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HomeMy WebLinkAbout06/20/2006, BUS. 10 - AFFORDABLE HOUSING STANDARDS - REVISED FORMULAS FOR RENTS/SALES PRICES J council D� 6-20-06 j ac Enda RepoRt 1�N..b� Bus ./o CITY OF SAN LUIS OBISPO FROM: John Mandeville, Director of Community Development Prepared By: Doug Davidson, Deputy Director of Community Development'p.J>, SUBJECT: AFFORDABLE HOUSING STANDARDS—REVISED FORMULAS FOR RENTS/SALES PRICES CAO RECOMMENDATION Amend the Affordable Housing Standards, specifically the revised formulas for determining the maximum rents and sales prices for each income group. Introduction The City's Affordable Housing Standards (Standards) set maximum rental costs and sales prices based on income level and dwelling size. The standards officially define the term "affordable housing" and are used to determine if projects qualify for density bonuses, financial assistance, and other incentives. They help define the housing need for low- and moderate income households, promote development of affordable housing, and are a key ingredient in explaining the City's housing requirements. The City's Affordable Housing Standards are updated annually and are based on the Income Limits published by the State Department of Housing and Community Development (HCD). Table 1 (Exhibit A) shows the 2006 Income Limits. This year the income limits changed for the first time in three years rising to $63,800 for a family of 4 (up from $61,700 in 2005). By law, the upper limit for "very-low income" households is 50 percent of the County median income; the upper limit for "lower-income" households is 80 percent of the County median income; and the upper limit for "moderate-income" households is 120 percent of the County median income. HCD releases the Income Limits in March of each year and staff uses this information to update the Affordable Housing Standards by April 1. DISCUSSION The City has not updated its formula for calculating the Affordable Housing Standards since they were originally adopted in 1984. Over the years two trends have emerged with a contrasting impact on the Affordable Housing Standards. On one hand, the formula for moderate-income rental limits has caused these rates over time to rise to market, or more recently, above-market rents. The Housing Element specifically calls out to change moderate-income rents so that they are more proportional to the two lower income categories. On the other hand, the formula used for sales prices has lagged behind a normal rate of increase for "affordable" homes. The low ceiling on sales prices has become a disincentive for developers to build affordable housing and has resulted in a large disparity in affordable home prices with other communities in the County. /d Amended Affordable Housing Standards Page 2 In sum, the City's moderate-income rents are too high, while the sales prices for all income groups are too low. The recent change in income limits for 2006, County-wide interest in affordable housing standards, and continuing Housing Element implementation all point to a timely opportunity to update the City's Affordable Housing Standards. Methodology Staff's main objective in the Affordable Housing Standard_s amendment is to keep it simple. A simple adjustment to the rent and sales price formulas we now use will result in the appropriate level of change to the maximum limits. The standards will continue to be easily understood by staff, and in tum, the development community. Furthermore, adjusting the current methodology allows the standard, particularly affordable sales price, to be known immediately at a given point in time, as opposed to pegging the standard to an ever-fluctuating index, such as interest rates. The current formulas and proposed modifications will be discussed below in the appropriate section. Moderate-Income Rents The City's current formula for moderate-income rents is 30% of 110% of the annual median County household income divided by 12 and adjusted for household/unit size. For example, the median income for a three-person household (Table 1, Exhibit A) is $57,400; $57,400 X 1.10 = $63,140 X .30 = $18,942 divided by 12 = $1,578. The paragraph below Table 1 equates a three- person household to a two-bedroom unit, thus as shown on Table 2, the moderate-income rent for a two-bedroom unit is $1,578. For the 2006 Standards, this calculation results in moderate- income rents of $1,402, $1,578, and $1,824 for a one-bedroom, two-bedroom, and three- bedroom, respectively. Compared to a recent survey of rental costs in the City, these moderate rents exceeded market-rate rents. According to rent surveys conducted by staff over the last year, market rate average rents range from $800-$900 (one-bedroom), $1,2007$1,400 (two-bedroom), and $1,70041,800 (three-bedroom). The discrepancy grew more this year with the increase in income limits. This situation was called out for action in the 2004 Housing Element: Program 2.3.10 "Amend Affordable Housing Standards to modify the method of calculating maximum moderate-income rental costs, so that moderate-income rents are proportionately consistent with rental cost for very-low and low-income renters, to the extent allowed by State and federal law." The ratio of 30% of 110% of median income is based on the Affordable Housing Standards of the State Health and Safety Code. (As are the ratios of 30% of 50% and 30% of 60% for very- low income and lower income, respectively.) Simply changing the moderate-income formula to 30% of 100% of County median, lowers the rent maximums over $100 a month for the smaller units sizes to over $300 a month for a four-bedroom. As shown on Table 2 in Exhibit A, the reduced rents are $1,275 (one-bedroom), $1,435 (two-bedroom), and $1,595 (three-bedroom). While, revising the formula still leaves the one-bedroom (and studio) units above the current market rate rents, it lowers the rents to a more proportional level with the two lower income 16 -.