
Prototype 2, Owner Townhomes ................................ A-8
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A-9 Estimated Households by Income Level,
Prototype 3, Rental Apartments ................................... A-9
A-10 Development Cost Assumptions and Budgets,
Housing Prototypes ................................................... A-10
A-11 Affordable Sales Price Calculations by Income
Level ......................................................................... A-11
A-12 Affordable Rent Calculations by Income Level .......... A-12
A-13 Owner Housing Affordability Gap Calculation,
Prototype 1, SFD ....................................................... A-13
A-14 Owner Housing Affordability Gap Calculation,
Prototype 2, Owner Townhomes .............................. A-14
A-15 Renter Housing Affordability Gap Calculation,
Prototype 3, Rental Apartments ................................. A-15
A-16 Maximum Justifiable Residential Nexus Fees ............ A-16
A-17 Single-Family Home Sales ........................................ A-17
A-18 Condominium Home Sales ....................................... A-19
A-19 Vacant Land Sales, City of San Luis Obispo,
July 2019 to October 2019 ....................................... A-21
B-1 2019 National Occupational Distribution by
Land Use .................................................................... B-1
B-2 Wages by Occupational Grouping, San Luis
Obispo County ........................................................... B-2
B-3 Estimated Occupational Distribution of New
Employee Households by Land Use ............................ B-4
B-4 Estimated Qualifying Extremely Low Income
Households by Land Use ............................................ B-5
B-5 Estimated Qualifying Very Low Income
Households by Land Use ............................................ B-6
B-6 Estimated Qualifying Low Income Households
by Land Use ............................................................... B-7
B-7 Estimated Qualifying Moderate Income
Households by Land Use ............................................ B-8
B-8 Justifiable Non-Residential Nexus Fee Per
Building Square Foot by Land Use .............................. B-9
D-1 Regional Housing Need Allocation ............................ D-2
D-2 Summary of Affordable Housing Unit
Production, On-Site IHO Units and Units
Subsidized by the Affordable Housing Fund .............. D-3
D-3 Comparison of Average Market and Affordable
Rents ......................................................................... D-4
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Executive Summary
Introduction
The City of San Luis Obispo (City) adopted its Inclusionary Housing Ordinance
(hereafter referred to as the IHO or Program) in 1999. In 2004, the Program was
revised as part of the Housing Element update to include housing affordability
requirements. The Program requires that certain new residential and commercial
developments of five or more units and commercial developments of more than
2,500 square feet of commercial floor area help to meet affordable housing needs
by one or a combination of the following methods: 1) building affordable units; 2)
dedicating real property; or 3) paying an in lieu fee used to fund the development of
new affordable housing.
The City retained David Paul Rosen & Associates (DRA) to prepare a nexus study to
establish a rational nexus between market-rate residential development and non-
residential development and the need for affordable housing in the City. To the
extent that new market-rate residential and non-residential development in the City
increases demand for housing and exacerbates the City’s shortage of affordable
housing, the City has a strong public interest in, and a legal basis for, causing new
affordable housing to be developed to meet this additional demand. This executive
summary provides an overview of the methodology and financings of the analysis.
The remainder of the report provides additional detail on the assumptions and
analysis of DRA’s nexus study.
In designing a fee on new residential and non-residential development to assist the
provision of affordable housing, the basis for the fee is that such development has a
deleterious impact by increasing employment, which also increases the demand for
housing for the added employees. Since the private for-profit housing market, with
no public assistance, has not demonstrated the ability to meet the housing needs of
lower-earning employees, a nexus fee is justified to help create that housing. Non-
residential development, such as retail/services, office and industrial uses, have a
direct employment impact with the creation of additional employment that generates
demand for additional housing. Residential development has an indirect impact on
employment, as household expenditures on goods and services are linked to the
employment necessary to produce those goods and services. A nexus study is
intended to determine whether: (1) those who must pay the fee are contributing to
the demand that the fee will address; and (2) the amount of the fee is reasonably
justified by the magnitude of the fee-payer's contribution to the problem. Affordable
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housing requirements, including nexus fees, have been successfully upheld against
legal challenge where the fees met standards set by case law.
This nexus study examines the impacts of new market-rate rental and owner housing
and non-residential development in San Luis Obispo on the demand for affordable
housing.
In addition to this main report, DRA’s study includes four Appendices with additional
detail on the data and analysis that are referenced in this report:
Appendix A: contains Tables A-1 through A-19 detailing the data, assumptions and
calculations used in the residential nexus analysis and affordability
gap analysis.
Appendix B: contains Tables B-1 through B-8 detailing the data, assumptions and
calculations used in the nonresidential nexus analysis.
Appendix C: contains case studies on inclusionary housing programs in six
comparison cities and the nonresidential nexus fee program in
Petaluma (the only one of the six cities profiled to have a
nonresidential nexus fee).1
Appendix D: contains analysis of the historical performance of the City’s IHO
Program.
Target Income Levels and Affordable Housing Cost
The nexus analysis uses State income limits for San Luis Obispo County shown in
Table ES-1 for Fiscal Year 2019-20. Extremely low income households are defined
as households with incomes up to 30 percent of area median income (AMI), or
$26,950 for a four-person household in San Luis Obispo County in 2019. Very low
income households are defined as households with incomes between 31 percent
and 50 percent of AMI, or up to $44,950 for a four-person household in San Luis
Obispo County in 2019. Low income households are defined as households with
incomes between 51 percent and 80 percent of AMI, or a maximum of $71,900 for
a four-person household in 2019. Moderate income households are defined as those
households earning between 81 and 120 percent of AMI, or a maximum of $105,000
1The six cities surveyed were Davis, Monterey, Santa Barbara, Santa Cruz, Ventura and Petaluma.
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for a four-person household. The 2019-20 State AMI for a household of four in the
County is $87,500.
Table ES-1 shows 2019 extremely low, very low, low and moderate income limits
for the City of San Luis Obispo for household sizes of one to eight persons using
HUD household size adjustment factors1.
Table ES-1
Affordable Housing Income Limits by Percent of Area Median Income (AMI)
and Household Size1
City of San Luis Obispo
FY 2019-2020
Income
Category
Household Size
1 Person 2 Persons 3 Persons 4 Persons 5 Persons 6 Persons 7 Persons 8 Persons
Extremely
Low
30% AMI
$18,900 $21,600 $24,300 $26,950 $30,170 $34,590 $39,010 $43,430
Very Low
50% AMI
$31,500 $36,000 $40,500 $44,950 $48,550 $52,150 $55,750 $59,350
Low
80% AMI
$50,350 $57,550 $64,750 $71,900 $77,700 $83,450 $89,200 $94,950
Median*
100% AMI
$61,250 $70,000 $78,750 $87,500 $94,500 $101,500 $108,500 $115,500
Moderate
120% AMI
$73,500 $84,000 $94,500 $105,000 $113,400 $121,800 $130,200 $138,600
*Median income shown for reference only. This is not an official Affordable Housing Income Level.
Source: California Department of Housing and Community Development 2019 published income
limits; California Tax Credit Allocation Committee (CTCAC) 60% AMI income limits; DRA
Affordability Gap Analysis
The affordability gap analysis compares the cost of developing housing in the City
to the amount extremely low, very low, low, and moderate income households can
afford to pay for housing. The affordability gap represents the capital subsidy
required to develop housing affordable to families at these target income levels.
The per unit subsidy required to make new housing affordable to extremely low, very
low, low, and moderate income residents was calculated by subtracting per unit
1 HUD adjustment factors by household size are: 1 person: 70%; 2 persons: 80%; 3 persons:
90%; 4 persons: 100%, 5 persons: 108%; 6 persons: 116%; 7 persons: 124% and 8 persons:
132%.
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development costs from the per unit mortgage or home price supportable from
affordable rents and owner housing cost. Per affordable housing unit subsidies were
calculated for three prototypical housing developments developed by DRA in
consultation with City staff for this analysis. The resulting per unit subsidy
requirements by prototype and unit bedroom count are shown in Table ES-2.
The results of the gap analysis show significant affordability gaps for all three
identified prototypes for extremely low, very low, low and moderate income
households. The gaps for the rental prototype are based on affordable rents to each
income level based upon the City’s standard that rent will not exceed 25% to 30%
of annual income, dependent on the income group, and do not consider whether
affordable rents may be above market rents at higher income levels.
The purpose of the gap analysis is to determine the fee amount that would be
required to develop housing affordable to households whom will need to find
housing in the City in connection with new market-rate residential and non-
residential development in the City. Therefore, no other housing subsidies, or
leverage, are assumed.
For example, the cost to develop a two-bedroom townhome unit is $569,400, and
using the City’s current Affordability Standards, a three-person household at 80% of
AMI can afford a sales price of $194,130, leaving an affordability gap of $375,270.
Detailed calculations of the gap can be found in Tables A-13, A-14 and A-15.
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Table ES-2
Per Unit Affordability Gaps by Income Level1
Housing Prototypes
City of San Luis Obispo Affordable Housing Nexus Study
2019
Unit Bedroom
Count Extremely Low Very Low Low Moderate
Prototype #1
Owner SFD
Two Bedrooms $557,201 $508,669 $435,870 $299,250
Three Bedrooms $909,113 $855,188 $774,300 $622,500
Four Bedrooms $1,076,171 $1,013,618 $919,788 $743,700
Prototype #2
Owner
Townhome
Two Bedrooms $496,601 $448,069 $375,270 $238,650
Three Bedrooms $619,913 $565,988 $485,100 $333,300
Prototype #3
Rental Apartments
Studio $212,500 $170,200 $149,100 $99,900
One Bedroom $328,400 $280,201 $256,089 $199,873
Two Bedrooms $519,300 $465,200 $438,000 $374,700
Three Bedrooms $656,700 $594,000 $562,700 $489,500
1Calculated using the City’s 2019 Rent and Sales Affordability Standards.
SFD= Single-Family Dwelling
Source: DRA
Nexus Analysis
The methodology used for the residential nexus analysis begins with the estimated
sales prices or rents of a prototypical residential subdivision or apartment complex
and moves through a series of linkages to the incomes of the households that
purchase or rent the units, the annual expenditures of those households on goods
and services, the jobs associated with the delivery of these goods and services, the
income of the workers performing those jobs, the household income of those worker
households, and finally to the affordability level of the housing needed by those
worker households. DRA uses estimated market-rate sales prices and rents for
prototypical housing units to determine the typical household incomes of
households renting or purchasing these units. The consumer expenditures of
residents in the new market-rate housing and the jobs generated by these
expenditures are estimated using the IMPLAN model, an economic analysis model
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widely used for the past 25 years to quantify employment impacts from personal
income and now commercially available through the Minnesota IMPLAN Group
(MIG). The methodology of the IMPLAN model is described in Section 4 of this
report.
