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HomeMy WebLinkAbout09 - September 25, 2026 - Evaluation of potential procedural improvements to the Cupertino Below Market Rate (BMR) Housing ProgramCOMMUNITY DEVELOPMENT DEPARTMENT CITY HALL 10300 TORRE AVENUE • CUPERTINO, CA 95014-3255 TELEPHONE: (408) 777-3200 CUPERTINO.GOV CITY COUNCIL INFORMATIONAL MEMORANDUM Date: September 25, 2026 To: Cupertino City Council From: Benjamin Fu, Director of Community Development Re: Evaluation of potential procedural improvements to the Cupertino Below Market Rate (BMR) Housing program. Background During its regular meeting on May 19, 2026, the City Council requested that staff prepare a supplemental informational memorandum regarding potential procedural improvements to the City’s BMR Housing program. To ensure that the City’s BMR Program uses best practices that are aligned with regional and State housing goals, procurement of the BMR Administration contract included a category for suggesting improvements to the City’s program that have been successfully implemented by other jurisdictions. Specifically, the following potential process implementations were identified as items of interest: 1) approving a new fee to BMR home sellers to cover the cost of the resale procedure, 2) integrating the waitlist with the Bay Area Housing Finance Authority (BAHFA) Doorways system, and/or revising the waitlist application period to being open the year-round rather than for a one month period each year. Discussion Through research and further study, it was found that many of the suggested process improvements would require a separate Council review and approval in order to be implemented. Generally, they would need to be approved via resolution to amend the City’s Policy and Procedures Manual for Administering Deed Restricted Units (BMR Admin Manual). Procedurally, these process improvements may be scheduled for a public hearing with the City Council at the Council’s request of the City Manager. Additionally, it was requested by the Council to consider the implementation of an anonymous reporting system for BMR residents who may fear retaliation when reporting housing issues. This will also be evaluated as a potential process improvement to the BMR program. For this study, only comparably sized cities in Santa Clara County were surveyed for comparison due to their similarity with Cupertino. The City of San Jose, and cities in other Bay Area counties were not included. CITY OF fl CUPERTINO Resale Administrative Fee Affordable housing units in the City’s BMR portfolio fall under two categories: 1) ownership units for sale and 2) rental units for lease. To begin the process of buying/selling an ownership BMR unit, the unit must be advertised through the City’s waitlist for an income-qualified buyer, and a loan agreement must be acquired for the purchase. In addition to the typical transfer of deed, the sale of an ownership unit also requires the execution of various occupancy, refinancing, and resale restrictions with the new buyer which keeps the unit within the City’s affordable housing program criteria. To fully protect both the unit and the City, the list of required documents has grown extensively to also include noticing requirements in cases of default, release of restriction for the previous owner, subordination agreements, deed reconveyances, and many others. The process of execution also involves several rounds of review, coordination of signing, and recording the deed with the County. Currently, the City pays a fee of $8,000 to the BMR Administrator who coordinates much of this process for each BMR home-owner resale. The resale price of a BMR home is tied to the percentage increase of either the Area Median Income or the Consumer Price Index from the time of the initial purchase to the time of resale. In the City of Cupertino, BMR homes are typically resold after decades of residency, with the valuation of the property often increasing by several hundred thousand dollars. Thus, charging the cost of BMR resales as an administrative fee to sellers in the program would have little effect on their economic gain from participating in the program and would deter individuals who might try to participate in the program for a short term, only to resell the home primarily for profit. Due to the sustained upswing in residential development projects over the last two years, the City currently has six separate in-progress housing developments that will add a total of 65 for-sale units to the inventory. Moving the cost of BMR ownership as an administrative fee to the seller will, therefore, potentially prevent $520,000 of additional costs to the City that are not currently accounted for in the BMR Administration agreement. Additionally, the City’s contract for BMR Administration currently budgets $16,000 per year for resale management for existing ownership units in the portfolio. This accounts for $48,000 in costs for the next three years. Combined, the potential savings of moving resale costs to an administrative fee for BMR sellers would save the City $568,000 over the term of the FY 26-29 BMR Administration Contract. Having BMR sellers absorb the administrative costs of reselling has been adopted as a successful model in other neighboring cities. It allows the seller to make a significant profit due to the increased valuation of the home during their term of ownership and avoids either the City having to absorb these costs or passing the costs along to the prospective new owner. Overall, the common practice is to charge sellers of the BMR home 3% of the sale price to compensate the BMR Administrator for their services. Palo Alto is currently the only other city studied in Santa Clara County that