� . Amended Affordable Housing Standards Page 3 categories and gets right in line (or below) the current market rents for two, three- and four bedroom units. Staff considered using a 30% of 90% formula further lowering the moderate- income rents. While this would bring the rents for the smaller units (studios and one-bedrooms) down closer to the average market rate, it also lowers the rents for the two, three and- four- bedroom units to well below market rates. It's a balancing act. The revised calculation is most balanced on the two bedroom unit; the most common form of apartment. Staff monitors the Standards annually and will determine if future revisions are necessary to reflect the changing housing market. Another proposed change to the Affordable Housing Standards for the household sizes of three- bedroom and four-bedroom units will further bring down the affordable rents. This change affects both rents and sales prices and is discussed below after the sales prices section. Affordable Sales Prices The City uses a traditional federal HUD (Housing and Urban Development) standard from the 1980s; that is, multiply the income limit of the income group, adjusted for household size by 2.5 for the two lower income groups and 3 for the moderate-income. For example, the maximum price for a moderate-income three-bedroom unit is $206,700; $68,900 (moderate-income limit for a three-person household) X 3 = $206,700. Across much of the country, where the national median home price just passed $200,000, these factors still produce a valid figure. In California, and specifically. San Luis Obispo, where the County median home price surpassed $600,000 earlier this year, the factors of 2.5 and 3 should be adjusted. With the downturn in home prices of the early 1990s, the median in many areas of California was generally the same in 2000 as it was in 1990. It's this latest and steepest increase in home prices since the year 2000—that has caused the City's affordable housing prices to remain lower in proportion to the median sales price and with other similar jurisdictions. The three-bedroom moderate-income unit is often used for discussion and comparison purposes. The maximum sales price for such a unit is $238,950. Although, this is up from the $231,000 maximum of the last three years, it is still too low to encourage construction of affordable housing and when compared to other areas in the County. Adjusting the factors to 3 for the two lower income groups and 3.5 for the moderate-income raises the affordable sales prices from 8 percent to 17 percent. These slightly higher prices ($268,100) are still affordable to the designated income groups and more in line with those of other jurisdictions. The proposed increase would raise the monthly mortgage payment by approximately $100.00 for a moderate- income three-bedroom unit. A working group consisting of representatives from the County, each city in the County, and the Housing Trust Fund met on a regular basis for a six-month period last year. The purpose of the group was to better coordinate affordable housing requirements. In addition to the maximum sales price formula, the group also looked at consistency of affordable housing agreements among the jurisdictions. Several cities in the County use the County formula for determining affordable sales price. The County's formula fluctuates much more since its interest rate sensitive, and has set a sales price Amended.Affordable Housing Standards Page 4 of approximately $300,000 for a moderate-income three-bedroom unit. This price is too high as it limits the number of households with minimum incomes to qualify and the maximum income to still be an eligible family. As noted above, the City's$230,000+price over time has been too low to encourage construction of affordable housing units for sale. It was the "gut" feeling of the working group that the proper maximum sales price was in-between the City's and County's. Sure enough, as the parties each modified their formulas, the revised sales price for the comparison unit was between 260,000 and $270,000. Staff believes that the City's figure of $268,100 is appropriate and "affordable" for a moderate-income three-bedroom unit as it's approximately 50% of a market rate unit. Household Size and Number of Bedrooms Table 1 of Exhibit A contains the City's assumptions for correlating the number of bedrooms to the number of people in a household: studio unit = one-person household, one-bedroom unit = two-person household, etc. The City has always used the average of a four and five-person household for a three-bedroom unit and six-person household for a four-bedroom unit. In another effort to