The methodology used for the non-residential nexus analysis estimates the number
of households at extremely low, very low, low and moderate income levels
associated with the employees that work in a building of a given size and land use
type in the City, based on employment and wage data by industry and occupation,
and calculates the development impact fee required to fill the gap to make housing
affordable to those income groups.
The result of the nexus methodology is the estimated number of households by
residential or non-residential land use prototype living in the City and qualifying as
extremely low, very low, low and moderate income as a result of new development
activity in the City. DRA uses the results of the housing affordability gap analysis to
calculate the development impact fee required to make housing affordable to the
low and moderate income households who will need to find housing in the City in
connection with new market-rate residential and non-residential development in the
City. This fee is referred to as the Maximum Justifiable Nexus Fee.
Tables ES-3 summarizes the maximum justifiable residential nexus fees by income
level and housing prototype based on the economic analysis. The fees for providing
new housing for the added employees assume the fees are spent on the construction
of rental housing, which is the most economical way to meet these extremely low,
very low, low and moderate income housing needs. The fees are both shown per
unit and per net square foot of living area. Detailed calculation of the fees is shown
in Table A-16. Single-family homes are typically more expensive and require higher
incomes to purchase than townhomes or apartments. Higher income households
generally spend more on goods and services in the community. Employment impacts
are related to household expenditures on goods and services, therefore the
employment impacts and associated employee households are higher with single-
family homes relative to other types of residential development.
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Table ES-3
Maximum Justifiable Nexus Fees Per Unit and Per SF
Residential Prototypes
Assumes Construction of Rental Housing1
2019
Income Group
Prototype 1
Owner SFD
Prototype 2
Owner Townhomes
Prototype 3
Renter Apartments
Per Unit Per NSF Per Unit Per NSF Per Unit Per NSF
Extremely Low
<30% AMI $30,695 $32.97 $18,793 $12.12 $14,909 $16.01
Very Low
30%-50% AMI $30,944 $33.24 $19,893 $12.83 $14,698 $15.79
Low
50%-80% AMI $25,263 $27.14 $16,498 $10.64 $12,271 $13.18
Moderate
80%-120% AMI $19,226 $20.65 $12,016 $7.75 $9,613 $10.33
Total Maximum
Nexus Fee $106,128 $113.99 $67,200 $48.33 $36,582 $55.31
1Fees for all prototypes based on gap to build affordable rental units
SFD=Single-Family Dwelling; NSF=Net Square Foot (Living Area)
Source: DRA
Table ES-4 summarizes the Maximum Justifiable Nexus Fees for the non-residential
land uses, per net square foot of building area, as they compare to six different non-
residential uses. Since most jurisdictions levy a single nexus fee by land use, the
table shows the justifiable fee by income level as well as a total fee across all of the
income levels analyzed.
These maximum fees are not the recommended fees for adoption by the City of San
Luis Obispo. DRA recommends that jurisdictions adopt fees less than the maximums
indicated in Tables ES-3 and ES-4, because fees at these high levels will affect the
financial feasibility of development as well as the competitiveness of development
in the City with neighboring jurisdictions with much lower fees. The City will look
to develop fee recommendations following review of the draft fee estimates and
consideration of a number of policy factors that may influence the City’s decision.
Table ES-5 provides a sample of recent nexus fees for new non-residential
development in other California jurisdictions to illustrate the range of actual nexus
fees. As part of this assignment, DRA surveyed six cities similar to San Luis Obispo
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regarding their inclusionary housing programs (see Appendix C)1. Since Petaluma is
the only one of the six cities surveyed with a non-residential nexus fee, DRA has
provided comparative information for other selected cities in California with non-
residential nexus fees. DRA is not aware of other cities the size of SLO that utilize a
non-residential nexus fee. At the top end of the range, San Francisco has a nexus fee
on office uses of $69.60 per square foot.
Table ES-4
Per Square Foot Maximum Justifiable Nexus Fees
Non-Residential Land Uses
2019
Extremely
Low
<30% AMI
Very Low
30%-50%
AMI
Low
50%-80%
AMI
Moderate
80%-120%
AMI
Total Nexus
Fee
Retail $17.11 $33.74 $14.78 $3.97 $69.60
Hotel $23.95 $35.62 $18.62 $7.93 $86.12
Service $17.11 $29.99 $14.78 $3.97 $65.85
Office $29.94 $56.24 $53.21 $33.71 $173.09
Industrial $14.97 $29.99 $23.65 $15.86 $84.47
Institutional $25.66 $54.36 $42.86 $28.75 $151.64
Source: DRA
Table ES-5
Examples of Total Non-Residential Per Square Foot Nexus Fees in Other Jurisdictions
2016-2019
Office Hotel Retail R&D Industrial
San Diego $2.12 $1.28 $1.28 $0.80 N/A
San Francisco $24.03 $17.99 $22.42 $16.01 N/A
Sacramento $1.84 $1.74 $1.47 $1.56 $0.50-$1.15
Oakland $4.00 N/A N/A N/A $4.00
Berkeley $4.50 $4.50 $4.50 $4.50 $2.25
Petaluma $2.84 N/A $4.91 N/A $2.93
Source: DRA
1 The six cities surveyed were Davis, Monterey, Santa Barbara, Santa Cruz, Ventura and
Petaluma.
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Recommendations
The following summarizes DRA’s recommendations for the City’s Program based on
the nexus study. Recommended changes to the City’s program are further detailed
and supported in Section 7 of this report.
1. IHO Set-Asides1
Based on the survey of comparable cities and analysis of San Luis Obispo’s
economic/market data DRA recommends the following:
Rental: 5% of units at 50% AMI (very low income) plus 10% of units at 80%
AMI (low income)
Owner: 5% of units at 80% AMI (low income) plus 10% of units at 120%
AMI (moderate income)
2. Affordable Housing Standards2
DRA recommends the City maintain its current definitions of affordable
housing expense in terms of the percent of AMI used to calculate affordable
rents and sales prices, but revise to adjust for various components of
affordable housing expense to ultimately calculate affordable sales prices.
DRA’s recommended Affordable Housing Standards for renters and owners
are as follows:
Affordable Rents:
30% AMI (extremely low income): shall not exceed 30% of 30% of AMI for
the number of persons expected to reside in the unit, divided by 12, and
adjusted for household/unit size and utility cost.
1 See Section 7.1
2 See Section 7.2
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50% AMI (very low income): shall not exceed 30% of 50% of AMI for the
number of persons expected to reside in the unit, divided by 12, and adjusted
for household/unit size and utility cost.
80% AMI (low income): shall not exceed 30% of 60% of AMI for the number
of persons expected to reside in the unit, divided by 12, and adjusted for
household/unit size and utility cost.
120% AMI (moderate income): shall not exceed 30% of 120% of AMI for
the number of persons expected to reside in the unit, divided by 12, and
adjusted for household/unit size and utility cost.
DRA recommends that the City use utility costs based on HUD utility
allowances published annually by the Housing Authority of the City of San
Luis Obispo (HASLO).
Affordable Sales Prices:
80% AMI (low income): 30% of 70% of AMI for PITI1 plus HOA dues
120% AMI (moderate income): 35% of 100% of AMI for PITI plus HOA
dues
3. Geographical Variation2
DRA recommends discontinuing the City’s IHO differential requirements
between City boundaries and Expansion Area. We consider this a best
practice used in 85% of California jurisdictions surveyed in 2017 in the
absence of compelling reasons for varying the requirements, which we do
not find in the City.
4. Project Size and Density Adjustments3
DRA recommends eliminating the project size and project density
adjustments currently contained in Table 2A of the Article 8: Housing-
Related Regulations. DRA recommends a minimum inclusionary
1 PITI = mortgage principal and interest, property taxes and property insurance.
2 See Section 7.3
3 See Section 7.4
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requirement of one unit for projects of five or more units not otherwise
exempt from the Program.
5. Residential In Lieu Fees and Annual Adjustments1
DRA recommends applying in lieu fees on a per square foot basis at the
estimated economic equivalent of providing on-site units, as derived from
the recommended set-aside requirements and gap analysis. The resulting
residential in lieu fees for renters and owners are summarized in Table ES-6.
Table ES-6
Recommended Residential In Lieu Fees
City of San Luis Obispo
Owner
Renter SFD Townhome
Very Low Income -- -- $19
Low Income $18 $16 $36
Moderate Income $31 $24 --
Total In Lieu Fee $49 $40 $55
The goal for in lieu fee annual adjustments is for them to be easily updated
administratively, without a lot of data analysis by staff. DRA recommends
that in lieu fees be updated annually based on the percentage difference
between the trailing three-year average annual change in median household
income for San Luis Obispo County and the All Transactions House Price
Index for San Luis Obispo-Paso Robles MSA published by the U.S. Federal
Housing Finance Agency.
6. Methods of Securing Residential IHO Requirements2
The City currently implements its IHO requirements through deeds of trust
for owner housing and regulatory agreements for rental housing. DRA
recommends that the City continue with these practices, which comport with
industry best practices.
1 See Section 7.5
2 See Section 7.6
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7. Effective Date of Ordinance1
DRA recommends that projects with planning applications that have been
deemed complete be exempt from any material changes to the IHO and
nexus fee programs. This will prevent changes to the ordinance from
affecting the financial feasibility of developments that are already far along
in their planning and financing process and unable to readily adapt to
additional regulatory requirements.
8. Non-Residential Nexus Fees2
Based on the non-residential nexus fees adopted in other California
communities, DRA recommends that the San Luis Obispo consider fees in
the range for $1 to $4 for industrial uses and $2 to $5 per square foot for
other non-residential uses. For ease of implementation, DRA recommends
establishing one rate for industrial uses and a single rate for all other non-
residential uses.
1. Background and Introduction
The City retained DRA to prepare a nexus study to analyze the rational nexus
between market-rate residential and non-residential development and the need for
affordable housing in the City. To the extent that new market-rate residential and
non-residential development in the City increases demand for housing and
exacerbates the City’s shortage of affordable housing, the City has a strong public
interest in, and a legal basis for, causing new affordable housing to be developed to
meet this additional demand.
