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11. Housing Mitigation COMMUNITY DEVELOPMENT DEPARTMENT CUPERTINO CITY HALL 10300 TORRE AVENUE' CUPERTINO, CA 95014-3255 (408) 777-3308 . FAX (408) 777-3333 AGENDA ITEM NO. .11 AGENDA DATE: June 5. 2007 SUBJECT: Consider adopting a resolution (Resolution No. 07-099) approving housing mitigation fees (continued from May 1, 2007). RECOMMENDATION: Adopt Resolution No. 07-099, amending the 2006-07 fee schedule as follows: . Raise the housing mitigation fee from $2.32 to $4.75 per square foot. · Assess the mitigation fee against. office, industrial, hotel, retail and research and development projects. · Redevelopment area projects and mixed-use projects of at least two-thirds residential and one- third retail/office will be exempt from the fee, as long as they provide Below Market Rate housing as part of a residential development. · Raise the residential housing in-lieu fee from $1.19 per square footto either a sliding scale fee with the fee for.a six unit development being set at a maximum of $49 per square foot with an exemption for existing single family parcels or set a fee of $2.50 per square foot for developments of six units or less as recommended by the Cupertino Housing Commission. BACKGROUND: On February 27, 2006, Council adopted Resolution 06-045 approving a fee study and directing staff to include retail and hotel developments in the housing mitigation program at the same rate as office and industrial projects. Council also proposed raising the in-lieu fee from $2.32 per square foot to $4.75 per square foot. The resolution exempted redevelopment projects and certain mixed-use projects from the impact fee, but required them to provide Below Market Rate (BMR) housing units instead. The new fee was to be implemented with the entire fee schedule adopted at the April 4, 2006 Council meeting. However, the approved fee schedule, in error, raised the fee only by the cost of living percentage, to $2.32 per square foot and it did not include the retail and hotel elements. In April 2006, Council directed staff to further .study the mitigation fee for residential projects.. That study was completed and approved by the Housing Commission on January 11, 2007. The commission and the study further recommended that the residential development fee be raised from the current $1.19 per square foot to $2.50 per square foot. 11 - 1 At the March 6, 2007 City Council meeting, the City Council requested that staff conduct additional research on the fee calculations for the residential component. Council members expressed interest in charging a fee for fractional units and reviewing a sliding scale approach to the residential fee. for developments of six units or less. Furthermore,.Council directed staff to research making the fee at the sixth unit high enough to discourage a developer from deliberately reducing their unit count from seven to six units to avoid building a BMR unit. Staff conducted the research and presented the findings at the April 3, 2007 City Council meeting. The staff report with detailed information can be found in Exhibit A. At this meeting, the Cupertino Chamber of Commerce requested a continuation of the fee adoption to meet with staff and discuss the fee recommendations. The item was continued to May 1,2007 and subsequently continued again to June 5, 2007. DISCUSSION: Staff met with the Chamber four times since April 3, 2007 and both parties have agreed on the following amendments to the current mitigation program. Reference to exempting use permits prior to 1993 will be removed from the manual. Instead credit will be issued for any office, retail, hotel building that is currently on the ground. This credit will be directly tied to the demolition permit. In order to receive the credit, the property owner will need to submit a stamped letter from a licensed surveyor certifying the existing square footage when applying for a demolition permit. The credit shall remain in place for two years with an automatic one-year renewal upon receipt of a written request for extension. A cap, to be proposed, will be set for the housing mitigationlBMR fees to ensure that no one corporation is paying an unfair share of this tax and to provide a built-in credit for large companies providing other types of revenue sources to the city, such as sales tax. FISCAL IMPACT: Housing mitigation fee revenues are dependent on the mix and volume of projects, but the near doubling of the fee rates and expansion of fee basis should double the revenues per project. Nearly $344,000 was collected last year. The new Regional Housing Needs Allocation (RHNA) requires cities with lower concentrations oflow and very low income to show they can provide.a greater percentage of housing for these income levels. Consequently, the City of Cupertino will need greater resources to address affordable housing needs for the low and very-low income categories. The Housing Mitigation fees are the City of Cupertino's primary resource for affordable housing development. While retail and hotel development projects are new to this fee, the recent lowering of other construction-related fees will mitigate the overall impact to these businesses. PREPARED BY: Vera Gil, Senior Planner 11 - 2 REVIEWED BY: ~, t2fl~tfm- Steve Piasecki Director of Community Development Attachments: Resolution No. 07-099 Exhibit A: April 3, 2007 Staff Report with attachments APPROVED FOR SUBMLTT AL: &si David W. Knapp City Manager 11 - 3 DRAFT RESOLUTION NO. 07-099 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CUPERTINO ADOPTING BELOW MARKET RATE HOUSING PROGRAM MITIGATION FEES WHEREAS, the City has conducted a Jobs Housing Nexus Study in 1992; and WHEREAS, the Housing Element of the 2005 General Plan states that an updated Jobs Housing Nexus Study shall be conducted; and WHEREAS, Keyser Marston and Associates conducted a "Jobs Housing Nexus Update" pursuant to the State Mitigation Fee Act (Government Code Section 66000, et seq.); and WHEREAS, the "Jobs Housing Nexus Update" has found that there is a nexus between new retail, hotel and office/industrial development, the creation of jobs and the demand for very-low, low, median and moderate income housing for the employees; and . WHEREAS, a fee will can legally be assessed on said development; and WHEREAS, the fee will be used solely to increase and improve the supply of housing affordable to very-low, low,'median and moderate income employees; NOW, THEREFORE, BElT RESOLVED that the City Council of the City of Cupertino adopts a fee of $4.75 a square foot to be assessed on any new retail, hotel and office/industrial development applications. A cap shall also be proposed, will be set for the housing mitigation/BMR fees. NOW, THEREFORE, BE IT FURTHER RESOLVED that the following uses shall be exempt from the impact fee, but still required to provide Below Market Rate Housing as part of a residential development: projects in a redevelopment project area and mixed use projects providing two thirds residential and one third retail/office. NOW, THEREFORE, BE IT FURTHER RESOLVED that the City Council directs staff to prepare an Affordable Housing Program Ordinance detailing the housing impact fees. PASSED AND ADOPTED at a regular meeting of the City Council of the City of Cupertino this 5th day of June 2007 by the following vote: Vote Members of the City Council AYES: NOES: ABSENT: ABSTAIN : A TIEST: . APPROVED: City Clerk Mayor, City of Cupertino 11 - 4 Exhibit A cItY OF .CUPEI{fINO City of Cupertino 10300 Torre Avenue Cupertino, CA 95014 (408) 777-3308 FAX (408) 777-3333 Community Development Department Housing Services Summary Agenda Item' No. 17a Agenda Date: April 3.2007 SUBJECT: Consider the 2007~08 Fee Schedule: a) Review and approve housing mitigation fees (continued from March 6) BACKGROUND: Housing Mitigation Fees On February 27, 2006, Council adopted Resolution 06-045 approving a fee study and directing staff to assess retail and hotel developments a housing