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HomeMy WebLinkAbout02/24/2004, PH1 - MEETING DATE: FEBRUARY 24, 2004 ITEM # PH-1 DRAFT HOUSING ELEMENT UPDATE CYDNEY HOLCOMB 905 S94 0365 02/24/04 02:24pm P. 001 Ado Residents for Quality Nei-ghborhoo Is P.O. Box 12604 •San Luis Obispo, CA 93406 RECEIVED FEB 2 4 2004 SLO CITY CLERK DATE: February 24, 2004 FAXED TO: 781-7109 TO: San Luis Obispo City Council RED FILE RE: Meeting Date: February 24, 2004 - ME ING AGENDA Item PH-1 DATE ITEM # DRAFTT HOUSING ELEMENT UPDATE Honorable Mayor and Members of the City Council, We believe that our legislative draft and the comments therein, submitted to you on January 27,. 2004, are on point with your stated City Council goal of preserving and protecting existing residential neighborhoods. We also strongly believe that the programs we have cited in Goal 6.1 (Housing Production) as currently written are ambiguous and have the potential to threaten the future of our R-1 (low-density residential) neighborhoods. It has come to our attention that, in a statement directed to Citizens of the City of San Luis Obispo" Planning Commission Chairman Osborne, declared that RQN's comments on the draft Housing Element are: "uninformed, ill conceived and antagonistic to many City Goals". In other correspondence he suggests that the continued participation of groups of citizens, such as RQN and the Sierra Club diminish the public process. We do not believe that this emotional reaction Is either respectful of the right of citizens to communicate directly with their elected representatives or of his appointed position on a City advisory body. As you know, RQN has been involved with the. Housing Element Update, since the Regional Housing Needs Allocation process in the fall of 2002. Our membership stronglysupports the preservation and enhancement of all the City's existing residential neighborhoods; the creation of a substantial number of new affordable workforce housing units; the high quality of life currently enjoyed by City resident/voters; and a higher and more inclusive level of citizen participation. These goals have been reflected in all of our many comments, including those submitted to the Planning Commission on November 121 2003. As elected representatives only you are entrusted with the right to set policies that will affect the every day lives of the resident/voters of the City of San Luis Obispo. We do not support the suggestion that you abrogate that right. Respectfully s mit d, *0-NCIL y'CDD DIR , 'CAO ,[FIN DIR� ZACAO FIRE CHIEF C dney H4lco b ATTORNEY �Pyy DIR Chairperson, RQN 2"CLERK/ORIG R-POUCE CHF ❑ D PT HEADS Te-REC DIR C 4JTIL DIR _,_D HR DIR R EV I S'E D council 2-24-04 �°� j aGEnba Repout CITY OF SAN LUIS OBISPO FROM: John Mandeville, Director of Community Developme Prepared By: Jeff Hook, Associate Planner SUBJECT: DRAFT HOUSING ELEMENT UPDATE CAO RECOMMENDATION Review the Planning Commission recommended Draft Housing Element Update (GPA 33-02) focusing on Chapter 3, provide direction to staff on necessary changes or additions, and continue to March 1, 2004. REPORT-IN-BRIEF In considering Chapter 3 of the Draft Housing Element on February 3, 2004, several important questions emerged regarding the meaning of"affordable moderate income housing", the possible effect of exempting such housing from the City's Growth Management Regulations, the implications of exempting small residential projects from Architectural Review Commission review, the effect of relaxing open space requirements in certain situations for increased affordable housing, and whether an EIR should be prepared on the Draft Housing Element. This report provides the City's current definition of "affordable moderate income housing", which is housing that is enforceably restricted to maintain affordability for a designated period, and concludes that: 1) exempting affordable moderate income housing from growth management would not compromise the City's growth management objectives and may help achieve our affordable housing objectives, 2) exempting small residential projects from ARC review would have minimal effect, since most projects would still receive staff level architectural review and "sensitive sites" would receive ARC review, 3) the effect of relaxing open space requirements would be limited to a small area within the Orcutt Area and would not affect other General Plan polices setting community parkland standards, and 4) the City may choose to prepare an EIR on the Draft Housing Element for information purposes, however there is no information indicating that an EIR is required under State environmental law (CEQA). This report also responds to questions posed by Vice Mayor Schwartz in a memorandum dated January.26, 2004,. and forwards the results of an economic feasibility evaluation of the City's proposed Affordable Housing Requirements (Mundie and Associates Draft Report). DISCUSSION Overview On January 27, 29, and February 3, Council reviewed Chapter 3 of the Draft Housing Element and took public testimony. On the P, Council left off at Program 6.3.1 and asked staff to respond to several housing and environmental questions at tonight's meeting (see below). Council should complete its review of Chapter 3 tonight, starting with Program 6.3.1, on Page 19 J ' 1 Draft Housing Element Update,February 24, 2004 Council Meeting Page 2 of the Chapter 3 legislative draft distributed for the January 27`h meeting, and as time permits, review the remaining chapters and appendices. Updating the 1994 Housing Element was identified as part of the Major City Goals in the 2001- 2003 Financial Plan. During that fiscal period, staff started preparing the data for the update and worked with the San Luis Obispo Council of Governments and the State to determine the City's "fair share" of housing production. The current 2003-05 Financial Plan again identifies the Housing Element Update as a Major City Goal. A draft update has been prepared and reviewed by the Planning Commission, with input from the Council-appointed Housing Element Update Task Force. Council Review So far, Council focused mainly on Chapter 3 — Goals, Policies and Programs. It is important to note that most programs will require some type of follow-up action and return for public hearings before the Planning Commission and City Council. These actions may include General Plan, Zoning map or text amendments, new or amended ordinances regarding housing incentives and standards, development approvals, and new capital improvement projects. Consequently, most program details need not be addressed in the Housing Element. .Council members are dealing primarily with policy direction, and in so doing, balance.the need for clear, concise policymaking with the need for sufficient guidance in the element's text to enable implementation. Council's review of Chapter 3 generated questions on specific Draft policies and programs, plus some questions dealing with broader General Plan and growth management issues. Staff has prepared this report to respond to the questions and to augment the Council Agenda Report provided for the January 27, 29 and February 3 meetings. The more significant questions and responses are summarized below, with more detailed discussion in the Draft Housing Element, where noted. Staff will be prepared to provide additional information at the meeting on these and other questions from the last meeting. Suggested Review Framework It appears Council may need time beyond tonight's meeting to complete its review and adopt the Draft.Housing Element. Staff has tentatively scheduled March 16 for Housing Element Review. Depending upon review progress, Council may need to schedule additional meetings for Housing Element review. To help organize Council's review, staff suggests the following outline: February 24: Complete review of Chapter 3 legislative draft (starting with Program 6.3.1). If time permits, review Chapters 1, 2, and 4, the environmental determination, and Appendices; provide direction to staff on revisions, as appropriate. March 16: Review revisions; General Plan glossary and internal consistency; take final action on the environmental determination and Final Council Hearing Draft. ( ' ot, Draft Housing Element Update, February 24, 2004 Council Meeting Page 3 Council Questions on Chapter 3 1. What is Moderate Income housing? This is rental or purchase housing that is deemed affordable under the City's Affordable Housing Standards for households or individuals of"moderate income" (Attachment 1). These standards are updated annually to reflect changes in the County median income, according to the State Department of Housing and Community Development (HCD). The income upper limit for a moderate-income household is 120 percent of the median County income, adjusted for the number of persons. If the moderate-income housing is provided through the City's Inclusionary Housing Program,the rental or resale price is controlled to preserve affordability for a designated time period, typically at least 30 years. In 2004, City Standards set the maximum income for a four person, moderate-income household at $74,040. The 2000 Census indicates about 10 percent of City households were moderate income, and that percentage is likely to decline due to rapidly escalating housing costs (Draft Housing Element pp. 60-63; 71-77). The estimated median home sales price in the City is $476,000, about 15% higher than County median. The current County median home price is about $414,000. According to a recent Tribune article, a four-person household.would need an annual income of$78,316 to qualify for a conventional 30-year mortgage, with 20 percent down payment, to purchase the County median priced home. 2. What are the Residential Growth Management Regulations and what would be the effects of exempting Affordable Moderate income housing from growth management? First, it is important to note that the proposed exemption would not include all housing that, by design, might appeal to moderate income persons. "Affordable Moderate Income Housing" refers to a specific subset of housing that meets the City's affordability standards and is "enforceably restricted"to maintain its affordable price over an extended period. The Residential Growth Management Regulations are intended to ensure that the City's annual average population growth rate, averaged over a 3-year period, does not exceed one percent, until it reaches a build out population of 57,200 persons in approximately 2022 (Attachment 2). The Regulations do this through a phasing plan that limits the issuance of building permits—and hence, the rate of new residential construction -- within certain areas that have been annexed to the City or that will be annexed to the City. The phasing plan is reviewed annually and can be revised as often as needed to respond to changes in construction cycles. Revisions would allow allocations to be shifted among areas, or the phasing intervals could be modified to better achieve housing goals. Dwellings affordable to very-low and low-income households are currently exempt from the Regulation.. Also, the regulations do not limit the issuance of building permits for locations outside of expansion areas with an "assumed" rate of housing construction, like Downtown and most infill areas. The City's Quantified Objectives (following our RHNA number) anticipate the construction of up to 2,909 in-city dwellings during the planning period, with the balance of our housing objectives met through Cal Poly housing. The effect of meeting these objectives on population growth during the Housing Element planning period is summarized below. l Draft Housing Element Update, February 24, 2064 Council Meeting Page 4 QUANTIFIED OBJECTIVES,IN-CITY, 2001-2009 (*Exempt from 1% growth management) Above Moderate Income 989 Moderate Income 579 Low 553* Very-low 788* Subtotal 2,909 dwellings (of these, 1,568 are non-exempt dwellings) CITY POPULATION IN JANUARY 2001 (Dept. of Finance) 44,218 persons ADDED PERSONS, 1/01 —6/09: 1,568 X 2.251 (ave. household size) 3,530 47,748 POPULATION GROWTH, 1/01 — 6/09 = 3,530/44,218 = 8% OR AN AVERAGE OF 0.94% PER YEAR Thus, fully achieving the City's Quantified Objectives is unlikely to compromise the City's growth management objectives. During the Housing Element planning period, population growth would average slightly less than one percent per year. The City's growth rate largely depends on the rate of buildout of the expansion areas, Margarita and Orcutt areas. If, during the Housing Element planning period,the average growth rate over a three-year period exceeds one- percent the Council may revise the phasing plan to ensure General Plan growth provisions are followed. The Draft Housing Element would accommodate up to 579 Moderate Income in-city units . between 2001 and 2009. This represents about 73 moderate-income dwellings per year during the Housing Element Planning Period, or adding about one-third of one percent (0.3%) to the City's 2003 housing stock per year. On balance, the effect of exempting enforceably restricted, affordable moderate-income housing is likely to be minimal. Market appreciation can quickly turn housing initially priced in the "moderate" range to above-moderate income housing. The City's affordability programs would be improved if these included a way to ensure moderate income housing remains affordable to moderate income households. The proposed exemption of enforceably restricted, affordable moderate-income housing could become an incentive to the production of such housing if housing production remains at or near the 1 percent limit. Without significant savings, equity from another property, or private or public assistance, moderate-income households cannot afford to purchase housing in San Luis Obispo. Between 1994 and 2001, only six moderate-income dwellings were built, while our adopted construction objective for this type of housing was 172 units. Why wasn't more moderate-income housing produced? Simply put, it doesn't "pencil" in today's housing market on the Central Coast, without lower land costs, smaller lots and houses, development incentives, purchase assistance, or a combination of these. As noted in the Draft (p. .50, bottom), meeting this objective is theoretically possible but depends upon private development decisions and the City's ability to secure Federal, State or local financial assistance. In a time of increasing fiscal uncertainty in Sacramento, it is unlikely sufficient assistance will be available to fully meet this objective. I _ � Draft Housing Element Update, February 24,2004 Council Meeting Page 5 3: What would be the effect of exempting the development of 2 4 dwellings from Architectural Review Commission review? The effect of this change would be minimal. Most residential developments of 4 or less units are either exempt or are already processed as "minor or incidental' architectural review. Draft Program 6.3.14 would exempt the construction, relocation, rehabilitation or remodeling of 2-4 dwellings from Architectural Review Commission (ARC review). These units would still be subject to "minor or incidental' or staff level architectural review unless the units are located on a sensitive or historically significant site. In this case, the project would be subject to full ARC review. The purpose of this change is to allow small, infill residential projects that meet development standards and community design guidelines to proceed through the permit process with reduced time and cost. Under current regulations, the development of one or two, individually built single-family dwellings is exempt. This program would expand that to exempt most developments of up to four multi- or single family units from automatic ARC review; . however they would still be reviewed by staff for conformance with design guidelines .and standards and could be referred to the ARC when necessary. The Architectural Review Commission supported this approach. 4. What are the implications of Program 6.5.2 to relax open space requirements :in Expansion Areas in ,return for additional affordable housing beyond the minimum required, provided such open space was not required for protecting sensitive environmental features, like hillsides and wetlands? The effect is likely to be limited to a small area within the Orcutt Specific Plan Area. It would not significantly reduce parkland dedication as part of new subdivisions due to established City policies that set minimum standards. Parks and open space are important mitigations for density. Greater density brings with it more park resources, because parkland dedications are directly related to population. The Parks and Recreation Element states the City will develop and maintain ten acres of parkland for every 1,000 residents (PR 2.1.1 - Digest). Policy 4.1.3 says that property in the annexation areas will dedicate land for neighborhood parks at a rate of 5 acres per 1,000 people. (The difference between these two policies has to do with the difference between neighborhood parks and citywide parks. The 10 acres per 1,000 refers to both.) The more people per a given area of land, the greater will be the parkland dedication the City will receive from that area of land. PR 4.1.1 states that the City will provide a neighborhood park within .5 to 1.0 miles walking distance to all residents. This sets a park accessibility standard for all residential neighborhoods, including higher density neighborhoods. Draft Housing Element Program 6.5.2 would not change these requirements. In addition to these standards, the design and integration of open space and parks into new neighborhoods is important to providing a satisfying living environment. Chapters 2.2 and 2.3 of the Land Use Element, the distribution of land uses within the residential specific plans, and the development of high density design guidelines called for in the proposed housing element update, will provide minimums for insuring that open space and parks are leveraged to provide a satisfying living environment. 1 ^ � Draft Housing Element Update, February 24, 2004 Council Meeting Page 6 5. Should an Environmental Impact Report(EIR) be required for the Housing Element Update? General Plan Elements are deemed "projects" under the California Environmental Quality Act and subject to environmental review requirements; however that does not mean that an EIR is necessarily required. CEQA provides for several types of environmental review, including exemptions, negative declarations, and EIRs. A negative declaration is a document which states it has been determined the project (in this case, adoption of the Housing Element) will have no significant environmental impacts upon the environment, or that such impacts can be mitigated to a level of non-significance. A negative declaration is valid unless there is evidence or a compelling reason to believe that it is not. So far, no such evidence or reasoning has come to light, either as a result of staff's initial environmental study or from subsequent public comments. Basically, environmental review is intended to be an information tool for decision-making. As such, an agency may choose, for informational purposes, to prepare an EIR even when CEQA does not require one. EIRs, however, are expensive and time consuming (at least $120,000 plus staff time). A lead agency must weigh the costs of voluntarily preparing an EIR against the benefit to be gained. In the case of the Housing Element Update, a negativedeclaration appears to satisfy CEQA. The City.Council can decide that an EIR is desirable :for informational purposes, or conversely, that an EIR is not needed for informational purposes given the time and resources required, and the potential benefits. There is, however, no evidence that. CEQA compliance alone should be the reason to do an EIR. Two reasons have been stated for preparing an EIR. The first is that Draft Program 6.3.6 says that the City will initiate General Plan amendments and rezonings of commercial, manufacturing or public facility zoned areas for residential use to promote higher-density, infill or mixed-use housing where appropriate. The second has to do with the fiscal impacts of exempting moderate-income housing from payment of City impact and other development fees. With regard to the first reason, Program 6.3.6 is not enacting any land use or zoning change. It is saying that land use and zoning changes should be considered. It goes further to identify several areas where they should be considered. As such there is no commitment by the Update that necessarily results in land use or zoning changes - hence no impact. This language, by itself,will not result insignificant environmental impacts. In fact, the purpose of the list is to demonstrate that the City has reviewed its land inventory and identified parcels that might be used to provide needed housing. It is unlikely that all these sites would reach the point of serious consideration in the near future. If land use and zoning changes are eventually proposed, they will undergo environmental review. A future decision by the Council to change land use or zoning will be informed by a specific environmental review. The second reason is moot because new fee waivers are no longer recommended. The previous program wording was modified by the Planning Commission. Programs 2.3.6 and 2.3.7 were changed to say 'Pursue alternative sources of outside funding...." and "To the extent that outside funding resources can be identified to offset impacts on city funds..." to assist affordable housing developments with these fees. There is no longer any financial impact that could lead to a i - LP Draft Housing Element Update, February 24,2004 Council Meeting Page 7 physical impact. Program 6.3.6 might be clearer if amended to read, "Consider initiating . . ." rather than "Initiate." 