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HomeMy WebLinkAbout2014-01-09; Housing Commission; MinutesMinutes of: Time of Meeting: Date of Meeting: Place of Meeting: CALL TO ORDER HOUSING COMMISSION 6:00P.M. JANUARY 9, 2014 COUNCIL CHAMBERS Chairperson Smith called the Meeting to order at 6:10p.m. PLEDGE OF ALLEGIANCE Commissioner Kirk led with the Pledge of Allegiance. ROLLCALL Present: Absent: Staff Present: Commissioners: Bobbie Smith Brian Andrews Emelda Bradwell Susanlgoe Craig Kirk N/A Housing & Neighborhood Services Director: Debbie Fountain Senior Planner: Scott Donnell APPROVAL OF MINUTES Minutes of September 19, 2013, meeting were approved as written. VOTE: AYES: NOES: ABSTAIN: ABSENT: 4-0 Andrews, Bradwell, lgoe and Kirk None Smith None ITEM NOT ON AGENDA There were no items not on the agenda. NEW BUSINESS Debbie Fountain, Director of Housing & Neighborhood Services, presented the item before the Housing Commission is the Housing Impact Fee consideration. This is requesting the Housing Commission to consider a recommendation to the City Council to accept this study and its findings and make some recommendations on a potential fee. We have Scott Donnell, Senior Planner, who has been working on this project. He will introduce our consultant who is here tonight to make the presentation. I will now turn this over to Scott Donnell, you will hear the presentation and then at that time if you would like to ask questions of staff for clarification on the report, you are welcome to do so. We will have the public testimony at that time. When we have completed the public testimony, we will close the public hearing and you again can ask questions of the staff or ask any follow up questions raised by the members of the public. At that time, we would hold all questions from the public until that time. So we will not be trying to answer individual questions, but the public will have their opportunity to provide their HOUSING COMMISSION MINUTES January 9, 2014 PAGE 2 oflS testimony and ask their questions and we will keep track of that so we can try and answer that after we close the public testimony portion. Scott Donnell, Senior Planner, gave his slide presentation on the City of Carlsbad's proposed Affordable Housing Impact Fee. At the conclusion of his presentation, he recommended to the Housing Commission they make this recommendation to the City Council. The first part of the recommendation is that Housing Commission recommend to Council acceptance of the Affordable Housing Impact Fee Nexus Study that has been prepared by Keyser Marston Associates; that you would approve an Affordable Housing Impact Fee, not to exceed $20 per square foot. Finally, that you recommend to City Council approval of a cost construction index, also known as CCI and the index for fee adjustment. This index would be in place to recognize that building costs change and this index would enable the Affordable Housing Impact Fee to fluctuate with those costs. As far as next steps following the Housing Commission's review and actioned recommendation to the City Council, staff will then embark on drafting an actual ordinance. We anticipate that this will be an ordinance in our Municipal Code that is placed with other impact fees the city has. We will then present both the draft ordinance as well as the Housing Commission's recommendation to the City Council for consideration. The remainder of the slide presentation will be by Paul Marra with KMA. He will go into detail about the nexus study. Both he and staff will be available to answer questions following his presentation. Paul Marra, Keyser Marston Associates. Mr. Donnell has given you a great summary and context of our study so I will give a brief overview of the study. We are an economic consulting firm, and we do a great deal of work in affordable housing of two types. We work with cities on policy issues, such as these, adopting affordable housing requirements or fees, and in that context we have done about four of these nexus studies in the county in the last several years. Statewide, we have probably done several dozen nexus studies in the last five years. We also work with cities on actual transactions to implement affordable housing developments, tax credit developments and redevelopment subsidized projects while we still had redevelopment. We have worked on affordable housing all over the state, and particularly my experience in San Diego County so we understand the costs and economics of these projects. The objectives of the nexus study are to quantify the impact of new market rate rental housing, on demand for affordable housing and specifically to estimate the maximum fee that could be supported from a nexus perspective. We started our work in early 2013, and at that point we were using the 2012 county income figures. Since that time, obviously we have 2013 figures and we now have 2014 income figures from HUD. We actually have the state figures for San Diego County. Those are not yet ready for 2014. Regardless of that, the income figures are essentially flat. They are relatively unchanged for 2012, 2013, 2014 thus far so there shouldn't be any concern that our study relies on the 2012 figures. We were focused on two income categories that are called out in your existing inclusionary ordinance, which is the very low income up to 50% of median and low income above 50% up to 80% of median. This is to display a reference page for household sizes of one, two, three, four persons; at 50 and the 80% median levels and as a comparison the median income level that is shown in italics at the bottom of the slide at 100% of median. The affordability categories we deal with in our study are the very low and the low not exceeding an income of $64,000 for a four person household at the 80% income levels. ~ HOUSING COMMISSION MINUTES January 9, 2014 PAGE 3 of 15 The nexus analysis concept for residential nexus studies is straight forward. Newly constructed units are going to generate new households in the community, and those households are going to expend money on goods and services, which are going to require new jobs to provide those goods and services. A share of those jobs are low paying; a number of those households will be very low and low income, and those households will have a need for affordable housing. We go through six steps to perform the analysis in response to the concept I just walked through. We start with working with city staff to identify the typical market-rate rental units that are being developed in the community, have recently been developed and are anticipated under the zoning categories you have in the community. We are going to have four prototype developments; market-rate rental prototypes that we are going to use in the analysis. We then look at what market rents are in the community today, but also what rents are required for the development to be feasible. In Carlsbad, which has very healthy economics and very strong development pressure, break even rent and market rent are essentially the same. That is not always true in other communities. Break