mitigation in-lieu fee at the same rate as office and industrial projects and to .raise the fee to $4.75 per square foot. The resolution exempted redevelopment projects and certain mixed-use projects from the impact fee, but required them to provide Below Market Rate (BMR) housing units instead. The new fee was to be implemented with the entire fee schedule adopted at the April 4, 2006 Council meeting. However, the approved fee schedule, in error, raised the fee only by the cost of living percentage, to $2.32 per square foot and it did not add-in the retail and hotel elements. In April 2006, Council directed staff to further study the mitigation fee for residential projects. That study was completed and approved by the Housing Commission on January 11~ 2007. The commission and- the study recommend that the residential development fee be raised from the current $1.19 per square foot to $2.50 per square foot. At the March 6, 2007 City Council meeting, the City Council requested that staff conduct further research on the fee calculations for the residential component. Council members expressed interest in charging a fee for fractional units and reviewing a sliding scale approach to the residential fee for developments of six units or less. Furthermore, Council directed staff to research making the fee at the sixth unit high enough to discoUrage a developer from deliberately reducing their unit count from seven to six units to avoid building a BMR unit. Fractional Unit Fee: Council members were concerned that developers may be proposing fewer units in order to provide one less BMR because of current rounding practices. Currently, the city has the practice of rounding up at .5 or greater and rounding down at less than .5. For example, if a developer is p~oposing 24 units, the BMR requirement is 3.6 units, which is rounded up to four BMR units. However, if the developer proposes 23 units, then the BMR requirement would be 3.45 units, which is rounded down to three units. In both cases, the developer will net 20 market rate units, 11 - 5 Consider the 2007-08 Fee Schedule: a) Review and approve housing mitigation fees (continued from March 6) April 3, 2007 Pa.ge 2 of3 which is rounded down to three units. In both cases, the developer will net 20 market rate units, , but in the latter example, the developer would only be required to construct three BMR units as opposed to the four. Staff reviewed tentative map applications from 2000 through the present to study how many subdivisions have proposed a number of units that would allow for rounding down. Of the 60 applications, eight applications proposed a number of parcels, which could be rounded down. Of these eight applications, site constraints were the reason five of the developers proposed fewer units. The remaining three developments were Saron Gardens, Toll Brothers and a new 21-unit development on Stelling Road. After the analysis, staff believeS that with the exception of the Toll Brothers development, site constraints and density and not avoiding the BMR program are the driving forces behind the developer proposing fewer units on sites. Attached is information provided by the City's consultant Keyser Marston and Associates on how to apply a fractional fee for Council review. At this time, Staff does not recommend charging a fee for fractional units since it will increase administration costs for the program with limited projected income. Staff does believe the bigger'issue would be developers that propose a unit count just under the requirement to build a BMR unit although this haS only occurred in three cases. Examples of a sliding scale approach to the residential fee are included for review as well. The sliding scale would need to be amended to reflect Cupertino land prices and construction costs. Keyser Marston and Associates is still working on determining those costs, but a conservative maximum fee would be the $49 per square foot for condominiums. Small lot single-family homes actually generate a higher fee. because of the land cost associated with less dense development. Staff recommends that if the City Council chooses the sliding scale approach, the $49 per square foot fee be adopted as the maximum since it is a conservative figure. FISCAL IMP ACT Housing mitigation. fee revenues are dependent on the mix and volume of projects, but the near doubling of the fee rates and expansion of fee basis should double. the revenues per project. Nearly $344,000 was collected last year. With the new Regional Housing Needs Allocation (RHNA) requiring cities with lower concentrations of low and very low income to show they can provide a greater percentage of housing for these income leve~s. Consequently, the City of Cupertino will need greater resources to address affordable housing needs for the low and very- low income. The Housing Mitigation fees are the City of Cupertino's primary resource for affordable housing development. RECOMMENDATION: Adopt a resolution amending the 2006-07 City fee schedule as follows: . As described in previously adopted Resolution 06-045, replace the current $2.32 per square foot office/industrialfresearch and development housing mitigation in-lieu fee with . a new $4.75 per square foot housing mitigation in-lieu charge for office, industrial, hotel, retail; and research and development proj ects. While redevelopment area proj ects and 11 - 6 Consider the 2007-08 Fee Schedule: a) Review and approve housing mitil!:~.!ion fees (continued from March 6) Apn13,2001 Page3 on mixed use projects of at least two-thirds residential and one-third retail/office will be exempt from the fee, they must instead provide Below Market Rate Housing as part of a: residential development; and . Raise the residential housing in-lieu fee from $1.19 per square foot to either a sliding scale fee with the fee .for a six unit development being set at a maximum of $49 per square foot with an exemption for existing single family parcels or set a fee of $2.50 per square foot for developments of six units or less as recommended by the Cupertino Housing Commission. APPROVED FOR SUBMITTAL: ~L David W. Knapp City Manager Attachments: Exhibit A: Fractional Unit Calculation Overview Exhibit B: Graduated In-Lieu Fee Program Overview Exhibit C: In-Lieu Fee Analysis 11 - 7 Exhibit A Overview of Fractional Fee Calculations City of Cupertino Below Market Rate Housing Program Many jurisdictions with below market rate housing programs include provisions for in- lieu fees for fractional units owed. Below, we outline a typical, and straightforward, methodology for calculating the amount of the fractional fee. In summary, the fractional fee equals the fractional unit owed times the average affordability gap (the foregone revenue to the developer associated with one affordable unit). Fractional Unit Calculation. Cupertino's Below Market Rate Housing Program requires that 15% of new units be set aside for affordable housing, half for moderate income households. and half for median income households. We assume that the first affordable unit owed is set aside for median, the second unit for moderate, the third for median and so forth. Table, 1 illustrates the application of this requirement to projects of betweeh seven and forty units. For example, a project with seven units owes 1.05 affordable units (7*15% = 1.05). The developer would provide one median unit onsite and pay a fee on the remaining 0.05 units. A project with thirty-five units owes 5.25 affordable units (35*15% :=: 5.25). The developer would provide five affordable units (three median and two moderate) and pay a fee on the rem~ining 0.25 units. Average Affordability Gap. The affordability gap is the difference between the market rate sales price and the restricted affordable sales price. Because Cupertino's program requires 50% of units to be set aside at moderate income and 50% at median income, we used the average of the two affordability gaps (see Table 2). This equals $458,000 per affordable unit