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
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January 9, 2014
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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.
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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.
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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.
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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,
,....,,
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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?
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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
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January 9, 2014
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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
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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.
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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.