bring down the affordable housing costs, staff is proposing that the standards be modified to a four-person household for a three-bedroom unit and a five-person household for a four-bedroom unit. This adjustment further lower the rents ($63 for a three-bedroom and $132 for a four-bedroom), as well as the home prices for three and four-bedroom units. This household size change to the formula lowers the moderate-income three-bedroom unit approximately $10,000 and the four-bedroom unit about $20,000. Although, this goes against the overall notion of slightly raising the affordable home prices, staff would prefer to "en" on the side of affordability. Also, the modified household size criteria is consistent with State standards (the City's household sizes for studios, one-bedroom, and two-bedroom units are already consistent with the State). Allowance for Utilities Staff proposes one more change to the Standards relating to the "allowance for utilities". This provision has always been difficult for staff to include in the maximum rents and over the years has not been implemented. What is a "reasonable" allowance for utilities? Utility rates fluctuate and vary based on specific circumstances, such as construction quality/materials and lifestyle differences. Applying a blanket reasonable rate for utilities does not take these differences into account and has been a point of contention with property owners of affordable rentals. Utilities are often not included in monthly rents, but what about rentals where the landlord pays one or more of the utilities? To address this situation would require a large amount of staff time to monitor rent agreements and establish a "reasonable allowance" for utilities under a number of possible scenarios. For all these reasons, and to maintain the simple approach to administering these Standards, staff proposes eliminating the utility allowance section. Summary The proposed amendments to the Affordable Housing Standards use the same historical formula and maintain simplicity for staff and the public. The changes to the Standards are more consistent with, or more restrictive, than the State Code. Staff will continue to review the �d Amended Affordable Housing Standards Page 5 Standards on an annual basis for consistency with State Income Limits and continued validity in light of changing real estate market trends. The City's Standards and affordable housing formulas need not be identical to other jurisdictions in the County, however, the..differing methods of calculation result in similar affordable housing prices throughout the County. Exhibit A of Attachment 1 includes all changes referenced in this report by stfikethfeugh and bold type. FISCAL EWPACT None. The affordable rents and sales prices have no impact on the General Fund. ALTERNATIVES Maintain existing Affordable Housing Standards — Staff argues that the Standards are outdated and with the proposed amendments will better serve the purpose of encouraging and providing affordable housing. The moderate-income rents are not "affordable" and the sales prices are too low to encourage construction of affordable units. Revise the Affordable Housing Standards to use a different formula, such as the County's or other index-based system — These other methods are more complex and subject to change on a regular basis. By updating the long-practiced method, the City keeps simple and constant (reviewed on an annual basis) affordable housing standards while being internally proportional and similar in range to other local jurisdictions. ATTACHMENTS Attachment 1 —Resolution No. Exhibit A: 2006 Affordable Housing Standards dd/J:/Housingprog=s/CC RptAffHousingStand /6 -S Attachment 1 t RESOLUTION NO. (2006 Series) A RESOLUTION OF THE COUNCIL OF THE CITY OF SAN LUIS OBISPO APPROVING THE 2006 AFFORDABLE HOUSING STANDARDS WHEREAS, the City of San Luis Obispo has adopted Affordable Housing Standards to establish maximum rental costs and sales prices based on income level and dwelling size; and WHEREAS, the City updates the Affordable Housing Standards annually based on Income Limits published by the State Department of Housing and Community Development HCD); and WHEREAS, Housing Element Program 2.3.10 states that the City should amend the Affordable Housing Standards to modify the method for calculating moderate-income rental costs, so that moderate-income rents are proportionately consistent with rental costs for very low- and low-income renters; and WHEREAS, the City's sales prices are outdated and should be raised to more accurately reflect the current real estate market and to be more consistent with those of other local jurisdictions; WHEREAS, in light of the above, it is appropriate for the City to amend the 2006 Affordable Housing Standards by revising the formula for maximum rents and sales prices. NOW, THEREFORE, BE IT RESOLVED by the Council of the City of San Luis Obispo as follows: SECTION 1. Environmental Determination. The Council hereby determines that the proposed amendments to affordable housing standards are not "projects" as defined by Section 21065 of the California Environmental Quality Act (CEQA), since they will not cause a direct or indirect physical change in the environment and do not involve the issuance of a lease, permit, license, certificate or other entitlement. Consequently, no further environmental review is necessary. SECTION 2. 