even rent can often be higher than current market rent. We then back into what is the minimum household income of the household that can afford that rent. That is simply looking at 30% of their income allocated to rent. We take the income of all those households and we go through a model that generates the employment direct, indirect and induced, which are three levels of employment, the people that provide the goods and services, the vendors and suppliers that provide services to those businesses and the people who provide goods and services to the first categories of people when they have their incomes and they are spending their incomes. It is a ripple effect, what we will describe as the IMPLAN models and the input/output economic model. We analyze those jobs in terms of distribution by industry, occupation and income using federal, state and local data with the most recent and the most local data we can get. Then we have a distribution of worker households by income level generated by the new market rate households. Separately we have estimated affordability gaps to deliver affordable units for these households, and then we multiple it through. How many affordable households will need housing, and what is the gap to produce the affordable housing? That gets us to a fee level express·ed per market-rate unit or per square foot of market-rate housing. We have four prototypes, these are market-rate rental housing developments, because that was the focus of the study and that would be the focus of the fee. We worked with the city's planning staff, and we came up with town homes, garden apartments, slightly denser stacked-flat apartments and mixed- use rental that is more urban like what you would see in the Village area that includes commercial space on the ground floor. They range from seven to twelve acres for the ones that are Greenfield sites, and a half acre for the urban infill in the mixed-use rental category. He showed a chart. This represents the types of projects we see in the market place or expect to see and then we create financial proformas for each of these development types. This yields these break-even monthly rents. We create a balanced financial pro forma for each one. The highest rent on a per foot basis would be the mixed-use rental at $2.50 per square foot per month. In our survey in the current market, one-third of the developments that we surveyed in the city have average rents in the vicinity of $2. One-third of the projects have rents that are close to these because these range from $1.72 to $2.57 with the outlying being the mixed-use rental. These are feasible market-rate developments today, and the tenants residing in those units would need minimum incomes ranging from $70,000 to $86,000 per units. HOUSING COMMISSION MINUTES January 9, 2014 PAGE 4 oflS IMPLAN is an input output model developed by the federal government and it is used for growth forecasting. It is used by SANDAG and other regional planning agencies. It is San Diego County based, so it is locally based. It is the understanding of the local economy. If you put new personal income into the local economy and it filters through the economy, what is it spent on? What industries receive that money, what kind of jobs does it generate and how does it trickle through the economy until it spills out of the region? That is my lay person understanding of that model. We use it all the time in doing these forecasts. We used a standard one hundred units for each column. One hundred units of town homes would generate 64.3 permanent jobs to provide services, shopping, goods, etc. Garden apartments generate 53 permanent jobs; stacked flat, 54 permanent jobs. The last three were about the same because the household incomes were about the same to rent those units. The townhome is higher because the household income was higher. In our region there are approximately 1.72 workers in households that have workers. Some households in our region have no workers, for example retired seniors. For households that do have workers, the average number of workers is 1.72. We take the number of jobs, generate it and reduce it down to worker households generated. Then we distribute it into income categories. We take it through distribution into the different industries, which are the sectors of business, income occupations, into income distribution and then we correlate it to the 50 and 80% income categories and above, so very low, low and above that level. Our focus in the study is the line that says "total not exceeding 80% AMI." As you recall, the bottom line here in this slide is just a repeat from the previous table. We had 37.4 worker households generated by a hundred town homes; 23.2 of those are going to be at the 80% median level or lower. That is our very low and low broken out 12 and 10, approximately. Then we have separately prepared a calculation for the cost of producing an affordable unit, what scale of gap is there? For the very low income level, we assume that regardless of who is developing it, the project would be eligible for the 4% low income housing tax credit program. We conclude a gap of 119,000 per affordable unit. At the low level, there really is no dependable funding at the 80% median level from outside the local level. There is no dependable federal or state funding at the 80% level. At the low level, it is just the difference between market-rate rent and affordable rent. It is the capitalized value of the lost income. We estimate that to be $112,000. It is not that different from the very low level, but the very low level could be subsidized with tax credits. These are the gaps that would need to be filled to deliver the affordable units that we were tabulating before. In step six, we have repeated those gaps in the first column of the previous slide, $119 at the 50% level, $112 at the 80% level. Then we multiplied it by the number of worker households at those affordability levels from the nexus analysis and we add it down. To house all of the workers at very low and low level generated by the demand for goods and services from the household living at a market-rate rental town home would cost $27,000 per town home; similarly, $22,000 per garden apartment and so forth. The last three columns are similar because the rents are similar. These are the nexus conclusions expressed on a per market-rate unit basis. This would represent the limit for what would be legally defensible to adopt a fee. We recommend that your fee be lower than the lowest supported fee because we imagine you would adopt a fee applicable to any unit. You wouldn't have a fee that is based on whether it is a townhome or a garden apartment or something like that; it would be very complicated to administer. We recommend you stay below the lowest. We recommended not more than $20,000 per unit to allow a margin of error so you not be precisely at the nexus amount. If there are differences of opinion regarding the methodology, you didn't adopt a fee right at the ceiling; you adopted one that was somewhat lower and we chose about a 10% reduction for $20,000. '~ HOUSING COMMISSION MINUTES January 9, 2014 PAGE 5 of 15 In conclusion, we did the same thing on a per foot basis, so it is the same gaps but we divided it by the square feet of these units. If you were to charge a fee per foot, we would say that the nexus conclusion is between $22 and $32 per square foot of the market-rate unit. Again, we recommend you stay below the lowest supported fee. In this case it is $22 on the town home that is a large unit so it is low per foot. So we recommend you use a fee not more than $20 per square foot of market-rate residential. That is the nexus conclusion, but that does not tell decision-makers what they should do policy wise and how it fits with feasibility for the development community and feasibility for your goals of still getting the inclusionary units that you got before, the same ratio. If you were going to collect this money and fee revenue and then you as a city were going to pursue the development of these units elsewhere, you would likely build the most cost-effective product. We are assuming that would be garden apartments. Even if it is market-rate rental townhome, garden stacked flat paying the fee, you are likely to produce units that have the lowest gap, which we are saying are garden apartments. We applied that all the way across and estimated what your gap would be that you would need to fill. On a per unit basis, you would need a fee of at least $16,875. On a per foot basis, it would range from $14 to $23, depending on which size unit was paying the fee and then we recommended a $20 fee. These are not ceilings, these are just a measure for you of what we think your gap is if you are the one collecting the fee and having to go out and get the units produced, we think this is the gap on garden apartments. The recommendations of $20,000 and $20 respectively would give you ample money to fulfill what was your previous 15% at low income inclusionary target. Finally, you may ask what will happen to private market-rate developers paying this fee. This is our measure of what we think their experience is today prior to 2009, before the Palmer decision. This was when they were required to deliver 15% at low income. We think this is what it would cost to build townhomes, garden apartments, etc. if they were to dedicate 15% of the units in their project, in the same product type. These are the gaps we think they would experience or were experiencing. The point I want to make here is in some cases these are higher than the recommended fee, because we think they would experience gaps, depending on what they were building, between $16,000 and $27,000 per unit; between $18 and $27 per foot. Again, pre-Palmer they delivered these units for you. This was part of their obligation, and this is our quantification of what they were absorbing. The recommended at $20,000, $20 per foot, is relatively consistent with their prior obligation. Commissioner Kirk thanked both Scott Donnell and Paul Mara. For Mr. Donnell, the estimated square footage of 908 square feet per apartment, is that based on low income housing only or based on all apartments in Carlsbad? Mr. Donnell said it is based on market-rate housing. There is a table, Table A1 in the nexus study, page 55, if you would like to see that survey and the average of 908 square feet. Commissioner Andrews asked how we get perspective on what other cities charge. Since this is a regionally based model, it is very specific to that area, but there is a lot of variation. Mr. Donnell said there is a lot of variation and fortunately KMA has surveyed what other cities in San Diego are charging. To preface all of that, the fees are both impact fees as the City of Carlsbad is proposing, as well as in-lieu fees, which are typically charged through an inclusionary ordinance. Some of the fees were adopted recently, some of the fees were adopted many years ago. It is difficult to do an apples to apples comparison. As a comparison, the City of Carlsbad's fee, as we are recommending, ,....,, HOUSING COMMISSION MINUTES January 9, 2014 PAGE 6 of 15 is $20 per square foot. I think the most recent impact fee adopted in North County was the City of Solana Beach. Their recommended fee was $25.28 a square foot. That is an example of something higher than the City of Carlsbad. On the southern end of the county, down at the City of San Diego, reflective of land costs in San Diego being less than expensive than they are here, 1 think the recommended fee is a figure certainly less than what we are recommending. I am going to defer the answer to Mr. Marra for that information. Mr. Marra said the current fee in the City of San Diego is $8.22. Before Palmer, you had a variety of inclusionary policies around the county that were applied differently in different cities whether they were a 10% requirement or a 15% requirement. Whether there was a fee option, in-lieu fee or no in lieu fee option, you had to produce. Whether there was an exemption for small projects that could pay a fee or did not have to produce without a fee, etc. Post-Palmer the cities started to bifurcate in how they address rental housing. We have several cities that have an in-lieu fee for for-sale, an impact fee for rental or no in-lieu fee for for-sale, they must build the for-sale requirement, which I believe is your intent here, to maintain that requirement. In the most recent cities where we have done the nexus studies, which are the post-Palmer approach, Solana Beach is the highest at the $25 per foot level, only for rental, for-sale is still inclusionary. In San Diego we did a nexus study, and the conclusions were not that different than here in Carlsbad, a little higher, but they adopted a fee that is based on a formula that yielded $5 at the time and yields about $8 now. Their nexus amounts for rental were $30,000 per unit. In doing so, they had us look at 65% of median for rental and 100% of median for for-sale. There are instructions for these nexus studies that have a relationship to their previous inclusionary ordinance. Commissioner Andrews asked, is there any data on how the fees have increased or decreased the amount of affordable housing that comes out of that. Has it been around long enough to have data on that? Does it generate more affordable housing than without the fee? Mr. Marra said most cities have a pretty good database, the fee revenue they have collected, their projects they have spent it on, they typically leverage it with other funds. They have often invested it in tax credit projects and redevelopment funds, as well. The city of San Diego has a complete database on all the projects they have assisted over the years. Commissioner Andrews continued, with the cost index, is that evaluated on a set time table like an annual basis, and does that go through an approval process if that was to go up or down? Mr. Donnell said that is a good question, but we have not gotten into all the mechanics of how the fee level would work. That is something we would work out when we develop the ordinance. I know the nexus study does recommend that the fee be considered annually and then overall looked at more comprehensively every five to eight years. Ms. Fountain said the city does look at its fees each year as part of its budgeting process. Generally, those will go to the City Council to decide if they are going to be increased by the escalator that is in the ordinance or not. Generally, they do go through a process of review, and it is usually at budget season time that happens. Commissioner Kirk commented it says there is no ceiling on this. That gives me a little bit of concern. Is there some index that will drive this? Is there a percentage or range that it can be increased, because it can be significant? .