Office of the City Manager

2180 Milvia Street, Berkeley, CA 94704 ● Tel: (510) 981-7000 ● TDD: (510) 981-6903 ● Fax: (510) 981-7099 E-mail: manager@CityofBerkeley.info Website: http://www.CityofBerkeley.info/Manager

WORK SESSION June 29, 2010

To: Honorable Mayor and Members of the City Council

From: Phil Kamlarz, City Manager

Submitted by: Jane Micallef, Director, Housing and Community Services

Subject: Affordable Housing Policy: Impact Fee Nexus Study

RECOMMENDATION Direct the City Manager to prepare an ordinance adopting an affordable housing impact fee of $19,500 per unit for new multifamily rental housing, and directing proceeds to the City’s Housing Trust Fund. Direct the City Manager to draft changes to the inclusionary housing ordinance, specifically, removing components addressing rental housing in order to make Berkeley’s requirements consistent with the Palmer/Sixth Street Properties vs. City of Los Angeles court decision. Both changes will return to City Council for review and adoption.

SUMMARY The City’s inclusionary housing ordinance required that 20% of all multifamily housing developments built be affordable according to certain criteria. In 2009, the Palmer/Sixth Street Properties vs. City of Los Angeles court ruling found that inclusionary housing requirements on rental developments violate the Costa-Hawkins Rental Act of 1995, thereby invalidating the City’s inclusionary requirements for rental housing, although the inclusionary requirements for condominiums still stand. At the January 26, 2010 Council meeting, Council members expressed interest in housing policy options that could not only compensate for the loss of inclusionary rental housing, but achieve an even higher percentage of affordable units. Identifying these options is the focus of today’s work session.

Through a competitive process, Bay Area Economics (BAE) was selected to complete an impact fee nexus study, quantifying the need for affordable housing created by the development of new market rate rental housing. The study translated the resulting need into a per unit impact fee of $19,500. Proceeds from the fee would go into the Housing Trust Fund to support the acquisition, rehabilitation, and development of affordable housing. The full study is attached.

FISCAL IMPACTS OF RECOMMENDATION The City’s Housing Trust Fund would receive $19,500 per unit of market rate rental housing built. The total funds generated would depend on rental housing development volume. In the current real estate market, the City would be unlikely to see much

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funding. However, when the economy and real estate market recover, this source of funding would augment the other sources available for affordable housing development.

The existing inclusionary requirements for condominiums would still apply, so developers would continue to have the option to build affordable for-sale units or pay the existing in-lieu fee.

CURRENT SITUATION AND ITS EFFECTS Generally speaking, the City’s inclusionary housing ordinance required that 20% of all multifamily housing developments built be affordable according to certain criteria. The inclusionary ordinance was an important tool in creating affordable housing, with 362 affordable units created during the last 10 years.

In 2009, the Palmer/Sixth Street Properties vs. City of Los Angeles court ruling found that inclusionary housing requirements on rental developments violate the Costa-Hawkins Rental Act of 1995, thereby invalidating the City’s inclusionary requirements for rental housing. On January 26, 2010, a number of Council members expressed interest in housing policy options that could not only compensate for the loss of inclusionary rental housing, but achieve an even higher percentage of affordable units.

This report proposes adopting an affordable housing impact fee. Because impact fees do not dictate future rents, the critical issue in the Palmer decision, the City’s ability to adopt impact fees was not affected by Palmer. The attached nexus study by Bay Area Economics examines the connection between the development of market rate housing and the resulting need for affordable housing, and translates the cost of providing this housing to $19,500 per new market rate rental unit.

Staff also propose including an option for developers to provide affordable units in lieu of paying the fee. According to the nexus study, 16.9 affordable units would be needed per each 100 new market rate units, which translates into 16.9% of the units built. Developers could have an option to build 16% of the units to be affordable, and pay the remaining 0.9% as an impact fee. Since, unlike the inclusionary ordinance, building and dedicating the units would be an option, not a requirement, this would still be legal under state law.

Essentially, the nexus study examines the likely incomes of new households that will occupy new market rate housing in Berkeley. It then looks at how much these households are likely to spend, and on what, to estimate the number of new workers who will be needed to provide services for these households. To project the need for below market rate units, the study includes only those new worker households that will have low or very low incomes. The size of the impact fee is then determined by the amount of subsidy needed to provide this housing.

In addition, revisions are needed to the Berkeley Municipal Code to address the implications of the Palmer decision, by removing rental housing requirements.

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BACKGROUND At the January 26th Council meeting, staff identified several alternatives to responding to Palmer/Sixth Street Properties vs. City of Los Angeles, a recent court decision which found that inclusionary zoning programs that apply affordability requirements to rental housing violate the Costa-Hawkins Act, and reported back on a previous Council request for information on the City’s Regional Housing Needs Assessment, history of the City’s inclusionary zoning program, Berkeley incomes, and limited equity cooperatives. At that meeting, Council directed staff to proceed with the affordable housing impact fee nexus study.

On January 27, 2010, the City released a Request for Proposals for consultant services to complete an affordable housing impact fee nexus study. On February 18, 2010, eight consultant firms submitted proposals. A selection team composed of City staff and Housing Advisory Commission members met to review proposals and interview the top teams. The panel recommended the selection of Bay Area Economics (BAE), an Emeryville based firm, for the project. Staff executed a contract with Bay Area Economics starting March 15, 2010.

Bay Area Economics started the study by examining the affordability of housing in Berkeley. BAE then developed an affordable housing nexus model to estimate the demand for affordable housing generated by new market-rate units. The model predicts the household incomes of the residents inhabiting the new market-rate units, then calculates the number of new employees by industry generated by the new households, and translates the new employees into worker households. The number and income of new worker households determined the resulting housing needs. BAE then compared the cost of developing new affordable housing with the subsidy needed to make it affordable to identify the cost of creating new units, concluding with the fee recommendation.

RATIONALE FOR RECOMMENDATION More policy guidance is needed from Council before staff can proceed with developing responses to Palmer/Sixth Street Properties vs. City of Los Angeles.

ALTERNATIVE ACTIONS CONSIDERED None.

CONTACT PERSON Amy Davidson, Senior Management Analyst, Housing and Community Services, 981-5406

Attachments: 1: Bay Area Economics (BAE), Affordable Housing Nexus Study, May 2010 2: BMC 23C.12. Inclusionary Housing