1.1 Target Income Levels
The nexus analysis uses State income limits for San Luis Obispo County. DRA
estimated the maximum justifiable affordable housing nexus fee for the following
income categories:
1 See Section 7.7
2 See Section 7.8
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• Households with incomes up to 30 percent of AMI, or approximately $26,950
for a four-person household in San Luis Obispo County;
• Households with incomes between 31 percent and 50 percent of AMI, or
between $26,950 and $44,950 for a four-person household in San Luis
Obispo County;
• Households with incomes between 51 percent and 80 percent of AMI, or
between $44,950 and $71,900 for a four-person household; and
• Households with incomes between 81 percent and 120 percent of AMI, or
between $71,900 and $105,000 for a four-person household.
All of these income limits are based on the 2019 State income limits for San Luis
Obispo County, adjusted for household size. The 2019 State AMI for the County is
$87,500 for a four person household.
2. The Nexus Rationale
This section describes and substantiates the relationship between new residential
and non-residential development and the need for affordable housing, as quantified
using DRA’s nexus methodology developed using the standards established through
case law. This relationship has been well documented and nexus fees have been
successfully upheld against legal challenge where the fees met standards set by case
law.
Fees on development in California are subject to two overlapping sets of legal
requirements: constitutional requirements of nexus and "rough proportionality"
under the U. S. Supreme Court cases of Nollan v. California Coastal Commission
(1987) 483 U. S. 825 and Dolan v. City of Tigard (1994) 512 U. S. 374; and
California's statutory "reasonable relationship" requirements under California
Government Code sections 66000-66010. Although legally distinct, these two
standards are substantively similar and in practice a development fee that satisfies
one will almost certainly satisfy both. The California Supreme Court in Ehrlich v. City
of Culver City (1996) 12 Cal. 4th 854, 867 concluded that the two standards "for all
practical purposes, have merged."
The legal requirement is that a local government charging a fee make some
affirmative showing that: (1) those who must pay the fee are contributing to the
problem which the fee will address; and (2) the amount of the fee is justified by the
magnitude of the fee-payer's contribution to the problem. In designing a fee on new
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residential or non-residential development to assist the provision of affordable
housing, there is now likely to be little dispute that such development, by increasing
employment, also increases the demand for housing for the added employees. In
addition, it is well established that in most communities, market-rate housing
development, with no public assistance, will not provide housing affordable for all
of the additional lower-earning employees. The main legal concern is the amount of
responsibility for providing housing that is assigned to new development, and thus
the appropriate fee level.
More recent case law continues to uphold nexus fees, as long as the relationship
between proposed projects and the burdens imposed on developers for approval is
carefully considered. In Koontz v. St. Johns River Water Management District
(2013) 570 U.S. 595 (“Koontz”), the U.S. Supreme Court held that the requirements
of Nollan and Dolan for essential nexus and rough proportionality apply even when
a jurisdiction denies a permit for development, and emphasized the need for
permitting agencies to justify impact fees or fees in lieu attached to permit approval.
2.1 The Relationship Between Job Growth and Population Growth
The basis of the nexus fee concept is growth in lower to moderate income
households. New population growth in most U.S. regions occurs in response to job
growth. Many factors underlie the reasons for growth in employment in a given
region. These factors are complex, interrelated, and often associated with forces at
the national or even international level. However, most people coming to the region
would not come if they could not expect to find a job. People born in the local area
would not stay without jobs.
In the short-term, economic cycles and other factors can result in population growth
without jobs to support the growth. If an economic region in the U.S. does not
maintain job growth in the long term, however, there is an out-migration to regions
where job growth is occurring. Many cities in the Midwest during the 1970s and
1980s experienced such outmigration.
2.2 The Relationship Between Construction and Job Growth
Job growth does not occur in most industry sectors without buildings to house new
workers. Therefore, new buildings are constructed to accommodate the workers
associated with job growth.
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Any new building in the City of San Luis Obispo may be occupied partly or wholly
by employees relocating from elsewhere in the City or the region. Buildings are often
leased entirely to firms relocating from other buildings in the same jurisdiction.
However, when a firm relocates to a new building from elsewhere in the region, they
vacate building space somewhere else, which in turn is filled by new firms and
employees. Somewhere in the chain new jobs are created in the region. The net
effect is that new buildings accommodate new employees, although not necessarily
inside of the new buildings themselves.
Just as new non-residential buildings make room for new firms and their employees
relocating to the area, new residential construction makes room for new population
and households moving to the area. Even if the household moving into a new unit
may be relocating from the same jurisdiction, the household vacates an existing unit
that, in turn, is filled with another household. Again, somewhere in the chain new
population and households are added to the region.
New market-rate housing development accommodates growth in population and
households. The arrival of new population creates demand for additional jobs in
retail outlets and services that follow housing growth. A portion of the income of the
residents in new market-rate housing units will be spent to purchase a range of goods
and services, such as purchases at local supermarkets and restaurants or services at
local dry cleaners. These purchases in the local economy in turn generate
employment at a range of different compensation levels.
New housing affordable to lower income households is not added to the supply in
sufficient quantity to meet the needs of new employee households associated with
new commercial and residential buildings. This is because the cost to build new
housing, or to acquire and rehabilitate existing housing, is more than the rents or
home prices that lower income households can afford to pay. Retail and service
sectors, in particular, include a high proportion of low paying jobs.
DRA’s nexus analyses are designed to demonstrate the economic relationship
between residential and non-residential development and the need for affordable
housing in the City. The nexus methodology used by DRA quantifies the estimated
increase in lower income households associated with new residential and non-
residential development, and estimates the costs of providing housing affordable to
these new households. These costs are then translated into the maximum
supportable nexus fee that may be levied on residential and non-residential
development. DRA employs consistently conservative assumptions, so that the
resulting calculations of the maximum fees understate the maximum nexus
calculation for each land use type. This methodology is consistent with the standards
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of reasonable relationship established by Supreme Court case law and Government
Code sections 66000-66010.
3. Summary of Housing Market Trends
This section summarizes recent trends in the housing inventory, rents, and sales
prices in the City of San Luis Obispo, and serves as the basis for the market rent and
sales price assumptions used in the residential nexus analysis.
3.1 Affordable Rents and Home Prices
a. Affordable Housing Cost Definitions
Calculation of affordable rents and home prices requires defining affordable
housing expense for renters and owners. For the nexus calculations in this report,
DRA used the City’s existing affordable housing standards. Under these standards,
affordable housing expense for renters is defined as 30% of household income for
rent. For owners, affordable sales price limits are determined by multiplying the
annual income limit of the income group, adjusted by household size, by 3.0 for
extremely low, very low, low and moderate income households, and by 3.5 for
moderate income households, rounded to the nearest $25.
b. Occupancy Standards
Because income definitions for affordable housing assistance programs vary by
household size, calculation of affordable rents and sales prices require the definition
of occupancy standards (the number of persons per unit) for each unit size. For the
purposes of this analysis, affordable housing cost for renters is based on the
following occupancy standards:
Studio: One person
One Bedroom: Two persons
Two Bedroom: Three persons
Three Bedroom: Four to five persons (4.5 persons is used)
Four Bedroom: Six persons.
c. Affordable Rents and Sales Prices
Table 1 summarizes affordable monthly net rents by income level and unit bedroom
count, based on the City’s current Affordable Housing Standards.
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Table 2 shows affordable home prices by income level and unit bedroom count,
according to the City’s current Affordable Housing Standards.
Table 1
Affordable Net Rents by Percent of AMI and Unit Bedroom Count1
City of San Luis Obispo
2019
Unit Size Studio 1 Bedroom 2 Bedroom 3 Bedroom 4 Bedroom
Extremely Low
30% of AMI2 $459 $525 $591 $683 $761
Very Low
50% of AMI3 $766 $875 $984 $1,138 $1,296
Low
80% of AMI4 $919 $1,050 $1,181 $1,365 $1,523
Moderate
120% of AMI5 $1,838 $2,100 $2,363 $2,730 $3,045
1From City of San Luis Obispo 2019 Affordable Housing Standards.
2Calculated at 30% of 30% AMI, adjusted by household size.
3Calculated at 30% of 50% AMI, adjusted by household size.
4Calculated at 30% of 60% AMI, adjusted by household size.
5Calculated at 25% of 100% AMI, adjusted by household size.
Sources: City of San Luis Obispo; DRA.
Table 2
Affordable Home Prices by Percent of AMI and Unit Bedroom Count1
City of San Luis Obispo
2019
Unit Size Studio 1 Bedroom 2 Bedroom 3 Bedroom 4 Bedroom
Extremely Low
30% of AMI $56,700 $64,800 $72,900 $85,675 $103,761
Very Low
50% of AMI $94,500 $108,000 $121,550 $140,250 $156,400
Low
80% of AMI $151,050 $172,650 $194,250 $224,400 $250,350
Moderate
120% of AMI $257,250 $294,000 $330,750 $382,200 $426,300
1Affordable sales price limits are determined by multiplying the annual income limit of the income
group, adjusted by household size, by 3.0 for extremely low, very low, and low income households,
and by 3.5 for moderate income households, rounded to the nearest $25.
Source: HUD; San Luis Obispo County; DRA.
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3.2 Housing Inventory
Table 3 shows data from the California Department of Finance on the number of
housing units by type of unit in the City of San Luis Obispo from 2010 to 2019, as
well as the City’s household population and average household size. The City added
a total of 850 housing units between January 2010 and January 2019, including 388
units in five plus unit buildings and 341 single-family detached units. Average
household size fluctuated up and down slightly and is currently 2.27 persons per
household.
Table 3
Housing Units by Type
City of San Luis Obispo
2010 to 20191
2010 2015 2016 2017 2018 2019
Single-Family Detached 9,541 9,676 9,693 9,763 9,821 9,882
Single-Family Attached 1,379 1,381 1,383 1,387 1,391 1,403
Two to Four Unit Buildings 2,627 2,662 2,678 2,695 2,717 2,723
Five Plus Unit Buildings 5,524 5,685 5,714 5,812 5,861 5,912
Mobile Homes 1,482 1,483 1,483 1,483 1,483 1,483
Total Units 20,553 20,887 20,951 21,140 21,273 21,403
Persons Per Household 2.29 2.31 2.30 2.30 2.29 2.27
Household Population2 43,937 45,149 45,181 45,523 45,559 45,495
1As of January first of each year.
2Excludes persons in group quarters (numbering 1,307 in 2019, for a total population of 46,802).
