17A. Housing Mitigation Fees
City of Cupertino
10300 Torre Avenue
Cupertino, CA 95014
(408) 777-3308
FAX (408) 777-3333
Community Development Department
Housing Services
CUPEIUINO
Summary
Agenda Item No. 17a
Agenda Date: April 3. 2007
SUBJECT:
Consider the 2007-08 Fee Schedule:
a) Review and approve housing mitigation fees (continued from March 6)
BACKGROUND:
Housing Mitigation Fees
On February 27, 2006, Council adopted Resolution 06-045 approving a fee study and directing
staff to assess retail and hotel developments a housing mitigation in-lieu fee at the same rate as
office and industrial projects and to raise the fee to $4.75 per square foot. The resolution
exempted redevelopment projects and certain mixed-use projects from the impact fee, but
required them to provide Below Market Rate (BMR) housing units instead. The new fee was to
be implemented with the entire fee schedule adopted at the April 4, 2006 Council meeting.
However, the approved fee schedule, in error, raised the fee only by the cost of living percentage,
to $2.32 per square foot and it did not add-in the retail and hotel elements. In April 2006, Council
directed staff to further study the mitigation fee for residential projects. That study was
completed and approved by the Housing Commission on January 11,2007. The commission and
the study recommend that the residential development fee be raised from the current $1.19 per
square foot to $2.50 per square foot.
At the March 6, 2007 City Council meeting, the City Council requested that staff conduct further
research on the fee calculations for the residential component. Council members expressed
interest in charging a fee for fractional units and reviewing a sliding scale approach to the
residential fee for developments of six units or less. Furthermore, Council directed staff to
research making the fee at the sixth unit high enough to discourage a developer from deliberately
reducing their unit count from seven to six units to avoid building a BMR unit.
Fractional Unit Fee:
Council members were concerned that developers may be proposing fewer units in order to
provide one less BMR because of current rounding practices. Currently, the city has the practice
of rounding up at .5 or greater and rounding down at less than .5. For example, if a developer is
proposing 24 units, the BMR requirement is 3.6 units, which is rounded up to four BMR units.
However, if the developer proposes 23 units, then the BMR requirement would be 3.45 units,
which is rounded down to three units. In both cases, the developer will net 20 market rate units,
/7C1-/
Consider the 2007 -08 Fee Schedule:
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April 3, 2007
Page 2 of 3
which is rounded down to three units. In both cases, the developer will net 20 market rate units,
but in the latter example, the developer would only be required to construct three BMR units as
opposed to the four.
Staff reviewed tentative map applications from 2000 through the present to study how many
subdivisions have proposed a number of units that would allow for rounding down. Of the 60
applications, eight applications proposed a number of parcels, which could be rounded down. Of
these eight applications, site constraints were the reason five of the developers proposed fewer
units. The remaining three developments were Saron Gardens, Toll Brothers and a new 21-unit
development on Stelling Road. After the analysis, staff believes that with the exception of the
Toll Brothers development, site constraints and density and not avoiding the BMR program are
the driving forces behind the developer proposing fewer units on sites. Attached is information
provided by the City's consultant Keyser Marston and Associates on how to apply a fractional
fee for Council review. At this time, Staff does not recommend charging a fee for fractional
units since it will increase administration costs for the program with limited projected income.
Staff does believe the bigger issue would be developers that propose a unit count just under the
requirement to build a BMR unit although this has only occurred in three cases. Examples of a
sliding scale approach to the residential fee are included for review as well. The sliding scale
would need to be amended to reflect Cupertino land prices and construction costs. Keyser
Marston and Associates is still working on determining those costs, but a conservative maximum
fee would be the $49 per square foot for condominiums. Small lot single-family homes actually
generate a higher fee because of the land cost associated with less dense development. Staff
recommends that if the City Council chooses the sliding scale approach, the $49 per square foot
fee be adopted as the maximum since it is a conservative figure.
FISCAL IMPACT
Housing mitigation fee revenues are dependent on the mix and volume of projects, but the near
doubling of the fee rates and expansion of fee basis should double the revenues per project.
Nearly $344,000 was collected last year. With the new Regional Housing Needs Allocation
(RHNA) requiring cities with lower concentrations of low and very low income to show they can
provide a greater percentage of housing for these income levels. Consequently, the City of
Cupertino will need greater resources to address affordable housing needs for the low and very-
low income. The Housing Mitigation fees are the City of Cupertino's primary resource for
affordable housing development.