2006 Affordable Housing Standards. The City's 2006 Affordable Housing Standards, as set forth in Exhibit A, attached and incorporated by reference, are hereby approved. Upon motion of seconded by and on the following roll call vote: AYES: NOES: ABSENT: Atta?hment 1 Resolution No. Page 2 The foregoing resolution was adopted this 20th day of June, 2006. Mayor Dave Romero ATTEST: Audrey Hooper, City Clerk APPROVED AS TO FORM: Jonathan Lowell, City Attorney Exhibit: A—Amended 2006 Affordable Housing Standards ddlUHousingPrograms/CCReso2006AffHousingStand �j C1�C�l Of - San WI S OBI SPO AFFORDABLE HOUSING STANDARDS 2006 (Effective April 1, 2006) Purpose These standards apply to all development projects within the City. They set maximum rental costs or sales prices based on income level and dwelling size and are used by developers, citizens, housing groups, City staff and commissions, and housing agencies. The Community Development Director implements the standards. Besides defining the often misunderstood term "affordable housing", the standards promote the construction of housing which meets residents' needs and help explain the City's housing requirements. In addition, the City uses these standards to determine if housing projects are "affordable" and qualify for density bonuses, financial assistance or other types of incentives. For more information about these standards, call the City's Community Development Department at (805) 781- 7170. The City requires new development projects to provide affordable housing for very-low, low, or moderate income households by: 1) building affordable housing in conjunction with new residential or commercial development, or 2) by paying an "in-lieu fee" to support the development of affordable housing citywide, or 3) by contributing real property, including land or existing dwellings, to be used as affordable housing, or 4) by a combination of these methods. To help offset costs of providing affordable housing, the City has adopted Affordable Housing Incentives (San Luis Obispo Municipal Code Ch. 17.90). State and local law allows residential density bonuses and certain other incentives in return for developers agreeing to construct affordable housing. Additional information on incentives is available from the Community Development Department. How the Standards Are Determined These standards are prepared by the Community Development Department and are updated annually to show income limits for the City and County of San Luis Obispo as published by the State Department of Housing and Community Development (HCD). These limits are shown in Table 1. By law, the upper income limit for "very-low income" households is 50 percent of the median County income; the upper limit for "lower income" households is 80 percent of the median County income; and the upper limit for "moderate-income" households is 120 percent of the median County income. Households with more than eight persons For all income groups, the income limits for households larger than eight persons are determined as follows: For each person in excess of eight, add eight percent of the four-person income limit to the eight-person income limit and round the sum to the nearest $50. For example, the nine-person very- low income limit is .08 X $31,900 = $2,552; then $2,552 + $42,100 = $44,652; rounded to the nearest $50=$44,650. j 2006 Affordable Housing Standards Page 2 TABLE 1: 2006 ANNUAL INCOME LIMITS ($) INCOME NUMBER OF PERSONS IN HOUSEHOLD GROUP 1 2 3 4 5 6 7 8 'VERY LOW 22,350 25,500 28,700 31,900 34,450 37,000 39,550 42,100 LOWER 35,750 40,850 45,950 51,050 55,150 .59,200 63,3.00 67,400 MEDIAN 44,700 51,000 57,400 63,800 68,900 74,000 79,100 84,200 MODERATE 53,600 61,300 68,900 76,600 82,700 88,900 95,000 101,100 How to Determine Affordable Rents or Sales Prices To determine affordable rents or sales prices, follow these three steps: 1) find the "income group" in Table 1, based on the number or persons in the household and gross annual household income; 2) determine the number of bedrooms in the dwelling to be bought, rented or sold; and 3) Use Table 2 to find the maximum affordable rent or sales price based on the income group and number of bedrooms. When the number of persons in the household is not known, the City's affordability standards for both rent and sales prices assume the following household sizes corresponding to the number of bedrooms in the dwelling: • Studio unit: use the income limit for a one-person household. • One-bedroom unit: use the income limit for a two-person household. • Two-bedroom unit: use the income limit for a three-person household. • Three-bedroom unit: . use the income limit fora four-person household e Four-bedroom unit: use the income limit for a five-person household Affordable Rent Limits The maximum monthly rents, ineluding eests ef tAilifies, to qualify as affordable housing are listed in Table 2. For example, the maximum monthly rent cost for a two-bedroom dwelling which is affordable to a lower-income household can be found in Table 2 by reading across the row labeled "Lower, Maximum Monthly Rent" and then finding $861 under the column heading "2-Bedroom." Rent limits are based on formulas set by State law (H&S Code 50053) and are computed as