Sources: California Department of Finance; DRA.
3.3 Rental Housing Market Conditions
a. Distribution of Market Rents
Table 4 summarizes 2017 ACS data (the most recent available) on the distribution of
rental housing units in the City of San Luis Obispo by the amount of rent paid, and
estimates the income categories to which those units are affordable, based on
affordable rents for two-bedroom units, calculated using San Luis Obispo County
AMI from Table 2. Based on the countywide definition of affordability,
approximately 80% of housing units are affordable to low income households.
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Table 4
Distribution of Rental Housing Units by Rent Paid
City of San Luis Obispo
2017
Monthly Rent
Category
Affordable to:
Number of
Units
Percent of
Units
Cumulative
Units
Cumulative
Percent
Less than $500 Extremely Low1 601 5.3% 601 5.3%
$500 to $749 Very Low 745 6.6% 1,346 11.9%
$750 to $999 Very Low 1,954 17.3% 3,300 29.1%
$1,000 to $1,499 Very Low/Low 3,713 32.8% 7,013 61.9%
$1,500 to 1,999 VL/Low/Mod 2,265 20.0% 9,278 81.9%
$2,000 to $2,499 Mod/Above Mod 1,290 11.4% 10,568 93.3%
$2,500 to $2,999 Above Mod 328 2.9% 10,896 96.2%
$3,000 or More Above Mod 420 3.8% 11,325 100.0%
Total 11,325 100%
1For studio and one-bedroom units.
Sources: American Community Survey, five-year data, 2017. This is the most recent source
available that tabulates the number of housing units by rent.
b. Apartment Asking Rents
Table 5 shows the trend in average advertised asking rents by unit bedroom count
in the City during the 2012 through 2019 period, which may include deed-restricted
affordable rental units. The average rent increased by nearly 85% from 2012 to 2019,
from $1,112 to $2,048 per month. Table 6 shows the annual compound growth rate
in apartment rents. The average rent increased at a rate 9% per year over the last
seven years.
Table 5
Average Asking Rents
City of San Luis Obispo
2012 to 2019
Number of
Bedrooms in
Unit 2012 2015 2016 2017 2018
2019
Jan-Apr
One Bedroom $892 $1,113 $1,177 $1,251 $1,376 $1,445
Two Bedroom $1,192 $1,335 $1,778 $1,354 $1,407 $2,094
All Units $1,112 $1,343 $1,502 $1,259 $1,277 $2,048
Annual averages of monthly rents (except for 2019 which is average of January through April).
Sources: Rentcafe.com; DRA.
Table 6
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Annual Increase in Average Asking Rents1
City of San Luis Obispo
2012 to 2019
2012 to 2016 2016 to 2019 2012 to 2019
One Bedroom 7% 7% 7%
Two Bedroom 11% 6% 8%
All Units 8% 11% 9%
1Annual compound growth rate.
Sourced: Rentcafe.com; DRA.
c. Comparison of Market and Affordable Rents
Table 7 compares affordable rents at different income levels and unit bedroom
counts with average market rents in the City of San Luis Obispo, and with HUD Fair
Market Rents (FMRs) for San Luis Obispo County. Affordable one-bedroom and two-
bedroom rents for moderate income households at 50% of AMI are well below
average market rents for these unit sizes in the City, and low income 60% AMI rents
are below market as well. For a two-bedroom unit, the moderate income 100% AMI
rent is also below market, while for a one-bedroom unit the 100% AMI rent is equal
to the market rent.
HUD FMRs for San Luis Obispo County are substantially below average asking rents
for one- and two-bedroom units in the City of San Luis Obispo.
Table 7
Comparison of Average Market and Affordable Rents
City of San Luis Obispo
2019
Unit Size
Affordable Rents HUD 2019
FMR
San Luis
Obispo Co.2
City of San Luis
Obispo Ave.
Market Apt.
Rent
Very Low
Income
50% AMI
Low Income
60%AMI1
Moderate Income
100%
AMI
110%
AMI
Studio $766 $919 $1,276 $1,684 $1,059 N/A
1 Bedroom $875 $1,050 $1,458 $1,925 $1,196 $1,445
2 Bedroom $984 $1,181 $1,641 $2,166 $1,542 $2,094
3 Bedroom $1,138 $1,365 $1,896 $2,503 $2,230 N/A
N/A = Not available (too few units available).
1These rents equal City’s 2019 Affordable Housing Standards for Low Income (80% AMI).
2From HUD FY 2019 Fair Market Rent Documentation System for the San Luis Obispo-Paso Robles-
Arroyo Grande MSA.
Sources: HUD; San Luis Obispo County; Rentcafe.com; DRA.
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3.4 For -Sale Housing Market Conditions
a. Market Home Price Trends
Table 8 shows trends in median home values in the City and neighboring
communities from August 2010 to August 2019. Median home values have
increased dramatically from the near-bottom prices of the Great Recession in 2010
to current prices in 2019. The estimated current median home value in the City is
$728,100, which exceeds the 2010 median home value of $466,100 by 56%. Home
prices have increased at an average rate of 5% per year since 2010.
Table 8
Trends in Median Home Values
City of San Luis Obispo
August 2010 to August 2019
Single-Family Condominium All Homes
Median Home Value1
2010 $502,100 $323,700 $466,100
2015 $666,100 $410,100 $614,700
2019 $774,800 $503,600 $728,100
Annual Compound
Growth Rate
2010-2015 5.8% 4.8% 5.7%
2015-2019 3.9% 5.3% 4.3%
2010-2019 4.9% 5.0% 5.1%
1Based on Zillow home value index. No other data sources on median home prices in the City were
identified.
Sources: Zillow; DRA.
b. Single-Family Home and Condominium Sales Prices
Table 9 summarizes sales prices for 120 single-family homes in the City of San Luis
Obispo sold between June, 2019 and November, 2019. The median home sales
price for a three-bedroom single-family home in the City was approximately
$720,000. Table 10 shows the prices for 46 condominium sales over the same time
period. The median sales price for a two-bedroom condo was $465,000.
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Table 9
Summary of Single-Family Home Sales Prices by Unit Bedroom Count
City of San Luis Obispo
July 2019 to October 2019
2 Bedroom 3 Bedroom 4 Bedroom 5-6 Bedroom
Number of Sales 23 61 28 8
Ave. Price $719, 000 $748,000 $1,000,000 $894,000
Median Price $715,000 $719,000 $950,000 $880,000
Low Price $256,000 $399,000 $249,000 $133,000
High Price $1,153,000 $1,200,000 $2,349,000 $2,675,000
Ave. Price/SF $552 $483 $418 $332
Median Price /SF $483 $469 $424 $321
Low Price/SF $277 $222 $177 $287
High Price/SF $1,000 $744 $543 $403
Note: Units with 5 or more bedrooms comprise only 3% of total housing units in the City as of
2017 ACS data. These may be older units, affecting their price in comparison with smaller units.
Source: CoreLogic; DRA.
Table 10
Summary of Condominium Sales Prices by Unit Bedroom Count
City of San Luis Obispo
July 2019 to October 2019
1 Bedroom 2 Bedroom 3 Bedroom
Number of Sales 3 37 6
Ave. Price $304,667 $458,554 $584,167
Median Price $310,000 $465,000 $594,500
Low Price $270,000 $300,000 $502,000
High Price $334,000 $650,000 $690,000
Ave. Price/SF $415 $403 $332
Median Price /SF $442 $392 $337
Low Price/SF $360 $280 $276
High Price/SF $443 $531 $375
Source: CoreLogic; DRA.
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4. Residential Nexus Analysis
4.1 Impact Methodology and Use of the IMPLAN Model
The methodology used for the residential nexus analysis begins with the estimated
sales prices of a prototypical residential development and moves through a series of
linkages to the incomes of the households that purchased the units, the annual
expenditures of those households on goods and services, the jobs associated with
the delivery of these goods and services, the income of the workers performing those
jobs, the household income of those worker households, and finally to the
affordability level of the housing needed by those worker households.
The Appendix A tables referred to in the following sections are contained at the end
of the text.
The steps of the residential nexus analysis are generally as follows:
1. Define a prototypical residential development.
2. Estimate the household income distribution of the households purchasing or
renting these homes.
3. Estimate the consumer expenditures of those households.
4. Estimate the number of new full-time employees required to provide the goods
and services purchased by these households.
5. Estimate the number of new households associated with this employment
growth.
6. Estimate the income distribution of these new employee households.
7. Estimate the number of new households requiring affordable housing.
8. Estimate the housing affordability gap for these affordable housing units.
9. Calculate the maximum supportable residential nexus fee.
For owner housing, DRA estimated the household income distribution of households
purchasing the new homes based on the estimated minimum income necessary to
afford the mortgage principal and interest, property taxes and property insurance
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required to purchase the home. For renters, tenant household income is calculated
from typical income to rent standards used by apartment owners. The consumer
expenditures of these households and the jobs generated by these expenditures are
estimated using the IMPLAN model, a model widely used for the past 25 years to
quantify employment impacts from personal income. Based on the employment
generation by industry from the IMPLAN model, DRA used its nexus model to
quantify the income of worker households by affordability level.
4.2 The IMPLAN Model
The IMPLAN model is an economic analysis software package now commercially
available through the Minnesota IMPLAN Group (MIG). IMPLAN was originally
developed by the U.S. Forest Service, the Federal Emergency Management Agency,
and the U.S. Department of the Interior Bureau of Land Management. It has been in
use since 1979 and refined over time. IMPLAN has become one of the industry
standards widely used across the United States to predict economic impacts in a
broad range of applications from major construction projects to natural resource
programs. IMPLAN’s clients include more than 20 federal government agencies, 60
state agencies across the country, and academic, local government, nonprofit and
private sector clients numbering in the hundreds. IMPLAN is also the industry
standard in California for use in local residential nexus impact fee analyses.
The IMPLAN model projects the number of employees needed to produce a given
amount of goods and services, based on actual 2017 economic data for San Luis
Obispo County. More specifically, IMPLAN is based on an input-output accounting
of commodity flows within an economy from producers to intermediate and final
consumers. The model establishes a matrix of supply chain relationships between
industries and also between households and the producers of household goods and
services. The model tracks changes in purchases for final consumption through the
supply chain. Industries that produce goods and services for final consumption must
purchase inputs from other producers that, in turn, purchase goods and services. The
model tracks these relationships through the economy to the point where leakages
from the region stop the cycle.