6. What are the financial implications of the�proposed changes to the inclusionary housing requirements,as exemplified by tables 2 and 2A? Attachment 6 to this Agenda Report is the latest draft of the Affordable Housing Requirements Incorporated in the Housing Element of the General Plan (2004 Update), , by Mundie & Associates. The Draft looks at several different commercial and residential development scenarios, and evaluates the effects of revised Inclusionary Housing requirements in Table 2 and 2A of the "Council Hearing Draft" on three main development variables: land cost, developer's profit, and sales/rent prices. Mundie and Associates' study methodology closely follows two previous reports prepared for the City on the same subject, with updated assumptions reflecting changed economic factors and the new, proposed inclusionary housing requirements. As noted in the Report's Summary and Conclusions section, the proposed affordable housing requirements are unlikely to. discourage new development, but may price some .housing consumers out of the market and encourage developers to meet the requirements by paying in- lieu fees ratherl than•actually building affordable housing. The report's findings suggest that a:: higher:in-lieu• fee or. lower -housing production requirement may result in more:;long-term' affordable units.: . . . . 7. Responses to questions.posed by Vice Mayor Schwartz(full memo, Attachment 7). 1.- Clarify the definition of a "house", versus households, housing units and housing,: . and describe why the Housing Element is important. The terms "housing or dwelling unit" and "household" are defined in the Housing Element Glossary. "House" is not .defined here, but typically refers to detached, single-family dwellings on separate lots. The Housing Element is the most extensively regulated general plan element under State law, and therefore, much of the document addresses the information needed to achieve State certification. Therefore, staff has used terms defined in State law rather than developing alternative or more locally preferred terms. The Draft Housing Element also addresses the importance of housing in view of human needs, changes in the housing market, and community changes (see pages 13, 16, 19-22, and 79-96). 2. The Draft Housing Element appears to place the entire burden of meeting housing needs on the City. The Housing Element should set goals to ensure the private sector bears some responsibility for meeting housing needs in return for City incentives. First, it is important to keep I mind that the Housing Element, as set forth in State law, is intended to be a public policy document, and so its content is primarily oriented toward what is within the control of the public agency. However, the issues of the private sector's role and responsibility were discussed during Housing Task Force and Planning Commission meetings, and are not entirely absent from the document. For example, the Quantified Objectives in Chapter 4 of the Draft are, in fact, goals for the private sector as well as for the City to achieve. Draft Housing Element Update, February 24,2004 Council Meeting Page 8 The City does not build housing. But through its policies, programs, and development review, the City determines the location, type, rate and number of dwellings built. As with most cities, the City's housing strategy depends upon the private sector to produce housing. As noted on page 24 of the Draft, affordable housing programs usually involve cooperative public/private efforts to be effective. These often include public incentives in return for developers' increased commitment to affordable housing or other City, as in Programs 6.2.3 and 6.3.8. Inclusionary Housing Requirements also set financial or production objectives for developers with regard to affordable housing. It is appropriate for the Housing Element to do this. Thus, Chapter 3 provides policy guidance mainly for City decision-making, but also attempts to influence private sector decisions and/or contributions to housing. Council may "raise the bar" further to increase development commitment to housing, but in a larger sense, the City has very limited influence over the private sector and other entities who are not developers (e.g. businesses, major employers, schools, non-profits) to build "workforce" housing or otherwise contribute to that effort. One way this could happen, for example, would be for an alliance of diverse City businesses, including real estate, lenders, retail, and tourist-related businesses to lead an effort to establish a dedicated source of income for affordable "workforce" housing through a voter initiative process. The Countywide Housing Trust Fund, which is composed of several private sector representatives, has discussed such an effort. 3. Where are illustrations and examples of good housing? The Draft Housing Element includes many policies highlighting the need for good housing design, including Policy 2.3.5, 6.3.11, 7.2.2, 7.2.4, 7.2.7, 7.3.6, and 9.2.1. Once policy content is set, photographs and additional graphics will be added to the Housing Element to clarify key points. The final version including graphics could return for Council review, if desired. The Housing Element is, however, primarily a policy document and not intended to be design guidelines. The Community Design Guidelines (Architectural Review), Margarita and Orcutt Area Specific Plans appropriately include the photographs, diagrams and details needed to guide architectural design, form, finish and quality. 4. There appears to be unnecessary repetition in Chapter 3, with similar policy and program language, that needs simplifying. The number and range of policies and programs reflect the Planning Commission's efforts to be comprehensive and to incorporate Housing Task Force recommendations. Condensing some policies and programs may be possible without significantly changing their effect. In its detailed review, Council should provide direction on changes where appropriate. ATTACHMENTS: 1. 2003 Affordable Housing Standards 2. Residential Growth Management Regulations and Phasing Plan 3. Letter from Richard Straight 4. Letter from Sandra Rowley Draft Housing Element Update, February 24,2004 Council Meeting Page 9 5. Letter from Sierra Club, Santa Lucia Chapter 6. Draft Analysis of Affordable Housing Requirements Incorporated in the Housing Element of the General Plan (2004 Update) by Mundie&Associates 7. Memorandum from Vice Mayor Schwartz JAMOMHousing Element Update\CAR2-24-04CHEupdate.doc I ^� - Attachment 1 city of dam2asan LUIS OBISPO AFFORDABLE HOUSING STANDARDS 2003 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's 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 (SLOMC 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 periodically to show income limits for the 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 $28,850 = $2,308; then $2,308 + $38,100 = $40,408; rounded to the nearest$50=$40,400. 6-99 Rev.4/03 +, '� V Attachment 1 2003 Affordable Housing Standards Page 2 TABLE 1: 2003 ANNUAL INCOME LIMITS ($) INCOME NUMBER OF PERSONS IN HOUSEHOLD GROUP 1 2 3 4 5 6 7 8 VERY LOW 20,200 23,100 25,950 28,850 31,150 33,450 35,750 38,100 [30,850] LOWER 32,300 36,950 41,550 46,150 49,850 53,550 57,250 60,950 [49,360] MEDIAN 40,400 46,150 51,950 57,700 62,300 66,950 71,550 76,150 [61700] MODERATE 48,500 55,400 62,350 69,250 74,800 80,350 85,850 91,400 [74,040] Incomes in [brackets] are 2004 figures, U.S. Dept.of Housing and Community Development 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 averse of limits for four and five-person households. • Four-bedroom unit: use the income limit for a six-person household Affordable Rent Limits The maximum monthly rents, including costs of utilities, 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 $779 under the column heading "2-Bedroom." Rent limits are based on formulas set by state law and are computed as follows: • 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 (Health&Safety Code 1 II Attachment 1 2003 Affordable Housing Standards Page 3 50105). • 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 (H&S Code 50079:5). • For moderate-income households: Affordable monthly rents shall not exceed 35% of 110% of the annual median County household income divided by 12, and adjusted for household/unit size(H&S Code 50093). 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 HUD guidelines. Sales price limits are determined by multiplying the annual income limit of the income group, adjusted for household size, by 2.5 for very-low and lower income households, and by 3 for moderate income households. For example,the maximum sales price for a 2-bedroom dwelling would be 2.5 X $41,550 = $103,875 for a three-person, lower- income household; and 3 X$62,350=$187,050 for a three-person, moderate-income household. Maximum rent shall include a reasonable allowance for utilities paid directly by tenant (gas, electricity, water, sewer, trash collection), but not cable TV or telephone. Sales prices may exceed these amounts only if the City determines that the down payment, plus buyer's closing costs and monthly payments (PITI) excluding utilities over the life of the financing, provide a level of affordability equivalent to the maximum sales price financed at prevailing market terms. Attachment 2003 Affordable Housing Standards Page 4 TABLE 2: 2003 RENT/SALES AFFORDABILITY STANDARDS INCOME DWELLING SIZE GROUP TENURE STUDIO 1-BDRM 2-BDRM 3-BDRM 4-BDRM VERY LOW M[AXWUM $505 $577 $649 $750 $837 MoNrBLY RENT N lAXU" $50,500 $57,750 $64,875 $75,000 $83,625 SALES PRICE LOWER N tkxu UM $606 $692 $779 $900 $1,004 MoNIMY RENT KkX VfUM $80,750 $92,375 $103,875 $120,000 $133,875 SALES PRICE MODERATE MAXIMUM $1,296 $1,480 $1,667 $1,925 $2,148 MomrHLY RENT MAXEAUM $145,500 $166,200 $187,050 $216,075 $241,050 SALES PRICE Long-term Affordability Rental housing affordability is maintained through recorded agreements between a property owner and the City, its Housing Authority, 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; 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. By City ordinance, 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 for owner-occupied units: 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 or buyer. 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 initial purchase price and the initial appraised value as an "affordability loan" or "silent second" payable to the City. The loan accrues interest at a rate set by the City when the note is executed, amortized over 30 years. Monthly payments (principal plus interest) on the affordability loan are typically waived as long as eligible residents continue to own and reside in Attachment 1 2003 Affordable Housing Standards Page 5 the property. Upon sale, transfer, gift or inheritance of the property, the City, its Housing Authority, or a non-profit agency approved by the City, shall have first right of refusal to purchase the property at its current appraised value. The consideration for the City's first right of refusal shall consist of 1 percent of the remaining affordable loan balance. The balance of the City's loan, after deducting the 1% first right of refusal cost, shall be credited toward the purchase price if the City, its Housing Authority or non-profit agency chooses to exercise its purchase option. 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. jh/1lhowuWaffordablehousingstandards2003 Rev.4/03 I - I � Chapter 17.88 . RESIDENTIAL GROWTH MANAGEMENT REGULATIONS 17.98.01: Attachment,;Z_ 17.88.010 Purpose and justification. 17.88.020 Allocations. 17.88.030 Adjustments to allocations requested by property owners. 17.88.040 Periodic city council review and consideration of revisions. 17.88.010 Purpose and justification. A. The regulations codified in this chapter are intended to assure that the rate of population growth will not exceed the city's ability to assimilate new residents and to provide municipal services, consistent with the maximum growth rates established in the general plan. Also, these regulations are to assure that those projects which best meet the city's objectives for affordable housing, infill development,open space protection, and provision of public facilities will be allowed to proceed with minimum delay. B. San Luis Obispo is a charter city, empowered to make and enforce all laws concerning municipal affairs, subject only to the limitations of the city Charter and the Constitution and laws of the state. Regulation of the rate of residential development is a reasonable extension of municipal authority to plan overall development, in furtherance of the public health, safety and general welfare. C. According to the general plan land use element,the city should achieve a maximum annual average population growth rate of one percent. The reserve of developable land withilr the city and the capacity of proposed annexations could sustain growth rates which would exceed the objectives of the general plan. D. General plan policies and the annexation-area phasing schedule required by these regulations reduce the likelihood that any property within the city might be deprived of reasonable development entitlements through the operation of these regulations. E. The growth rate policies of the general plan reflect the city's responsibility to accommodate a reasonable share of expected state and regional growth. F. To avoid further imbalance between the availability of jobs and of housing within the city, the general plan also manages expansion of growth-inducing activities. The burdens of growth management are not being placed solely on the residential sector, since it largely responds to demands caused by other sectors. G. Considering the likely levels of housing demand and construction throughout the housing market area, nearly coinciding with San Luis Obispo County, these regulations are not expected to affect the overall balance between housing supply and demand in the market area.These regulations will not impede and may help meet the needs of low-income households.(Ord. 1359 § 3 (part), 1999) 17.88.020 Allocations. A. The city council shall, by resolution, adopt a phasing schedule that allocates potential residential construction among annexation areas,consistent with the general plan and with these regulations. . B.The limitations on residential'development established 6y these regulations apply to new residential construction within certain areas that have been annexed to the city or that will be annexed to the city. Development in such areas is subject to development plans or specific plans, which shall contain provisions consistent with these regulations and with the phasing schedule. C. For locations which the phasing schedule shows as"allowed,"allocations shall be implemented by the timing of issuance of building permits. D. These regulations shall not limit the issuance of building permits for locations which the phasing schedule shows as having an"assumed"rate of construction. E. Dwellings affordable to residents with very low or low incomes, as defined in the city's general plan housing element, shall be exempt from these regulations. F. It shall not be necessary to have dwellings allocated for a particular time interval or location to process and approve applications for general plan amendment, zone change or other zoning approval, subdivision,or architectural review.(Ord. 1359 § 3 (part), 1999) 17.88.030 Adjustments to allocations requested by property owners. Upon verified written request by each owner for whom the timing of property development would be affected by a proposed change (either hastened or delayed), the community development director may adjust the allocation of dwellings among expansion areas shown in the phasing schedule, so long as the total number of dwellings for all expansion areas within an interval does not change. The director shall approve such requests upon determining that there would be no substantial difference in provision of affordable housing, necessary public facilities,or open space protection as a result of the adjustment.(Ord. 1359 § 3 (part), 1999) 17.88.040 Periodic city council review and consideration of revisions. 01998 Code Publishing,Inc. Page I,/ A. The community ielopment department shall provide us updates to the city council concerning implementation of these regulations, coordinated with t►.,,innual report on the genemi-plan. The status update will describe actual construction levels and any adjustments to allocations that have been approved by the director,and may include recommendations for revisions. B. Following consideration of the annual report,or at such other times as it deems appropriate,the city council may revise the phasing schedule. Such revisions shall be consistent with the general plan. City council approval shall be required to do any of the following: 1.Change the total number of dwellings that may be permitted within an interval; 2. Change the number of dwellings assumed for demolition or infill development or small annexations,or allocated in total to expansion areas; 3. Reduce the number of dwellings previously allocated to a certain expansion area, when there is not verified written approval by each affected owner; 4. Shift the years covered by intervals. C. Before approving a revision, the city council must conduct a public hearing. Notice of the hearing shall be provided at least ten but not more than thirty days prior to the hearing, by publication in a newspaper of general circulation in the city and by first-class mail to each owner of property potentially affected by a delay in building permit issuance as compared with the schedule in effect at that time.Owner information may be obtained from the county property assessment role, or from other sources which the community development director determines will provide complete and current information. Failure of an owner or owners to receive notice shall not invalidate any duly adopted revision. D. For in-city development and for minor annexations, the annual report shall compare the actual number of permitted dwellings with the assumed rate of permit issuance. When the previously assumed number of in-city and small-annexation permitted dwellings exceeds those actually permitted, and expected to be permitted based on current trends and project processing, the city council shall consider revising the phasing schedule to make the difference available to the current phases of large annexations. E. If an annexation area does not fully use its allocation within the previously indicated interval, the city council shall consider assigning the unused potential to that same area in future intervals. It is the intent of this part to encourage completion of neighborhoods that hpve been started; provided, that doing so does not cause the allowed citywide growth rate to be exceeded; and further provided, that the allocations previously assigned to other annexation areas will not be reduced without the approval of the affected landowners.(Ord. 1359 § 3 (part), 1999) Attachment ? 01998 Code publishing,Inc. Page `2 1rI � N 0000M000 M Attachment2 N (NOCotiNCNN � NN M ` O CV - m N r r M CO Ci O x (n y uJ NCO0000000 O 00 c N r M N r y pr O o cqN y m N _ c o a OOOOOOOcO O m . > r �. 0) N O r �. C 0 > r C C C d L .aN o WmEo U y E C W � CONOOOOCO C7 CO OQ N "0 = W C.. m a.k E W W (D r �" C mcScca0c Z6 E0 0 N cc m oWai C? 40 M O0) 10 M 0) W o v 0 . . r r N M CO C7E E c _ o o . mO Woomc� Ec 3Noo000u000 o O � y �ro .