does not charge this fee to sellers. Moving to this model would be highly beneficial to the City and would also be considered adopting an established best practice. Table 1: Santa Clara County Cities on the Resale Administrative Fee City Charged to Sellers Calculated How? Campbell Yes 3% of sale price Cupertino No Flat fee Los Gatos Yes % of sale price (depends on agreement terms) Milpitas Yes 6% sale price for resale, 3% for new ownership Mountain View Yes 3% of sale price Palo Alto No Flat fee Santa Clara Yes 2.5% of sale price Sunnyvale Yes Flat fee Doorways Listing Portal Cities often have hundreds or even thousands of households on their BMR waitlist at any given time due to the exponentially growing need for affordable housing. A new prospective BMR tenant can wait years before a unit that fits their household needs is available to them. To cast a wider net and increase their ability to be placed into affordable housing more quickly, applicants often apply to multiple cities’ BMR programs concurrently. However, applicants across the San Francisco Bay Area have noted inconsistencies between different cities’ programs: citing different policies, processes, administrative practices, and a general lack of transparency which leads to confusion and distrust in the system. In 2023, the Bay Area Housing Finance Authority (BAHFA) created the Doorways portal: a centralized listing portal for BMR units to which any Bay Area municipality can join for no cost upon request. The Doorways portal lists all available units across jurisdictions that can be currently applied for and acts as a single point of submittal for standard BMR application documents. Examples of standard documents are tax returns, legal identification, bank statements, and public benefit letters. This gives each user an accurate depiction of the true amount of available affordable housing in each city while lowering barriers for them to apply to multiple available listings in different areas. An important caveat to note, however, is that while this service is currently offered for free, BAHFA may charge cities a fee for this program in the future, as its original funding source, the Regional Early Action Planning (REAP) grant, begins to run out. Currently, only the Cities of Campbell, Sunnyvale (partially), and Santa Clara have added their listings to the Doorways portal. Most of the other similar-sized Santa Clara County cities have either decided not to join, or simply haven’t considered the idea yet. When asked about their reasons for not joining, a common response was that their BMR program’s current design contains features that are inconsistent with the requirements of the Doorways model. The City of Cupertino falls into this category due to using a waitlist system that is only open for one month each year. The goal of the Doorways portal is to only list units that can be actively applied for in order to maintain uniformity in the user experience. This means that Cupertino’s listings would only be available for a single month, and even then, Doorways would only list the few units that are available for that month. Therefore, joining Doorways without also implementing further process changes would have little to no benefit for the City of Cupertino. Table 2: Santa Clara County Cities on Using the Doorways Portal City Using Doorways If No, Why Not? Campbell Yes N/A Cupertino No Incompatible with current waitlist system Los Gatos No Haven’t considered yet Milpitas No Rental is managed by property managers, City only manages ownership listing Mountain View No Doesn’t meet City policy needs Palo Alto No Haven’t considered yet Santa Clara Yes N/A Sunnyvale Yes, for rentals Ownership listing requires more onboarding from the property owners Year-Round Waitlist As previously stated, joining Doorways is not particularly useful for the City of Cupertino’s BMR program in its current design, which is open for one month each year, that being the month of October. However, the benefits and drawbacks of this action can also be evaluated alongside the possibility of amending the program structure to a year- round waitlist, which would fit much better with the Doorways model. The City of Cupertino utilizes a waitlist system that is open for one month each year, and then a single, central waitlist is used for all available BMR units throughout the year until the next waitlist update. The waitlist update comprises of compiling all the applicants, sorting them by the amount of priority points they acquired (such as being a Cupertino resident, Cupertino worker, or a displaced tenant from a Cupertino residence), and then using a random number generator to assign final placement within their priority point groups. This is commonly called a placement lottery in BMR Administration. The City has utilized this type of waitlist system to provide more transparency and fairness in the process since a single annual waitlist update is able to be recorded and shared with the public. The City currently posts each annual waitlist update to the Housing webpage. Having a single lottery each year also reduces the workload and cost for the BMR Administrator and is generally more intuitive for applicants. A year-round system is another system utilized by other Santa Clara County cities. Majority of the other jurisdictions use this system, except for the Cities of Palo Alto and Santa Clara, which only re-open their waitlist when their current waitlist entirely empties, known as the as-needed system. The year-round system requires prospective residents to apply multiple times to be placed. The first application is to qualify for the waitlist, which adds them to an interest list that notifies them when open units are available. A secondary application