IMPLAN’s industry sectoring scheme is tied to the Bureau of Economic Analysis
(BEA) Input-Output Study, which uses a 440-sector scheme. This scheme
approximates 6-digit North American Industrial Classification System (NAICS) for
manufacturing, and is more highly aggregated for service sectors. IMPLAN data sets
are available for each county and state, so the model can be tailored to the specific
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economic conditions of the region being analyzed. This analysis uses the most
current 2017 data set for San Luis Obispo County.
Economic impacts estimated using the IMPLAN model are divided into three
categories:
Direct impacts result from the household spending included in the analysis. A
relevant example is restaurant employment created when households in new
residential buildings spend money dining out. Employment at the restaurant would
be considered a direct impact.
Indirect impacts result from supplier purchases made by the business operations of
the companies included in the analysis. With the restaurant example, indirect
impacts would include employment at food wholesalers, kitchen suppliers, and
producers of agricultural products.
Induced impacts result from increased demand for local-serving retail and services
by the new employees. Again, using the restaurant example, induced impacts would
include employment generated when employees of the restaurant, food wholesaler
and kitchen suppliers spend their earnings in the local economy.
DRA used the Household Income Change Activity feature of the IMPLAN model,
considered by IMPLAN staff to be the best option for determining the jobs impact
from household spending.
4.3 Disposable Income of New Households
This analysis uses estimated sales prices and rents for the four housing prototypes to
estimate the income of the new households moving into these units. Sales prices and
apartment rents for the prototypes were estimated based on a review of recent home
sales in the City of San Luis Obispo, as well as data on current rents for apartment
properties in the City. Data on single-family home sales and condominium home
sales in the City are summarized in Table A-17 and Table A-18, respectively, in
Appendix A.
To estimate the household incomes of the buyers of new for-sale homes, the analysis
assumes average incomes approximately equal to the minimum qualifying income
criteria for a new-home loan. This calculation assumes that the new buyers pay a 20
percent down payment and secure a mortgage equal to 80 percent of the home’s
sale price. Monthly principal and interest payments on the mortgage are calculated
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assuming a 30-year fixed rate mortgage at 5.0 percent interest. Qualifying household
income is estimated assuming households pay 35 percent of gross household income
for principal, income, taxes and insurance (PITI), a typical standard used by
mortgage lenders.
For renters, the income distribution of tenants in the new apartments is estimated
assuming tenants on average spend 33 percent of their household income for rent.
The IMPLAN Household Income Change model uses the increase in disposable
household income in the City from the new buyers and renters as the primary upfront
input. To arrive at disposable income, gross income for residents of prototypical units
must be adjusted downward to account for Federal and State income taxes, Social
Security and Medicare (FICA) taxes, and personal savings. Other taxes, including
sales tax, gas tax and property tax, are handled internally within the model. Housing
expenses are not deducted from disposable income as they are also handled
internally with the IMPLAN model. Based on a review of data from the Tax Policy
Center (a joint venture of the Brookings Institution and the Urban Institute), and the
California Franchise Tax Board, disposable income for households in the income
levels projected for the buyers and renters of the prototypical market-rate housing
units is estimated at 75 percent of gross household income.1
Table A-2 shows the estimated average household income, projected total
household income, and projected total disposable household income of new
homebuyers for each of the owner single-family and townhome prototypes. Table
A-3 shows the disposable household income projections for new renters for the
apartment prototype.
4.4 Projected Employment Generation
The IMPLAN model has been applied to link household consumption expenditures
to job growth occurring in the City. The IMPLAN model distributes spending among
various types of goods and services, and therefore industry sectors, based on data
from the Consumer Expenditure Survey and the Bureau of Economic Analysis
Benchmark Input-Output study to estimate direct, indirect, and induced employment
generated. The IMPLAN model also projects total industry output and payroll
associated with the direct, indirect and induced impacts. For the residential nexus
analysis, the projected impacts are induced by the spending of new resident
1 “Household Income and Disposable Income by State” retrieved from taxpolicycenter.org.
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households. The IMPLAN outputs are multiplied by Full-Time Equivalent (FTE)
conversion factors to convert the projections into estimated full-time employment.
The projected employment impacts from each residential prototype are summarized
in Tables A-4 through Table A-6, respectively. These tables show the breakdown of
the new jobs by major industry category created as a result of the development of
each prototype.
4.5 Projected Household Growth
The next step in this analysis is to translate the number of new employees into the
number of employee households in the City. The 2017 Five-Year ACS indicates that
the City of San Luis Obispo had an average of 1.82 workers per worker household.
Therefore, DRA divided the number of new employees by 1.82 to generate the
number of new households.
In this step we also adjust for potential jobs that are taken by existing residents in
San Luis Obispo County that are unemployed or underemployed. According to the
State of California Employment Development Department, as of October 2019 the
unemployment rate in San Luis Obispo County was 3.1%. Since employment is
currently at a historical low, we conservatively reduce the employment estimates by
a 5% labor force adjustment factor.
The number of employee households created as a result of the development of each
prototype are summarized in Tables A-7 through Table A-9, respectively.
4.6 Projected Low and Moderate Income Households
This step estimates the number of new employee households that will require
affordable housing. The IMPLAN model provides information on payroll per
employee. To estimate household incomes, DRA multiplied each payroll per
employee figure by 1.82, the citywide average number of workers per worker
household. This approach assumes that all workers in a household earn similar
wages.
The average household size in the City of San Luis Obispo was 2.27 persons
according to California Department of Finance estimates for January, 2019.
Therefore, we adjust income limits by a household size of 2.25 persons resulting in
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limits of $22,200 at 30% AMI, $36,950 at 50% AMI, $59,150 at 80% AMI, and
$86,350 at 120% AMI.
The percentage of employee households in each industry category expected to fall
into each of the four income categories (less than 30% AMI, 30% to 50% AMI, 50%
to 80% AMI, and 80% to 120% AMI) was estimated based on Occupational
Employment and Wage Data by occupational grouping for San Luis Obispo County
from the California Occupational Employment Statistics (OES) Survey for First
Quarter, 2019. Table B-2 summarizes this wage data by two-digit Standard
Occupational Classification (SOC) code, including mean, 25th percentile, median,
and 75th percentile wages for each occupational category.
Tables A-7 through A-9 detail the calculation of extremely low, very low, low and
moderate income households, respectively, that would be expected to move to the
City as a result of the development of each of the housing prototypes.
5. Non-Residential Nexus Analysis
5.1 Overview of Non-Residential Nexus Methodology
The numerical nexus analysis in this report identifies the number of households at
extremely low, very low, low and moderate income levels associated with the
employees that work in a building of a given size and land use type in the City, and
calculates the development impact fee required to make housing affordable to those
households.
DRA examined the development of six non-residential land use prototypes that are
expected to be built in the City in the near future: retail, hotel, service, office,
industrial and institutional.
The nexus analysis employs a tested nexus and gap methodology, described below,
that has proven acceptable to the courts1. The economic analysis uses a conservative
approach to understate the maximum fee amount. Therefore, the housing impacts
are likely even greater than indicated in the analysis.
The nexus economic analysis methodology employs the following steps:
1 Such as Commercial Builders of Northern California v. City of Sacramento (1991) 941 F2d
872.
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1. Estimate total new employees;
2. Estimate new employees living in the City;
3. Adjust for potential future increase in labor force participation;
4. Estimate the number of new households represented by the number of new
employees;
5. Distribute households by industry groupings for each land use; and
6. Estimate the number of employee households meeting extremely low, very low,
low and moderate income limits, adjusted for household size, based on
estimated wages by occupation and industry.
The result of these steps is the estimated number of households by land use living in
the City and qualifying as extremely low, very low, low and moderate income based
on development in the City. DRA used the results of the housing affordability gap
analysis to calculate the development impact fee required to make housing
affordable to the extremely low, very low, low and moderate income households
who will need to find housing in the City in connection with new non-residential
development in the City.
The nexus analysis requires a number of assumptions. DRA consistently employs
conservative assumptions that serve to understate the nexus calculation. We expect
that the cumulative effect of these assumptions understates the maximum nexus fee
calculation for each building type.
The residential nexus fee calculation estimates affordable housing needs generated
by employees meeting the goods and services needs generated by new market rate
residential development in the City. This is particularly the case for commercial/retail
space. To address the overlap between employees created by new residential
development and those created by new non-residential development, DRA 1) adjusts
the retail employment generation downward by an estimated overlap factor and 2)
recommends that the City establish residential and non-residential nexus fees that
are below the maximum level.
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5.2 Non-Residential Nexus Methodology and Assumptions
Each of the steps in the nexus analysis is described below, along with corresponding
assumptions. The detailed assumptions and calculations for the non-residential
nexus analysis are included in Appendix B.
Estimate Total New Employees in Prototype Buildings
The first step estimates the total number of direct employees who will work at or in
the building type being analyzed. This step implicitly assumes that all employees are
new employees to the City. When firms and their employees relocate from other
buildings in the City, they will have vacated spaces that will likely be filled by other
firms and employees. A subsequent step in this analysis adjusts for existing
unemployed City residents who may be hired in the building.
The estimate of the number of employees that will be working in each prototype
building is based on an employment density factor for each land use (i.e. number of
net square feet per employee). The net square feet of building area is divided by the
employment density factor to calculate employment.
The employment density factors used in this analysis, based on DRA experience and
a review of recent fiscal and environmental impact studies, are as follows:
Retail/Service: 350 net square feet per employee for retail and 400 net square feet
for service. These assumptions accommodate a mix of retail and restaurant space
and a range of personal services. Restaurant space typically has a higher employment
density, while retail space ranges widely depending on the type of retail, with
furniture stores, for example, representing the lower end. The density range within
this category is wide, with some types of retail as much as five times as dense as
other types.
Hotel: 1,000 square feet per employee, representing a lower level of service than
more employment intensive higher service urban hotels.
Office/Institutional: 300 square feet per employee. This represents an average of a
range that includes traditional office uses, high tech activities, research &
development (R&D) space, and medical offices.
Industrial: 750 square feet per employee. This density covers flex space, typically
leased to a mix of office, light manufacturing, R&D and storage uses. This designation
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may also be applied to auto related servicing and other activities of a semi-industrial
character.
Estimate Employees Living in the City
This step estimates the number of new employees associated with new employment
growth in the City that would live in the City.
The 2017 Five-Year ACS indicates that 61 percent of workers in the City aged 16
years and older lived in the City1. For the purposes of this analysis, we have assumed
that 61 percent of new City workers will reside in the City.