~ HOUSING COMMISSION MINUTES January 9, 2014 PAGE 7 of 15 Mr. Marra said there is a chart in the report with seven or eight different indexes. The one that is recommended is the CCI. For your information, I looked up BCI and CCI, they both in the past twenty plus years have moved at an annual roughly 3.1%. They do vary per year, but on average they have been close to what we think as a typical inflationary rate. We typically recommend an administrative method for adjusting the fee each year rather than a council action. You can incorporate beyond that fairly liberal recommendation. You could incorporate a City Manager exercise to make a determination up to the maximum. You could incorporate a cumulative. Let's say the fee went up 6% in a year and you didn't want to pass that hardship through, the City Manager could have it go up 3%, but hold the other 3% back if next year it went up 0%. We like to recommend something fairly simple and straight forward and not subject to future dispute. The key question is whether you want a City Council action or you want a City Manager action or you just want it on July 1, somebody does the calculation and posts it at the building counter. Commissioner Kirk said it certainly would be his recommendation that the indexes to be used be specified in any exceptions and how that would be managed would also be specified for clarity. Commissioner Andrews asked if there is any data on how the fee ends up being circulated to those who pay for it. In other words, the developer gets charged the fee that might result in the developer taking some hit on the projects that could also result in higher costs for the market-priced units. Do you see any kind of flow of percentages of that? Mr. Marra said it is a hotly debated topic. Our view is that all fees and actions ultimately go to the land. Over time as the market absorbed a requirement, the buyers and sellers of land have to adjust for that impact, for that burden, when they are making an offer to acquire land. There are quite a few exceptions to what I just said. The first is, whatever is happening right now, whatever is under way right now, cannot quite absorb that if you put this in effect tomorrow. If someone is in escrow or someone has already designed their project, someone is already in the approval process and so forth. Those projects and land transactions are not well positioned for that absorption, for that change. We like to look at how the fee relates against escalation trends because if you are imposing a fee that was an increase, how many years of land appreciation would it take to absorb that increase? You are taking the seller's land appreciation. In most cases, it is a fairly minor impact to be absorbed over a few years by the value of land. It does not mean that sellers of land are wise and willing. Your question is though, is it passed to the home owner or to the renter. You would have tC? argue that the renter today isn't paying full market rent. There are a few extra dollars you could get from that renter because suddenly there is a fee, and you want to pass it through. Likewise, the home buyer today isn't paying full market price. The developer of apartments and condos and so forth is renting and selling at the highest market price or rent they can get. We think it has to be absorbed in the development economics. It may make some projects temporarily infeasible, but ultimately it has to be absorbed. Commissioner Kirk said he thinks it would be reasonable to assume that if the market will bear it, it will be passed on to the renter. Mr. Marra said you are in a rising market. Your rents are rising while we are sitting here. Less of that increased rent is flowing to developer profit, land seller, building contractor that might want to raise their price, and a little more of it has to go to cover a fee. Commissioner Kirk said he has a question for Mr. Donnell or for Ms. Fountain. In terms of the allocations between townhomes, garden apartments, stacked flat apartments and mixed use, do we ,....,., HOUSING COMMISSION MINUTES January 9, 2014 PAGE 8 of 15 expect mixed use to play any significant factor in these rental units? Because it is the highest in terms of fee, do we expect a small percentage of that to be mixed use or any rough idea what that might be? Mr. Donnell answered he would expect that type of construction would appear primarily in the village, and I think based on production that has occurred there over the past several years, I don't think it would be a significant part of the apartment construction we would see in the City of Carlsbad. There might be several mixed-use projects, but my suspicion would be they would be generally smaller versus a larger project you might see along El Camino Real, for example. Commissioner Kirk said then the assumption that it would be basically townhome, garden apartments and stacked flats is reasonable then? Mr. Donnell said for the majority of apartment construction in Carlsbad, yes. Ms. Fountain said that is consistent with what we have been seeing. We do desire mixed use in the village area, and we try to encourage it. The market is not as supportive of mixed use right now. It could change in the future. We anticipate most of it would be in garden apartments or stacked flats. Commissioner Bradwell asked if a developer initially included or set aside a certain percentage of low- income housing and for instance it becomes under new management, what happens to the existing apartments that were already set aside. Would the new owner be obligated to continue to offer low- income housing to the existing renters? Ms. Fountain said if I understand the question correctly, any time that we produce affordable housing, restricted for low income, we always have a regulatory agreement that is recorded against the property so it runs with the property. If it has a new owner at any time during the term ·of the regulatory agreement, that requirement continues with the new owner. We have had that happen where apartment complexes have been sold to a new buyer, and they just have to accept purchase of that with the restrictions on it. That does not change in this case. There is also a related issue that has been asked a number of times; if there is a project that is currently in process and it has agreed to provide affordable housing within its project, say it is an apartment project, it would not be subject to this fee, even though it may not have