is subsequently required to apply to the individual units as they become available. If they are unable to be placed into the unit, they must repeat this secondary application for each subsequent unit they attempt to find. This greatly adds administrative burden to the applicants and also requires that separate lotteries be drawn for each listing. To reduce their own administrative burden, many cities have moved the responsibility for conducting the lottery process to the developers and property managers of each building. In this scenario, rather than taking an active role during the lottery process, the city audits the process afterwards to check if the cities’ waitlist priorities were used. The year-round system poses some notable drawbacks and potentially reduces the potency of the priority point system. The first issue is that many qualified applicants will miss out on placement opportunities if they are unable to continually reapply for the secondary application due to fatigue. The second issue is that it opens the opportunity for the waitlist priorities to be applied incorrectly by private property managers and market rate developers: parties that do not share the City’s BMR policy goals. The Doorways portal, however, appears to be designed to directly address the shortcomings of the year- round waitlist design. The way that it simplifies the application process for multiple reapplications is to assist prospective applicants who must repeatedly apply to different listings. It also contains functions that can automate the lottery and priority point system to remove the opportunity for errors that can be made by property managers. The Doorways portal can compensate for weakness in the year-round waitlist system, but the City of Cupertino does not have these issues in its one-month system. The one-month system has a single centralized list with one application. This has a low barrier of entry and allows City staff to have an active role in enforcing policy priorities in the lottery. The single waitlist update is able to be publicly shared and also, by design, purges applicants no longer interested in the program. Thus, moving to a year-round system without also joining the Doorways portal would add administrative burden to both applicants and the City and have more drawbacks than benefits. However, as previously stated, doing both actions may come with other unexpected costs, such as if BAHFA were to start charging cities a fee for using its service. Knowing this, it may be more prudent to continue using the City’s current waitlist design. Table 3: Santa Clara County Cities on Waitlist Availability City Waitlist Type Campbell Year-Round Cupertino 1-month; October Los Gatos Year-Round Milpitas Year-Round Mountain View Year-Round Palo Alto As needed Santa Clara As needed Sunnyvale Year-Round Anonymous Reporting System During the May 19, 2026, City Council meeting, staff were asked to consider implementing an anonymous reporting system for BMR residents to report issues with the BMR Administrator without fear of retaliation. Logistically, this feature can be created using the City’s 311 reporting system by creating a new option for Below Market Rate Program reports. However, to resolve issues when they have arisen, City staff must collect personal and unit specific information to investigate each specific situation. With the goal of addressing issues raised by BMR residents, staff recommends that the residents reach out directly to staff via email for any complaints. Items reported using the anonymous feature can be collected by staff for informational purposes but cannot be resolved without the information necessary to address the issue. Analysis Approving a new administrative fee to charge BMR sellers the cost of facilitating the resale process would only marginally impact sellers and could save the City $568,000 in costs over the next three-year BMR Administration period. This is a common practice that would be beneficial for the City to adopt. Optimally, it should be made a priority to be implemented before the currently in-progress housing developments have completed construction. The Doorways portal is an innovative practice but it largely corrects for structural inefficiencies that the City of Cupertino does not have due to its unique one-month waitlist design. Moving to a year-round system to join the Doorways portal may result in other unexpected costs beyond the City’s control. Therefore, these practices are recommended for future study, but are not recommended by staff for any immediate changes. An anonymous reporting feature is able to be logistically created, but would be generally unhelpful to a BMR resident looking to have an issue resolved. This feature can be created and advertised during the City’s BMR Annual Informational Presentation that is posted to the website, but staff still encourage BMR residents to reach out to directly staff via email at housing@cupertino.gov with any issues so that proper investigations into reported issues can be conducted. Sustainability Impact No sustainability impact. Fiscal Impact No fiscal impact from this study. Potential cost reductions in BMR Administration for future implemented actions. City Work Program (CWP) Item/Description None Council Goal: Housing TBD Item: No California Environmental Quality Act This is an informational item not requiring discretionary action and is, therefore, not subject to the California Environmental Quality Act (CEQA). ___________________________________________ Prepared by: Nicky Vu, Senior Housing Coordinator Reviewed by: Luke Connolly, Assistant Director of Community Development Benjamin Fu, Director of Community Development Approved for Submission by: Tina Kapoor, City Manager