='. c 0040 e- e- C+9 N O o c c m W « o a O .' `- N M CC) r = sem � � � c � t m o � 5 3: 'o 0 x MO m ^ E ., ayi W 7 N to a a O y y 0 0 0 0 0 0 0 0 o o m m ZoC? 0GGo O� MCh OCA = �a� � cW � N o � mccoEo5 O y a N = my o o W 0a co yx 3 N aid c Tom _ L d O qOri.. OOtititiNOrO mcoE � W CCmCOCOOo No caCmC cC NO` WC ON >'+ 'T 4m � OtiO O o 3E� � $ � m C O N r o r o o 3 � CD Z' ccm— E �° m rn m Cc W cx � r" .ccwW � mo C) 3 ai � � € y, c co 3 � c m uv RC9 t w O aci = W 5 cL d v C a) v m � U. 0 CL s .M ZV1pma8 'a c fA fA R _ _ tp Q (D 0.L •�j r L c O V m C C 0 r l0 W ca c Lx C :E 'o W U W 7 m 7 E m a N N R t m c o o co ncc 01 v c C = = 0 o c E m Q $ 'o N N cc m 0 'o m �: m c- v a � a = 033333 = 2 .0 CL U) U) m Iw o = — aca v, ma^v v m 1 - i �- RESOLUTION NO. 9161 (2001 Series) Attachment2 A RESOLUTION OF THE SAN LUIS OBISPO CITY COUNCIL AMENDING THE RESIDENTIAL GROWTH MANAGEMENT PHASING SCHEDULE(GPI 21-01) WHEREAS,the Planning Commission and City Council have held hearings on the proposed amendment on February 14, 2001,and March 6, 2001,respectively; and WHEREAS,the Community Development Director has determined and the Planning Commission has concurred that the proposed amendment is not a project under the California Environmental Quality Act,because it has no potential for physical changes to the environment;and WHEREAS,the proposed amendment is consistent with the General Plan and the Residential Growth Management Regulations,specifically by: Encouraging the timely production of housing, including affordable housing;Encouraging the completion of public facilities,including road improvements; Recognizing the dedication of open space; Allowing development consistent with land use designations,zoning, and approved development plans,and subject to availability of resources and services; and Maintaining a citywide population growth rate not exceeding an annual average of one percent. NOW,THEREFORE, BE IT RESOLVED by the Council of the City of San Luis Obispo as follows: The Residential Growth Management Phasing Schedule, first adopted October 5, 1999,by " Resolution No. 8972, is hereby amended as shown in the attached Exhibit A. On motion of Mayor Settle,seconded by Council Member Manx, and on the following roll call vote: AYES: Council Members Mulholland,Schwartz,and Howell Marx,and Mayor Settle NOES: None ABSENT: Council Member Ewan The foregoing resg4bn was passed and adopted the 6a'day of March 2001. yor Allen Settle ATTES Ci Clerk Lee Price, CMC R 9161 B Jeff Hook-letter from Sandra Rowle�pgf -_: .: .a.1 rage -1 Attachment.3 Allen Settle Housing Task Force Page 1 From: 'Richard Straight"<getstraight®oharter.net> To: <dromerodsloclty.org>,comulholland®slocity.org>,<lewan®slooity.org>, <asettleaslocity.org>,<kschwartz® slocity.org> Date: Thu,Feb 5,2004 3:09 PM tANn dlib dom nenHOr - Subject: Housing Task Force tAND 0o1lrldl rtlBB'I n Dear Council Members 6 I have followed the housing element update process since the Council appointed the Housing Task force. I,am a part of a group represented by a community organization including the Police Department,Fire Department,Nurses,Home Builders,Realtors and the Chamber of Commerce.. This group has been working for months with the Planning Commission to help bring forth a reasonable draft of the,Housing Element Update. A draft that would not only help protect and preserve our community but also encourage the creation of affordable homes for the working people in our town,such as the nurses. It has come to my attention that some groups,that did not participate in the process during the Planning Commissions review,have come out to criticize the work of the Planning Commission. We believe the existing draft put forth by the Planning Commission will encourage the creation of affordable homes without detriment to R1 zones. Claims that these recommendations would encourage uncontrolled development or growth are unfounded. The Planning Commission,Staff and the community groups Worked long and hard,together,to create a document that made good sense and incentivized affordable housing. Please do not disregard the long hours that have been spent in collaboration to put forth a quality plan. I urge you to adopt the Planning Commission's recommendationsIM Jeff Hook.-letter from Richard Strai htasalf.c ' NagJl J Attachment Lt- Allen Settle-Housin -Element Discussion,3 Feb 2004 �ge t From: macsarcnacsar99Qearthlink.neb Flow fit for tftnoouml fir Date: Wed,Feb 4,2004 7:03 PM Sabled: Housing Element Discussion,3 Feb 2004 Mr.Mayor,City Councifinembers. A couple of years ago I retired(atter 32 years)from a very large organization. During this time I functioned both in staff and leadership positions. When functioning In a staff or advisory role I was often tasked to put together studies or proposals of various kinds. Sometimes all of the information I compiled was used,sometimes only part of it was used,and sometimes my Was decided not to use any of it. He/she was the decision-maker,this was his/her right and responsiblitty. When 1 was in decision-maker positions,I tasked others to assemble information and recommendations for me. Sometimes the product was exactly what I was looking for,sometimes it was close,and sometimes it was way off the mark. In the tatter two cases,I thanked them for their work said It was not quite(or not at all)what I was lookirig for and then proceeded to make the necessary revisions. In this case,I was the person who was responsible:I was the decision-maker. Individuals in advisory positions should not expect that ft work they do is a substitute for the Council's deliberations and decisions. Nor should they be so fragile as to be upset when the product they assembled is changed. If staff members or commission members think they should be the final decision-makers on city policies and programs, they should run for office. You as City Council members are the final decision-makers. You each expressed your position on various issues when you ran for office. The votes were cast.and now you represent the residents of this city. The residents have expressed their desires on a number of Issues-growth, owner occupancy for grannies:and various other neighborhood Issues- and they look to you,their elected representatives,to ensure the Housing Element is what THEY want. As for the Planning Commission's concern that their product will be changed: That's the political process...in fact,that's life. Speaking of the political process,thank you for reading my emails and listening when I speak. Sincerely, Sandra Rowley I ^ � FEB-10-2004 00=44 Jan r e ham 00und III g 11lemM tfiie dootettnetttl0r SC:LUB 0.9rnca ChapW 5ft 2& 1 r5s 1204 Nipomo Street San Luis Obispo, CA 93406 February 9,200} Attachment J1 Dear San Luis Obispo City Council: The Housing Committee of the Santa Lucia Chapter of the Sierra Club has recently approved this correspondence,which is respectfully submitted into the record regarding the proposed draft of the Housing Element City Council is being pressured to rubber stamp this draft of the proposed Housing Element. The Council needs to step back from the morass of detail and look at the big picture. The proposed"Housing at Any Cost"M=ept goes far beyond wbat is required to satisfy the state housing requirements. As proposed,it. would degrade quality of life in the neighborhoods,harm the eaviromaent,spend down the General Fund and undermine the city's long4reesuted Growth Management policies. The voters are looking to Council to draw on your own expertise and knowledge of the community and to assert proactive leadership. The Council could successfully address the state bousing regmrem=b and protect the neighborhoods and environment by doing the following"Ten Simple Things To Save The Housing Element ' 1. Exempt established residential neighborhoods from"retroactive remcning';leave them as they are,and continue to require owner occapancy of granny units. 2. Require infill projects in established neighborhoods to be compatible with charaeftr of surrounding neighborhood and to meet the same development standards as the teak of the neighborhood.Use earrcmt definition of"infill"from the Land Use IIanent;not the new elle proposed. 3 Prior to making any decision on any draft,obtain a complete hst from staff of all General Plan A= that would be made necessary if Out version proposed Housing Element were adopted,ie.a"General Plena impact"report 4. Use the money budgeted to prepare an EIR with mitigation measures and thorough economic analysis ou all those changes and all new policies and programs proposed by may draft: Permanently snarled traffic is not an acceptable trade off for donsifieation. 5. Concentrate densification only on newly annexed areas and on oominen Tally zoned land(mixed use). 6. Increase tho present ratio of parkland to households and do not'rehe open space requirements. Parks and open space arc important mitigations for deasiticadon. 1�� FF-s-1e-200" 00:x' J8" - Attachment9 P.ez�ez 7. Require the bmldiag of MORE homes affordable to low and very low incanta households than required by the present element„not fewer as proposed by this drab, and keep them affordable as long as possible 8. Do not provide General fined subsidies for moderato-incame haasmg and do not exempt it from aaydm&including the 1%growth cap,impact or is lieu foes_ D19Md, encourage employers to pr(mde equity abating or assistance programs to moderate-income employees. 9. Do not eliminate or reduce the lnalusionary Hoasb*i n lion foes,and make 00MMI rciel projects pay 15%in lien fm is the a xpanAon arcs,as inn residential. 10. Plan new oidinmeas and amend old oases in order to mitigate impacts which will result from dendficenon,such as a`bight sky"o diamm A basic premise of this draft of the proposed Housing Element,which is$awed, is that more housing equals more affordable housing. This draft element actually provides for FEWER homes affordable to low and very low-income households than the old element.The quest for affordable housing cannot be satisfied by simplybuilding MORE houses. We cannot bind our way out of this dilemma. The market deermines the price because demand comes from outside the area,where homes are much more expensive than they are here. This has been recently affirmed by Bill Watkins ofUCSB in the Tribune. Small lots will not necessarily result in lower prices. For ft sw=,the 17 new houses on McCollum off Grand were(briefly)mated at$650,000 each They have almost no backyards. The owner pulled them off the market,hoping to get more later for them. Maybe he will. The Devaul Ranch homes were going to be sold for $350,000 when the project began,but now are going for$650,00 and up.All these new houses on the market have made the market RISE,not fail,Why? Because houses here are still a good deal to potential buyers, ie. people from outside our area and real estate investors. Al the City Council members campaigned on being a friend of the neighborhoods and the envuonmeeut. But,red.friends would not place the quest for housing"at any cost,"as this Housing Element draft asks the Council to do. The residents of the city are depen ft an you to keep your campaign prone ises,protect their quality of life and create a positive vision for our community's future. Sincerely, aanHewell Marx Chair,Housing Committee Santa Lucia Chapter TOTAL P.62 I- a;) 1: Attachment 6 DRAFT Analysis of Affordable Housing Requirements Incorporated in the Housing Element of the General Plan (2004 Update) City of San Luis Obispo Prepared by: Mundie &Associates Consultants in Land Use and Economics 3452 Sacramento Street San Francisco, California 94118 January, 2004 '- a3 ANALYSIS OF AFFORDABLE HOUSING REQUIREMENTS IN THE HOUSING ELEMENT OF THE GENERAL PLAN: SUMMARY AND CONCLUSIONS BACKGROUND •.. The City of San Luis Obispo General Plan contains requirements for the provision of affordable housing by all new development projects—both residential and nonresidential—that are built in the city.t The afford- able housing requirements proposed in the current update of the Housing Element of the General Plan are, in general,more aggressive than the requirements currently in effect;that is,they would require the production of more affordable units,or payment of higher in-lieu fees,as a condition of development. Affordable housing requirements seek to capture some of the value of new development that would other- wise accrue to the owner of the development site or the real estate developer. This analysis estimates the impact of the new requirements on the three factors in real estate development that would potentially be affected: (1)the developer's budget for land that would have to be acquired for the development site(that is,the land price); (2)the price charged to purchasers or occupants(renters)of the development;and(3)the profit earned by developers. In reality,the impact of the fee requirements would probably be shared among these three factors. If the impact on any (or all) of these factors is too great, then it is possible that real estate development activity in San Luis Obispo would cease,because(1)land owners would not sell their properties to develop- ers; (1)rents for new building space and prices for new market-rate housing would be too expensive; or(3) developers could make more money in some other line of work. Thus, the key to a.successful inclusionary housing requirement is to find the level of inclusionary requirement that captures some—but not all—of the value of new development. CONCLUSIONS - ■ For the most part,the City's proposed housing affordability requirements would not discourage new development. Although the impact of the requirements would theoretically be distributed among the three factors— land,rentstsales prices,and profit—in the current real estate market they are most likely to fall mainly in rents/sales prices. The expected increases in rents and sales prices resulting from the proposed affordability requirements—which are in the range of 3 percent for most projects and up to 10 percent for the expansion area residential project—would price some consumers out of the market,but would probably not discourage new development. ■ In all cases, a developer is more likely to satisfy the affordable housing requirement by paying the fee than by producing housing units. For nonresidential projects, paying the fee is preferable because it is less expensive than producing housing units and easier to do (production could require acquisition of a different site and would require construction of an entirely different real estate product). For residential projects,paying the fee is preferable because it is less expensive. In Cases 13 and 14, the construction cost on which the fee is based comprises between 30 and 40 percent of the total cost 1 I ,. a4 of housing production? Therefore, payment of the fee would not support housing production on the same scale as the production requirement,and payment of the fee is a bargain for the developer. ■ To ma3dmine the yield of the affordable housing requirement, the amount of the fee should be increased or the amount of housing production required should be decreased. This adjustment would reduce the attractiveness of the fee option; at the same time, if developers still choose to satisfy the requirement by paying the fee, it would yield more revenue for the production of housing units. I "Affordable housing"is housing that is offered at a sales price or rent that is within reach of moderate-income households(those with incomes not exceeding 120 percent of the County median household income),low-income households(those with incomes not exceeding 80 percent of the median),or very low-income households(those with incomes not exceeding 50 percent of the median). Median income and affordable housing prices are established for each county or metropolitan area by the U.S. Department of Housing and Urban Development. 2 For Case 14, this estimate excludes the costs of infrastructure improvements, such as the water tank and park, which are not known;therefore,the construction cost is likely to be less than 30 percent of total cost. 2 I �� r TABLE OF CONTENTS CHAPTER PAGE I Introduction Background Purpose of This Report Overview of the Report II Foundations for the Analysis The Proposed Affordability Requirements Theoretical Framework for Assessing Impacts Methodology Definitions Limitations III Findings ofthe Case Studies Case 2: Downtown Mixed Use (Office/Retail) Case 3: Expansion Area Retail Case 4: Expansion Area Industrial Case 13: Infill Condominiums Case 14: Expansion Area Residential IV Conclusions Findings of the Feasibility Analysis Additional Discussion of the Fee Option Appendix A. Income Limits, Rents,and Sales Prices Appendix B: Detailed Assumptions for 1991,1997,and 2004 1, LIST OF TABLES TABLE PAGE lA Existing and Proposed Housing Affordability Requirements 1 B Proposed Adjustments to Housing Affordability Requirements for Larger Residential Projects (20 or More Units) 2 Summary List of Projects Evaluated 3 Effects of Current and Proposed Affordable Housing Fee Requirements: Case 2A 4 Effects of Current and Proposed Affordable Housing Fee.Requirements: Case 213 5 Effects of Affordable Housing Requirements: Case 3A 6 Effects of Affordable Housing Requirements: Case 313 7 Effects of Affordable Housing Requirements: Case 4 8 Effects of Affordable Housing Requirements: Case 13 9 2004 Market Prices for New Housing Units: Case 14 10 Construction Schedule: Case 14 11 Distribution of Affordable Units: Case 14 12 Effects of Affordable Housing Requirements: Case 14.1 13 Effects of Affordable Housing Requirements: Case 14:2 14 Summary of Effects of Affordability Requirements: Cases 14.1 and 14.2 15 Summary: Impacts of Affordable Housing Requirements on Feasibility of New Development 16 Housing Yields from Different Methods of Meeting the Affordable Housing Requirements 1� � I. INTRODUCTION AACKGROUND The City of San Luis Obispo General Plan contains requirements for the provision of afford- able housing on by all new development projects—both residential and nonresidential —that are built in the city. "Affordable housing" is housing that is offered at a sales price or rent that is within reach of moderate-income households (those with incomes not exceeding 120 percent of the County median household income), low-income households (those with incomes not exceeding 80 percent of the median), or very low-income households (those with incomes not exceeding 50 percent of the median).1 As it originally considered the imposition of affordable housing requirements in 1991 and as it has reconsidered the issue in subsequent years, the City Council has been aware that requiring development projects to provide affordable housing may conflict with other city pri- orities. For example, requiring residential development projects to provide affordable hous- ing may reduce the feasibility— and, consequently, the production — of market-priced hous- ing. Similarly, requiring nonresidential development projects to provide affordable housing may reduce the feasibility — and, consequently, the production — of new retail, office, and industrial building space, and thereby make it more difficult for San Luis Obispo to attract and retail jobs and capture retail sales. PURPOSE OF THIS REPORT This report examines the affordable housing requirements proposed in the current update of the Housing Element of the General Plan. These proposed requirements are, in general, more aggressive than the requirements currently in effect; that is, they would require the production of more affordable units, or payment of higher in-lieu fees, as a condition of development. The report considers the potential effects of the proposed requirements on the feasibility of new residential and nonresidential development in the City and its expansion areas. It asks — and attempts to answer — the question, "Will the new requirements reduce the returns from new projects to such a degree that they would not be built?" This report is an update of two previous analyses of the same issue. The first, prepared in 1991, considered the effects of the then-proposed affordable housing requirements on 13 hypothetical development projects that were defined based on actual applications that had been received by the City of San Luis Obispo. An update in 1997 focused on five of those case studies, representing an array of project types and locations. This update examines the same five cases that were reviewed in 1997. Median income and affordable housing prices are established for each county or metropolitan area by the U.S.Department of Housing and Urban Development. Draft 2/12/2004 5:04 PM 1 Why this update at this time? For several reasons. First, the current process of updating the City's Housing Element provides an opportunity to consider whether the affordability requirements currently in place are appropriate, given the experience of recent years and current market conditions. Second, a dramatic change in housing and financial market conditions since the 1997 update have prompted City officials to consider whether currently obtainable profits in the housing market may enable the City to provide more affordable housing to meet current and future needs. OVERVIEW"ClF THE RK, Chapter II of this report provides additional background for the analysis of the proposed affordable housing requirements. It describes the theoretical framework for the analysis and establishes a vocabulary for the study. The information in this chapter parallels information presented in Chapter I of the 1997 study. Chapter III presents findings of the updated analysis for each development case study in turn. Each case study begins with a brief description of the development characteristics and the affordable housing requirements. It then outlines the characteristics of a "feasible" development project, identifies the land budget for such a project in the absence of afford- able housing requirements, and evaluates the impacts of the existing requirements on development feasibility. The format of this chapter closely parallels Chapter II of the 1997 report. Chapter IV summarizes the conclusions of the 2004 update. The conclusions are based on the findings of the 2004 analysis and on a comparison of the 2004 findings to the 1997 findings. Information about 2004 income limits as well as affordable rents and housing purchase prices for low- and moderate-income households are presented in Appendix A. Appendix B compares the financial assumptions used in the 2004 update to those used in the 1997 and 1991 analyses. 