owed. Fractional Fee Calculation. The fractional fees are calculated by multiplying the fractional unit owed by $458,000. For example, the seven unit project would pay a fee equal to 0.05*$458,000, or $22,900. The thirty-five unit project would pay a fee equal to 0.25 * $458,000, or $114,500. Other Methodologies. This is just one methodology for calculating the fractional fee. It has the benefit of being straightforward and easy to update. However, there are other ways to calculate the fee. Many cities adapt their in-lieu fee for fractional fee purposes. For example, if a city has an in-lieu fee of $20' per square foot, the fractional fee could. be calculated by multiplying the average unit size times $20 times the fractional unit. This approach has the benefit of being consistent with the calculation of the in-lieu fee and does not involve calculating new affordability gaps except as part of an in-lieu fee update. Rounding Policy. The structure of the fractional fee provision is related to the rounding . policy. Cupertino, along with many other cities, requires developers to round up if the fraction is 0.5 or greater. Other cities require rounding up at 0.7 or greater, and allow a fee for anything below 0.7. Still other programs allow the developer to pay an in-lieu fee for a fractional unit regardless of the fraction; in other wqrds, the developer never has to round up. In this discussion, we assume that Cupertino continues to require that developers round up fractions of 0.5 or greater. Keyser Marston Associates, Inc. fractional fee.doc 3/29/2007 11 - 8 Table 1 Sample Units Owed and Fractional Units Calculations In-Lieu Fee Analysis City of Cupertino Units Provided Affordable Total Units 15% of Units Fractional 50% 50% in Project Units Provided1 . Unit Median Moderate 7 1.05 .1.00 0.05 1.0 0.0 8 1.2 1.00 0.20 1.0 0.0 9 1.35 1.00 0.35 1.0 0.0 10 . 1.5 2.00 1.0 1.0 11 1.65 2.00 1.0 1.0 12 1.8 2.00 1.0 1.0 13 1.95 2.00 1..0 1.0 14 2.1 2.00 0.10 1.0 1.0 15 2.25 2.00 0.25 1.0 1.0 16 2.4 2.00 0.40 1.0 1.0 17 2.55 3.00 2.0 1.0 18 2.7 3.00 2.0 1.0 19 2.85 3.00 2.0 1.0 20 3 3.00 2.0 1.0 21 3.15 3.00 0.15 2.0 1.0 22 3.3 3.00 0.30 2.0 1.0 23 3.45 3.00 0.45 2.0 1.0 24 3.6 4.00 2.0 2.0 25 3.75 4.00 2.0 2.0 26 3.9 4.00 2.0 2.0 27 4.05 4.00 .0.05 2.0 2.0 28 4.2 4.00 0.20 2.0 2.0 29 4.35 4.00 0.35 2.0 2.0 30 4.5 5.00 3.0 2.0 31 4.65 5.00 3.0 2.0 32 4.8 5.00 3.0 2.0 33 4.95 5.00 3.0 2.0 34 5.1 5.00 0.10 3.0 2.0 35 5.25 5.00 0.25 3.0 2.0 36 5.4 5.00 0.40 3.0 2.0 37 5.55 6.00 3.0 3.0 38 5.7 6.00 3.0 3.0 39 5.85 6.00 3.0 3.0 40 6 6.00 3.0 3.0 1. Assumes a 0.5 rounding policy. 2. Assumes that first unit goes to median, second to moderate, and so forth. Prepared by: Keyser Marston Associates, Inc. File Name: ownership.xls;Fractional Uni1s;3/29/2007;hgr 11 - 9 Table 2 Fractional Units Fee Calculation In-Lieu Fee Analysis City of Cupertino If the number of required units results in a fraction of less than 0.5, the developer has the option of paying a fee in-lieu of providing an additional affordable .unit. Fractional Fee = Average Affordability Gap * The Fraction of the Unit Affordability Gaps Moderate Units (120% AMI) $403,000 Median Units (90% AMI) $513,000 Average Affordability Gap $458,000 Sample Calculations Average Fractional Affordability Unit Owed Gap Fee Owed 0.05 1 $22,900 0.10 $45,800 0.15 $68,700 0.20 $458,000 $91,600 0.25 j $114,500 0.30 $137,400 0.35 $160,300 0.40 $183,200 0.45 $206,100 Prepared by: Keyser Marston Associates, Inc. File Name: ownership.xls;Fractional Units;3/29f2007;hgr 11-10 Exhibit B Other Graduated In-Lieu Fee Programs City of Walnut Creek The City of Walnut Creek adopted a graduated fee schedule to accompany its Inclusionary housing ordinance in.2004. Residential development projects with between two and nine units have the option of paying an in-lieu fee. For ownership units, the fee is $2.00 per square foot for two-unit projects and increases by $1.00 per square foot per unit, to a maximum of $9.00 per square foot for nine-unit projects. For rental units, the fee is $1.60 per square foot for two-unit projects and increases by $0.80 per square foot per unit, to a maximum of $7.20 per square foot for nine-unit proj ects. City of Menlo Park In 2003, the City of Menlo Park adopted a graduated in-lieu fee schedule for developments between five and nine units. Prior to adopting this fee schedule, the City's fee was 3% of the sales price for market rate units. The revised fee schedule charges 1 % of the sale prices for the first, second and third units; 2% of the sale prices for the fourth, fifth, and sixth units; and 3% ofthe sale prices for the seventJl, eighth, and ninth units. The individual units paying each rate are designated ill the BMR Agreement. City of Nova to The City of Nova to is currently considering adopting a graduated in-lieu fee schedule for its Inclusionary Housing program. The program is currently primarily fee-based, with projects paying $11,418 per market rate unit. The City is considering a prograril that would require developments of seven or mOre units to build units onsite. The proposed graduated in-lieu fee schedule would charge a fee per square foot, as opposed to per unit, and the fee would increase to $20.00 per square foot for a seven-unit project (this fee level would be used to calculating fractional unit fees, as a seven-unit project would be required to build a unit onsite). City staff suggested that the fee for a one-unit project be set to approximate the current fee for a prototypical project. The full fee for a seven unit project ($20.00 per square foot) is approximately equal to the burden of providing one affordable unit for the prototypical condominium project in Novato. Note: The underlying Inc1usionary programs for the three cities are fairly different, which explains much of the difference in the amounts of the in-lieu fee. Prepared by Keyser Marston Associates, Inc. File Name: Graduated fees.doc; 3/22/2007; hgr 11-11 .. . RESOLUTION NO. 04-11 A RESOLUTION OF THE ClTY COUNClL OF THE CITY OF WALNUT CREEl{ ESTABLISHING A FEE SCHEDlJl.E PURSUANT TO TJ:(E INCLUSYONARY HOusING ORDINANCE WHEREAS. the Inolusionary Housing Ordinance (Municipal Code section 10-2.3.90 I et seq.) requires developers of residential projects to include affordable housing units in the project Qr, in some cases, to pay a fee in-lieu ofincluding the units; WHEREAS, Municipd Code section 10-2.3.905 provides that the City Council shall adopt a resolutiQn setting forth the amount of the fee. The fee shall reflect the 'average estimated CQst of otherwise providing the required affordable housing units; WHEREAS, Keyser MarstQn Assooiates, a cQnsulting finn commissioned by the City to study h01.lSing affordability in Walnut Creek, issued a study in July 2003 detailing the gap between market prices of housing in the City and prices affordable to very low. low and moderate income households. The study included a proposed per square foot in lieu fee for rental and ownership projects based on thl' afford~bmty gap; WHEREAS, the fees will be placed in an affordable housing fund and used 6xcll.lsively for the development of affordable housing within the City; WHEREAS, there is a reasonable relationship between the need fQr affordable housing and the impacts of market-rate housing development within the City. There is also a reASonable relationship between the fee's use and the impacts ofmarketMrate housing development. Development of new market-ra.te housing encourages new residents to move to the City. These new residents will place d6ffifl.Il.ds on services provided by both the public and private sectors. Some ofthe public and private sector employees needed to meet the needs of the new residents earn incomes that only allQW the employees to be able to afford very-low. low or moderato income housing. This type of affordab Ie housing is in 'Very short supply within the City. The fees will be used to help increase the supply of affordable housing in the City; and NOW, THEREFORE, the City Council oftbe City ofWamut Creek resolves as follows: 1. Municipal Code section 10-2.3 .904 providos in part that the developer of a residential development project of2 to 9 units has the option of providing an affordable unit on site or paying an m-lieu fee. The amount ofthe in-lieu fee shall be based on the following table. The amount of the fee is determined by first selecting the number of total units in the project from the left-hand column; then selecting the per square foot fee from the applicable column depending upon whether the project is a rental or ownership project; and then multiplying .t11at pet square foot fee times the. total square feet of aggregate living area in the entire project. 