pulled its building permits. If we agreed and they are going to provide their affordable housing on site, we would proceed with that and they would not be required to pay the fee. It is only those projects that are going to be built as rental and are not going to be providing their affordable housing, then they would pay this fee. Commissioner Andrews asked if the fee applies to 100% of the units that are being built for that development or just the 15% of the units. Ms. Fountain answered it applies to all of the market rate units. But if they did provide their 15% of low income within that project, they would not pay a fee on those market rate units. Chairperson Smith opened for public comment. Mr. Rob Morgan, 3990 Ruffin Road, Suite 100, San Diego, CA 92123. Mr. Morgan is with CON-AM Development and we are an apartment investment, development and management firm. We manage close to 15,000 units throughout the western U.S. We own about 6,600 of those. In Carlsbad alone, we manage about 700 units and we own about 157 of those. I am here tonight to speak our opposition to ~ HOUSING COMMISSION MINUTES January 9, 2014 PAGE 9 of 15 this fee and give you a perspective from an apartment developer first-hand. We actually developed the project in the early 2000's called the Traditions, which we still own today. Our view is that this fee will equate to about 10% of the total development cost that we would bear in the new project. That is a significant amount. That is close to the amount of profit we would earn from a project. So when you impose that, it is very difficult for us to absorb in our economics. Secondly, when you are adding this in, you are going to create a dynamic where we as apartment developers become less competitive on land sites compared to for-sale developers. If you have a housing development site, they can go a number of different ways. On our side right now, that will tip the scale and make us much less competitive. I think the unintended consequence of this might be more for-sale housing, which will result in overall less production. As Paul pointed out to you, townhome development typically happens at a lot lower density amount. When we look at new sites in Carlsbad, we target a density range that is closer to 25 to 30 units to the acre versus a for-sale developer that targets closer to 12· to 15 to the acre. You can see we are almost double in the amount of housing, and we feel that the additional supply helps to create affordability for the overall market. We build new units, we attract renters from other complexes that are within the city. Often times those are older complexes and as people move up, that creates opportunity in those older complexes for people to move in and typically those are at more affordable rent levels. Our view is that ultimately this would distort some of the diversity housing stock, and it would have the effect of creating more for-sale housing. If that is your goal, I think you will accomplish that. But my understanding is the goal is to have more affordable housing, and I think this would be counter to that, especially at the level of the fee that is being contemplated. In conclusion, I appreciate you hearing my perspective and letting me speak to you and if you should have any questions, we would welcome any dialogue and feedback that you might have. Commissioner Kirk asked Mr. Morgan what the average square footage of your new development for rental property. Mr. Morgan said it ranges by market. I can tell you if we were to target Carlsbad, Paul's analysis is very close to what the average would be. I would say about 900 square feet on average. Commissioner lgoe asked Mr. Morgan if they have any current projects happening right now in Carlsbad. Mr. Morgan answered no, not in Carlsbad. We are active in Seattle, Portland and some other cities within the county, but nothing in Carlsbad right now. Commissioner Kirk asked Mr. Morgan, what would your resistance be then rather than if the fee were to be imposed, would you be more inclined to do the inclusionary, the 15% inclusionary, because you certainly fall within the square footage. Would that not be a more desirable approach? Mr. Morgan said we would have to look at those economics. I think from our perspective, there is going to be a very large increased burden starting now. In terms of those two, the challenge with developing inclusionary housing is just some of the regulations. As an owner and manager, we manage a lot of affordable housing projects ourselves, specifically for other clients that are affordable housing developers. In fact, in the Traditions we had an inclusionary requirement. We manage those, but the regulatory complexity of doing that is daunting. I think for other developers and even us, our preference would be to pay a fee rather than manage those. But if the fee is so high it makes more economic sense to do the 15%, we would do that. It becomes a break-even analysis. ~~ HOUSING COMMISSION MINUTES January 9, 2014 PAGE 10 oflS Commissioner Kirk said right it becomes a break-even analysis, but you haven't completed that analysis yet right? But you do know there would definitely be a burden with it? Mr .. Morgan answered absolutely. Michael McSweeney, 9201 Spectrum Center Blvd, San Diego, 92123, the senior Public Policy Advisor for the Building Industry Association. I wanted to start out by saying I know you may not want to hear what I have to say tonight, but I wanted to share with you what your proposal feels like, looks like from our point of view. Your Housing Element, which was recently adopted, shows a need for additional densification in your city. You also have regional housing needs assessment numbers that are produced from SANDAG. These are goals requiring in your affordable housing needs, the different strata. You also have to comply with state law, AB32 and SB375, which forces infill development, increase the densification, and we can't understand why you are doing this. A new fee is going to severely restrict apartment construction. Therefore, you will never generate enough revenue to make your program whole as his report pointed out. Since your Housing Element requires additional density, this fee keeps your city from achieving. It is a chicken and an egg type of a thing. We are left scratching our heads of what you are actually going to gain. When Paul talked about Solana Beach at $25, Solana Beach is built out. Nobody is building there, they are difficult to deal with, there is no real development going on. So to say they have a fee that is that high, yes nobody pays it because nobody builds there. Mr. McSweeney continued, let's talk about the problem of affordable housing. Because we are seeking a cure here for something, but maybe we really don't understand the problem. The problem is caused by a multiple, it is like death by a thousand cuts. You have got mandates from the state and federal government, you have long project approval timelines, developments done with borrowed money. So this is like having the cab sitting out in front of development services for four years with the meter running. You have got restrictions on land use, you have got regulations, and, of course, your proposed action which would add even more costs. So you add thousands upon thousands of dollars to the cost of housing. Studies show that the cost of housing in California is 25 to 33% more because of the costs of government in the death by a thousand cuts. All these noble things we try to do, we just pass it on. Understand, who pays for this?