2 Draft 2/12/2004 5.04 PM 1� � 11. FOUNDATIONS FOR THE ANALYSIS HE PROPOSE.D:ATF( 'RITY The City of San Luis Obispo imposes requirements for the provision of affordable housing on all development projects in the City. These requirements typically provide for either the production of housing units affordable to low- and/or moderate-income households (as defined by the U.S. Department of Housing and Urban Development) or the payment of a fee in lieu of housing production (an "in-lieu fee"). The affordable housing requirements vary from project to project depending on (1) the type of use proposed (residential vs. non- residential) and (2) the location of the project (within the existing city limits vs. in an expan- sion area, requiring annexation prior to development). The affordable housing requirements proposed in the Housing Element update currently being prepared would add two new considerations to the calculation: (3) the size of a resi- dential project and (4) a combination of project density and average housing unit size. For projects that contain 20 or more housing units, the new requirements would apply a sliding scale to adjust the total in-lieu fee or number units to be produced. Table 1 compares the existing and new affordability requirements. The recommended affordability requirements are different for projects in major expansion areas from those within the existing city limits. The rationale for this difference is that land values would increase significantly upon annexation to the city, because annexation would bring with it the potential for more intensive development than could be achieved in the unincorporated area, and the City is entitled to capture some of the significant increase in land value. HEO,RETISALf I KAOIINSING IMPACTS: r. This analysis of the effects of proposed affordable housing requirements on development in San Luis Obispo recognizes that applying the requirements increases the costs of producing the proposed development or reduces the revenues generated by the proposed development. Specifically: ■ The costs of development are increased if the requirement is satisfied by payment of the fee. ■ Revenues generated by the development are reduced by the difference between the market price for housing and the allowed price of the affordable unit(s),which is estab- lished by the City of San Luis Obispo. If the cost increase or the revenue reduction is too great, the return, or profit, generated by the project will decrease to a level that makes it an unattractive investment, and develop- ment activity will decrease as well. In an extreme case, development activity may cease alto- gether until market conditions adjust, the affordability requirements are revised, or other changes occur that make development of new projects profitable once again. Draft 2/12/2004 5:04 PM 3 c 3.0 Table 1A Existing and Proposed Housing Affordability Requirements Affordability Requirement Location Type of Project Fee ora Production In City Commercial Current: Pay in-lieu fee Current: Build 1 ADUb equal to 2%of building per acre, but not less valuation than 1 ADU per project. Proposed. Pay in-lieu fee Proposed.- Build 2 ADUs equal to 2%of building per acre, but not less valuations than 1 ADU per project. Residential Current: Pay in-lieu fee Current: Build 3% low or equal to 5%of building 5% moderate cost ADUs, valuation. but not less than 1 ADU per project. Proposed.- If<20 units, Proposed: If<20 units, same as current same as current requirement. If 20+ requirement. If 20+ units, current require- units, current require- ment adjusted(see Table ment adjusted (see Table 1B). 1 B). In Expansion Areas Commercial Current:. Pay in=lieu fee Current: Build 1 ADU per equal to 2%of building acre, but not less than 1 valuations ADU per project. ---._ ..,..................... .-........_._.._....... --... -- Proposed Pay in-lieu fee Proposed. Build 2 ADUs equal to 2%of building per acre, but not less valuation.c than 1 ADU per project. Residential Current: Pay in-lieu fee Current: Build 5%low- equal to 10%of building and 10% moderate-cost valuation. ADUs, but not less than 1 ADU per project Proposed: If<20 units, Proposed. If<20 units, pay in-lieu fee equal to same as current 15%of building valua- requirement. If 20+ tion. If 20+ units, pay in- units, current require- lieu fee equal to 15%as ment adjusted (see Table adjusted (see Table 1_13). 11 B). Note: ADU=Affordable Dwelling Unit a Developer may build affordable housing in the required amounts,or pay in-lieu fee based on the City's formula. b. ADUs must meet City affordability criteria listed in the Housing Element of the General Plan. c. "Building Value"shall mean the total value of all construction work for which a permit would be issued,as determined by the Chief Building Official using the Uniform Building Code. Source: City of San Luis Obispo, Housing Element,September 1994 (Table 1); Planning Commission.Staff Report, Item#1, Meeting of 11/12/03 4 Dmft 2/12/2004 5:04 PM Table 1 B Proposed Adjustments to Housing Affordability Requirements for Larger Residential Projects (20 or More Units)* Density Average Unit Size (Units per Up to 1,000- 1,501- 2,001- 2,501- Net Ave 1,000 11500 _21000 22500 3,000_ 3,000+ 36+ 0.25 0.50 0.75 1.00 1.25 1.50 24-35.99 0.50 0.50 0.75 1.25 j 1_25._................- 1.50 _ 12-23.99 0.75 0.75 j 1.00 1.25 I 1.50 1.75 7-11.99 1.00 -1.00_._......1 1.25 1.5_..-.._.__.... 1...50 -' 1.75 _. ..........._....._....-..._.__................ - -.......................--.. <7 1.00 i 1.25 j 1.50 1.75 1.75 2.00 * Adjustment factors apply to the fee and production requirements shown in Table 1A. In this analysis, for example, Case 14, with 353 units (see Table 2 and Chapter III), is subject to an adjustment factor of 1.25 because the average unit size is 1,567 square feet and the average density is less than 7 units per acre: Therefore,the production requirement is scaled up from 10 percent moderate income units and 5 percent low income units to 12.5 percent and 6.25 percent,respectively,and the fee requirement is increased from 15 percent to 18.75 percent. Source: Planning Commission Staff Report, Item#1, Meeting of 11/12/03 In this conceptual context, the potential impact of the proposed housing affordability. requirements may be evaluated by addressing the following questions: ■ What effect would the proposed requirements have on developers' profits? Would the revenue reductions resulting from the recommended requirements have such a severe impact on developers' profits that it would no longer make sense to build new devel- opment projects? ■ What effect would the proposed requirements have on land values? Faced with increased costs and/or reduced revenues, developers are likely to seek ways to reduce . their production costs. The obvious target for cost reductions is the land budget: while most production costs are inelastic, the price a developer is willing to pay for a site is subject to negotiation with the prior owner of the land. Would the affordability requirements reduce land values to such an extent that landowners would no longer be interested in selling their property to developers? ■ What effect would the proposed requirements have on the prices of market-priced units? If the land prices were not reduced and the developers attempted to recoup their foregone profits from the affordable units by increasing the prices of the market- priced units, by how much would the prices of the market-priced units rise? How much additional income would be required to buy a house at higher price? If the requirements were determined to reduce expected profits, reduce land values, or increase the prices of market-priced housing to an excessive degree, then they would be likely to reduce the feasibility of new development: ■ Lower profits for developers could drive them out of the development business in search of investments that provide a more attractive.return. Draft 2/12/2004 5:04 PM 5 t -3a ■ Lower land values might discourage some landowners from selling their property to developers; instead, they may choose to use the land for some other purpose (e.g., keep it in agriculture) and wait until prices rise once again. If landowners are unwilling to sell their property for development (or develop it themselves), then the number of sites available for new urban uses will decline. (Ultimately, such a decline could lead to an increase in the price that developers are willing to pay for the sites that are available, but only if they can charge high enough rents/sales prices to cover the increased cost.) ■ Higher prices for market-priced housing units mean that some households that would have been able to afford those units at the `original' lower prices will be excluded from the market, or that households will decide to live in lower-priced communities within commute distance of San Luis Obispo. If enough households are excluded or decide to live elsewhere, it will become too difficult to sell whatever units are produced. The bottom line result of this effect would be a reduction in the amount of new housing (for all income groups) produced in San Luis Obispo, and a further tightening of the housing market. METHODOLOGY This update uses the same approach as the 1991 and 1997 analyses: it considers the impact of affordable housing requirements on land value, developer profit, and the sales prices of . market-priced housing units based on a series of cash flow simulations for alternative devel- opment projects. The alternative development projects, which are the same as those evalu- ated in the 1997 study,2 are summarized in Table 2. Table 2 also identifies the proposed afFordable housing requirements that would apply to each project. Staff provided updated information about construction costs and fees. Mundie & Associ- ates interviewed-local (San Luis Obispo) real estate professionals to update information about rents, sales prices, construction and mortgage lending terms, and other factors that are incorporated into the flnancial analysis. Assumptions used in the 1997 analysis are com- pared to those used in the 1991 and 1997 analyses in Appendix B. As in the previous editions of this analysis, the following calculations were performed: 1. Given assumed costs, expected revenues, and assumed threshold profits, a land budget was calculated for each scenario. This calculation incorporates an assumption that no contribution to affordable housing—either in the form of housing units or as a contribution to offsite production — is required. This calculation is used to establish the value of the land for each type of project. The threshold profit is assumed to be an internal rate of return (IRR) of 11 percent in operating year 10 for 2 All together, 14 case studies were evaluated in 1991. Five cases described in the 1991 report and reexamined in the 1997 update were determined to provide a comprehensive look at the.impacts of the proposed affordable housing requirements. The same five cases are reviewed in this report. 6 Draft 2/72/2004 5.04 PM Table 2 Summary List of Project Types Evaluated Project Description ...................... ...................... ................ ............................... Pti 2003 Affordable Building Housing Case Location Description Site Area Area Comments uirements 2 existing i downtown 7,000 s.f. 18,390 s.f. 5,990 s.f. At least 1 unit city mixed use retail, 12,400 or pay 5%fee s.f. office 3 expansion retail 20 acres 225,000 13 structures 40 units or s.f. pay 5%fee 4* expansion industrial 4 acres 160,000 s.f. 8 units or pay 5%fee 13 existing 'infill 1.79 acres 24,900 s.f. 18 units 1 low or city condominiums (10.06 du/ I moderate acre; 1,383 (or pay fee) s.f./unit) 14 expansion residential 1139.5 acres 580,000 353 units 22 low and (excluding s.f. (0.39 44 moderate streets) du/acre; (or pay fee)* - 1,643 s.flunit Cases 4 and 5 are synthesized into Case 4. In 1991,the two cases were expected to have slightly different construction costs and different housing affordability requirements resulting from location within vs.outside the city limits. The current study omits any price differences,and City regulations have omitted differences in the affordability requirements. Source: City of San Luis Obispo Planning Department;Mundie&Associates commercial and industrial projects, and a profit on sale equal to 20 percent of revenue for for-sale housing projects. These profit assumptions are based on accepted industry norms. The calculation of a land budget as a starting place for the analysis is based on the concept that the price a developer can afford to pay for a development site is deter- mined by subtracting the costs of all other components of production (including, but not limited to, construction, architects and engineers, government fees and exactions, marketing, and profit) from the expected revenues (rents or sales). The difference between total revenues and total costs is the "residual land value" and is equal to the land budget. This step defines the "1997 Base Case"for this study: it is the set of costs and revenues, and resulting land values, associated with new development, exclusive of an affordable housing requirement. 2. Given costs and revenues, and holding constant the land budget calculated in Step 1, the effect of the existing affordable housing requirements on developer profits is esti- mated. This calculation provides some indication of whether developers would still Draft 217212004 5.04 PM 7 consider their projects feasible if they have to bear For comparison: the entire impact of the requirements (that is, if land prices are relatively non-negotiable and rents/sale The 1997 analysis assumed prices cannot be increased). that developers would 3. Given costs, revenues, and required threshold prof- require an internal rate of its, the effect of the existing requirement on the land return of 12 percent for budget is calculated. Comparing the land budget commercial and industrial with the proposed affordable housing requirement to (and apartment) projects the land budget in the 2004 base case provides a and a profit of 12.5 percent quantitative estimate of the impact of these require- on for-sale housing ments, assuming that the entire impact is borne by projects. the pre-development landowner. The current study reduces 4.. Given costs, the land budget calculated in Step 1, the required IRR to reflect and required threshold profits, the effect of the current low inflation and existing affordable housing requirements on prices. interest rates, and of market-priced units or rents is estimated. For resi- increases the profit on for- dential projects, this calculation provides sale projects to recognize information about the potential subsidy to affordable the financial effect on. housing, that would be contributed by other home developers of long 'project' buyers, as well as a ballpark indication of how much processing times. higher those buyers' incomes would have to be if the entire affordable housing subsidy were passed through to the purchasers of market-priced units. For commercial and industrial proj- ects, this calculation provides an indication of whether the required contribution to an affordable housing fund would drive the price of nonresidential space in San Luis Obispo into a range that is unaffordable or noncompetitive. As in 1991 and 1997,this aspect of the analysis is not intended to suggest that market- priced units (that is, those units not reserved for low- and moderate-income house- holds) with higher prices will indeed be marketable. The earlier reports noted the City Council's awareness that every increase in the price of a home puts that home beyond the financial reach of additional households. This evaluation of impacts on housing prices is simply intended to show the amounts by which asking prices would have to rise in order to replace the revenue that a developer would have to forego by offering the required number of affordable units, or by paying the alternative contribution to the housing fund. As in the 1991 and 1997 studies, the conclusions of this analysis describe the effects of the afford- able housing requirements on the feasibility of new development, based on the change in devel- oper's profit, land budget, and asking rents/prices. In each case, the quantified changes assume that the entire impact of the requirements is borne by one of the three indicators (profit, land price, or occupant/purchaser). In reality, the impacts may be shared among the three; in that case, the change in any one of these indicators would be smaller than indicated in this report. g Draft 2/12/2004 5:04 PM 1 � 3C DEFINITIONS This report makes frequent use of the following terms, which are defined here for convenient reference: ■ Household: the person or group of people occupying a single housing unit. ■ Affordable housing/affordable dwelling unit: housing that is affordable to households with low or moderate incomes. (See Appendix A for a summary of upper income lim- its, maximum allowable rents, and maximum allowable housing purchase prices for low-and moderate- income households.) ■ Low income: annual household income that is no more than 80 percent of the area's median household income. In 2003, a three-person low-income household would have had an income of no more than $41,550. A housing unit affordable to such a house- hold would rent for no more than $779 per month and would sell for no more than - $103,875. Median income: the middle income of all households in the area. In San Luis Obispo County,the median income in 2003 for.three-person households was $51,950. ■ Moderate income:, annual household income that is between 80 percent and.1.20 pert..:; cent of.the area's median household i.ncome. In 2003, a three-person modeeate income household would have had an income of no more than $62,350; a housing unit affordable to a household with this income would rent for no more than $1,66.6 per. month and would sell for no more than $187,050. Major expansion area: one of the five areas that the city has considered for potential annexation at some time in the future. These areas are (1) the Dalidio area, lying gen- erally U.S. 101 between the Madonna Area and Los Osos Valley Road; (2) the Margarita ..area, located north of Prado, generally between South Higuera and Broad; (3) the Air- port area, located between Prado on the north, a line midway between Tank Farm and Buckley on the south, South Higuera on the west, and Broad on the east; (4) the Irish Hills area, located west of Los Osos Valley.Road between Madonna Road and U.S. 101; and (5) the Orcutt area, located east of the Southern Pacific,Railroad Tracks south of Orcutt Road. ■ Feasibility. In this report, a project is considered to be theoretically feasible if it would yield a positive land value given the production costs, financing terms, and rents/sale prices assumed (see Appendix B). Although the report comments on whether devel- opment should be expected given the land budgets indicated by the analysis or other conditions that might affect demand for various types of space, it does not consider the full dimensions of the market for residential and nonresidential development in San Luis Obispo at this time. Appendix A provides additional information about income limits for households of various sizes and the amount of rent or sales prices expected to be affordable to those households. Draft 2/12/2004 5.04 PM 9 LIMITATIONS This approach to evaluating requirements for the production of affordable housing, as noted in the 1991 and 1997 reports, provides a rigorous, quantitative system for testing the effects of alternatives. It is nevertheless subject to certain limitations that should not be ignored as the results are considered. These limitations include the following: ■ All cost and revenue assumptions are subject to challenge. Because every case is different, and the assumptions used in the analysis are intended to represent general scenarios, questions about the particular values used may arise. ■ The number of potential development sites—both within the existing city limits and in the major expansion areas — is limited, as is the number of ownerships. Every land transaction will be subject to a set of expectations and dynamics specific to that site. Therefore,the land budgets calculated in Step 1 above are unlikely to be identical—and may not even be close—to those already mentally assigned to sites with development potential by either the owners of those sites or by the development community. ■ It is unlikely that the impact of affordable housing requirements will fall entirely on land value,or on developer profit,or on housing prices; instead, it will most probably be dis- tributed among those three factors, depending on the relative bargaining position of the landowner, developer, and households or businesses seeking to purchase or rent building space. 10 Draft 2/12/2004 5:04 PM r� � ' D � III. FINDINGS OF THE CASE STUDIES CASE 2: DOWNTOWN MIXED USE (OFFICURETAIL) Development Characteristics Site Area 7,000 square feet Building Area Groundfloor Retail 5,990 squarefeet Second and third oo Qye 12,400s ware eet Total 18,390 square feet Parldng 37 spaces* *. Requirement met through payment of fees totaling.$407,000. Affordable Housing Requirements The affordable housing requirement proposed in the new For comparison: Housing Element may be satisfied by either: ■ Construction of one unit that is affordable to low or The housing affordability moderate income households3, or requirement currently in ■ Payment of a fee equal to five percent of the effect would require the construction cost. Under the construction cost construction of one unit or assumptions used in this study, this fee would total Payment of a fee equal to $97,147.4 two percent of construction cost ($38,859).4 For all commercial and industrial development projects, it was assumed for this analysis that the developer would find payment of a fee preferable to construction of a housing unit. Therefore, the new requirement would effectively represent no change. 