11-12 . '" REN'fJ\.L OWNEMHIP 'ONi:T COUNT FEE/SQ FT FE)!; ISQ FT 2 $1. 60 $2.00 3 $2.40 $3.00 4 $3.20 . $4.00 5 $4.00 $5.00 6 $4.80 $6.00 7 $5.60 $7.00 8 $6.40 $8.00 9 .$7.20 $9.00 III...LJeu Fee Per Square Foot 2. Municipal Code section lO-2.3.904(C) provides in part that if the fommla for calcula.ting the number of required affordable uni~s results in a fraction ofles! than .7, the developer has the option of paying a fee in-lieu of providing an additional affqrdable unit. The in-lieu fee shall be calculated as follows: Low-Income Rental Units: $111,600 times the fraction ofa unit Very Low-Income Rental Units: $193,900 times the fraction ofa unit Moderate-Income Ownership Units: $185)000 times the fraation oCa unit Low-Income Ownership Units: $306,350 times the fraction of a unit Very Low-lncome Ownership Units: $3.94~50 times the fraction ofa unit The foregoing formula shall also be used to determine the requisite value of land tha.t may be dedicated as an alternative to providing affordable units pursuant to Municipal Code section 10- 2,3.906(B). 3. The foregoing formula will be reviewed and the in-lieu fee amounts re-established if necessaryJ within a four-year period from the date this Resolution is adopted, and thereafter, a minimum of every five years, coinciding with the Housing Element update. . 4. Effective Date. The fees specified in this Resolution shall take eff~ct sixty (60) days following the adoption of this Resolution. PASSED AND ADOPTED by the City Counoil of the City of Walnut Creek at a regular meeting thereof held on the 3rd day cifFebmary 2004) by the following oalled vote: AYES: Counoilmembers: Hicks, Rainey, Skrel. Regalia, Mayor AbrflInS NOES; Counoilmembers: None ABSENT: Councilmembers: None /s/ Charlie Abrams Mayor ofth~ City of Walnut Creek 11-13 0\, ~ Attest: /s/ Barbara M. Rivara, CMC City Clerk of the City of Walnut Creek I HEREBY CERTIFY that the foregoing resolution was duly and regularly passed and adopted by the City Council of the City of Walnut Creek~ County of Contra Costa, State of California. at a regular meeting of said Council held on the 3rd day of February 2004. Q~rr;. ~ . City Clerk of the City of Walnut Creek 11 -14 . HOUSING AND REDEVELOPMENT Council Meeting Date: March 25. 2003 Staff Report #: 03~035 No~e-: 4~p+e4. Agenda item # F2 REGULAR BUSINESS: Adoption of a Resolution Approving Below Market Rate (BMR) Housing Program In Lieu Fees for Housing Developments of Five to Nine Units RECOMMENDA liON The Housing Commission recommends adoption of Below Market Rate (BMR) Housing Program in lieu fees for housing developments of five to nine units. BACKGROUND On May 15, 2001, the City Council approved Ordinance No. 905, which addresses the Below. Market Rate Housing Program, resulting in the following Municipal Code Sections. (Ordinance No. 905 is Attachment B.) Section 16.96.020 Residential Development Projects (1) Applicabilitv states that the Below Market Rate Housing Program applies to residential housing projects of five (5) or more units seeking a development permit, building permit or variance, as well as to condominium conversions. Section 16.96.02.0 (2) Requirements states that "for projects of less than 20 units, the developer shall provide not less than 10 percent of the units at below market rates to very low-, low- and moderate-income households. If the number of units required for a residential development project .includes a fraction of a unit, the developer shall provide either a whole unit or a prorated in lieu payment on account of such fraction as determined in the Below Market Rate Housing Program Guidelines." . The BMR Guidelines previously established a fee of 3% of the sale price for market rate units for which no BMR unit is provided. This fee applies to all developments subject to the Below . Market Rate Housing Program. Thus it currently applies to developments offive to nine units as well as larger developments. However, when the City Council approved Ordinance No. 905, it requested that the Housing Commission bring forward a proposal for in lieu fees responding to the particular needs of developments of five (5) to nine (9) housing units. The Housing Coml}lission reviewed the BMR Housing Program Guidelines at its April 3, May 20, June 5, October 17, November 6 and December 4,2002 meetings to discuss revisions to the BMR Guidelines including a proposal setting in lieu fees for developments of five to nine units. Because of public notice requirements for a proposal for a new development fee, the Housing Commission separated the main body of the revised Below Market Rate Housing Program Guidelines from the proposal for an in lieu fee schedule for 11-15 Page 2 of 4 SfaffReport # 03-035 developments offive (5) to nine (9) units. On December 17, 2002'the City Council approved the BMR Guidelines. The Housing Commission recommendation to adopt the new in lieu fees is proposed as an amendment to the BMR Guidelines to be a new Section 4.3.1. (See Attachment A) ANALYSIS The BeloW Market Rate Housing Program was developed in response to the scarcity of housing that households with very low, low and moderate incomes can afford and the scarcity of land available for housing development. Below Market Rate housing units preferably, and in lieu fees if BMR units cannot be built, are required of new developments to address the need for lower cost housing that is not met by the marketplace. Ordinance No. 905 established five unit developments as the smallest size of devl?lopments required to participate in the Below Market Rate Housing Program. Previoysly, this requirement applied to developments of 10 or more units: Rate of Production The Housing Commission recom~ended the fee, among other reasons, for its ability to contribute funds for the production of BMR housing. The Housing .Commission recognizes the priority for BMR units to be developed as a developer's contribution, rather than fees~ The Commission acknowledged a recent low rate of production of projects of five to nine housing units (Attachment C). Thus the Housing Commission recognized that in the near future the mon~tary contribution from BMR in lieu. fees collected from developments of five to nine units, but still is not likely to be large. Specifically, since November 1997,90 housing units have been approved for development. Attachment C, "Projects by Size," shows the size of new developments receiving permits and the number of units developed in each. None of the 90 units were new developments of five to nine units, although two projects added four units each to existing developments of two units each, producing six units total for each. These two projects would not be subject to the BMR Program .as it only applies to new units. Because of the scarcity of appropriately zoned developable land in Menlo Park, it is likely that this trend of very little development in projects of five to nine units will. continue, and that the in lieu fees collected from developments of this size will have a minor impact on the BMR Fund. Nevertheless, all in lieu fees that are. collected can be used to develop BMR units and to address the shortage of housing. The Housing Commission listed the following four criteria, which it used to formulate its recommendation for BMR in lieu fees for projects .of five to nine units. 