· His company doesn't pay for it. Our development members don't pay for it. It gets passed on. So your inclusionary housing fee on your single-family residential I believe is like $4,500 a unit. It is passed on to the buyer of the house. The buyer of the house pays for it over 30 years. You all know a 30 year mortgage, you borrow a hundred, you pay back three. So the $4,500 becomes $13, $14,000. It is not necessarily the most efficient way to do this. My question is, does building more housing cause the need for affordable housing? Does a farmer producing more wheat cause hunger? Does Mercedes producing CD300s cause Volkswagen to build more beetles? Do you see where I am going here? If it is a causational factor, I can understand that. But it is simple economics. If a farmer produces more wheat, does the price go up or down? If the car companies all make more cars, do the prices go up or down? Cell phones, is the basic cell phone more expensive today than it was ten years ago? How do we deal with people that cannot afford food, transportation and housing. With food, we have different types of programs. They are usually government programs, but how are they paid for? They are paid for with general fund revenue taxes spread across the entire population. You don't tax the farmer for the hunger probl~m. You are not taxing the trucking company for the hunger problem. What do we do with people who do not have transportation? There are subsidies for public transportation. Have you ever read your cell phone bill? There is a charge so that people who cannot afford cell phones can have a cell phone. The same thing on your land line, the same thing for your utilities. So what they are doing is spreading the cost over a .~ HOUSING COMMISSION MINUTES January 9, 2014 PAGE 11 of 15 large basis. But how does Carlsbad deal with the people who cannot afford housing? You tax home construction. It is paid for by your residents. Keyser Marston study tries to link new apartment construction to job creation in a static model. Therefore if you build 200 units, you will have 1.72 and you will have .3 of a lawyer, it is a static model. Static models don't work. When the government looks at taxing cigarettes because of the health costs, what happens? The more they tax the cigarette, cigarette usage drops or it increases a black market. So static models, we feel, is not the right way to look at this. Assuming he is right and I am wrong, basically what we are talking about then is mitigation. Do we tax the car dealers at Car County Carlsbad for the impacts of the cars they sell on the roads? No. How do we do that mitigation? We do it through the gasoline tax. You drive a Prius, you are getting 50 miles to the gallon, you are driving a 4 X 4, you are getting 10 miles a gallon, you are paying more taxes than he is. You are mitigating based on you have a higher truck weight than his smaller car~ There is a proportionality there. The heart of Keyser Marston's work is on trial before the State Supreme Court right now in a case called San Jose vs. CBIA. We feel the best course of action would be to wait. That decision is going to be made sometime this year. But if we mitigate for food and transportation and phone repairs on a broad based systems, how is it okay for the development community to be forced to carry the entire burden of a society issue. That is the crux of where we are with something like this type of an action. We agree, housing affordability is a serious issue. We don't think that this cure is necessarily the right thing. I want you to take into consideration the size of the fee for a minute. I called up Steve Mueller who is a concrete contractor. He has been in the business his whole life. I asked him what it costs per square foot to build a foundation of a two or three story garden style apartment building. It is $12 to $15 a square foot. Your fee is higher than the actual foundation the building is built on. I think it is excessive. I think the approach the city is taking on this doesn't work. I don't mean to take offense, but I don't feel we were properly respected. Let me tell you why. In September we received notice about it, we contacted the City Manager, and asked the item be continued so you could meet with us. So the meeting consisted of very nice people that told us we can do this, legally we are going to do it. We said we have some ideas. I want to conclude with this. If this is a societal problem, and the city and their updated Housing Element needs additional densification, and the city has RHNA numbers they have to meet, my question is: Why didn't anybody from the city contact the people that build all types of housing and ask a question? We got a problem up here. Since you build all types of housing, what can we do to increase our stock of affordable and available affordable housing? We have some unmet needs, and we think your expertise would be of value to come up with a viable solution. Would you be willing to examine our process and share with us the best way forward to provide this type of housing with the least amount of subsidization; the most efficient program? We want to collaborate with you on this issue. In my previous career as a member of the BIA, I was a general contractor. I did large scale renovations. In that business, there is always more than one way to skin a cat because the number one thing for every single client I have ever worked for except one very wealthy person in La Jolla was cost. Everyone has a dream of what their remodeled home would look like and a budget that doesn't meet it. We were very good at figuring out ways to skin that cat, to give my customers as much as what they envisioned in their mind as their budget would allow. If you want more of something, incentivize it. If you want less of something, tax it. We feel your cure actually exacerbates the disease and will kill the patient. I have been told to tell you that our industry adamantly opposes this action, and my boss says we will move heaven and earth to oppose at City Council. We don't want to do that; we don't feel it is the most productive way. Please consider delaying your proposal until the Supreme Court rules on the San Jose case. I ask you to instruct your staff to assemble a group of stakeholders, to bring forward the best HOUSING COMMISSION MINUTES January 9, 2014 PAGE 12 oflS management practices and reforms that will actually increase affordable housing construction. The Chairman of our Association this year, we elect a chairman every year, is a gentleman that is an affordable housing developer. He is headquartered in your city. He wants to see, we want to see real reforms. We