3 The City requires construction of two affordable units per acre,with a minimum of one unit. Because the site area for this project is less than one-half acre,the requirement would be one unit. 4 According to the Housing Element, the fee is calculated based on the "total value of all construction work for which a permit would be issued,as determined by the Chief Building Official using the Uniform Building Code." Draft 2/12/2004 5:04 PM 11 I - M Assumptions for the Analysis Two sets of rent assumptions were used to evaluate Case 2: ■ In Case 2A, market rents are assumed to $2.50 per square foot per month for retail space and $1.30 per square foot per month for office space. The leases for office space are assumed to be gross.5 For the office space, fixed operating costs are assumed to amount to $1.50 per square foot per year and variable costs are assumed to For comparison: amount to $2.50 per square foot per year. These assumed costs reduce the effective rent per occupied square foot of In the 1997 analysis, the office space to about$0.97 per square foot per month. rent for retail space was assumed to be $2.00 per ■ In Case 213, market rents are assumed to be the same as in square foot per month and Case 2A ($2.50 per square foot per month for retail space the rent for office space and $1.30 per square.foot per month for office space). All was assumed to be $1.50 leases —.both retail and office — are assumed to-be triple per square foot per month. net; that is, all costs of operating the building are,passed Operating costs for office through to the tenant. space were assumed to be This case reflects current market conditions in downtown the same.as the costs used San Luis Obispo; that is,.office leases are likely to be made here_ for Case.2A. . on a triple net basis. This type of lease arrangement for office space is a change.from the conditions that prevailed at the time the 1991 and 1997 studies were conducted. As noted in Chapter I, development is assumed to be feasible if the developer can reasona- bly anticipate an internal rate of return (IRR) on investment of 11 percent in operating year 10. Results of the Analysis: Case 2A In Case 2A, the project owner is expected to pay the operating costs of the project associ- ated with the office space. Land Budget with No Affordable Housing Requirement For comparison.- With omparison:With no affordable housing requirement, Case 2A would have an In the 1997 analysis, the estimated total land budget of$100,800. This total is equal to land budget with no $14.40 per square foot for the 7,000-square-foot site. affordable housing require- ment was $1.5.00 per Impact of Affordable Housing Requirements square foot of site area. The effects of paying a fee equal to two percent of construction costs (the current requirement) or five percent of construction costs (the proposed requirement) are compared in Table 3. 5 Retail rents are triple net that is, tenants pay all operating costs.. Office rents are full service; that is, landlords pay operating costs. Detailed revenue and cost assumptions are presented in Appendix B. 12 Draft 2/12/2004 5:04 PM r ( " r2 Table 3 Effects of Current and Proposed Affordable Housing Fee Requirements: Case 2A Value ifthis Variable Bears the Full Impact of Affordable Housing R uirement Value in 2% Fee 5% Fee 2004 (Current (Proposed Variable Base Case Requirement) Requirement) Land Budget (value/sq. ft. $14.40 $9.00 $1.00 Profit IRR in operating ear 10 11.0% 10.7% 10.3% Rent (per sq.fl:, per year Retail $30.00 $30.30 $30.78 Office $15.60 $15.76 $16.01 Source: Mundie&Associates In sum, payment of a two percent fee (the.current requirement) would:- Reduce ould:Reduce the developer's,profit (IRR in year 10) from 11.0 percent to 10.7 percent (an approximate three percent change6), or ■ Reduce estimated land value from $14.40 to $9.00 per square foot of site area (about a 38 percent change), or ■ Increase the rents required to maintain the.base case land budget by about one per- cent; or ' ■ Some combination of these results that yields developer's profit between 10.7 percent and 11 percent and land value between $9.00 and $14.40 per square foot and rents between $1.30 per square foot per month for office space/$2.50 per square foot per month for retail space and $1.31 for office space and $2.53 for retail space. Increasing the affordable housing fee payment to five percent would especially affect the land budget affordable for this type of project. Impacts on developer profit and rents would be smaller than the effect on land value, but greater than with the current two percent fee. As shown in Table 3, payment of a fee equal to five percent of construction costs would: ■ Reduce the developer's profit by from 11.0 percent to 10.3 percent (about a seven per- cent change); or ■ Reduce the land budget by from $14.40 to $1.00 per square foot of site area (a change of about 93 percent); or ■ Increase rents from $2.50 per square foot to $2.57 per square foot for retail space and from $1.30 per square foot to $1.33 per square foot for office space (a change of about 2.6 percent);or 6 The percentage change in return is calculated as follows: 10.7% (the new value)divided by 11.0%(the base case value). The result-9735&-represents an approximate 3%reduction. Draft 2/12/2004 5:04 PM 13 I - 4o '1 ■ Some combination of these results that yields developer's profit between 10.4 percent and 11 percent and land value between $1.00 and $14.40 per square foot and rents between $1:30 per square foot per month for office space/$2.50 per square foot per month for retail.space and $1.33 for office space and $2.57 for retail space. Results of the Analysis: Case 213 In Case 26,the project owner is not expected to pay any of the operating costs of the project: both the retail and office tenants pay the operating costs associated with the space they occupy. Land Budget with No Affordable Housing Requirement With no affordable housing requirement,. Case 26 would have a total land budget of $598,500. This total is equal to $85.50 per square foot of site area. The substantial increase in the value of the site to the developer is a direct result of the assumed change in lease terms, so that the tenant rather than the building's owner is expected to pay all costs of operating the building. Impact of Affordable Housing Requirements The effects of paying a fee equal to two percent of construction costs (the current require- ment) or five percent of construction costs (the proposed requirement) for Case 26 are compared in Table 4. Table 4 Effects of Current and Proposed Affordable Housing Fee Requirements. Case 2B Value if this Variable Bears the Full Impact of Affordable Housing Requirement. Value in 2% Fee 5% Fee 2004 (Current (Proposed Variable Base Case Requirement) Requirement) Land Budget (valu_e/sq.. $85.50 $80.25 $72.25 Profit IRR inoperating year 10)........__.--........ 11.00%_ -_ - 10.74% -- — -10.35% Rent (per sq. ft. per yeaO _ Retail $30.00 $30.30 $30.77 Office $15.60 $15.76 I $16.00 Source: Mundie&Associates In this case, payment of a two percent fee (the current requirement) would: ■ Reduce the developer's profit (IRR in year 10) from 11.0 percent to 10.7 percent (about a three percent change), or 14 Drpft 2/12/2004 5:04 PM , ■ Reduce estimated land value from $85.50 to $80.25 per square foot of site area (about a six percent change), or • Increase the rents required to maintain the base case land budget by about one per- cent, or ■ Some combination of these results that yields developer's profit between 10.7 percent and 11 percent and land value between $80.25 and $85.50 per square foot and rents between $1.30 per square foot per month for office space/$2.50 per square foot per month for retail space and $1.31 for office space and $2.53 for retail space. For all three variables — profit, land value, and rent — the absolute value of the impact is approximately the same in Case 2B as in Case 2B. The change in land budget represents a much greater percentage impact in Case 2A, however, because the base case value of the land is so much smaller in that case. Imposition of a five percent affordable housing fee in Case 2B would further reduce the land budget and developer's profit, or would further increase the rent asked for space in the proj ect. These effects are similar to those identified for Case 2A and, except for the percentage change in land value, would be of similar magnitude. Increasing the affordable housing fee to five percent fee would: • Reduce the developer's profit from 11.0 percent to 10.4 percent (a change of about six percent); or • Reduce the land budget from $80.50 to $72.25 per square foot of site area (a change of about 15 percent); or ■ Increase rents from $2.50 per square foot to $2.56 per square foot for retail space and from $1.30 per square foot to $1.33 per square foot for office space (a change of about 2.6 percent); or Some combination of these results that yields developer's profit between 10.4 percent and 11 percent and land value between $72.25 and $80.50 per square foot and rents between $1.30 per square foot per month for office space/$2.50 per square foot per month for retail space and $1.33 for office space and $2.56 for retail space.. Additional Conditions that May Affect Project Feasibility Interviews with real estate professionals active in the downtown San Luis Obispo market for retail and office space indicate that demand for retail space is strong, especially in the heart of the downtown area. They also indicate, however, that it may be difficult to secure tenants for office space in a building with no onsite parking. The land values estimated in Case 2A (in which the landlord pays operating costs for the. office tenants) appear to be relatively low compared to the values for some other types of uses. If the land budget for a different type of project (e.g., the infill condominiums tested in Case 13, later in this report) could be expected to yield a greater land value, or if the existing land use on a downtown parcel yields a greater value, then sites might not become available Draft 2/12/2004 5:04 PM 15 I - �a i for the type of mixed-use project considered in this case. For example, if a surface parking lot yields income of$5 per space per day, six days per week, then a reasonable estimate of its land value might be in the range of$45 (based on 350 square feet per parking space and a capitalization rate of 10 percent). This value is higher than any of the values estimated for Case 2A, but lower than any of the values for Case 2B. It is therefore reasonable to conclude that if office leases return to a formulation in which the landlord pays operating costs, little development of this type will be seen in downtown-San Luis Obispo. It is also important to consider that, in downtown San Luis Obispo, sites that would be con- sidered for a mixed-use project similar to Case 2 are probably already occupied by some type of revenue-generating development. To acquire those sites, the developer must pay for both the land and improvements, and may have to relocate any tenants currently occupying the improvements. All of these costs must be covered by the land budget. In Case 26, the land budget.may be adequate; in Case 2A, it almost certainly is not. Summary: Case 2 The impacts of either the current two percent affordable housing fee requirement or the proposed five percent fee requirement do not appear to compromise developer profitability or building rents to a degree that would inhibit new development in downtown San Luis Obispo. Similarly, the change from a two percent fee to a five percent fee does not appear to have a significant impact on profits or rents. It is considered unlikely, therefore, that the shift from a two percent fee to a five percent fee would disrupt development of new mixed- use buildings of the type considered here. At the same time, both fees have a significant impact on land values. The current fee (two percent) would reduce the land budget by between $5.25 and $5.40 per square foot of land (Case 2B and Case 2A, respectively); the proposed fee (five percent) would reduce the land budget by between $1.3.25 (Case 213) and $13.40 (Case 2A). In Case 2A, the latter reduction represents 93 percent of the land value absent an affordable housing requirement; in Case 213, it represents 16 percent. Such a dramatic change in land values is likely to give some owners pause as they consider whether to make.their properties available for new develop- ment. The scenario that characterizes Case 2B is considered to be a better reflection of the current market for nonresidential building space in San Luis Obispo than the scenario that charac- terizes Case.2A. If the expectation that office space will be leased on a triple net basis con- tinues, it is reasonable to expect new downtown mixed use development to occur if sites are available for sale and agreements about land price and rents in the ranges described above can be reached by the landowner, prospective developer, and prospective tenant(s). It remains possible, however, that other, noneconomic factors could affect the ability of the respective parties to reach agreement. In that case, development may not occur even if the asking price for land is no more than $72.25 per square foot (the estimated value with a five percent.fee for affordable housing) and the asking rents are no more than $2.57 per square foot per month for retail space and $1.33 per square foot per month for office space and the developer is willing to accept an internal rate of return as low as 10.3 percent. 16 Draft 2/12/2004 5:04 PM c � 45 4,'1 Development Characteristics Site Area 20 acres Building Area Three single-story buildings 255,000 square feet averaging 95,000 square feet parking I 1,275 spaces 510,000 sq.ft. Streets I 106,200 sq. ft. Affordable Housing Requirements The affordable housing requirement proposed in the new For-comparison: Housing Element may be satisfied by either: a Construction of 40 units (two units per acre) afford- The afFordable housing able to.low or moderate income households, or requirement currently in 0 Payment of a fee equal to five percent of construction effect may be satisfied by construction of 20 units cost. Under the construction cost assumptions used (one unit per acre) afford- in this study, this fee would total $1,137,300 for the able to low or moderate three buildings. income households or pay- As noted in the discussion of Case 2, however, it is ment of the five percent fee. assumed that developers of commercial and industrial development projects would find payment of a fee prefer- able to construction of any housing units. Therefore, the new requirement, which increases the production requirement but not the fee, would effec- tively represent no change.. Assumptions for the Analysis Based on information obtained from real estate professionals familiar with the market for retail centers in outlying areas of San Luis Obispo, two sets of rent assumptions were used for the analysis of Case 3. ■ In Case 3A, approximately one-half of the project was assumed to be occupied by "anchor"-type tenants; For comparison. that is, large stores that are expected to be the pri- mary attractions of the center. These tenants typi- In the 1997 analysis, the tally pay lower rents than the smaller stores that are rent was assumed to be assumed to occupy the remaining one-half of the $1.00 per square foot per project. Anchor-type tenants are assumed to pay month. I rent of$0.95 per square foot per month, and smaller Draft 211212004 5.04 PM 17 stores are assumed to pay $1.65 per square foot per month. The overall average rent in this case would be $1.30 per square foot per month. All rents are triple net; that is, the tenants pay all operating costs. ■ In Case 36, anchor-type tenants are assumed to occupy 80 percent of the center and smaller stores are assumed to occupy the remaining 20 percent. Given the same rents for the respective store types as in Case 3A, the overall average rent would be$1.09 per square foot per month. The target return on investment is an IRR of 11 percent in operating year 10. Results of the Analysis: Case 3A In Case 3A, the building space in the retail center is evenly divided between anchor-type ten- ants and smaller stores. Land Budget with No Affordable Housing Requirement With no affordable housing requirement, this project would have a total land budget of approximately For comparison: $11,282,000. This total is equal to approximately $12.95 per square foot for the 20-acre site. In the 1997 analysis, the land budget with no Impact of Affordable Housing Requirements affordable housing require- mentwas $8.75 per square Payment of a fee equal to five percent of construction foot of site area. .costs would have the following potential effects: ■ Reduce developer's profit (IRR in year 10 of oper- ation) from 11.0 percent to 10.3 percent (a change of about seven percent); or ■ Reduce estimated land value from $12.95 to $11.70 per square foot (a change of nearly 10 percent); or ■ Increase the rents required to maintain the base case land budget and IRR by about three percent; or ■ Some combination of these results that yields developer's profit between 10.3 percent and 11.0 percent and land value between $11.70 and $12.95 per square foot and rents between an overall effective level of$1.30 and $1.34 per square foot per month. These results are summarized in Table 5. 19 Draft 2/12/2004 5:04 PM Table 5 Effects of Affordable Housing Requirements: Case 3A Value ifthis Variable Value in Bears the Full Impact 2004 of Affordable Housing Requirement Variable Base Case 5% Housing Fee Land Budget value per sq.ft. $12.95 $11.70 profit IRR in operating year 10 11.0% 10.3% Rent (per sq.ft. per month)* $1.30 $1.34 * Overall effective rent. In this case,the base case assumes rents of$1.65 per square.foot for one-half of the space and$0.95 per square foot for one-half. Source: Mundie&Associates Results of the Analysis: Case 313 In Case 36, 80 percent of the building space in the retail center is occupied by anchor-type tenants and 20 percent by smaller stores. As a result, the overall rent— and, consequently, the land value—is lower in this case. Land Budget with No Affordable Housing Requirement With no affordable housing requirement, this project would have a total land budget of approximately $5,157,500. This total is equal to approximately $5.92 per square foot for the 20-acre site. Impact of Affordable Housing Requirements Payment of a fee equal to five percent of construction costs would have the following poten- tial effects: ■ Reduce developer's profit (IRR in year 10 of operation) from 11.0 percent to 10.1 per- cent (a change of about eight percent); or ■ Reduce estimated land value from $5.92 to $4.67 per square foot (a change of about 21 percent); or ■ Increase the rents required to maintain the base case land budget and IRR by between three and four percent; or ■ Some combination of these results that yields developer's profit between 10.1 percent and 11.0 percent and land value between $4.67 and $5.92 per square foot and rents between an overall effective level of$1.09 and $1.13 per square foot per month. These results are summarized in Table 6. Draft 2/12/2004 5:04 PM 19 r Table 6 Effects ofAffordable Housing Requirements: Case 38 Value ifthis Variable Value in Bears the Full Impact 2004 of Affordable Housing Requirement Variable Base Case 5%Housin_ Fee Land Budget value per sq. ft. $5.92 $4.67 Profit IRR in operating year 10 11.0910 1 10.1% Rent (per sq.ft. per month)* 1 $1.09 $1.13 * Overall effective rent. In this case,the base case assumes rents of$1.65 per square foot for 20 percent of the space and$0.95 per square foot for80 percent. Source: Mundie&Associates Additional Conditions that May Affect Project Feasibility A comparison of the base land values estimated for Case 3A vs. Case 36 indicates the criti- cal effect of obtainable rents on the feasibility of a large retail project in the San Luis Obispo expansion area. A shift in the assumed tenancy of the.hypothesized shopping center from 50 percent anchor tenants to 80 percent anchor tenants would reduce the land budget for the project by more than one-half. This impact is much greater than the calculated impact of the five percent affordable housing fee. Therefore, it is reasonable to conclude that mar- ket conditions — specifically, expectations about the mix of tenants that could be achieved — would have a greater influence on whether a retail project such as Case 3 would proceed than would the affordable housing fee at the five percent level. Summary: Case 3 As with Case 2, it is reasonable to expect retail development to occur in the expansion area if sites are available for sale and agreements about land price and rents in the ranges described above can be reached by the landowner, prospective developer, and prospective tenant(s). It is possible in this case as well, however,that other, noneconomic factors could affect the ability of the respective parties to reach agreement. In this case, development may not occur even if the asking price for land is no more than $5.92 per square foot and the overall average asking rent is no more than $1.09 per square foot per month for retail space and the developer is willing to accept an internal rate of return as low as 10.1 percent. 