1) New BMR Units Preferred M The BMR Program, including the portion dealing with projects of five to nine units, has a stated primary objective of producing new BMR units rather than the payment of in lieu fees. BMR units, whether produced as inclusionary housing in market rate developments or as a result of expenditure of BMR Housing Funds, are desired by the City because of the scarcity of housing affordable to many employees who work in Menlo Park and because of the hign cost of housing to residents. Many residents pay a high proportion of their incomes to rent here, and many employees commute considerable distances from housing that they can afford. 11 -16 Page 3 of4 Staff Report # 03-035 BMR housing units alleviate this problem by providing housing that residents who rent in the City and employees who work in the City can afford. 2) Lesser Economies of Scale in Smaller Projects - Smaller developments are known to have lesser economies of scale than larger developments. BMR in lieu fees should reflect this higher cost per unit of development that smaller projects experience, so as not to discourage small project development. 3) Fees Should Increase Gradually by Project Size - If fees are set at rates that increase by project size, the change in fee amount for incrementally larger projects should be gradual. Small increments in fees would reflect increasing economies of scale and would prevent providing an incentive to build smaller projects to avoid paying the BMR in lieu fee. 4) User Friendly - It is desirable to have a fee structure that is simple to understand and use. Fee Structure The Housing Commission considered three alternative fee structures, then revised one ofthem to produce the recommended fee structure, which is described below. _ See Attachment 0, "Alternatives for In Lieu Fee for 5 to 9 Unit Projects." Housinq units Fee rate 1, 2 and 3 4,5 and 6 7, 8 and 9 1 % of the sale price 2% of the sale price 3% of the sale price As an example of how this structure would apply, consider a housing development of seven units. Three units would pay 1 % of the sale price, three units would pay 2% of the sale price, and one unit would pay 3% of the sale price. If the units sold fqr $600,000 each, the fees would be: 1 % group 2% group 3% group $600,000 x 1% x 3 + $18,000 $600,000 x 2% x 3 = $36,000 $600,000 x 3% x 1 = $18,000 Total $72.000 The individual units paying each rate would be designated in the BMR Agreement. Each group would be representative of the various sizes 'of units in the project and would be distributed throughout the project. Proposed Text - The text of the proposed Amendment to the BMR Guidelines to establish in lieu fees for housing projects of five to nine units can. be found as Attachment A. Notice of the public hearing for the BMR in lieu fees for housing developments of five to nine units was published in the Almanac on February 26 and March 5, 2003. If approved, the effective date of the Resolution will be March 11, 2003. The BMR in lieu fee would then take effect 60 days after the effective date of the Resolution, IMPACT ON CITY RESOURCES 11-17 I . Page 4 of4 Staff Report # 03-035 BMR in lieu fees paid into the BMR Housing Fund will depend on the projects proposed for development arid will have a minor. positive impact on the amount of funds available to develop very low, low and moderate income housing in Menlo Park. POLICY ISSUE Establishing a graduated schedule for in lieu fees for residential developments of five to nine units will have a minor but positive impact on the development of housing for very low, low . and moderate income families. The fee structure responds to the higher per unit costs on a 'graduated basis that is experienced by small developments. The fee also meets nexus requirements because it is charged to those whq produce market rate housing' using the scarce commodity of developable, appropriately zoned land, and because it is dedicated to . . providing the needed Below Market Rate housing. ENVIRONMENTAL REVIEW Revision of the Below Market Rate Housing Program Guidelines is not a project under California Environmental Quality Act guidelines. Gretchen Hillard Don de la Pena Housing and Redevelopment Manager Director of Housing and Redevelopment Report Author . PUBLIC NOTICE: Public Notification was achieved by posting the agenda, with this agenda item being listed, at least 72 hours prior to the meeting. ATTACHMENTS A. Draft Section 4.3.1 proposed to be added to Below Market Rate Housing Program Guidelines. (The existing Section 4.3.1 will become Section 4.3.2) B. Ordinance No. 905 adopted May 15, 2001 . . C. Projects by Size D. Alternatives for In Lieu Fee for 5 to 9 Unit Projects 11-18 , . Table 10 Possible Graduated In-Lieu Fee Schedules Inclusionary Housing Update City of Novato, CA Condominium Prototype With Full In-lieu Fee at $20/SF WORKING DRAFT Moderate Fee AveraQe Unit Total Fee Units OWed Owed/SF Size FeelUnit Paid Full In-Lieu Fee 15% $20.00/SF 1,400 SF/unit $28,000 Proiect Size One Unit 0.15 $8.21/SF $11,500 $11,500 Two Units 0.30 $10.i8/SF $14,250 $28,500 Three Units 0.45 $12.14/SF $17,000 $51,000 Four Units 0.60 $14.11/SF $19,750 $79,000 Five Units 0.75 $16.07/SF $22,500 $112,500 Six Units . 0.90 $18.04/SF $25,250 $151,500 Seven Units or More 1.05 . $20.00/SF $28,000 $196,000 Nate.,7rofosecL Not o.c1optec/. 6.h, ~i,.J ~ /I-ot y~ re.-vitwed. Totals may not sum due to rounding. Keyser Marston Associates, Inc. . 16109.014/For Sale Proto w80.xls; Table 10; 3/20/2007; hgr 11a~e1 ~ Exhibit C CUPERTINO BELOW MARKET RATE HOUSING IN-LIEU FEE ANALYSIS Keyser Marston Associates (KMA) analyzed the City of Cupertino's Residential Housing Mitigation Program and calculated the maximum supportable in-lieu fees for ownership a,nd rental housing. The City's current fee is $1.15 per square foot, significantly below the supportable level. Our findings' are presented in the tables accompanying this text. Below, we provide a brief overview of the tables. Ownership Housing Market Suivey . KMA conducted a survey of new housing developments in Cupertino in order to develop a prototypical project reflecting what market rate developers are typically building in the City. For the purposes of the in-lieu fee analysis, the prototype development should represent a lower end average of the range of new houses, so KMA focused on new condominiums or townhome developments. . Table 1 shows the results of our survey. There have b~en two recent attached market rate developments marketed in Cupertino. The first is Villagio Cupertino, condominiums by Silverstone Communities that average 1,140 square feet and are a mix of one, two and three bedroom units. They have base list prices between $450,000 and $800,000, or $550 to $620 per square foot, or $580 on average. . The second is Sterling Square, townhomes developed by Taylor Woodrow . Homes. The units are a mix of three and four bedroom homes and an average of 1,825 square feet. They have base list prices between $900,000 and $1,050,000, or $500 to $550 per square foot, or $534 on average. . A third project, Metropolitan by Menlo Equities, is currently under construction. While estimated sales prices are not readily available, the project is a mix of two and three bedroom units. The two bedroom units are about 1,100 square feet. each, and the three bedroom units about 1,500 square feet. . Based on our survey and discussions with. City staff, KMA estimated that a typical new condominium or town home development in Cupertino would have 20 units averaging three bedrooms, 1,400 square feet, and selling for about $550 per square foot, or $770,000. Keyser Marston Associates, Inc. 11413.006/001-008.doc Pa~1- 20 WORKING DRAFT August 24, 2006 Affordable Home Prices . KMA calculated updated affordable hOme prices for the moderate and median income categories. In 2004, KMA assisted the City in an update to the Below Market Rate home prices. At that time, KMA recommended basing the moderate income home prices on 30% of 110% of the Area Median Income. The most recently published home prices in the City's Mitigation Manual suggest that the City agreed with this pricing strategy. In our most recent discussion with City staff, however, KMA was directed to base the moderate income home prices on 120% of Area Median Income, which results in higher sales prices than the 2004 methodology. The median income home prices are based on 30% of 90% of . Area Median Income, which is consistent with the 2004 .revisions. . For the purposes of calculating the affordable sales prices, KMA made the following assumptions: · HOA dues of $300 per month, based on what is charged at the Sterling Square development. Insurance at $1,000 per year, based on the City's assumptions from 2004. · Utilities at $1,704, based on the City's 2004 assumptions. The Santa Clara Housing Authority's Utility Allowances do not appear bhave changed significantly since this estimate was calculated. · A 30 year mortgage with 7% interest and a 5% down-payment. · Property taxes at 1.05%. . . The updated affordable prices are shown in Table 2. A three-bedroom moderate unit would be priced a1.