RECOMMENDATION:
Adopt a resolution amending the 2006-07 City fee schedule as follows:
. As described in previously adopted Resolution 06-045, replace the current $2.32 per
square foot office/industrial/research and development housing mitigation in-lieu fee with
a new $4.75 per square foot housing mitigation in-lieu charge for office, industrial, hotel,
retail, and research and development projects. While redevelopment area projects and
/7 4 -~
Consider the 2007-08 Fee Schedule:
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April 3, 2007
Page 3 of 3
mixed use projects of at least two-thirds residential and one-third retail/office will be
exempt from the fee, they must instead provide Below Market Rate Housing as part of a
residential development; and
. Raise the residential housing in-lieu fee from $1.19 per square foot to either a sliding
scale fee with the fee for a six unit development being set at a maximum of $49 per
square foot with an exemption for existing single family parcels or set a fee of $2.50 per
square foot for developments of six units or less as recommended by the Cupertino
Housing Commission.
APPROVED FOR SUBMITTAL:
~l.
David W. Knapp
City Manager
Attachments:
Exhibit A: Fractional Unit Calculation Overview
Exhibit B: Graduated In-Lieu Fee Program Overview
Exhibit C: In-Lieu Fee Analysis
/7a-3
Exhibit A
Overview of Fractional Fee Calculations
City of Cupertino Below Market Rate Housing Program
Many jurisdictions with below market rate housing programs include provisions for in-
lieu fees for fractional units owed. Below, we outline a typical, and straightforward,
methodology for calculating the amount of the fractional fee. In summary, the fractional
fee equals the fractional unit owed times the average affordability gap (the foregone
revenue to the developer associated with one affordable unit).
Fractional Unit Calculation. Cupertino's Below Market Rate Housing Program requires
that 15% of new units be set aside for affordable housing, half for moderate income
households and half for median income households. We assume that the first
affordable unit owed is set aside for median, the second unit for moderate, the third for
median and so forth. Table 1 illustrates the application of this requirement to projects of
between seven and forty units. For example, a project with seven units owes 1.05
affordable units (7*15% = 1.05). The developer would provide one median unit onsite
and pay a fee on the remaining 0.05 units. A project with thirty-five units owes 5.25
affordable units (35*15% = 5.25). The developer would provide five affordable units
(three median and two moderate) and pay a fee on the remaining 0.25 units.
Average Affordability Gap. The affordability gap is the difference between the market
rate sales price and the restricted affordable sales price. Because Cupertino's program
requires 50% of units to be set aside at moderate income and 50% at median income,
we used the average of the two affordability gaps (see Table 2). This equals $458,000
per affordable unit owed.
Fractional Fee Calculation. The fractional fees are calculated by multiplying the
fractional unit owed by $458,000. For example, the seven unit project would pay a fee
equal to 0.05*$458,000, or $22,900. The thirty-five unit project would pay a fee equal to
0.25 * $458,000, or $114,500.
Other Methodologies. This is just one methodology for calculating the fractional fee. It
has the benefit of being straightforward and easy to update. However, there are other
ways to calculate the fee. Many cities adapt their in-lieu fee for fractional fee purposes.
For example, if a city has an in-lieu fee of $20 per square foot, the fractional fee could
be calculated by multiplying the average unit size times $20 times the fractional unit.
This approach has the benefit of being consistent with the calculation of the in-lieu fee
and does not involve calculating new affordability gaps except as part of an in-lieu fee
update.
Rounding Policy. The structure of the fractional fee provision is related to the rounding
policy. Cupertino, along with many other cities, requires developers to round up if the
fraction is 0.5 or greater. Other cities require rounding up at 0.7 or greater, and allow a
fee for anything below 0.7. Still other programs allow the developer to pay an in-lieu fee
for a fractional unit regardless of the fraction; in other words, the developer never has to
round up. In this discussion, we assume that Cupertino continues to require that
developers round up fractions of 0.5 or greater.
Keyser Marston Associates, Inc.
fractional fee.doc
3/29/2007
17a-t.!