20 Draft 2/12/2004 5:04 PM �{,( 1 r (N�,"0, T JC-A0SV-4i_i`,1'1 PAN" Development Characteristics Site Area: 4 acres Building Area: Single-story building, suitable 60,000 square feet for dry goods manufacturing or publishing? Parking 150 spaces 60,000 sq. ft. Loading,outdoor storage, 54,240 sq. ft. setbacks,etc. Affordable Housing Requirements The affordable housing requirement proposed in the new For comparison: Housing Element may be satisfied by either. m Construction of eight units (two units per acre) The housing affordability affordable to low or moderate income households, or requirement currently in a Payment of a fee equal to five percent of construction effect would require cost. Under the construction cost assumptions used construction of one unit in this Study, this fee would total $191,100. per acre (a total of four units) or payment of the As in Cases 2 and 3, it was assumed for this analysis that five percent fee. developers of commercial and industrial projects would find payment of a fee preferable to construction of a housing unit. Therefore, the new requirement would effectively represent no change. For comparison. Assumptions for the Analysis In the 1.997 analysis, mar- ket rent was assumed to be This project was tested with two market rents: $0.65 per $0.50 per square foot per square foot per month and $0.85 per square foot per month. month. Rents were assumed to be triple net. No interior tenant improvements were assumed.8 Two scenarios were con- sidered: one with no inte- rior finish and one with 7 The 1991 and 1997 versions of this analysis assumed that this interior finish supplied by building would be used for industrial activity; its characterization the developer. as a.service commercial building represents a change in that assumption. 8 The 1991 versions of this analysis assumed that no interior finish was provided; the 1997 version considered one scenario with interior finish and one without. Draft 211212004 5.04 PM 21 f As in Cases 2 and 3, development is assumed to be.feasible if the developer can reasonably anticipate an IRR of 11 percent in operating year 10. Results of the Analysis Land Budget with No Affordable Housing Requirement For comparison: With no affordable housing requirement and rent at $0.65 per In the 1997 analysis, the square foot per year, this project would not yield sufficient land budget with no returns to be feasible. Even with free land, the return to the affordable housing require- developer (IRR in operating year 10) would be less than 11 per- ment was $8:50 per square cent. foot if no interior finish was provided by the developer. If the project could be rented at a rate of$0.85 per square foot per year, it could afford a land budget of$871,200, or $1.00 per square foot. Impact of Affordable Housing Requirements Although the base case land value of$1.00 per square foot is considered too low to attract development, the analysis was nevertheless completed for a case with rents of$0.85 per square foot per month. Payment of a fee equal to five percent of construction costs would have the following poten- tial effects: ■ Reduce developer's profit (IRR in year 10 of operation) from 11.0 percent to 10.2 per- cent (about seven percent); or ■ Reduce estimated land value from $1.00 to $0.79 per square foot (about 21 percent);or ■ Increase the rents required to maintain the base case land budget and IRR by about three percent, or ■ Some combination of these results that yields developer's profit between 10.2 percent and 11.0 percent and land value between $0.79 and $1.00 per square foot and rents between$0.85 and $0.88 per square foot per month. These results are summarized in Table 7. 22 Draft 2/12/2004 5:04 PM (q \ i Table 7 Effects ofAffordable Housing Requirements: Case 4 Value ifthis Variable Value in Bears the Full Impact 2004 ofAffordable Housing Requirement Variable Base Case 5% Housing Fee Land Budget value per sq.ft. $1.00 $0.79 Profit IRR in operating year 10 11.0% 10.2% Rent (per sq. ft. per month $10.20 $10.52 Source: Mundie&Associates Additional Conditions that May Affect Project Feasibility The very low land value indicated by this analysis suggests that development of industrial properties may not be feasible at the present time in San Luis Obispo. Real estate profes- sionals interviewed for this update indicated that space offered at the lower rent considered here ($0.60 per square foot per month) would "rent all day long," but—as indicated above:— that level of rent will not support new development. This conclusion was confirmed by the observation of a City staff member that no new industrial projects had been proposed recently. As was observed for Case 3, therefore, it is reasonable to conclude that market conditions — in this case, the amount of rent that could be obtained for new industrial building space—would have a greater influence on whether a project such as Case 4 would proceed than would the affordable housing fee at the five percent level. Given current cost estimates, industrial rents would have to rise to between $1.35 and $1.40 per square foot per month to support a land budget of$5.00 with or without a housing affordability fee. In this analysis, the project was assumed to be located in the Airport-Margarita expansion area. This location assumption increases the cost of the project: in this particular area, a surcharge of about 22 percent is imposed on the wastewater connection charge. In this analysis, the surcharge amounted to $2,984, or $0.003 per square foot of land. Although this fee is substantial,this surcharge by itself cannot be considered responsible for inhibiting the development of new industrial space in the SLO expansion area. Summary: Case 4 As in the previous cases, it is reasonable to expect that development will occur if land is available and rents are offered in the ranges indicated above. The imposition of a five per- cent fee for affordable housing does not appear to have a great enough impact to inhibit development that would otherwise occur. Nevertheless, as was observed for Cases 2 and 3, agreement between the landowner and developer on land price, and between the developer and tenant(s) on rent, does not guarantee that development will occur. Draft 2/12/2004 5:04 PM 23 t '� Development Characteristics Site Area: 1.79 acres Building Area: Two-bedroom units 11 units Ca) 1,220 sq. 13,420 sqware feet Three-bedroom units 7 units @ 1,640 sg. 77,480squarefeet Total 18 units 24,900 square feet Parking 45 spaces Affordable Housing Requirements This project may satisfy the affordable housing require- For comparison. ment proposed in the new Housing Element by either: • Construction of five percent of the units at prices The proposed affordable affordable to moderate income households (one unit housing requirement is the would be required), or same as the existing requirement for this proj- • Construction of three percent of the units at prices ect. affordable to low income households (one unit would be required), or i 0 Payment of a fee equal to five percent of construction cost (in this case, $107,008). Assumptions for the Analysis For comparison., This analysis assumes that the two-bedroom units will command an average market price of $400,000 (between The 1997 analysis consid- $325 and $330 per square foot) and that the three-bedroom ered three average price units will command an average price of $425,000 (about scenarios: (1) $150,000, $260 per square foot). (2) $175,000, and (3) $195,000. Only the third Development is assumed to be feasible if the developer can case yielded a feasible reasonably anticipate a profit on sale equal to 20 percent of project. In that scenario, 2- the production cost (including land and marketing costs). bedroom units would be priced at $172,200 and 3- bedroom units would be $231,250. 24 Draft 211212004 5:04 PM Results of the Analysis Land Budget with No Affordable Housing Requirement With no affordable housing requirement, this project would have a total land budget of approximately $1.98 million, equal to about$25.40 per square foot for the 1.79- For comparison: acre (77,970-square-foot) site. In the 1997 analysis, the Impact of Affordable Housing Requirements land budget with no afford- able housing requirement The project may meet its affordable housing requirement Was $2.66 per square foot in any of three ways: payment of a fee, sale of five percent of site area. of the units at prices affordable by moderate income households, or sale of three percent of the units at prices affordable by low-income households. Payment of a fee equal to five percent of construction costs would have the following potential effects: Reduce developer's profit on sale from 20 percent to 19.8 percent (a change of about one percent); or ■ Reduce estimated land value from $25.40 to $23.30 per square foot (a change of about eight percent); or C Increase the sales price for market-priced units from an overall average.of$409,700 per unit to an overall average of about $419,300 per unit (a change of about two percent); or ■ Some combination of these results that yields developer's profit.between 19.8 percent and 20 percent and land value between $23.30 and $25.40 per square foot and average sales prices for market-priced units between $409,000 and $419,300. Sale of five percent of the units at prices affordable to moderate income households would have the following effects: ■ Reduce developer's profit on sale from 20 percent to 18.1 percent (a change of about 10 percent); or ■ Reduce estimated land value from $25.40 to $23:20 per square foot (a change of 8.5 percent); or ■ Increase the sales price for market-priced units from an overall average of$409,000 to an overall average of$422,800 (a change of about three percent); or ■ Some combination of these results that yields developer's profit between 18.1 percent and 20 percent and land value between $23.20 and $25.40 per square foot and average sales prices for market-priced units between$409,000 and $422,800. Draft 2/12/2004 5:04 PM 25 r��a I Sale of three percent of the units at prices affordable to low-income households would have.the following effects; ■ Reduce developer's profit on sale from 20 percent to 16.7 percent (a change of about 16.5 percent); or ■ Reduce estimated land value from $25.40 to $22.40 per square foot (a change of about 12 percent); or ■ Increase the sales price for market-priced units from an overall average of$409,000 to an overall average of$427,700 (a change of about four percent); or • Some combination of these results that yields developer's profit between 16.5 percent and 20 percent and land value between $22.40 and $25.40 per square foot and average sales prices for market-priced units between $409,000 and $427,700. These.results are summarized in Table 8. Table 8 Effects of Affordable Housing Requirements: Case 13 Value ifthis Variable Bears the Full Impact Value in ofAffordable.Housing R uirement _ 2004 Base 5% 5% Moderate 3% Low Variable Case Housing Fee Income Units Income Units Land Budget valuer sq. ft.) $25.40 $23.30 $23.22 $22.41 .__. : _..-.—.....— -- -._......._. Profit on sale 96 of sale rice 20.0% 19.8% 18.1% 16.7% Average price of market-priced units $409,720 $419,270 $422,820 $427,710 Averaa or 2-BR Units $400,000 $409,320 $41Z790 $477,560 Averaa r3-BR Units $425,000 $434,900 $438,590 1 $443,660 Source: Mundie&Associates Additional Conditions that May Affect Project Feasibility The analysis assumes that the availability of low- or moderate-priced units in the complex will not affect the prices obtainable for the market-priced units. Summary: Case 13 As in the previous cases, it is reasonable to expect that development will occur if land is available and rents are offered in the ranges indicated above. The results indicate that, all other things being equal, a prospective developer would find it most advantageous to satisfy the affordable housing requirements by paying the five percent contribution to the affordable housing fund, and least advantageous to meet the requirements by selling three percent of units in this project at prices affordable to low income households. 26 Draft 2/12/2004 5:04 PM CASE 1'4: EXPANSION'rAREA,"RESIDENTIAL' Development Characteristics Site Area: Custom homes 25.2 acres Sin !ef gmily tract units 16.9 acres Condominiums 6.6 acres Apartments 1.8 acres Open space easement 75.0 acres linear ark 13.0 acres Mini ark 1.0 acre Total 139.5 acres, excluding streets Building Area: Case 14.1: Original Unit Sizes Custom homes 111 units @ 2,200s .ft. averse 244,200 squarefiet Singlefamily tract units 134 units @ 7,500s . averse 201,000squarefeet Condominiums 88 units @ 1,200 sq. averse 105,600 s uare et Apartments 20 units @ 1,000 sq.ft. (average) 20,000 squarefeet Total 353 units 570,800 square feet Case 14.2 La er Custom and Tract.Homes Custom homes 111 units @ 2,500s . averse 277,500square-feet Singlefamily tract units. 134 units @ 7,800 sq. averse 241,200 squarefeet Condominiums 88 units @ 1,200 sq. averse 105,600 squarefeet Apartments 20 units @ 1,000 sq.ft. (average) 20,000 square feet Total 353 units 644,300 square feet Affordable Housing Requirements For comparison: The affordable housing requirement applicable to this project that is proposed in the new Housing Element may The affordability require- be satisfied by either: ments currently in effect • Construction of 12.5 percent of the units at prices would mandate: affordable to moderate income households and 6.25 Construction of 10 percent of the units at prices affordable to low percent of the units at income households (44 moderate-income units and prices affordable to 22 low-income units would be required), or moderate income households and 5 per- ■ Payment of a fee equal to 18.75 percent of construc- cent of the units at tion cost. In this study, the new fee for all housing prices affordable to low units totals between $9.7 and $11 million, depending income households, or on the sizes of the housing units. Draft 2/12/2004 5:04 PM 27 1 _9� The new requirements reflect both an increase in the Comparison (cont'd) "base case" fee requirement (from 10 percent at present to 15 percent) and a new sliding scale adjustment factor Payment of a fee equal for large projects (more than 20 units) in expansion areas to 10 percent of construction cost. In this study, , the fee for Assumptions for the Analysis all housing units totals between $5.1 and $5.8 A complex project such as this one requires a series of million, depending on explicit assumptions. Assumptions for this analysis are: the sizes of the housing units (Case A vs. Case Unit Sizes B in the table above; see explanation below). The unit sizes identified in the table above for Case 14.1 were originally hypothesized in 1991, when this analysis was first undertaken. Since then, living patterns and market demand characteristics have changed to some degree. For this analysis, therefore, Case 14.2 —with larger custom units and larger tract homes—was added to the study. Market Prices Prices assumed in the current analysis are summarized in Table 9 Table 9 2004 Market Prices for New Housing Units: Case 14 Type of Unit Price f Rent Case 14.1 Case 14.2 Custom Home $675,000 $767,045 Single Family Tract Home $500,000 $600,000 Condominium $385,000 $385,000 Apartment* $1,000 $1,200 * Two rent levels for apartments were tested. To maintain simplicity in the report,the lower rent level is included in Case 14.1 and the higher rent level with Case 14.2. For comparison: In the 1997 analysis, custom homes were priced at $325,000, single family tract homes at $225,000, and condominiums at $175,000. Apartments were assumed to rent for$775 per month. Because the apartments did not yield a positive land budget at the assumed rent; they were omitted from the analysis of the impacts of housing affordability requirements in the 1997 analysis. 29 Draft 2/12/2004 5:04 PM Timing of Development A project of this magnitude is unlikely to be built all at the same time. Table 10 outlines the construction schedule assumed for this project. This schedule is the same as was assumed in the 1997 analysis. Table 10 Construction Schedule: Case 14 _ Units Constructed in Year. Component 1 2 3 4 5 � Total _ Custom Homes 25 25 25 25 11 111 Single Family Tract Homes 50 50 34 0 0 134 Condominiums 24 24 20 20 0 88 Apartments 20 0 0 0 0 20 Total 119 99 79 45 11 353 Affordable Units None of the custom units are marketed as affordable units; instead, all of the affordable units are single family tract homes, condominiums, and apartments. The rents hypothesized for the apartments - $1,000 per month in Case 14.1 and $1,200 per month in Case 14.2 —would qualify those 20 units as moderate income housing. To meet the proposed affordability requirements, the project would have to provide 22 low-income for-sale units and 24 moderate-income for-sale units in addition to the 20 apartments. Two approaches to meeting these requirements were tested. ® In Scenario A, all of the low- and moderate-income units are assumed to be condominiums. ■ In Scenario B, all of the low-income units are assumed to be condominiums and all of the for-sale moderate income units are assumed to be tract homes. Scenario A and Scenario B were tested for both Case 14.1 and Case 14.2. The distribution of affordable units in both scenarios is summarized in Table 11. Calculation of the Land Budget The land budget for the project is the total value of the land for all four residential compo- nents discounted to the net present value in the first year of construction. In other words, the "real' land value of the project components built after the first year is lower than the nominal value, because the money used to pay for those portions of the site could have. been invested elsewhere instead of being tied up in the project (and, if it were invested else- where, could have been generating interest or dividends).. Dmft 2/12/2004 5:04 PM 29 The land budget for this project must also cover the cost of the water tank, park improve- ments, and other costs incurred for development that are not explicitly included in the pro forma. Table 11 Distribution ofAffordable Housing Unite: Case 14 Scenario A Total Market-rate Moderate-Income Low-Income Units Units Units Units Component # Pct # Pct # Pct Custom Homes 111 111 100.0090 0 0.000/0 0 0.000/6 Single Family Tract Homes 1 134 134 100.00% 0 0.000/0 0 0.000/6 Condominiums 1 88 42 47.73% 24 27.27% 22 25.00% Apartments 20 0 0.00% 20 100.00% 0 0.000/ Total 353 1 287 81.3096 1 44 12.46% 22 6.23% Scenario B Total Market-rate Moderate-Income Low-Income Units Units Units Units Component # Pct. # PcL # Pct Custom Homes 111 111 100.00% 0 0.000/6 0 0.00% Single Famil Tract Homes 134 134 100.00% 24 1.7.91% 0 0.000/6 Condominiums 88 42 47.73% 0 0.0096 22 25.00% Apartments 20 0 0.00% 20 100.0096 1 0 0.000/0 Total 353 287 81.300/6 44 1 12.46% 1 22 6.23% Results of the Analysis: Case 14.1 Case 14.1 considers a project with custom homes and tract homes of the originally-defihed sizes. These homes are smaller than those considered in Case 14.2. Land Budget with No Affordable Housing Requirement For Case 14.1, the total land budget for this project is approximately $47.7 million. This total is equal to an For comparison: average of$7.85 per square foot for the 139.5-acre site, or $21.69 per square foot for the 50.5 acres assumed to be In the 1997 analysis, the occupied by residential development. (The remainder is land budget with no devoted to parks and open space.) affordable housing require The estimate of value derived in this analysis relies on a ment was $1.38 per square series of assumptions, most of which are described above foot for the 139.5-acre. and detailed in Tables 9 through 11. An additional critical I entire site area. assumption is the discount rate used to adjust future 30 Draft 2/12/2004 5:04 PM r revenues to current dollars. The.discount rate used in this analysis is eight percent (in other words, $1.08 in 2005 is worth $1.00 in 2004). Impact of Affordable Housing Requirements The project may meet its affordable housing requirement in either of two ways: (1) payment of a fee equal to 18.75 percent of the construction cost or (2) provision of 12.5 percent of the units (44 units) at prices affordable by moderate-income households and 6.25 percent of the units (22 units) at prices affordable by low-income households. Payment of a fee equal to 18.75 percent of construction costs would have the following potential effects: ■ Reduce developer's profit on sale from 20 percent to about 19 percent (a change of by about four percent); or ■ Reduce estimated land value from $7.85 to $6.29 per square foot (a change of about 20 percent); or Increase the sales price for market-priced units from $675,000 to $731,600 for custom homes,from $500,000 to $539,900 for single family tract homes, and from $385,000 to $416,100 for condominiums (a change of between eight and nine percent); or o Some combination of these results that yields. developer's profit between 19 percent and 20 percent and land value between $6.29 and $7.85 per square foot and average sales prices for market-priced units between $675,000 and $731,600 for custom homes, $500,000 and $539,900 for tract homes, and $385,000 and $416,100 for condomini- ums. Sale of 11.5 percent of the units at prices affordable to moderate-income households and 6.25 percent of the units at prices affordable to low-income households would have the following effects: in Scenario A (all for-sale low-and moderate-income units are condominiums): • Reduce developer's profit.on sale from 20 percent to 15.1 percent (a change of about 21 percent); or ■ Reduce estimated land value from $7.85 to $6.67 per square foot (a change of 15 per- cent); or ■ Increase the sales price for market-priced units by between six and eight percent, depending on the unit type (from $675,000 to $720,600 for custom homes, from $500,000 to $531,600 for tract homes, and from $385,000 to $413,500 for condomini- ums); or ■ Some combination of these results that yields developer's profit between 15.1 percent and 20 percent and land value between $6.67 and $7.85 per square foot and average sales prices for market-priced units between $675,000 and.