$367,OOO and a three-bedroom median unit would be priced at $257,000. . Affordability Gaps per Unit . KMA then calculated the 'affordability gaps' per unit, or the lost revenue to the developer when a unit is designated affordable (see Table 3). It is calculated by subtracting the market rate price from the affordable price. If a three-bedroom townhome is restricted to moderate income households, the affordability gap is the affordable price less the market price, or ($367,000 - $770,000 ~ ($403,000)). For median income units, the affordability gap is ($513,000). Total Affordability Gaps and Equivalent In-Lieu Fee · Table 4 calculates the total affordability gap for the prototypical 20 unit condominium/townhome project. With a 15% BMR requirement, the project owes Keyser Marston Associates, Inc. 11413.006/001-008.doc pil1~1 WORKING DRAFT August 24, 2006 three affordable units, half of which are priced for median-income ho~seholds and half for moderate. For the purposes of calculating the fee, we do not round to the nearest whole unit, but allow the number of units owed to result in fractional units. Therefore, the 20 unit project owes 1.5 moderate units and 1.5 median units. The total affordability gap for the income-restricted units is $1,374,000. KMA used this figure to estimate the in-lieu fee that would result in the same total affordability gap for the developer. KMA calculateq the in-lieu fee on a square foot basis, which is consistent with the current in-lieu fee; unlike the current fee, however, we do not include garage space. To generate a fee of $1,374,000 with 20 units averaging 1,400 square feE;lt, the in-lieu would have to be $49 per square foot. Rental Housing Market Survey .. There have been no market rate apartment projects developed recently in Cupertino. The newest units were built between 1997 and 1999. KMA conducted a market survey to determine current rent levels at these newer units. Table 5 summarizes our findings. In general, market rate rents have yet to return to their 2000 levels, although they are steadily increasing. Currently, rents are averaging around $2.00 per square foot, or $2,100 per month for a two-bedroom unit. . KMA assumes the average new market rate apartment unit would be an 1,100 square foot two-bedroom unit. Because current mprket rents do not support new . apartment development, we cannot rely on market rents to calculate affordability gaps. Instead, KMA calculated the required market rent by estimating development costs for a new apartment project and working backwards to an implied rent level for project feasibility. For the purposes of the analysis, KMA assumes development costs in the range of $300,000 p~r unit. Given the high la~d costs and the recent increases in the cost of construction, this figure may underestimate actual development costs in Cupertino. Assuming a cap rate of 6.5%, we estimate the net operating i~come required to support these , development costs. To the net operating income, we add operating expenses of $7,500 per unit per year, which includes property taxes, common area maintenance and utilities, water, trash collection, maintenance and reserves. We estimate that market rents would have to average $2,250 a month to support development costs of about $300,000 per unit. Affordable Rents Keyser Marston Associates, Inc. 11413.006/001-008.doc Pag1;:l13- 22 WORKING DRAFT . August 24, 2006 . Table 6 provides a calculation ofthe affordable rent levels for low income (60% of Area Median Income) and very low income (50% of AMI) households. Consistent with previous estimates for the City,' we assume 30% of income is . spent on housing. Estimated utility allowances are again based on the City's 2004 estimates. Under the revised rent calculation, a two-bedroom low-income unit would rent for $1,347 per month and a two-bedroom very-low income unit would rent for $1,116 per month. Affordability Gaps per Unit . Table 7 provides a comparison of feasible market rate rents for a new apartment unit to the affordable rents from Table 6. Assuming 30% of income goes towards housing (including utilities), this rent level is affordable to a household earning $93,000, or 98% of AMI. . Table 7 also calculates the supportable unit value for the affordable units using. the same assumptions detailed above. A low-income unit can support development costs of $133,300 while a very-low iri,come unit can support $90,600. . Table 8 calculates the affordability gaps. The affordability gap is the difference between the unit value supported by a market rate unit and the value supported by an affordable unit. The affordability gap for a low income unit is ($166,700) and for a very-low income unit, ($209,400). Total Affordability Gaps and Equivalent In-Lieu Fee . Table 9 takes the affordability gaps per unit and calculates the total affordability gap and the equivalent in-lieu fee. A 120-unit apartment projeCt would owe 7.2 (40% of 15%) low-income units and 10.8 (60% of 15%) very-low income units. (We use fractional units for the purpose of this analysis.) The total affordability gap from this obligation is $3,461,760. To generate a fee of $3,461.7~0 with 120 units averaging 1,100 square feet, the in-lieu would have to be $26 per square foot. Keyser Marston Associates, Inc. 11413.006/001-008.doc P!~43 TABLE 1 MARKET SALE PRICES - SINGLE.FAMIL Y ATTACHED PROJECTS IN-LIEU FEE UPDATE CITY OF CUPERTINO, CA Unit Mix Bd. Ba. BldQ.SF Price $fSF VILLAGIO CUPERTINO (2006). 20 Units 80 units planned. 19 Amber 4 '1 1 743 $453,880 $611 . currently sold. Rose 2 2. 2 1,116 $633,880 $568 Orchid 2 2 2 1,125 $671,880 $597 Jasper 3 3 2 1,193 $736,880 $618 Chime 3 2 2 1,230 $676,880 $550 Lotus 3 3 2 1,350 , $750,880 $556 Magnolia Z 3 2.5 1.433 $799.880 $558 19 1,139 $658,985 $582 STERLING SQUARE (2006) 29 Units 51 units planned. '25 Plan 3 7 3 2.5 1,670 $918,000 $550 currently sold. Plan 2 7 3 2.5 1,714 $945,000 $551 Plan 1 6 4 3.5 1,942 $1,009,000 $520 Plan 4 ~ 4 3.5 2.058 $1.035.000 $503 25 1,825 $970,800 $534 TRA VIGNE VILLAS (2004) 46 Units Sold out. Plan 4 10 2 2 938 $450,000 $480 Plan 1 12 2 2 973 $462,000 $475 Plan 2 10 2 2 1,088 $465,000 $427 Plan 3 14 2 2 1.198 $483.000 $403 46 1,059 $466,435 $444 AVERAGE (Wl) 44 1,482 $814,893 $558 Source: Hanley Wood. Searches conducted August 2006 and Summer 2004. Keyser Marston Associates, Inc. 11413.006/001-Q09.xls; Table 1; 8/30/2006; kh/mc 11 - 24 TABLE 2 UPDATED BMR HOUSING PRICES MEDIAN, MODERATE INCOME HOUSEHOLDS IN-LIEU FEE UPDATE CITY OF CUPERTINO, CA M 1-Bdrm 2-Bdrm 3-Bdrm 4-Bdrm 5-Bdrm ODERATE INCOME Income @ 120% County Median $101,280 $114,000 $126,600 $136,680 $146,880 Inc()me Allotted to Housing @ 30% of Income 30,384 $34,200. 