follows: EXMBITA 2006 Affordable Housing Standards Page 3 • For very-low income households: Affordable monthly rents shall not exceed 30% of 50% of the annual median County household income for the number of persons expected to reside in the unit, divided by 12, and adjusted for household/unit size. • For lower-income households: Affordable monthly rents shall not exceed 30% of 60% of annual median County household income divided by 12, and adjusted for household/unit size. • For moderate-income households: Affordable monthly rents shall not exceed 30% of 100% of the annual median County household income divided by 12, and adjusted for household/unit size. Affordable Sales Prices The maximum sales prices for affordable housing are based on a formula that accounts for what a typical very-low income, low-income or moderate-income household can afford to pay for housing, following established guidelines. Sales price limits are determined by multiplying the annual income limit of the income group, adjusted for household size, by 2-4 3 for very-low and lower income households;and by-3 3.$ for moderate income households, rounded to the nearest $25. For example, the maximum sales price for a 2-bedroom dwelling would be 2.5 X $45,950 = $114,875 for a three- person, lower-income household; and 3 X $68,900 = $206,700 for a three-person, moderate-income household. TABLE 2: 2006 RENT/SALES AFFORDABILITY STANDARDS INCOME TENURE DWELLING SIZE GROUP STUDIO 1-BDRM 2-BDRM 3-BDRM 4-BDRM VERY LOW MAXIMUM $560 $638 $718 $829 $925 MONTHLY_RENT $797 $861 MAXIMUM SALES cc� $6350 $92 PRICE $67,050 $76,500 $86,100 $95,700 $103,350 LOWER MAXIMUM $670 $765 $861 $995 $1419 MONTHLY RENT $957 $1,034 MAXIMUM SALES $89,375 $1Uz�3 $1}4,573 W2,750 $}4S^909 PRICE $107,250 $122,550 $137,850 $153150 $165,450 MODERATE MAXIMUM $1229 M'402 $};5:78 M'824 $2;033 MONTHLY RENT $1,118 _. $1275 $1435 $1y595 $1722 MAXIMUM SALES $160,800 $i 83,900 $206,700 $238,959 $266,,700 PRICE $187,600 $214,500 $241,150 1 $268,100 $289,450 FF "15D G� f 2006 Affordable Housing Standards Page 4 Ma*imam feat shall iaelude &Feasea.able aflewomee fer-idtilifies.paid difeetAy by tenant (gas, eleetfieivy; ;- epAy if--the City detemFtiaes tha the down pa54aeat, phis buyeF's elesing eesits —And—m-emah—ly pa54Rents Long-term Affordability Rental housing affordability is maintained through recorded agreements between a property owner and the City, the Housing Authority of the City of San Luis Obispo, or another housing provider approved by the City. These agreements shall specify: a) the maximum rents based on the same formula which established initial rent levels as a condition of City approval, or other formula approved by City; b) the term for which rental units must remain affordable; and c) terms under which affordability is maintained after sale or transfer of the property. Affordable dwelling units must remain affordable for a minimum of 30 years, or as otherwise required by State law. There are two different approaches to maintaining long-term affordability: 1) the property owner agrees to maintain the designated dwelling unit as affordable for at least 30 years; or 2) the property owner agrees to participate in a "shared equity purchase program" as described in the City's Inclusionary Housing Requirement. The decision on which approach to use is up to the affordable housing developer. Under the long-term affordability program, the housing must remain affordable for at least 30 years from the original date of sale or rental. Affordability terms are secured by a promissory note and deed of trust, recorded on the property prior to or concurrent with the initial occupancy (for rental units) or sale of the property. The promissory note is based on the monetary difference between the property's initial purchase price and its initial market value, and is an "affordability loan" or"silent second" payable to the City. The loan accrues interest at a rate set by the City. Repayment of the affordability loan is waived as long as affordability requirements are met. For- sale properties must be owner-occupied, and may be sold or otherwise transferred only to eligible buyers and at prices deemed affordable under these standards. Upon resale, the City, its Housing Authority, or a non-profit agency approved by the City, retains the first right of refusal to purchase affordable properties at their then current appraised value. . Under the equity-sharing program, the buyer of an affordable dwelling enters into an agreement with the city guaranteeing affordability for at least 6 years after the initial date of sale. Upon resale of the property, the agreement ensures that the City's equity share returns to the City for use in other affordable housing developments. The City's equity share is based on the difference between the property's market value and the actual price paid by the homeowner, divided by the market value; or the amount of subsidy provided by the city, divided by the property's market value. Affordable units sold before the sixth year are subject to an additional "Equity Recapture Fee" ranging from 25 to 100 percent of the property's equity. (For more information, refer to the Inclusionary Housing Requirements, Ch. 17.91 of the San Luis Obispo Municipal Code) dd/Lhousingprograms/2006affordablehousingstandards Rev.4/06 ` /