Adjust from Employees to Employee Households
The next step in the analysis converts the number of employees living in the City to
the number of employee households that will work at or in the building type being
analyzed. This step recognizes that there is, on average, more than one worker per
household, and thus the number of housing units in demand for new workers must
be reduced. The worker per worker household ratio also eliminates all non-working
households, including retired persons, students, and those non-working households
on public assistance.
Based on ACS Five-Year estimates for 2017, the City of San Luis Obispo had 24,213
employed residents and 13,332 households with one or more workers, for an
average of 1.82 workers per worker households. The total number of employed
residents includes part-time and full-time workers. This is a conservative assumption.
If only full-time workers were included, the ratio of workers per household would
be smaller, leading to a larger estimate of new households created. In addition,
wages by occupation and industry assume full-time employment. Household
incomes will be lower for households with part-time workers, generating a larger
impact than projected in this study.
Distribute Employee Households by Occupation
This step distributes households by occupational groupings for each land use. This
step is necessary to estimate new workers’ incomes. DRA used data from the First
Quarter 2019 U.S. Bureau of Labor Statistics, National Industry-Specific
Occupational Employment and Wage Estimates to calculate the percentage
1 Based 4,131 workers in the City of San Luis Obispo and 1,080 workers who lived and
worked in San Luis Obispo
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distribution of employment by industry occupational category for each non-
residential land use category. These distributions are shown in Tables B-1.
Estimate Wages by Occupation
In this step, occupation is translated to income based on Occupational Employment
and Wage Data by occupational grouping for San Luis Obispo County from the
Occupational Employment Statistics (OES) Survey, First Quarter 2019. Data on
mean, median, 25th percentile, and 75th percentile hourly wages by occupation were
used to estimate the percentage of employees earning salaries in the extremely low,
very low, low and moderate income categories based on the 2019 HUD income
limits for San Luis Obispo County adjusted for an average household size of 2.25
persons. The wage data and the estimated percentages of each occupational
category falling into the extremely low, very low, low and moderate income
categories are summarized in Table B-2. The projected number of new employee
households and the distribution of these employee households by occupation are
shown in Table B-3.
Estimate Extremely Low, Very Low, Low and Moderate Income Households
The estimated percentage and number of households earning salaries under 30
percent AMI, between 31 percent and 50 percent AMI, between 51 percent and 80
percent AMI, and between 81 percent and 120 percent AMI are shown in Tables B-
4 through B-7, respectively. These estimates were derived using 2019 income limits
adjusted for an average household size of 2.25 persons.
Individual employee income data was used to calculate the number of households
that fall into these income categories by assuming that multiple earner households
are, on average, formed of individuals with incomes within the same income
category.
6. Affordability Gap Analysis
The affordability gap analysis compares the cost of housing development in the City
to the amount extremely low, very low, low and moderate income households can
afford to pay for housing. The affordability gap represents the capital subsidy
required to develop housing affordable to families at target income levels. The
methodology, key assumptions and findings of the affordability gap analysis are
summarized below.
The resulting affordability gaps are used to estimate the maximum residential and
non-residential nexus fees required to mitigate new demand generated by each
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building type for housing affordable to extremely low, very low, low and moderate
income households. Detailed calculations for the gap analysis are found in Appendix
A.
6.1 Methodology
The first step in the gap analysis establishes the amount a tenant or homebuyer can
afford to contribute to the cost of renting or owning a dwelling unit. This analysis
uses the income level and affordable housing cost definitions defined in prior
sections of this report.
The second step estimates the costs of constructing or preserving affordable housing
in the City. DRA calculated the affordability gap for two owner prototypes and one
renter prototype considered representative of recent and proposed new single-family
and multifamily development in the City. The prototypes used in this analysis are
detailed in Table A-1. Prototype #1 is a detached single-family infill product.
Prototype #2 is an attached townhome development. Prototype #3 consists of
stacked flat apartments. Affordability gaps are calculated for studio through three-
bedroom units for renters, and two-bedroom through four-bedroom units for owners,
depending upon the prototype.
The third step in the gap analysis establishes the housing expenses borne by the
tenants and owners. These costs can be categorized into operating costs, and
financing or mortgage obligations. Operating costs are the maintenance expenses of
the unit, including utilities, property maintenance, property taxes, management fees,
property insurance, replacement reserve, and insurance. For the rental prototype
used in this analysis, DRA assumed that the landlord pays all but certain tenant-paid
utilities as an annual operating cost of the unit paid from rental income.
Financing or mortgage obligations are the costs associated with the purchase or
development of the housing unit itself. These costs occur when all or a portion of
the development cost is financed. This cost is always an obligation of the landlord
or owner. Supportable financing is deducted from the total development cost, to
determine the capital subsidy required to develop the prototypical housing unit
affordable to an eligible family at each income level.
For the rental housing prototype used in this analysis, the gap analysis calculates the
difference between total development costs and the conventional mortgage
supportable by net operating income from restricted rents.
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The purpose of the gap analysis is to determine the fee amount that would be
required to develop housing affordable to the extremely low, very low, low and
moderate income households who will need to find housing in the City in
connection with new market-rate residential and non-residential development in the
City. Therefore, no other housing subsidies, or leverage, are assumed.
For the non-residential nexus analysis, justifiable nexus fees are calculated using the
affordability gap for the rental prototype, which is generally the most cost-effective
way of providing affordable housing to extremely low, very low, low and moderate
income households. For the residential nexus analysis, justifiable nexus fees are
calculated using the affordability gap for the rental prototype, but are also shown for
the construction of “like” housing (i.e. SFD for SFD and Townhome for Townhome).
6.2 Housing Development Costs
DRA estimated the costs to build the new rental housing and housing prototypes
based on DRA’s experience with housing development throughout California, as
well as a review of California Tax Credit Allocation 9% tax credit application
development budgets for projects in San Luis Obispo County over the past three
years.
Estimated development costs for the prototypes are shown in Table A-10. Land costs
were estimated based on a review of recent land sales in the City, shown in Table
A-19.
6.3 Calculation of Per Unit Subsidy Amounts
The per unit subsidy required to make new housing affordable to extremely low, very
low, low and moderate income residents was calculated by subtracting per unit
development costs from the per unit mortgage supportable from affordable rents.
Affordable sales price and rent calculations are shown in Tables A-11 and A-12,
respectively. The per unit subsidy calculations are shown in Tables A-13 through A-
15 for each of the housing prototypes.
7. Policy Recommendations
This section presents DRA’s policy recommendations for the residential IHO
program and the non-residential nexus fee program. Tables referred to in this section
are found at the end of the text.
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7.1 IHO Set-Asides
Based on the survey of comparable cities and analysis of local economic/market data
DRA recommends the City’s IHO requirements for residential uses be revised to the
following citywide:
Rental: 5% of units at 50% AMI plus 10% of units at 80% AMI
Owner: 5% of units at 80% AMI plus 10% of units at 120% AMI
Analysis of rental data for the City indicates that the average market rent for one-
bedroom units is affordable at 100% of AMI, while two-bedroom rents are affordable
to households at approximately 110% of AMI (see Table 7). The City’s current IHO
requirements include units at 120% of AMI, which is above market. DRA believes
the City’s IHO will better serve the City’s affordable housing needs and will minimize
market competition between market-rate units and IHO units if all units are restricted
below 80% AMI.
According to the City’s 2015 Housing Element, the City has approximately 2,032
cost-burdened extremely low and very low income households paying more than
30% of their gross income on rent, accounting for about 28% of all renter
households.1 Further, 24.9% of the City’s 2014 to 2019 Regional Housing Need
Allocation (RHNA) is for very low income households. Reducing a portion of the
IHO requirement to 50% of AMI will help meet these very low income housing
needs.
DRA does not recommend IHO requirements for owners below 80% of AMI. In
DRA’s experience, homeownership for very low income households (50% of AMI)
is a struggle even with an affordable home price, due to the maintenance and other
costs associated with long-term homeownership and their difficulty in qualifying for
a loan.
The survey of comparable cities, summarized in Table 11, indicates that a majority
of the selected cities have rental IHO requirements at 50% and 80% of AMI. Only
Santa Barbara and Monterey have affordability limits extending up to 120% of AMI.
For owners, the majority of the surveyed cities have IHO requirements at 80% and
120% of AMI, with Santa Barbara going up to 160% of AMI for single-family
dwellings. None of the cities have ownership requirements below 80% of AMI.
1 Source: 2015 Housing Element Table B-4. Includes 39% of 4,532 extremely low income
households and 15% of 1,764 very low income households.
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7.2 Affordable Housing Standards
DRA reviewed the City’s existing Affordable Housing Standards for renters and
owners. DRA recommends the City maintain its current definitions of affordable
housing expense in terms of the percent of AMI used to calculate affordable rents
and sales prices, but revise them in terms of the components of affordable housing
expense and the calculation of affordable sales prices. DRA’s recommended
standards are described below, using HUD utility allowances for renter utility costs,
as explained Affordable rent calculations using the recommended standards for one
to four bedroom units are shown in Table 12. Affordable home price calculations
using the recommended standards for one to four bedroom units are shown in Table
13.
Affordable Rents:
30% AMI (extremely low income): shall not exceed 30% of 30% of AMI for the
number of persons expected to reside in the unit, divided by 12, and adjusted for
household/unit size and utility cost.
50% AMI (very low income): shall not exceed 30% of 50% of AMI for the number
of persons expected to reside in the unit, divided by 12, and adjusted for
household/unit size and utility cost.
80% AMI (low income): shall not exceed 30% of 60% of AMI for the number of
persons expected to reside in the unit, divided by 12, and adjusted for household/unit
size and utility cost.
120% AMI (moderate income): shall not exceed 30% of 120% of AMI for the number
of persons expected to reside in the unit, divided by 12, and adjusted for
household/unit size and utility cost.
DRA recommends calculating affordable sales prices assuming an occupancy
standard of one person per bedroom plus one, per California Health and Safety Code
standards (for example, for a one-bedroom unit, the income limit for a two-person
household is used).
Under the City’s current Affordable Housing Standards for renters, affordable rent is
defined as 30% of gross income. DRA recommends this definition be revised to
include an appropriate utility allowance for the size of the unit and based on the
actual utilities paid by the tenant (electricity, gas, water, etc.) to comport with the
standard industry practice for affordable rental housing used in virtually all State,
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Federal and private leveraged financing sources. As revised, the standard would be
30% of gross income for rent plus utilities. The Housing Authority of the City of San
Luis Obispo (HASLO) publishes utility allowances by unit bedroom count annually
that can be used for this calculation.