want to have programs that do not stop, do not crush development, and that don't just shove the costs and keep making all housing more affordable. There are ways to skin this cat. We think this way is a way that is not going to work. Molly Kirkland, 5675 Ruffin Rd #310, San Diego 92123, I am here on behalf of the San Diego County Apartment Association. We represent about 2,500 rental property owners, managers and suppliers to the industry. That equates to about 150,000 rental units throughout the region. I will be brief. I think the two gentlemen before me hit the nail on the head with their comments, but we encourage you to reject the proposed impact fee. We don't agree with the notion that this market-rate housing is going to create this overwhelming need for affordable housing. Moreover, by adding this fee per unit, you are ensuring that market-rate rentals are going to be less affordable for working families and you are going to have an unintended consequence. You are going to drive development away from your city when you need multi-family housing. That is the trend across the country and definitely in the region, and you will need that to meet your density needs. The San Diego Apartment Association remains committed to working with government and stakeholders to develop other ideas for meeting your affordable housing needs and raising those funds. We just don't think this fee as proposed is the right approach right now. Laura Nunn, San Diego Housing Federation, 110 West C Street, San Diego 92101. I wanted to share our support for the recommendation that comes from staff. The City of Carlsbad has had a very effective tool in providing affordable housing to its residents through its inclusionary policy, but unfortunately as we have heard tonight, they are not able to implement it because of the legal uncertainty of that policy, which is still moving through the courts and yet to be determined. In the meantime, the fee that is proposed can help to serve as a tool that can continue to deliver affordable housing in this city. We heard from those that have concerns about what impact this might have in the market, and I am not sure if there have been any conclusive studies that have demonstrated that to be true. The gentleman from CONAM mentioned that his company works up in the Seattle market. Seattle actually has an inclusionary policy and just increased their in-lieu fee from $18.75 per square foot to $22.88 per square foot. Clearly there is still room in the market for both market rate housing providers and affordable housing providers to work together in having a fee that can provide the city's needs for housing for all of its residents. We encourage you to pass this along to the City Council and also to recommend that the fee be set at the highest level possible because this won't be a complete replacement for a 15% requirement to build on site. An in-lieu fee needs to be at a level that can actually try to meet that 15% in the absence of the requirement to build. Mary Jane Jagodzinski, Community Housing Works and Vice President of the Board of Directions of the San Diego Housing Federation, 1953 Dove Lane, Carlsbad. We do support the staff's recommendation. I view this as an alternative choice for apartment developers. The developer still has the choice of the inclusionary program, but this is a different tool for them as well. Back in 1993 people said Carlsbad was crazy, and you look at what has happened in the last twenty something years in Carlsbad and our national model of being able to provide housing for the gardener at La Costa Resort as well as the wealthy client who may live at Aviara or anywhere else. It takes traffic off the roads; it is a sustainable policy, and I do not feel the inclusionary program to date has really hampered Carlsbad in any way. I think we are really talking about a continuation. I was very happy that my good colleagues in development at the BIA are indicating they are not opposed to the inclusionary program. I agree about reduced parking standards and expedited processing, but on this one we disagree. I am not going to HOUSING COMMISSION MINUTES January 9, 2014 PAGE 13 of 15 take more time. It is a decision at a time that there has been a lot of smoke, and I don't think it is really going to .... Carlsbad is a unique, wond~rful place, and some people who work in this community are never going to be able to afford to live in this community without a subsidy. Why is that? Because any smart developer who can, is going to be able to develop the best project that has the highest market rents. Of course, there is nothing wrong with that. The market forces won't allow that sustainable mix of people in neighbors in the community. The program that has worked so well in Carlsbad and is now changed a bit because of the court case, we provide what I think Palmar has indicated an equal alternative and a choice for the apartment developers. Chairperson Smith closed public testimony. Commissioner Kirk asked staff, could we make a rough estimate, assuming that these costs are passed on to the renter, which I assume they would be, what would be the monthly impact to their monthly rental? Mr. Marra said we are talking about $20 on a typical rental unit of 900 square feet, but if we use an average cost of funds, I am going to say .06, I am getting ten cents per foot per month so times $900 is $90. I came to that by assuming the cost of funds for the developer is 6%, mix of debt and equity and they have to amortize that new development cost of $20, I have ten cents per foot per month in rent or about $90 in incremental rent per month. As you recall during the surge in energy costs in the 2000's, hotels started charging a surcharge. So let us say you booked a hotel for $150 and then they had a utility surcharge when you got there of $8 or $10. You don't do that in the apartment market. You rent the apartment for X dollars. Over time a prudent renter and a prudent landlord are going to settle on a market rent. From one day to the next, if you were to adopt a new fee, the landlord can't suddenly pass that surcharge through to the tenant because the market resists. The landlord has to absorb it elsewhere, and that is why I described how I think it will ultimately. The key distinction here is just a few years ago apartment developers had to produce the affordable units under inclusionary program, which we have measured to be a comparable cost. A comparable cost to the proposed fee. We are just really reinstating through a different mechanism, through a different legal basis the same cost impact that was present in your market since 1993. Commissioner Kirk said an unlikely scenario that would be that 100% of this would be passed through to the renter. Mr. Marra said the worst case would be $90. Commissioner Kirk said that would definitely be significant. Mr. Marra said we expect that to be lower than that. Commissioner Kirk said in terms of the $20 per square foot, if this is to go forward and be adopted by the city, do we have a rough estimate on the forecasted revenue that would be gained