$720,600 for custom homes, $500,000 and $531,600 for tract homes, and $385,000 and $413,500 for condomini- ums. Draft 2/12/2004 5.04 PM 31 In Scenario 8 (all for-sale low-income units are condominiums and all for-sale mod- erate-income units are tract homes): ■ Reduce developer's profit on sale from 20 percent to about 12.9 percent (about 35 per- cent); or ■ Reduce estimated land value from $7.85 to$6.25 per square foot(about 20 percent); or ■ Increase the sales price for market-priced units from $675,000 to $727,500 for custom homes, from $500,000 to $547,300 for tract homes, and from $385,000 to $418,600 for condominiums (a change of between 8and 10 percent, depending on the unit type);or ■ Some combination of these results that yields developer's profit between 13 percent and 20 percent and land value between $6.25 and $7.85 per square foot and average sales prices for market-priced units between $675,000 and $727,500 for custom homes, $500,000 and $547,300 for tract homes, and $385,000 and $418,600 for condomini- ums. These results are summarized in Table 12. Table 12 Effects of Affordable Housing Requirements: Case 14.1 Value ifthis Variable Bears the Full Impact of Affordable Housing Requirement Value in 12.5% Moderate and 2004 Base 18.75% 6.25% Low Income Units Variable Case Housing Fee Case Aa 7 Case Bb Land Budget value per s . ft. c $7.85 $6.29 $6.67 $6.25 Profit on sale %of sale rice 20.0% 19.0% 15.1% 13.1% Price of market-priced unitsd Custom homes $675,000 $731,600 $720,600 $727,500 Single family tract homes $500,000 $539,900 $531,500 $547,300 Condominiums $385,000 $416,100 $413,500 1 $418,600 a All for-sale low-and moderate income units are condominiums. b Low-income for-sale units are condominiums; moderate-income for-sale units are tract homes. c For 139.5 acres. d Non-discounted average of values for all phases (values vary by phase as a result of the mix of unit types assumed). Apartments,which are all moderate-income units,are omitted from this table. Source: Mundie&Associates 32 Draft 2/72/2004 5:04 PM The results in the table indicate that, all other things being equal, a prospective developer would find it more advantageous to satisfy the affordable housing requirements by paying the 18.75 percent contribution to the affordable housing fund, but that the production of low- and moderate-income condominiums would have the smallest effects on land prices and the prices of market-rate units. This conclusion assumes, as in Case 13, that the inclu- sion of the low- and moderate-income units would not have a negative impact on the obtainable prices for other units in the project. Results of the Analysis: Case 14.2 Case 14.2 considers a project with larger custom homes and tract homes than were origi- nally assumed for this project. In this case, the custom homes would average 2,500 square feet (compared to 2,200 square feet in Case.14.1) and thetract homes would average 1,800 square feet (compared to 1,500 square feet in Case 14.1). Land Budget with No Affordable Housing Requirement With the larger single-family units; the total land budget for this project is approximately $56.9 million. This total is equal to an average of$9.36 per square foot for the 139.5-acre site, or $25.84 per square foot for the 50.5 acres assumed to be occupied by residential development. Impact of Affordable Housing Requirements Payment of a fee equal to 78.75 percent of construction costs would have the following potential effects: ■ Reduce developer's profit on sale from 20 percent to 19.1 percent (a change of about four percent); or Reduce estimated land value from $9.36 to$7.56 per square foot (a change of nine per- cent); or ■ Increase the sales price for market-priced units from $747,045 to $819,900 for custom homes, from $600,000 to $646,700 for single family tract homes, and from $385,000 to $415,400 for condominiums (a change of between 8 and 10 percent, depending on the unit type); or ■ Some combination of these results that yields developer's profit between 19 percent and 20 percent and land value between $6.29 and $7.85 per square foot and average sales prices for market-priced units between $747,045 and $819,900 for custom homes, $600,000 and $646,700 for tract homes, and $385,000 and $415,400 for condomini- ums. Draft 2/12/20045:04 PM 33 t -Up Sale of 12.5 percent of the units at prices affordable to moderate-income households and 6.25 percent of the units at prices affordable to low-income households would have the following effects: In Scenario A (all for-sale low-and moderate-income units are condominiums): ■ Reduce developer's profit on sale from 20 percent to 15.8 percent (a change of about 21 percent); or • Reduce estimated land value from $9.36 to$8.17 per square foot (about 19 percent); or Increase the sales price for market-priced units from $747,045 to $803,400 for custom homes, from $600,000 to $632,700 for tract homes, and from $385,000 to$410,000 for condominiums (between six and eight percent,depending on the unit type); or Some combination of these results that yields developer's profit between 15.8 percent and 20 percent and land value between $8.17 and $9.36 per square foot and average sales prices for market-priced units between $747,045 and $803,400 for custom homes, $600,000 and $632,700 for tract homes, and $385,000 and $410,000 for condomini- ums. In Scenario a (all for-sale low-income units are condominiums and all for-sale mod- erate-income units are tract homes) ■ Reduce developer's profit on sale from 20 percent to about 13.1 percent (about 35 per- cent); or Reduce estimated land value from $9.36 to$7.55 per square foot (about 19 percent); or ® Increase the sales price for market-priced units from $747,045 to $819,100 for custom homes, from $600,000 to $659,800 for tract homes, and from $385,000 to $419,600 for condominiums (between 9 and 10 percent, depending on the unit type); or ■ Some combination of these results that yields developer's profit between 13.1 percent and 20 percent and land value between $7.55 and $9.36 pet square foot and average sales prices for market-priced units between $747,045 and $819,100for custom homes, $600,000 and $659,800 for tract homes, and $385,000 and $419,600 for condomini- ums. These results for Case 14.2 are summarized in.Table 13. With the larger unit sizes,the least impact would occur in the effect on the developer's profit (about a four percent reduction, from 20 percent to 19.1 percent). This result is similar to Case 14.1. As with Case 14.1, too, satisfying the affordable housing requirement through the production of low- and moderate- income condominiums would have the smallest effects on land prices and the prices.of market-rate units. 34 Draft 2/12/2004 5:04 PM � '" lp1 Table 13 Effects of Affordable Housing Requirements: Case 14.2 Value ifthis Variable Bears the Full Impact ofAffordable Housing Requirement Value in 12.5% Moderate and 2004 Base 18.75% 6.25% Low Income Units Variable Case Housing Fee Case Aa Case Bb Land Budget value per sq. ft.)c $9.39 $7.56 $8.17 $7.55 Profit on sale %of sale rice 20.0% 19.1% 15.8% 12.9% Price of market-priced unitsd Custom homes $747,045 $819,900 $803,400 $819,100 Single family tract homes 1 $500,000 $646,700 $632,700 $659,800 Condominiums $385,000 $415,400 $410,000 $419,600 a All for-sale low-and moderate income units are condominiums. b Low-income for-sale units are condominiums;moderate-income for-sale units are tract homes., c For 139.5 acres d Non-discounted average of values for all phases (values vary by phase as a result of the mix of unit types assumed). Apartments,which are all moderate-income units,are omitted from this table. Source: Mundie&Associates Additional Conditions that May Affect Project Feasibility The land budget for this project, as noted earlier, must cover the cost not only of the land, but also the provision of certain major infrastructure improvements — including at least a water tank and park improvements — as well as other costs incurred for development that are not explicitly included in the pro forma. These costs have not been estimated for this analysis. If they are too high in relation to the land budget, they will affect the feasibility of development. Further, as was assumed for Case 13 and noted above, this analysis assumes that the avail- ability of low- or moderate-priced units in the complex will not affect the prices obtainable for the market-priced units. Draft 2/12/2004 5:04 PM 35 Summary: Case 14 Although the impacts of affordable housing requirements for Case 14 would be noticeable, they are unlikely to make the development of this proposed project infeasible. As noted above, payment of the 18.75 percent fee would have the least impact on the project if it were absorbed by the developer, reducing expected profits by less than five percent. The impacts of the various approaches to satisfying the affordability requirements for Cases 14.1 and 14.2 are summarized and compared in Table 14. Table 14 Summary of Effects of Affordability Requirements: Cases 14.1 and 14.2 Case 14.1 Case 14.2 Impact of Impact of Afrordable Affordable Impact of Housing Housing Larger Value Requirements Value R uirements Units* Land Value Base Case $7.85 $9.36 1.9% 18.75% Fee 6.29 -19.9% 7.56 19.1% 20% Case (Original Units 6.67 -15.1% 8.17 -- --12.7% 23% Case B (Larger Units 6.25 -20.5% W-- 7.55 -19.3% 21% Profit Base Case 20.09/o 20.0% 0°/0 18.75% Fee 19.0•/0 -4.8% 19.1% -4.3% 1% Case A Original Units_ 15.1%_ -24.3% 15.89,c/ Case B (Larger Units 13.1% -34.3% 12.9/ -35.4% -2% Average Price Base Case $527,943 $592,198 12% 18.75% Fee 571,117 8.2% 643,301 8.6% 13% CaseA (Original Units) 563,360 6.7% 630,759 6.5% 12% Case B (Larger Units 573,370 8.6% 649,421 9.7% 1 13% * Change in value from Case 14.1 to Case 14.2. Source: Mundie&Associates The table suggests the following observations: Increasing the sizes of the custom homes and single family tract homes as assumed in Case 14.2 would offset the land value impacts of the affordability requirements. For example, the land value in Case 14,2, Scenario A, would be $8.17 per square foot, which is greater than the land value with no housing affordability requirement in Case 14.1. 36 Draft 2/12/2004 5:04 PM 1 -�3 • The increase in overall average housing price (combined average for all for-sale unit types) would be 12 to 13 percent greater in Case 14.2 than in Case 14.1. The reason for this difference is that the difference between the market price of the larger units and the prices of the affordable units would be greater, and this greater amount would be divided among the same number of market-priced units. In general, the increase in market housing prices would increase the income required to buy a home by between $7,000 and $9,000 for Case 14.1 and between $7,000 and $11,000 in Case 14.2. ■ When the City Council originally considered the application of substantial affordability requirements to land in expansion areas in 1991, their expressed intention was to set the requirements at a level that would capture approximately one-half of the land value in that area after annexation. The fee requirement evaluated in this study is estimated to reduce the land value by about 20 percent. The housing production option(s) increase the impact by a small amount in some scenarios but not others (e.g:, about 23 percent in Case 14.2, Scenario A, and 15 percent in Case 14.1, Scenario A). The issue of fees is discussed further in Chapter IV. Whether it would be possible to increase the affordability requirements further, to achieve the 50 percent capture level originally envisioned by the Council, depends in large part on the demand for housing and whether there is flexibility in the marketplace for land. More specifically, apparently-developable land sometimes remains unavail- able for development because the owner has an expectation of the obtainable market price. If that price is unrealistically high and the owner is not especially motivated to sell, then he or she may retain ownership — and the land may remain vacant— rather than accept the perceived reduction in value that would result from the application of affordability requirements. Draft 217212004 5:04 PM 37 l — �a Ll 38 Draft 2/12/2004 5:04 PM IV. CONCLUSIONS . FINDINGS OF THE`FEASIBILITYNAL,YSIS ".{. "` " hh The analysis presented in Chapter III leads to the following conclusions: For the most part the City's proposed housing affordability requirements would not discourage new development. For convenience, the impacts are summarized in Table 11. In some cases the figures shown in Table 11 indicate that the affordability require- ments would yield dramatic reductions in land value. For example, in Case 2A (which assumes that the building owner is responsible for the operating costs of the office space), the land value would decline 93 percent if the project were assessed a five per- cent in-lieu fee for housing affordability. With an underlying (base case) land value of $14.40 per square foot, however, this project would not be able to compete for sites with Case 13, the infill condominiums, which generates a base case land value of $25.40 per square foot and values in the range of$23.00 even after application of the proposed affordability requirements. Therefore, while the proposed requirements would have a significant effect on land values for Case 2, they would not be the factor that determines infeasibility. Similarly,the underlying(base case) land value for Case 4 is $1.00 per square foot: It is unlikely that land would be sold for this amount in today's market, where expectations of value are likely to be governed by the value for retail projects (at a minimum, close to $6.00 per square foot in Case 2) or even housing (apartments in Case 14 yield at least $5.10 per square foot; other housing types would yield more). Therefore, the impact of housing affordability requirements is unlikely to be the determining factor in whether additional service commercial space is built in the San Luis Obispo expansion areas. • The indicator of impact most affected by the affordable housing requirements — both within the existing City and in the expansion areas — is land value (if it absorbs the entire impact of the requirements); rents and housing prices are affected least. It is reasonable to expect that if a potential developer cannot negotiate land prices down to level that would pass all of the impact of the requirements through to the pre-devel- opment landowner, he or she would attempt to pass on part of the impact to project occupants in the form of higher rents/sales prices. (This conclusion is the same as in earlier editions of this study.) ■ Based on the assumptions used for this study, impacts on the feasibility of new development are most severe in Case 2A, which is a mixed-use retail/office project located downtown. It is possible that the effects of the applicable requirements on land values would discourage a landowner from making the project site available for development: it is likely that a developer would consider the profits to be expected from such a project to be unreasonably low if none of the impact can be passed on to either the landowner or the tenants (in the form of higher rents). Draft 2/12/2004 5:04 PM 39 f � Table 15 Summary: Impacts of Affordable Housing Requirements on Feasibility of New Development Land Rent/Sq. Ft. Location Method of Value/ or (In City or Satisfying per Sq. j Sale Price/ Case Expansion) Requirement Scenario Ft. Profita Unit 2 In City 5% Fee Ab -93% 7% +3% Bc -16% -6% +3% 3 Expansion 5% Fee Ad -10% i -7% +3% Be -21% -8% +3% 4 Expansion2 5% Fee -21%- ; -7% +3% 13 In City 5% Fee -8% I -1% +2% 5% Moderate.Income -9% i -100/0 +3% Units 3% Low Income Units -12% c -17% +4% 14.1f Expansion 18.75% Fee -20% —5% +8% 12.5% Moderate Income j Units and Ag -15% -24% +7% 6.25% Low Income Units Bh -21% -34% +9% 14.1 i Expansion 18.75% Fee -209/o -4% +8% 12.5% Moderate Income 1 Units and Ag -13% -21% +7% 6.25% Low Income Units Bh -19% -35% +10% a Internal rate of return in operating year 10 for rental projects;profit on sale for for-sale projects. b Assumes project owner incurs operating costs for office space. c Assumes project owner incurs no operating costs (all leases are triple net). d Assumes 50 percent of project is occupied by anchor-type (lower-rent)tenants and 50 percent is occupied by smaller(higher-rent)tenants. e Assumes 80 percent of project is occupied by anchor-type(lower-rent)tenants and 20 percent is occupied by smaller(higher-rent)tenants. f Assumes that custom homes are 2,200 square feet and single family tract homes are 1;500 square feet (size assumption from previous analyses). g Assumes all for-sale low-and moderate-income units are condominiums. h Assumes that for-sale low-income units are condominiums and for-sale moderate-income units are single family tract homes. I Assumes that custom homes are 2,500 square feet and single family tract homes are 1,800 square feet (lar- ger than previously assumed). Source: Mundie&Associates 40 Draft 2/12/2004 5:04 PM Impacts on land value are also significant— in the range of 20 percent — in both ver- sions of Case 14 (major expansion area residential project). In this case, the impacts of the housing production requirements are also significant (20 to 25 percent for Sce- nario A, in which all affordable for-sale units are condominiums; 34 to 35 percent for Scenario B, in which low-income .for-sale units are condominiums and moderate- income for-sale units are single family tract homes). These impacts could be substan- tially reduced, however — to the range of four percent — by paying the in-lieu fee. The relatively slight impact of the fee on profitability suggests that the amount of the fee should be increased or the amount of housing production required should be decreased to reduce the attractiveness of the fee option, which is ultimately likely to produce fewer units. ADDITIONAL DISCUSSI ,`_,N OF'STHE FEEbPTION Of particular concern to the City at this time is whether the option of satisfying the housing affordability requirement compromises the ability to achieve housing production goals. Another more specific way of considering this question is to compare the theoretical hous- ing yield from different methods of meeting the requirement. A comparison of yields is pre- sented in Table 16. Table 16 Housing Yields from Different Methods of Meeting the Affordable Housing Requirements Project Yield from Yield from Greater Yield Type Fees Production from: Case 13 5%of the construe- 1 low-income unit or Production 18 Infill tion cost of 18 units 1 moderate-income Condominiums =90%of the con- unit struction cost of 1 unit Case 14 18.75%of the con- 22 low-income units Production 353 Expansion Area struction cost of 333 +44 moderate- Housing Units units* income units (mixed unit types) =construction cost =66 units of 62.4 units * Fees are not applied to the 20 apartments,which are affordable to moderate-income households. Source: Mundie&Associates For both Case 13 and Case 14, satisfying the requirement by building affordable housing units would yield more units. The difference appears to be marginal in both cases, but the table ignores the costs in addition to bricks and mortar that are incurred to produce a housing unit: costs that the entity ultimately producing the housing (the City, Housing Authority, or another developer) would incur in applying the funds to a construction project. Draft 2/12/2004 5:04 PM 41 I^lP$ I These costs include, for example, project design, engineering, and architecture; land; site preparation; fees and exactions; construction financing: and marketing. In Case 13, the construction cost comprises approximately 38 percent of the total production cost (includ- ing land); in Case 14, it comprises approximately one-third. (This estimate for Case 14 excludes the costs of infrastructure improvements, such as the water tank and park, which have not been estimated). When these.additional costs are considered, then, the fee option underfunds provision of units (it is a bargain to the developer). Table 14 also indicates the potential advantage to the developer of the fee option. The column headed "Profit" shows: • In Case 13, payment of the fee would reduce the developer's expected profit by about 1 percent, while production of one moderate income unit would reduce the profit by 10 percent and the production of one low-income unitwould reduce it by 17 percent. ■ In Case 14.1, payment of the fee would reduce the developer's expected profit by about 5 percent, while the less-costly production alternative (low- and moderate-income con- dominiums) would reduce the profit by 24 percent. In Case 14.2, the comparable reductions are 4 percent with the fee payment and 21 percent with the production of low- and moderate-income housing units. At the same time, Table 14 indicates that the impact of paying a fee on land value or on the prices of market-rate units is comparable to the impact of the housing production options. The difference in impact appears to be related to the fact that the amount of the fee is based on construction cost, which is similar for market-priced units and affordable units, while the amount of revenue foregone with the production option is based on the difference in price for the units. One result of the differing bases of impacts (cost vs. revenues) is that the effects of the pro- duction option are more volatile with respect to housing market conditions: any closure of the gap between market prices and affordable prices would reduce the impact of the produc- tion option and any widening of the gap would increase.the impact of the production option, but neither change would affect the impact of the fee option on the financial feasibility of development.9 Thus, if the gap between market prices and affordable prices were to decrease, the fee .option would become relatively less attractive and if the gap were to increase, the fee option would become relatively more attractive. Because the cost basis of the fee represents only a part of the full housing production.cost; however, the changes in the size of the gap would have to be considerable before the production option would become an attractive strategy for developers. 