Affordable Rent Calculation Example:
Two-person household at 50% of AMI (very low income)
Annual Income Limit $35,000
Monthly Income $2,917
Affordable Monthly Housing Cost @ 30% $875
Less Utility Allowance1 $73
Affordable Rent $802
Affordable Sales Prices:
80% AMI: 30% of 70% of AMI for PITI2 plus HOA dues
120% AMI: 35% of 100% of AMI for PITI plus HOA dues
Under the City’s current Affordable Housing Standards for owners, maximum
affordable sales prices are derived by multiplying the annual income limit of the
income group, adjusted by household size, by 3 for extremely low, very low, low,
and moderate income households and by 3.5 for moderate income households,
rounded to the nearest $25. DRA recommends revising these standards to better
match industry best practices.
Standard industry practice is to define owner affordable housing expense for low
income households at 30% of gross income for mortgage principal and interest,
property taxes, property insurance, and homeowner association (HOA) dues. In
DRA’s experience, this is the most common standard used for ownership affordable
housing programs in California, and is consistent with most available subsidy sources
for affordable ownership housing.
DRA recommends increasing affordable housing expense to 35% of gross income
for moderate income households, since higher income households can afford to pay
a greater share of their income on housing and still have sufficient income for other
1 Based on all electric utility allowance for a one-bedroom unit for South County from the
Housing Authority of the City of San Luis Obispo, effective 2/1/2019.
2 PITI = mortgage principal and interest, property taxes and property insurance.
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living expenses. This standard is consistent with former California Redevelopment
Law and private mortgage underwriting criteria.
DRA recommends calculating affordable sales prices assuming an occupancy
standard of one person per bedroom plus one, per California Health and Safety Code
standards (for example, for a three-bedroom unit, the income limit for a four-person
household is used).
Affordable Sales Price Calculation Example:
Four-person household at 100% of AMI (moderate income)
Annual Income Limit $87,500
Monthly Income $7,292
Affordable Monthly Housing Expense @35% $2,552
Less: HOA Expense $200
Less: Property Insurance $100
Less: Property Taxes1 $369
Affordable Monthly Mortgage Payment $1,883
Affordable Mortgage $350,768
Plus: 5% Downpayment2 $18,460
Affordable Home Price (Rounded) $369,200
7.3 Geographical Variation
DRA recommends that the IHO recommendations be applied citywide with no
differential requirements between City boundaries and Expansion Area. We consider
this a best practice in the absence of compelling reasons for varying the
requirements. A 2017 nationwide inclusionary housing survey by Lincoln Institute
of Land Policy found that 85% of the 140 California jurisdictions included in the
survey have uniform citywide requirements and only 6% have varying requirements
across the jurisdiction. The remaining 9% have requirements that apply only in
certain zones, neighborhoods or districts.
1 Property taxes estimated at 1.2% of approximate affordable home price.
2 At 5% of affordable home price.
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7.4 Project Size and Density Adjustments
DRA recommends applying the residential in lieu fee on a per square foot basis.
Applying the in lieu fee on a per square foot basis results in higher fees for larger,
generally more expensive, units and lower fees for smaller, generally less expensive
units.
Based on DRA’s experience and industry best practices, IHO requirements are
seldom adjusted by project size (number of units) and project density. Due to 1) the
complexity of applying the project size adjustment factors in Table 2A of the existing
ordinance (Article 8: Housing-Related Regulations), 2) the difficulty of substantiating
the link between the project size and density adjustment factors and the economic
impact of the IHO requirements as justification for the project size adjustment
factors, and 3) the potential for influencing developer’s choice of project size and
density because of the factors, DRA recommends eliminating Table 2A and the
project size and density adjustment factors. DRA recommends a minimum
inclusionary requirement of one unit for projects of five or more units not otherwise
exempt from the Program.
7.5 Residential In Lieu Fees and Annual Adjustments
DRA recommends applying in lieu fees on a per square foot basis at the estimated
economic equivalent of providing on-site units, as derived from the set-aside
requirements and gap analysis.
Table 14 summarizes estimated development costs for the prototypical single-family
detached, townhome and apartment developments used in the nexus and gap
analysis.
Table 15 calculates rental in lieu fees for the apartment prototype, based on the
difference between the cost of producing a typical rental unit and the per unit rental
mortgage supported by affordable rents for very low and low income households.
Applying the proposed rental IHO requirements of 5% very low income units and
10% low income units, assuming a typical two-bedroom unit, it also shows the
resulting in lieu fees per gross square foot. The resulting in lieu fee is $19 per square
foot for the very low income requirement and $36 per square foot for the low income
requirement, for a total rental in lieu fee of $55 per square foot.
Table 16 calculates owner in lieu fees for the single-family detached and townhome
prototypes based on the difference between the cost of producing a typical
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ownership unit and the per unit affordable sales prices for low and moderate income
households. Applying the proposed owner IHO requirements of 5% low income
units and 10% moderate income units, assuming a typical three-bedroom unit, it
also shows the resulting in lieu fees per gross square foot. For single-family homes,
the resulting in lieu fee is $18 per square foot for the low income requirement and
$31 per square foot for a moderate income requirement for a total owner in lieu fee
of $49 per square foot. For townhomes, the resulting in lieu fee is $16 per square
foot for the low income requirement and $24 per square foot for a moderate income
requirement for a total owner in lieu fee of $40 per square foot.
The goal for in lieu fee annual adjustments is for them to be easily updated
administratively, without a lot of data analysis by staff. DRA recommends that in lieu
fees be updated annually based on the percentage difference between the trailing
three-year average annual change in median household income for San Luis Obispo
County and the All Transactions House Price Index for San Luis Obispo-Paso Robles
MSA published by the U.S. Federal Housing Finance Agency1. This will help adjust
the in lieu fee upwards by the extent housing costs exceed (or lag) growth in income.
An example of the percentage changes in each index for the past three years is shows
as follows:
All Transactions House Price Index, San Luis Obispo-Paso Robles2 16.6%
Area Median Income, San Luis Obispo County, 2016 to 20193 13.5%
Annual Percent Adjustment to In Lieu Fees 3.1%
Since the House Price Index increased at a lower rate than the increase in the AMI
from January 2018 to January 2019, the result would be a reduction in the in lieu
fees based on the one-year trend. DRA recommends using a three-year average trend
to smooth out the changes and make the in lieu fee adjustments more predictable
for developers.
1 Source: https://fred.stlouisfed.org/series/ATNHPIUS42020Q
2 Calculated as the percent change from the 1/1/16 index of 288.9 and the 1/1/19 index of 336.83
3 Calculated as the percent change from 2016 AMI of $77,100 to 2019 AMI of $87,500. To
adjust fees in 2020 DRA recommends using change from 2019 to 2020 AMI, the latter which
is not yet available.
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7.6 Methods of Securing Residential IHO Requirements
The City’s implements its residential IHO requirements through deeds of trust for
owner housing and regulatory agreements for rental housing. DRA recommends that
the City continue with these practices, which comport with industry best practices.
7.7 Effective Date of Ordinance
DRA recommends that projects with planning applications that have been deemed
complete be exempt from any material changes to the IHO and nexus fee programs.
This will prevent changes to the ordinance from affecting the financial feasibility of
developments that are already far along in their planning and financing process and
unable to readily adapt to additional regulatory requirements.
7.8 Non-Residential Nexus Fees
The nexus analysis indicates that high nexus fees are justified for non-residential uses
in the range of $69 to $173 per square foot. However, the justifiable fees are much
higher than have been adopted in other jurisdictions throughout California. DRA
recommends that San Luis Obispo consider fees in the range for $1 to $4 for
industrial uses and $2 to $5 per square foot for other non-residential uses. For ease
of implementation, DRA recommends establishing one rate for industrial uses and a
single rate for all other non-residential uses. Generally, communities are interested
in encouraging industrial uses over, retail/commercial and charge lower fees or no
fees for industrial uses. In addition, higher fees tend to affect the financial feasibility
of industrial development more than commercial/residential because the rents and
sales prices are substantially lower.
Table 11
Inclusionary Housing Set-Aside and Threshold Size Provisions
Selected California Inclusionary Housing Programs
2019
City Year Adopted
Rental Owner Project
Size
Threshold
2019 Population
(2010-2019 %
Pop. Growth) % of Units % of AMI % of Units % of AMI
Davis
1987 5-19 Units: 15% plus
15%
80% AMI
50% AMI
SFD >5000 SF Lots: 25%
80%-120% AMI
w/ 100% AMI
Ave
5 units 69,761
(6.3%) SFD <5000 SF Lots: 15%
20+ Units: 25% plus
10% 80% AMI
50% AMI
SFA: 10%
Stacked Condos or Vertical
Mixed Use: 5%
Monterey 2003 20% 120% AMI 20% 120% AMI 6 units 28,448
(2.3%)
Petaluma 2018
(Orig. 1984)
7.5% plus
7.5%
50%
80%
7.5% plus
7.5%
80%
120%
5 units 62,427
(7.4%)
Santa Barbara1 2009 5-9 Units: 1 unit 120% AMI 10+ Units: 15% 120% AMI 5 units
(Rental)
2 units
(Owner)
93,532
(5.8%) 10+ Units: 10% 120% AMI Duplexes, Luxury Condos:
15%
130% AMI
SFD: 15% 160% AMI
Santa Cruz 2006 DT Dev. Area: 15% 80% AMI 2-4 units: 1 Unit 80% AMI 2 units 65,807
(9.8%) Outside DDA: %
Rental2
80% AMI 5+ Units: 15%
120% AMI
SROs: 15% 50% AMI
Ventura
2004 6% plus
9%
50% AMI
80% or 120%
6% plus
9%
80% AMI
120% AMI
7 units 108,170
(1.6%)
San Luis Obispo3 2004
(Orig. 1994)
City Limits: 3% or
5%
80% AMI
120% AMI
City Limits: 3% or
5%
80% AMI
120% AMI
5 units 46,802
(3.7%)
Expansion Area: 5% and
10%
80% AMI
120% AMI
Expansion Area: 5% and
10%
80% AMI
120% AMI
Table 11
Inclusionary Housing Set-Aside, Density Bonus, and Threshold Size Provisions
Selected California Inclusionary Housing Programs
2019
NOTES:
1 Rental projects of 5-9 units may build one unit or pay a fee; owner projects of 2-9 units must pay a fee.
2 For rental projects outside the Downtown Development Area, the % set-aside requirement equals the most recent % of rental units (of total units) in the City. For
owner projects with 2-4 units, the requirement is one owner unit or one rental unit. Off-site construction is allowed but must provide 30% more IZ units than on-site.