37,980 41,004 44,064 (Less) Ongoing Expenses' 9,230 $9,700 10,160 10,530 10,890 Income Available for Mortgage $21,154 $24,500 $27,820 $30,474 $33,174 I Maximum Purchase Prlce~ $279,000 . $323,000 $367,000 $402,000 $437,000 I EDIAN INCOME Income @ 90% County Median $75,960 $85,500 $94,950 $102,510 $110;160 Income Allotted to Housing @ 30% of Income 22,788 $25,650 28,485 30,753 33.048 (Less) Ongoing Expenses' 8,310 8,660 9,000 9)80 9,560 Income Available for Mortgage $14.478 $16,990 $19,485 $21,473 $23.488 I Maximum Purchase Price'" $191,000 . $224,000 $257,000 $283,000 $310.0001 M Includes utilities, homeowner association dues and property taxes based on unit value. :.! Debt @ 7.00% interest (7,9B% mortgage constant) & down payment@ 5.00 % of home price. ...lo. ...lo. N 01 Keyser Marston.Assoclates, Inc. . 11413:006/001-009.xls; Table 2; 8/3012006; mtn TABLE 3 AFFORDABILlTY GAPS IN-LIEU FEE UPDATE CITY OF CUPERTINO, CA WORKING DRAFT Prototype: Attached Row or Townhouse (condominium) 20 Units Averaqe Unit Size " $/SF Sales Price Market Price 1,400 SF Three Bedrooms $550 $770,000 Affordable Sales Price Affordability Gap Median {90% AMI) $257,000 ($403,000) ($513,000) Moderate (120% AMI) $367,000 Sources": See Tables 1 and 2 for calculation of the affordable sales prices. Square footage and market price based on proposed projects and new homes sales compiled by Hanley Wood; Keyser Marston. Associates. Totals may not sum due to rounding. Keyser Marston Associates, Inc. 11413.006/001-009.xls; Table 3; 8/30/2006; hgr 11 - 26 TABLE 4 EQUIVALENT IN-LIEU FEE CALCULATION.- ATTACHED PROTOYPE IN-LIEU FEE UPDATE CITY OF CUPERTINO, CA WORKING DRAFT Condominium/Townhome Prototype Development Proqram Unit Avg. Unit Size Number of Units Three Bedroom Units 1,400 SF 1 20 Affordabilitv Units Required Gap per Unit Total Gap 15% of Units 3.0 Moderate Units 1.5 ($403,000) ($604,500) Median Units 1.5 ($513,000) ($769,500) ($1,374,000) Equivalent In-Lieu Fee Calculation $49/SF 1,400 SF/Unit ($1,374,000) 1. Square footage does not include garage space. Totals may not sum due to rounding. Keyser Marston Associates, Inc:. 11413.0061 001-OO9.xls; Table 4; 8/30/2006; hgr 11 - 27 TABLES. . CURRENT MARKET RENTS. SUMMARY NEWER APARTMENT UNITS IN-LIEU FEE UPDATE ANALYSIS CITY OF CUPERTINO, CA 1 BR 2BR 3 BR Notes Sq. Ft. Rent $/Sq. Fl Sq. Ft. Rent $/Sq. Fl Sq.Fl Rent $/Sq. Ft. Newer Apl!u'tment Buildings Avlare 747 $1,450 $1.94 957 $1;695 $1.77 Built: 1997; 20415 Via ?aviso (140 units) 829 $1,550 $1.87 1,010 $1.995 $1.98 Arioso 534 $1.400 $2.62 1,197 $2,325 $1.94 Sold In 2005 for $2B6,OOO/unit. Built: 1999; 19608 Prunerldge (201 units) 546 $1.400. $2.56 1,213 $2,250 $1.85 Sold In 2000 for $238,OOOlunll. 792 $1,700 $2.15 1,237 $2,275 $1.84 Flats. 829 $1,800 $2.17 About 30 du/acre. Cucertlno perk Center 753 $1,320 $1.75 696 $1,630 $2.04 Podium Garage (240 sp.). Built: 1996; 20380 Stevens Creek (120 units) 647 $1,285 $1.99 953 $1.870 $1.96 85 duJacre. 668 $1,280 $1.92 1,166 $2,025 $1.74 753 $1,230 $1.63 1,340 $2,460 $1.84 1078 $1,900 $1.76 950 $1,945 $2.05 702 $1,260 $1.80 1.059 $1.995 $1.88 897 $1,735 $1.93 1,186 $2,460 $2.07 929 $1,862 $2.00 1,266 $3,550 $2.80 Forlle Homestead 709 $1,600 $2.26 929 $1,850 $1.99 1,262 $2.463 $1.95 Built: 1997; 20691 Forge Way (196 units) 739 $1,700 $2.30 98B $1,975 $2.00 The Hamptons at Cupertino 734 $1,655 $2.25 1,132 $2.465 $2.18 1.211 $2,480 $2.05 Flats and townhouses. BuIlt: 1998; 19500 Pronerldge (342 units) 753 $1,915 $2.54 945 $2,045 ' $2.16 1.387 $2,875 $2.07 27 duJacre. Structurad pkg. Archstone Cucertlno 728 $1.500 $2.06 1,043 $1,960 $1.68 1,508 $2,755 $1.83 . Sold in 2006 for $2B3.000/unlt. Built: 1998; 5608 Stevens Creek (311 units) 774 $1,610 $2.q8 1,060 $2,070 $1.95 Flats and townhouses. 1,112 $2,030 $1.83 39 duJacre. 1,142 $2,160 $1.89 .Podium structured parking 757 1,558 $2.06 1,085 $2,154 $1.99 1,342 2,643 $1.97 ...... ...... N . Sources: Raal Facts, Rant.com., Apartments.com ()) Keyser Marston Associates, Inc. 11413.006/D01-010.xls; Tabla5: 8130/2006;hgr TABLE 6 AFFORDABLE RENT CALCULATIONS VERY-LOW AND LOW INCOME HOUSEHOLDS IN-LIEU FEE UPDATE ANALYSIS CITY OF CUPERTINO, CA I. 1-Bdrm 2-Bdrm 3-Bdrm Low Income Income @ 60% County'Median $50,640 $57,000 $63,300 % of Income AI'lotted to Housing 30% 30.0% 30% Monthly Housing Expenses . $1 ,266 . $1,425 $1,583 (Less) Utilities Expenses (59) (78) (94) I Monthly Rent $1,207 $1,347 $1.489 I Very-Low Income Income @ 50% County Median $42,450 $47,750 $53,050 % of Income Allotted to Housing 30.0% 30.0% 30.0% Monthly Housing Expenses $1,061 $1,194 $1,326 (Less) Utilities Expenses (59) (78) . (94) I Monthly Rent $1,002 $1,116 $1,232 I II. . ....lo. ....lo. . N CD Keyser Marston Associates, Inc. 11413.006/001-010.xls; Table 6; 8/30/2006;hgr TABLE 7 SUPPORTABLE UNIT VALUES APARTMENT UNll:S . TWO BEDROOMS IN-LIEU FEE UPDATE ANALYSIS CITY OF CUPERTINO. CA Two BR Unit ..1,100 SF (Three Person Household) Income Target %AMI(1) Market Rent Apartment Unit 98% Affordable Rent Low Income 60% Very-Low Income 50% Rent and Values Per Square Foot . Market Low Income Very-Low Income Annual Household Income $93,120 $57,000 $47,750 Rent Month Year Less Op EXp(3) ($7,500) ($7,500) ($7,500) NOI $19,500 $8,664 $5,889 (1) AMI = Area Median.lncome, which is $95,000 for a three person household in Santa Clara County, 2006. (2) See Table R-2 for affordable rant calculations. Market rate rent assumes an 1,100 SF unit at $2.05/SF. This rent level reflects 'normalized' market conditlons. Current rents for new 28R units are approximately $2,000 to $2,100 per month, which do not support current development costs. In 2000, the same apartment was renting for $2,500 to $2,600.. (3) General operating expenses based on average operatlng expenses from slmllar size apartmant projects ($4,500). Property taxes are based on unit value. It is important to note that property tax-exemption is NOT assumed In this analysis. (4) Net operating income capitalized at 7%. Rounded to nearest 100. ..... ..... w o Keyser Marston Associates, Ino. 11413.00R1001-Q10.xls; Table 7; B/30/2D06;hgr $2,250 (2) $27,000 $1,347 $16,164 $1.116 $13.389 $2.05 $1.22 $1.01 Unit Value Supported(4) $300,000 $133.300 $90,600 $273 $121 $82 TABLE 8 AFFORDABILlTY GAPS PER UNIT APARTMENT UNITS - TWO BEDROOMS IN-LIEU FEE UPDATE ANALYSIS CITY OF CUPERTINO, CA Apartment Proiect Type Total Development Costs (Rounded) Affo'rdable Unit Value Affordability Gap Per Unle Two BR Unit--1,100 SF (Three Person Household) Low Income $300,000 $133,300 Very-Low Income $300,000 $90,600 ($166,700) ($209,400) 1Gap is the difference between development cost (value supported at market rents) and value supported at affordable rents. Keyser Marston Associates, Inc. 11413.006J001-010.xls; Table8; 8/30/2006;hgr 11 - 31 TABLE 9 EQUIVALENT IN-LIEU FEE CALCULATION - RENTAL PROTOYPE IN-LIEU FEE UPDATE ANALYSIS CITY OF CUPERTINO, CA WORKING DRAFT Apartment Prototvpe Development ProQram !!!ill Two Bedroom Units AVQ. Unit Size 1,100 SF 1 Units Required 1. Square footage does not include garage space. Totals may not sum due to rounding. Keyser Marston Associates. Inc. 11413.006f001-010.x1s; Table 9; 8/30/2006;hgr Number of Units 120 Affordabilitv Gap per Unit Total Gap .11 - 32 I+e m t:t JI TUf6doy -June 5 COMMUNITY DEVELOPMENT DEPARTMENT CUPERTINO CITY HALL 10300 TORRE AVENUE. CUPERTINO, CA 95014-3255 (408) 777-3308 . FAX (408) 777-3333 ADDENDUM MEMO Date: June 4, 2007 To: City Council From: Steve Piasecki, Community Development Director Subject: Addendum to staff report on Housing Mitigation Fees (Item 11) Staff has continued to meet with the Cupertino Chamber of Commerce on the Housing Mitigation and BMR in-lieu fees. On the office/retail/hotel housing mitigation fees, both the Chamber of Commerce and City staff have agreed on the following amended recommendation: 1. Any reference to exempting use permits prior to 1993 will be removed from the manual. 