9 As was noted in Chapter 11, market feasibility—in this case, whether a change in the relationship between market housing prices and affordable housing prices as an indicator of economic health and market housing demand—is not considered in this report. 42 Draft 2/12/2004 5:04 PM APPENDIX A INCOME LIMITS, RENTS, AND SALES PRICES Unit T e: 1 BR 2 BR 3 BR Permitted Household Size: 2 people 3 people 4 people 5 people Upper Limit of Income for. Lower-income Households $36,950 _$41,550 $46,150 $49,850 _ .......... Moderate-income --....-._.__..._.__.._..._... . .. -- ----- - —- —................. Moderate-income Households 55,400 62,350 69,250 74,800 Upper Limit of Rents Month Lower-income Households $692.25 $779.25 $865.50 $934.50 Moderate-income Households 1,480.65 1,666.73 1 1,851.21 1,998.79 Upper Limit of Purchase Prices Upper Limit of Rents Month $92,375 $103,875 j $115,375 $124,625 Moderate-income Households 166,200 187,050 207,750 224,400 Source: City of San Luis Obispo Draft 2/12/2004 5:04 PM Al J -qD A2 Draft 2/72/2004 5:04 PM I APPENDIX B DETAILED ASSUMPTIONS FOR 1991, 1997, AND 2004 CASE�2 ..D_� ".NTOWN;,1111XED USE ;BUILDINGf;'. ( 1991 1997 2004 Construction Costs Retail: Shell $95.00 � $80.00 $82.40 (per sq. ft.) Tenant Finish None None None Officer Shell $75.00 $90.00 $106.80 Tenant Finish $25.00 $20.00 $30.00 Construction Period months 12 j 12 12 Occupancy Retail: End of Year 1 500/6 50,1 50% End of Year 2 95% 95% 95% and after Office: End of Year 1 50% 501yo 35% End of Year 2 1 95% 95% 75% End of Year 3 95% 95% 95% and after j Efficiency(net:gross ratio) Retail 95% 95 95% Office 900/0 90% 90%_ Soft Costs %of hard costs 10% 10% 109/0 Additional Costs Developer-built Sidewalk and tree wells $5,100 $13,600 $39,168 infrastructure I _ Permits and Plan Check 8,400 20,788 41,515 Developer-funded (fees) Water _ 5,255 1 12,456 33,491 Sewer 4,435 5,131* 13,720 Circulation/Traffic 46,070 43,396 51,195 Parkin 37 spaces) 148,000 148000 407,000 Public Art n.a. n.a. 9,215 Non-City impact fees School district 4,597 4,598 4,598 Total excl. housing fee $221,857 $247,969 $599,902 Rent(per sq. ft. per month) Retail $2.00 $2.00 $2.50 Office $1.50 $1.50 $1.30 Operating Costs I Retail None None None (per.sq. ft. per year) Office ; Fixed: $1.50 Fixed: $1.50 (A): Variable: $2.50 Variable: $2.50 Fixed: $1.50 Variable: $2.50 B None * Assumes no restaurant Draft 2172120045:04 PM 131 I 74a -96 1991 j 1997 j 2004 Construction Costs Retail: Shell (1)_$85.00 $75.80 j $82.40 (per sq. ft.) (2) $-, Tenant Finish None None None Parkin $8.30 $8.30 $8.30 Construction period (months) U 12 12 Occupancy I End of Year 1 100% 100% 50% End of Year 2 and after 11 100% I 1009/0 95% -Efficiency (nietgross ratio) Retail j 1009,0 1000/0 j 98% SoftCosts (%of hard-costs 10% j 10% 109/0 Additional Costs Developer-built Parts of streets, bus (Not esti- i (Not esti- (Not esti- infrastructure j shelter/tumout, highway mated,unless I mated, unless mated, unless -interchange contribu- as part of cir- as part of ci r- as part of dr- tion,drainage culverts culation fee) culation fee) culation fee) Permits and Plan Check $220,185 $378,509 Developer-funded (fees) j Water $118,000 37,368 66,982 Sewer 99,1882 15,393 13,720 Circulation/Traffic 1,275,000 508,725 153,586 Public Art n.a. n.a. 112,230 Non-City impact fees School district 63,750 63,750 j 63,750 Total (excl. housing fee) $1,556,538 $845,421 $788,777 Rent (per sq.ft. per month) Retail (1) $1.00 $1.00 (A) $1.30b (2) 0.70 (B) $1.09c Parkin j None j None None Operating Costs j Retail None None None (per sq. ft. per year) j Parking None None None Assumes no restaurant b Assumes 50%of building space is rented by anchor-type tenants at$1.05/sq.ft./month and 50%is rented to smaller stores at$1.65/sq.ft./month. c Assumes 80%of building space is rented by anchor-type.tenants at$1.05/sq.ft./month and 200/6 is rented to smaller stores at$1.65/sq.ft./month. B2 Draft 217212004 5.64 PM P�ANSIUNAR -X1 a .,U, 7RlAL=;q. 1991 1997 2004 Construction Costs I Industrial: Shell (per sq.ft.) F Case 4 $37.00 $36.30 $63.70a Case 5 $40.00 $36.30 b Tenant Finish $3.75 $3.75 None Parking. $8.30 $8.30 $8.30 Site Im provements None None $5.00 Construction Period months 12 12 ( 12 Occupancy End of Year 1 100% 1000/0 75% End of Year 2 and after 10096 100% 95% Efficiency (net:gross ratio Industrial 100% 1000/0 95% Soft Costs %of hard costs 10% 100/6 1096 Additional Costs Developer-built none infrastructure Permits and Plan Check $11,872 $30,454 $69,764 Developer-funded (fees) Water $57,807 12,456 54,800 Sewer 48,785 5,131 16,704 Circulation/Traffic 18,000 43,980 97,320 Public Art n.a. n.a. 18,610 Non-City impact fees School district 15,000 15,000 15,000 Total excl. housing fee $151,464 $107,021 $272,198 Rent (per sq.ft. per month) Industrial $0.50 $0.50 (A) $0.65 B $0.85 operating Costs Industrial None None None a Use is changed from industrial to service commercial in 2004. b Case 5,which was originally distinguished from Case 4 by a difference in construction costs between the City and the expansion area,has been eliminated. Draft 2/12/2004 5:04 PM B3 1 - rlL� { [COSt 2��■ :1(�FILV7C � ND®MI'NIM1%IS 1 1991 1 1991 2004 Construction Costs Site Improvements $15,000 $15,000 $18,000 (per unit Structures (per sq. ft. $45.50 $69.10 $98.95 Construction Period months 12 12 12 Sale Period months 6 1 6 6 Soft Costs %of hard costs 10% I 109'0' ( 10% Additional Costs Building permit $10,973 $32,180 $44,334 Plan Check 7,235 25,589 Developer-funded (fees) Water 37,837 89,694 121,698 Sewer 31,932 35,532 47,718 Circulation/Traffic 23,400 201196 23,814 Parks and Recreation 28,662 48,042 63,810 Non-City impact fees I School district 37;350 37,350 37,350 Total excl. housing fee $177,389 $288,583 $338,724 Other Costs: Marketing 9'0 of sale rice 4% 4% 1 4% Profit %of sale rice 1 12.5% 12.5% 20.0% Sale Price (per unit;average) Low-priced Scenario $150,000a Moderate-Priced Scenario 175,000b $195,000r $409,722d High-priced Scenario 195,0000 a Two-bedroom units @ $132,300;three-bedroom units @ $177,875. This scenario did not yield a positive land budget in 1997,and therefore is not included in that report. b Two-bedroom units @$154,375;three-bedroom units @ $207,520. This scenario does not yield a positive land budget in 1997,and therefore is not included in that report. c Two-bedroom units @$172,000;three-bedroom units @ $231,250. d Two-bedroom units @$400,000;three-bedroom units @ $425,000. B4 Draft 217212004,5:04 PM n 0MEJ4; Custom Homes 1991 1997 ( 2004 Construction Costs Site Improvements $15,000 $15,000 $18,000 (per unit Structures (per sq. ft. $70.00 $69.10 $98.95 Construction Period months �. 12 1 12 ! 12 Sale Period months 12 12 6 Soft Costs %of hard costs 104YO 10% 100/0 Additional Costsa Building permit $120,590 $183,864 $825,639 Plan Check 78,384 263,647 Developer-funded (fees) Water 291,664 691,308 933,843 Sewer 246,145 273,837 367,854 Circulation/Traffic 210,900 140,415 165,501 Parks and Recreation 0 0 0 Non-City im act fees School district 366,300 366,300 366,300 Total excl. housing fee)* $1,313,982 $1,919,371 $2,65.9,083 Other Costs: Marketing. %of sale rice 4% 4% 4% Profit% of sale rice 12.5% 12.5% _ 20.0% Sale Price (per unit;avera e b $325,000 $325,000 $675,000 * Detail and total do not agree because,of independent rounding. a For comparability to prior years,costs are shown for Case 14.1 (original-sized custom units). Additional costs for Case 14.2 (larger units)are: Building ermit lar check $901,509 Developer-funded (fees) Water _ 933,843 Sewer 367,854 Circulationfrraffic 165,501 Parks and Recreation 0 Non-City impact fees School district i 416,250 Total (excl.housing fee)* 1 $2;784,929 * Detail and total do not agree because of independent rounding. b For comparability to prior years,the sale price shown is for Case 14.1 (original-sized custom units_). The price assumed for Case 14.2 (larger units) is$767,045. Draft 2/72/2004 5.04 PM B5 /� C r VIY j Single-family Tract Homes 1991 ( 1997 2004 Construction Costs Site Improvements i $15,000 $15,000 $18,000 (per unit Structures (per sq. ft. $50.00 $69.10 $98.95 Construction Period months 1 12 12 12 Sale Period months 12 12 6 Soft Costs %of hard costs 109/0 10961 10% Additional Costsa Building permit $115,749 $202,790 $785,339 Plan Check 75,237 253,162 Developer-funded (fees) Water 352,098 834,552 1,127,342, Sewer 297,145 330,578 444,076 Circulation/Traffic 254,600 169,510 1.99,794 Parks and Recreation 0 0 0 Non-City impact fees School district 301,500 301,500 301,500 Total excl. housing fee)* 1 $1,396,330 $2,092,092 1 $2,858,079 Other Costs: Marketing %of sale rice 4% _ E 4% 4% Profit %of sale rice ( 12.5% 12.5% 20.09/6 Sale Price(per unit;averse $225,000 1 $225,000 $500,000 * Detail and total do not agree because of independent rounding. a For comparability to prior years,costs are shown for Case 14.1 (original-sized single family tract units). Additional costs for Case 14.2 (larger units) are: Buildin- ernift p Ian check $873,931 Developer-funded (fees) Water 1,127,342 Sewer 444,076 Circulation[Traffic 199,794 Parks and Recreation 0 Non-City impact fees School district 361,800 Total excl.housing fee $3,010,002 * Detail and total do not agree because of independent.rounding. b For comparability to prior years,the sale price shown is for Case 14.1 (original-sized single family tract units). The price assumed for Case 14.2 (larger units) is$600,000. B6 Draft 2/72/2004 5:04 PM ^1 r 1 "4 [C7A.SW,J "MNEQ-) T-11 h �A, Condominiums 1991 1 1997 2004 Construction Costs Site Improvements $15,000 $15,000 $18,000 (per unit) Structures (per sq. ft.) $45.50 _$63.05 $98.95 Construction Period (month) 12 1 12 12 Sale Period (month) 9 9 6 Soft Costs (%of hard costs) 109/0 100/0 109,0 Additional Costs Building permit $38,562 $68,451 $147,533 Plan Check 25,067 92,754 Developer-funded (fees) Water 184,985 438,504 594,968 Sewer 156,112 173,712 233,288 Circulation/Traffic 114,400 98,736 116,424 Parks and Recreation 0 0 0 Non-City impact fees School district 158,400 158,400 158,400 Total (excl. housing fee) $677'525 $1,030,557 $1,250,613 Other Costs: Marketing (%-of sale price) 4% 4% 4%. Profit (0/o of sale price) 12.5% 12.5% 20.0% Sale Price (per unit,average) Low-priced Scenarios $150,000 $150,000 $385,000r High-priced Scenariob 175,000 175,000 a Two-bedroom units @ $132,300;three-bedroom units@ $177,875. b Two-bedroom units @ $154,375;three-bedroom units @$207,520. C Two-bedroom units @ $$372,500-,three.bedroom units @$405,000. Draft 211212004 5:04 PM B7 li ,- KMMM Rf"B ..A M 7Z R7��� Apartments 1991 1997 2004 Construction Costs site improvementsa $3.00 $3.00 $5.00 (per sq. ft.) Structures $42.50 $63.05 $79.00 Construction Period (month;) 12 12 12 Efficiency (net:gross ratio) Residential 9 90%, 95% Soft Costs (%of hard costs) 10%, 109'/0 10% Additional Costs Buildin.&permit/plan check $10,408 $23,053 $35,974 Developer-funded (fees) Water 42,042 99,660 132,802 Sewer 35,480 39,480 53,020 Circulation/Traffic 26,000 22,440 26,460 Parks and Recreation 0 1 0 0 Non-City impact fees School district 30,000 30,000 30,000 Total $143,930 $214,633 $278,256 Rent (per unit per month) $775 n.a.b (A) $1,000 (13) $1,200c Operating Costs.(0/o of rent) 25% 25% 25% a Applies to 58,408 sq.ft.of site area not occupied by structure. b Rent of$930 per unit per month would yield the target return of 12 percent IRR.in operating year 10 with no land budget (that is,free land);rent of$1,015 per unit per month is required to yield the target return with land budget of$1.95 per square foot (the 1991 land budget). c Lower rent (A)was used in Case 14.1 (original-sized custom and single family tract units);higher rent (B) was used in Case 14.2 (larger custom and single 5mily tract units). Both rents are affordable to moderate- income households. B8 Draft 217212004 5:04 PM 61ENERALa `�SUMPTI ,NS•t ,� - :7W . ;,' ; ;h t . For-Rent Projects 1991 1.9.97 2004 Lease Term Apartments 1 year 1 year 1 year Downtown Mixed Use 5 years 5 years 5 years Expansion Area Retail 20 years 20 years 5 ears Industrial 20 years 20 years 5 years Lease Commission Apartments None None None Downtown Mixed Use 25%of first 25%of first 25%of first eara yeara yeara Expansion Area Retail 25%of first 25%of first 25%of first eara yeara eara Industrial None None 25%of first eara Percent of Lease Renewals ' For Tenant Imp. Calc. Apartments 0%b 0%b 0•/ob Downtown Mixed Use 25% 25% 25% Expansion Area Retail 0% 0% 25% Industrial 100% 100.0 25%c For Lease Comm. Calc. Apartments 0%b 0%b 0%b Downtown Mixed Use 50% 50910, 50% Expansion Area Retail 100% 100910, 50% I industrial 1001yo 1000/0 50910 Depreciation Type Straight Line Straight Line Straight Line Period Building 31.5 years 31.5 years 31.5 years Tenant Finish Same as Same as Same as lease term lease term lease term Lease Commissions Same.as Same as Same as lease term lease term lease term a Equivalent of 5 percent per year for the first five years of the lease. b No lease commissions or tenant improvement costs.. Draft 2/12/2004 5.04 PM B9 n� 4 For-Rent Projects (cont'd) 1991 1997 1 2004 Construction Financing %of Construction Cost 100% 75% 75% Interest Rate 10.59/6 10.25% 7.0% Points 2.0 1.5 1.5 Mortgage %of Construction Cost Nonresidential 70% 75% 65% Apartments 70% 75% 75% Interest Rate 10.0910 9.25% 7.096' Points Nonresidential 2.0 1.5 1.5 Apartments 1.5 n.a. 1.5 Termd Downtown Mixed Use 25 years Expansion Area Retail 30 years 20 years 20 years Industrial 25 years Apartments n.a. Tax Rate Federal 28.0% 28.0% 28.0% State 9.3% 9.3% 9.3% Inflation Rate 5.096 5.0% 3.0% Capitalization Rate on Sale Apartments 8.5% 8.5% 6.009,6' Downtown Mixed Use 8.00/0 8.0% 7.75% -Expansion Area Retail 8.0961 8.0% 8.75% Industrial 8.59,6' 8:5% 8.50% Commission on Sale 6.0% 6.0% 6.0% Discount Rate for N PV 12.0% 12.00/6 8.5% d For mortgage amortization schedule;typically,loans on commercial and industrial property amortize over 20 or 25 years,but are due after 10 years or so. B10 Draft 2/12/2004 5:04 PM � � gl For-Sale Projects i 1991 1997 2004 Financing Costs Amount of 1009,0' of 85%of 75%of construction loan construction construction construction costs_ costs costs Points on construction ^2.0 1.5 1.5 loan Interest rate on 10.5% 10.0% 7.0% construction loan j Construction Term Custom homes ! (months) 25-unit phase 12 12 12 11-unit phase j 6 6 12 Single-family tract homes 50-unit phase I 12 12 12 34-unit phase 9 9 12 Condominiums v^ 18 unit project 12 12 12 20 unit phase 12 12 12 24-unit phase 12 12 1 12 Sale Period (months) Custom homes 25-unit phase 12 12 6 11-unit phase 6 6 6 Single-family tract homes 50-unit phase 12 12 6 34-unit phase 9 9 6 Condominiums 18 unit project 6 6 6 20 unit phase 9 9 6 24-unit phase 9 9 6 Draft 2/12/2004 5:04 PM 1311 140 0. . - _._. ,� E- _ ,-%�JUNCIL �''CDD DIP CAO -L/FIN DIP XATTORNEY ACAO �FPwoRIEF RECEIVED MEMO JZ CLERK'ORIG 2rPCLICE CHF JAN 2 f 1004 10 DEPT HEADS IC REC DIR ��� ryZ UTIL DIP January 26, 2004 SLO CITY CLERK To: Jeff Hook, ,John.Mandeville Attachment 7 From: Ken Sch RED FILE Copy Ken HamperG AGENDA Re: Housing Element Update DA ''1z ITEM #-2ad You asked to be alerted to issues/questions prior to the public hearings slated for Tuesday and Thursday,January 27 and 29. I have concentrated my reading as you have recommended on Chapter 3, consequently there may be answers to a couple of my concerns located elsewhere in the documents. If so,I need to be directed to those locations. 1. I find it very puzzling that in all of the verbiage about `housing' and `housing units' and `households'that there is no definition of`house.' Just what is a.house? I get the idea that we all think that a"Housing Element"is an important unit of our General Plan—at least the State does—yet this document comes across as a huge impersonal compilation of rules and directions, goals,polices and programs without ever getting to the heart of why a `housing element'is important. I presume that a `house' is a unit of`housing,'but if this`housing element'never defines house,then the importance ofthe housing element is lost on me. The term`dwelling unit' is used a lot. If we substitute `house unit' for`dwelling unit' does the meaning remain the same? When does the term`home' enter the picture? 2. The assignment ofresponsibilities for improving the inventory ofhousmg units in SLO appears to be laid at the doorstep of the city. I don't accept this premise. I remember that it was the Chamber of Commerce who identified the lack of workforce affordable housing as one of the major problems effecting business in SLO. And the Chamber published a housing study in support of their position.. I also remember very vividly that the State's Housing and Community Development.Department identified the lack ofhousmg as one ofthe major deterrents to maintaining the State's economic position. HCD then dictated that each local government entity throughout California would be held responsible for accommodating a proportional share ofthis perceived housing need. No ifs ands or buts. As I read the documents presented, I find no assignment of a share ofthe responsibility for producing more housing to the private sector. I think this is a huge and unacceptable void MEMO: page 2 I want to know what goals will be established for the private sector to meet in return for the relaxation of city regulations that have allegedly restricted housing growth For instance,what will the real estate industry contribute;what will the financial community contribute;what will the developer community contribute;what will the design community contribute;and what will the homebuilders contribute? All of these private interests add a cost to the price ofhousing. If the City is expected to reduce regulations to help cut the cost ofhousing,what kind ofhelp can City taxpayers,the Chamber of Commerce and HCD expect ofthe private sector? If the answer is`nothing,'then I have a problem 3. Where are the illustrations? Where are the examples of good housing? We show all kinds diagrams and pictures in our other documents. Why do we not have illustrations showing what a good workforce affordable house looks like? Surely there must be a passel of examples of good designs. In fact,why doesn't this document contain a number of"stock plans"with the proviso: `Budd Plan 101 A and the City will issue you a building permit over the counter at 50%ofthe normal permit fees." "Construct a four- plea using Plan 4144P and the City will issue you a building permit over the counter at 30%ofthe normal permit fees." `.`Add a floor of apartments to your downtown commercial building using apartment units conforming with Plan 603-CD and the City will grant you use ofuse of X parking spaces witbin the DT parking district." Etc.,etc. There has been much talk of`incentives.' OK, I favor incentives,but on terms that return a measurable benefit to the City. The only reference I find to `design' is 6.3.11 on page 22. Why is this? If we really want to produce affordable housing we are going to have to come to terms with simplicity. Merchant homes are just like SUVs. We need to unload all of the gewgaws and get down to the basics of what constitutes the essentials of a good house(dwelling unit). The building industry(and city folks too)have gotten so far away from simple,well-designed housing units that we(collectively)have forgotten what they look.like. IFthe city is going to subsidize housing,then we absolutely must subsidize good design. 4. Last,but not least,I find far too much unnecessary repetition throughout chapter 3. Program language is very,very sear to Policy language. Can some of this be cleaned up? � r