3The required number of dwelling units is determined by multiplying the set-aside requirements by the appropriate Inclusionary Housing Requirement Adjustment
Factor, which varies by project size (number of units) and average unit size (square feet).
Source: DRA survey of selected inclusionary housing programs. Note: % of AMI is for eligibility.
Table 12
Recommended Affordable Rent Standards
City of San Luis Obispo
2019
Assumptions
2019 State Median Income, San Luis Obispo County $87,500
Affordable Housing Cost As a % of Income 30%
No. of Bedrooms Studio One Bedroom Two Bedroom Three Bedroom Four Bedroom
Household Size Adjustment 1 Person 2 Persons 3 Persons 4.5 Persons 6 Persons
Household Size Income Adjust. Factor (1)70%80%90%104%116%
Renter Utility Allowance (2)$51 $73 $128 $158 $210
Affordable Rents by Income Level
Studio One Bedroom Two Bedroom Three Bedroom Four Bedroom
Extremely Low Income
30% of Median
Annual Gross Income $18,375 $21,000 $23,625 $27,300 $30,450
Affordable Monthly Housing Cost $459 $525 $591 $683 $761
Less: Monthly Utility Allowance ($51)($73)($128)($158)($210)
Affordable Monthly Rent $408 $452 $463 $525 $551
Very Low Income
50% of Median
Annual Gross Income $30,625 $35,000 $39,375 $45,500 $50,750
Affordable Monthly Housing Cost $766 $875 $984 $1,138 $1,269
Less: Monthly Utility Allowance ($51)($73)($128)($158)($210)
Affordable Monthly Rent $715 $802 $856 $980 $1,059
Low Income
60% of Median
Annual Gross Income $36,750 $42,000 $47,250 $54,600 $60,900
Affordable Monthly Housing Cost $919 $1,050 $1,181 $1,365 $1,523
Less: Monthly Utility Allowance ($51)($73)($128)($158)($210)
Affordable Monthly Rent $868 $977 $1,053 $1,207 $1,313
Moderate Income
100% of Median
Annual Gross Income $61,250 $70,000 $78,750 $91,000 $101,500
Affordable Monthly Housing Cost $1,531 $1,750 $1,969 $2,275 $2,538
Less: Monthly Utility Allowance ($51)($73)($128)($158)($210)
Affordable Monthly Rent $1,480 $1,677 $1,841 $2,117 $2,328
Summary of Affordable Rents
As Calculated Above
30% of Median $408 $452 $463 $525 $551
50% of Median $715 $802 $856 $980 $1,059
60% of Median $868 $977 $1,053 $1,207 $1,313
100% of Median $1,480 $1,677 $1,841 $2,117 $2,328
(1) HUD published factors for adjusting household income by household size.
(2) Based on all electric utility allowance by unit bedroom count for South County from the Housing Authority of the County of San Luis Obispo,
effective 2/1/2019.
Source: DRA.
Table 13
Recommended Affordable Home Price Standards
City of San Luis Obispo
2019
Assumptions
2019 State Median Income, San Luis Obispo County $87,500
No. of Bedrooms Studio 1 Bedroom 2 Bedroom 3 Bedroom 4 Bedroom
Household Size 1 Persons 2 Persons 3 Persons 4 Persons 5 Persons
Household Size Income Adjust. Factor 70%80%90%100%108%
Monthly HOA Fee $200
Monthly Property Insurance $100
Property Tax Rate (1)1.20%
Mortgage Interest Rate 5.00%
Term (Years)30
Downpayment (% of Sales Price)5.00%
Per Unit Affordable Sales Price by Unit Bedroom Count
Studio 1 Bedroom 2 Bedroom 3 Bedroom 4 Bedroom
Low Income
70% of Median
Annual Income Limit $42,875 $49,000 $55,125 $61,250 $66,150
Affordable Monthly Housing Expense 30%$1,072 $1,225 $1,378 $1,531 $1,654
Less: HOA ($200)($200)($200)($200)($200)
Less: Property Insurance ($100)($100)($100)($100)($100)
Less: Property Taxes (1)1.20%($127)($152)($177)($202)($222)
________________________________________
Available for Mortg. Principal and Interest $645 $773 $901 $1,029 $1,132
Supportable Mortgage $120,152 $143,996 $167,840 $191,684 $210,871
Plus: Downpayment @ 5.00%$6,325 $7,580 $8,835 $10,090 $11,100
Affordable Purchase Price (Rounded)$126,500 $151,600 $176,700 $201,800 $222,000
Estimated Affordable Price for Property Taxes (2)$127,000 $152,000 $177,000 $202,000 $222,000
Moderate Income
100% of Median
Annual Income Limit $61,250 $70,000 $78,750 $87,500 $94,500
Affordable Monthly Housing Expense 35%$1,786 $2,042 $2,297 $2,552 $2,756
Less: HOA ($200)($200)($200)($200)($200)
Less: Property Insurance ($100)($100)($100)($100)($100)
Less: Property Taxes (1)1.20%($243)($285)($327)($369)($402)
________________________________________
Available for Mortg. Principal and Interest $1,243 $1,457 $1,670 $1,883 $2,054
Supportable Mortgage $231,548 $271,412 $311,090 $350,768 $382,622
Plus: Downpayment @ 5.00%$12,185 $14,285 $16,375 $18,460 $20,140
Affordable Purchase Price (Rounded)$243,700 $285,700 $327,500 $369,200 $402,800
Estimated Affordable Price for Property Taxes (2)$243,000 $285,000 $327,000 $369,000 $402,000
(1) Property taxes estimated at 1.2% of approximate affordable price
Source: DRA
Table 14
Estimated Prototype Development Costs
City of San Luis Obispo
2019
Prototype 1 Prototype 2 Prototype 3
Single-Family For-Sale Townhomes Apartments
Tenure Owner Owner Rental
Construction Type Wood Frame Wood Frame Wood Frame
Total Residential Units 50 35 50
Average Unit Size (Net SF)2,200 1,551 931
Residential Net SF 110,000 54,300 46,550
Total Net Building SF 110,000 54,300 46,550
Total Gross SF Building Area (Excluding Parking)110,000 54,300 51,722
Total Gross SF Building Area (Including Subt. Parking)110,000 54,300 51,722
Site Area (SF)311,143 127,050 90,750
Approximate Building Stories 1 to 2 Stories 2 2 to 3 Stories
ASSUMPTIONS
Development Cost Assumptions
Land Price Per Hsg. Unit $560,057 $326,700 $163,350
Per Site SF $90 $90 $90
Bldg. Hard Construction Cost (1)Per Net SF $150 $175 $250
Soft Costs (Incl. Dev. Impact Fees)% of Hard Costs + Cont.30%30%30%
DEVELOPMENT BUDGET
Land Acquisition $28,002,857 $11,434,500 $8,167,500
Construction Hard Costs $16,500,000 $9,503,000 $11,638,000
Soft Costs $4,950,000 $2,850,900 $3,491,400
_________________________________
Total Development Costs, Including Land $49,452,857 $23,788,400 $23,296,900
TDC Per Gross SF $450 $438 $450
TDC Per Housing Unit $989,057 $679,669 $465,938
TDC per Net SF Residential Area $450 $438 $500
(1) Hard construction costs include parking construction. For renter prototypes, estimated hard costs assume payment of prevailing wages.
Source: DRA
Table 15
Renter In Lieu Fee Calculation
City of San Luis Obispo
2019
Income Level
for Calculation
of Aff. Rent
Assumed Unit
Bedroom
Count
Estimated Unit
Size (GSF) (1)
Development
Cost Per Unit
(2)
Maximum
Monthly Rent
Per Unit
Project Annual
Gross Income
Annual Net
Operating
Income (3)
Affordable
First
Mortgage (4)
Gap Per
Affordable
Unit
(Rounded)
Required %
of Units
In Lieu Fee
Per Unit in
Development
In Lieu Fee
Per GSF (5)
Very Low:
50% AMI 2 Bedroom 1,100 $495,000 $856 $10,272 $5,558 $67,181 $427,800 5%$21,390 $19
Low:
60% AMI 2 Bedroom 1,100 $495,000 $1,053 $12,636 $7,804 $94,324 $400,700 10%$40,070 $36
Total In Liue Fee $61,460 $55
(1) For a typical two-bedroom unit.
(2) Based on estimated total development cost per square foot of:$450
(3) Net operating income projected based on the following assumptions:
Vacancy rate:5%
Annual operating expense/unit:$4,200
(4) Affordable first mortgage from Table A-2 based on following financing terms:
Debt Coverage Ratio:1.15
Mortgage interest rate:6%
Mortgage Term:30
(5) In lieu fee per unit divided by estimated unit size (GSF).
Source: DRA.
Table 16
Owner In Lieu Fee Calculation
City of San Luis Obispo
2019
Income Level for
Calculation of Aff.
Rent
Assumed Unit
Bedroom Count
Estimated Unit
Size (GSF) (1)
Development Cost
Per Unit (2)
Affordable Sales
Price Per Unit (3)
Gap Per
Affordable Unit
(Rounded)
Required % of
Units
In Lieu Fee Per
Unit in
Development
In Lieu Fee Per
GSF (4)
SINGLE-FAMILY DETACHED HOME
Low:
70% AMI 3 Bedroom 2,200 $990,000 $201,800 $788,200 5%$39,410 $18
Moderate
100% AMI 3 Bedroom 2,200 $990,000 $309,400 $680,600 10%$68,060 $31
Total In Lieu Fee $107,470 $49
TOWNHOME
Low:
70% AMI 3 Bedroom 1,600 $700,900 $201,800 $499,100 5%$24,955 $16
Moderate
100% AMI 3 Bedroom 1,600 $700,900 $309,400 $391,500 10%$39,150 $24
Total In Lieu Fee $64,105 $40
(1) For a typical three-bedroom units
(2) Based on estimated total development cost per square foot of:$450 for SFD units;$438 for townhome units.
(3) For a three-bedroom unit from Table 13 .
(4) In lieu fee per unit divided by estimated unit size (GSF).
Source: DRA.