by this and apply towards our inclusionary requirements? Ms. Fountain answered we did some rough calculations, but what we have found it is very difficult to determine from our RHNA numbers what would actually get produced and the size of those units and how much we would actually ultimately collect. Paul, did you run any assumptions on what you were HOUSING COMMISSION MINUTES January 9, 2014 PAGE 14 of 15 projecting? You were just focusing on the 15% requirement, what we would need to meet that 15% right? Mr. Marra said he didn't look at the projected market rate. Ms. Fountain asked Mr. Marra, do you have a number of what the overall would have been in revenue that we would need to produce the 15%, what that total calculation would be? Mr. Marra answered, no only on a per unit basis to keep pace with every market-rate unit, you would need to collect $17,000 per market rate unit. If you experience an average of 500 market-rate units a year or a 1,000 market-rate units a year, we can just do the math, but I do not have those figures. Commissioner Kirk said then in your previous studies that are similar to this with other cities that they have been tracking, has the fee been appropriate or has the city found that the fee was too high or too low. Mr. Marra said to be honest, there are high fees and low fees. High fees are cities that really want the dollars collected to help them fulfill their inclusionary target. Whether it was back when we had an inclusionary program and we were setting an in-lieu fee or it is today post-Palmer where we are setting an impact fee, so Solana Beach is such a city. They adopted a fee that they thought would replicate the requirement they had before when you weren't even allowed to pay a fee. San Diego is not such a city. They have had inclusionary since 2003, and they have always had a low fee that doesn't come close to producing the units. So no developers ever built the units unless they would be subsidized through redevelopment and tax credits. Developers didn't come in freely to build the units because the fee was just a few dollars per foot. It is really a policy call in different cities. Ms. Fountain wanted to add that we see this as one additional revenue source, but pretty much of all our projects have a variety of revenue sources that come in so very seldom is the city the primary assistance provider; so you get state tax credits or you get grants or you get other funding. Looking at the most recent affordable housing development that we helped subsidize that had a non-developer requirement with no master developer involved in it was our Tavarua senior housing project, which is 100% affordable; it is 50 units. We provided $75,000 per unit in subsidy to that project. That was a substantial amount of subsidy and that was to get low and very low income units with the bulk of those at the very low. When we start getting into those lower income categories, the very low and extremely low, our subsidy levels go up. What we are generally finding with any of the projects coming forward now that don't have a master developer attached to them, typically we are still hearing from the affordable housing developers that they need well over $100,000 in subsidy. That doesn't necessarily mean the city will provide all of that subsidy, but they are looking at a gap of well over $100,000 that has to come from somewhere. Trying to figure out where that comes from is the difficult part. This is just one more tool. As Mr. Marra shared, for years we were applying the inclusionary to rental development and they had no ability to pay a fee on it. The only time the in-lieu fee came into play was if their total project size was 6 units or less. So if they had a requirement like Traditions, they had to incorporate that into their project or we have other options where developers can go to gather and do an off-site combined. Sometimes we allow developers to buy housing credits. We try to be flexible in that type of product. So if they decide they want to do an ownership product or they want to do a rental product, we try to be flexible. We look at development standard waivers. We are trying to incorporate all the tools in the toolbox. In a perfect world, we would like the inclusionary to apply to rental, but we can't legally apply that. To still meet our demand for affordable housing, meet our state numbers, the only HOUSING COMMISSION MINUTES January 9, 2014 PAGE 15 of 15 option we felt like we had at this point is to apply a fee, but our goal would be to still work with the developers to try and get the housing produced and not ultimately have to charge them a fee. Commissioner Kirk said he would like to thank staff and Mr. Marra as well as the BIA for their information, including the BIA toolkit. It was a very detailed meeting of a lot of data, a lot of information to grasp. We applied the appropriate effort in reviewing this and giving it consideration. Chairperson Smith thanked all for their input. Commissioner Kirk made a motion that the Housing Commission adopt Housing Commission Resolution No. 2014-001 recommended by the City Council and accept the Affordable Housing Impact Fee Nexus Study prepared by Keyser Marston Associates dated September 2013 and approve an affordable housing impact fee not to exceed $20 per square foot to be paid by the developer of market rate rental housing to offset the affordable housing demand caused by the construction of market-rate rental housing and to the construction cost index, CCI, published by the engineering news record as an index with no ceiling for fee level adjustments, all based upon the findings contained in the resolution. Commissioner lgoe seconded the motion. VOTE : 3-2 AYES: NOES: ABSTAIN: ABSENT: lgoe, Kirk and Smith Andrews and Bradwell None None Commissioner Andrews said he would like to see the parties work a lot closer together on a good solution. I think this is a very viable solution, and I feel very conflicted on this and could have gone either way. I believe we have to address the housing needs and that is a social responsibility. For all these reasons, this is the why we want to do this, I think is good for our community. It is not satisfying that we are not currently meeting this need. Because of that 2009 law when we stopped doing the inclusionary, with the current market it is not being built. We do need more densification, we do need more building. I am concerned that if we impose a fee, that will drive building away and have an opposite effect. That is where I am not quite feeling good about that. As far as how much, I see the study and $20 does fit the model. But perhaps that might need more research in is that the right amount. I just feel like the parties need to work more together to see if there are alternatives. DIRECTOR'S REPORT-None ADJOURNMENT By proper motion, the meeting of January 9, 2014, was adjourned at 7:40 p.m. submitted, \ ....___.........__ Debora Fount n Housing & Neighborhood Services Director PATRICIA CRESCENT! Minutes Clerk MINUTES ARE ALSO TAPED AND KEPT ON FILE UNTIL THE WRITIEN MINUTES ARE APPROVED.