2. Credit will be issued for any office, retail, hotel building that is currently on the ground. The credit issued will be directly tied to the demolition permit. The property owner agrees the square footage shown on the most recent building permit(s) will prevail. Ifthe owner does not agree, he/she will need to pay a surveyor to certify the square footage. A letter with the stamp of a surveyor will need to be submitted to the building department with the demolition permit. The surveyor certification is to ensure that the credit is certified/agreed to via an independent third party. 3. The credit shall remain in place for two years with an automatic one-year renewal upon receipt of a written request for extension. 4. Those companies remitting over $700,000 annually in sales tax to the city of Cupertino will be assessed a BMR rate @ 50% ofthe fee ($4.75). All others will be assessed at the current rate of$4.75. Also, a preliminary agreement has been reached on the residential recommendation, which is now proposed as follows: The residential fee shall be set at $2.50 a square foot for 2-6 units. A single-unit development would be exempt as long as it is not part of a larger subdivision and was not created by a subdivision of property. Any single-family additions would continue to be exempt from the fees. Cupertino Chamber of Commerce Your Partner in Silicon Valley May 22 2007 Mr. Steve Piasecki Director of Community Development City of Cupertino 10300 Torre Avenue Cupertino, CA 95014-3202 Dear Mr. Piasecki: This letter is a follow -up to our meeting of May 9, 2007 regarding the City of Cupertino's proposed Below Market Rate Housing (BMR) fee increase. On behalf of the Cupertino Chamber of Commerce, I wanted to thank you for meeting with Chamber representatives, as well as seeking answers to the Chambers questions regarding the BMR program. As requested by the City Council, this document represents the Chamber of Commerce's response to the BMR fee mcrease. The city is seeking to adopt Resolution 06-045, which would replace the current $2.32 per square foot office/industrial/research and development housing mitigation in-lieu fee with a new $4.75 per square foot housing mitigation in-lieu charge for industrial, hotel, retail and research and development projects. Redevelopment area projects and mixed use projects of at least two-thirds residential and one-third retail/office will be exempt from the fee; they must instead provide Below Market Rate Housing as part of the residential development. Additionally the City is seeking to raise the residential housing in-lieu fee from $1.19 per square foot to either a sliding scale with the fee for a six unit development being set at a maximum of $49 per square foot with an exemption for existing single family parcels or set a fee of $2.50 per square foot for developments of six units or less as recommended by the Cupertino Housing Commission. The Chamber agrees with city staff that providing affordable housing for Cupertino residents is a particular challenge given the high-cost of land and recent voter initiated referendums that have defeated several housing projects. The Chamber believes that, as in all Silicon Valley cities, the problem of affordable housing is directly related to the amount of housing supply. Simply put, more units on the market reduces demand, and as a result, reduces price. Silicon Valley cities react to the challenge of providing housing in different ways. Some communities charge BMR fees while others do not. Affordable housing is an issue that cannot be solved by one segment of Cupertino's community, whether business or government, but instead must be a commitment from the entire city, including Cupertino residents. In an effort to limit unintended consequences from the proposed BMR fee increase, the Chamber requests the below be included into the BMR policy. 20455 Silverado Avenue, Cupertino, CA 95014 * 408-252-7054 * www.cupertino-chamber.org 1. Modify section 19.124.100 from the ordinance: This section refers to the allowed period of time between a building going vacant or scraped and the pulling of a new use permit. Currently the ordinance states that when dealing with a vacated or scraped building, the previous square footage will only be credited to new development if the period of time from vacancy/scraped to new permit is less than 1 year. This should be extended to 4 years. The I-year time frame is too constrictive and must be longer to accommodate Cupertino's businesses. 2. Eliminate the general plan requirement for square footage that is to be counted as credit. All buildings should receive credit for their existing square footage regardless of whether they were built after 1993. The city should encourage new development, which is more environmentally friendly and better meets the needs of the occupant. 3. Reduce the proposed fee increase and tie future increases to performance (including residential): The current proposed fee increase is above 100% of the original fee. The fee should be implemented incrementally over time to ease the impact to Cupertino's businesses and directly tied to actual construction ofBMR housing. The fee should be increased $.50 for the next two years and increase incrementally at $.50 every two years provided that the city reviews the program and determines that the increased funding is working to create housing. 4. Tier the BMR fee increase: Large sales tax contributors should continue to pay the current BMR fee of $2.32 per square foot. Large sales tax contributors already contribute significantly to Cupertino's city services and economy both directly and indirectly. 5. Allow an applicant to request a fee waiver from the City Council: Ifupon evaluation of facts presented by the applicant, there is an absence of any reasonable relationship or nexus between the impact ofthe development and the need for housing and/or it is determine that the applicant provides other significant financial benefit to the community, the project shall be eligible for a waiver of the fees. We request a meeting with you to discuss the above points at the earliest possible convenience: Christine Giusiana, CEO of the Chamber, will be contacting you to arrange details. Thank you again for your continued efforts to address the Chamber's concern regarding the BMR fee increase. Very truly yours, Scott Stauffer President, Cupertino Chamber of Commerce ~~ Christine Giusiana CEO, Cupertino Chamber of Commerce cc.: Mayor Kris Wang and the Cupertino City Council Addendum to May 22, 2007 Letter We do appreciate the willingness of staff to continue to examine and discuss with the Chamber some of the intended and possible unintended consequences ofthe BMR increase. After additional discussions with City staff, the Chamber and City staff discussed and agreed on the following modifications to the draft recommendation letter of May 22, 2007. I. Any reference to exempting use permits prior to 1993 will be removed from the manual. 2. Credit will be issued for any office, retail, hotel building that is currently on the ground. The credit issued will be directly tied to the demolition permit. The property owner agrees the square footage shown on the most recent building permit(s) will prevail. Ifthe owner does not agree, he/she will need to pay a surveyor to certify the square footage. A letter with the stamp of a surveyor will need to be submitted to the building department with the demolition permit. The surveyor certification is to ensure that the credit is certified/agreed to via an independent third party. 3. The credit shall remain in place for two years with an automatic one-year renewal upon receipt of a written request for extension. 4. Those companies remitting over $700,000 annually in sales tax to the city of Cupertino will be assessed a BMR rate @ 50% of the fee ($4.75). All others will be assessed at the current rate of$4.75. After additional discussions with the Chamber's Legislative Action Council, the Chamber proposes the following additions to the draft letter of recommendation: 1. The leveling proposal of $49 per square foot seems too high. Staff should consider looking at more reasonable fees that would include be an exemption for a homeowner remodeling their own residence.