Table 1
Sample Units Owed and Fractional Units Calculations
In-Lieu Fee Analysis
City of Cupertino
Units Provided
Affordable
Total Units 15% of Units Fractional 50% 50%
in Project Units Provided1 Unit Median Moderate
7 1.05 1.00 0.05 1.0 0.0
8 1.2 1.00 0.20 1.0 0.0
9 1.35 1.00 0.35 1.0 0.0
10 1.5 2.00 1.0 1.0
11 1.65 2.00 1.0 1.0
12 1.8 2.00 1.0 1.0
13 1.95 2.00 1.0 1.0
14 2.1 2.00 0.10 1.0 1.0
15 2.25 2.00 0.25 1.0 1.0
16 2.4 2.00 0.40 1.0 1.0
17 2.55 3.00 2.0 1.0
18 2.7 3.00 2.0 1.0
19 2.85 3.00 2.0 1.0
20 3 3.00 2.0 1.0
21 3.15 3.00 0.15 2.0 1.0
22 3.3 3.00 0.30 2.0 1.0
23 3.45 3.00 0.45 2.0 1.0
24 3.6 4.00 2.0 2.0
25 3.75 4.00 2.0 2.0
26 3.9 4.00 2.0 2.0
27 4.05 4.00 0.05 2.0 2.0
28 4.2 4.00 0.20 2.0 2.0
29 4.35 4.00 0.35 2.0 2.0
30 4.5 5.00 3.0 2.0
31 4.65 5.00 3.0 2.0
32 4.8 5.00 3.0 2.0
33 4.95 5.00 3.0 2.0
34 5.1 5.00 0.10 3.0 2.0
35 5.25 5.00 0.25 3.0 2.0
36 5.4 5.00 0.40 3.0 2.0
37 5.55 6.00 3.0 3.0
38 5.7 6.00 3.0 3.0
39 5.85 6.00 3.0 3.0
40 6 6.00 3.0 3.0
1. Assumes a 0.5 rounding policy.
2. Assumes that first unit goes to median, second to moderate, and so forth.
Prepared by: Keyser Marston Associates, Inc.
File Name: ownership.xls;Fractional Units;3/29/2007;hgr
/ 7 Q - 1:>-
Table 2
Fractional Units Fee Calculation
In-Lieu Fee Analysis
City of Cupertino
If the number of required units results in a fraction of less than 0.5, the developer has the option
of paying a fee in-lieu of providing an additional affordable unit.
Fractional Fee = Average Affordability Gap * The Fraction of the Unit
Affordability Gaps
Moderate Units (120% AMI) $403,000
Median Units (90% AMI) $513,000
Average Affordability Gap $458,000
Sample Calculations
Average
Fractional Affordability
Unit Owed Gap Fee Owed
0.05 1 $22,900
0.10 $45,800
0.15 $68,700
0.20 $458,000 $91,600
0.25 j $114,500
0.30 $137,400
0.35 $160,300
0.40 $183,200
0.45 $206,100
Prepared by: Keyser Marston Associates. Inc.
File Name: ownership.xls;Fractional Units;3/29/2007;hgr
/7Ct-fo
Exhibit 8
Other Graduated In-Lieu Fee Programs
City of Walnut Creek
The City of Walnut Creek adopted a graduated fee schedule to accompany its
Inclusionary housing ordinance in 2004. Residential development projects with between
two and nine units have the option of paying an in-lieu fee. For ownership units, the fee
is $2.00 per square foot for two-unit projects and increases by $1.00 per square foot per
unit, to a maximum of $9.00 per square foot for nine-unit projects. For rental units, the
fee is $1.60 per square foot for two-unit projects and increases by $0.80 per square foot
per unit, to a maximum of$7.20 per square foot for nine-unit projects.
City of Menlo Park
In 2003, the City of Menlo Park adopted a graduated in-lieu fee schedule for
developments between five and nine units. Prior to adopting this fee schedule, the City's
fee was 3% of the sales price for market rate units. The revised fee schedule charges 1 %
of the sale prices for the first, second and third units; 2% of the sale prices for the fourth,
fifth, and sixth units; and 3% of the sale prices for the seventh, eighth, and ninth units.
The individual units paying each rate are designated in the BMR Agreement.
City of Nova to
The City of Nova to is currently considering adopting a graduated in-lieu fee schedule for
its Inclusionary Housing program. The program is currently primarily fee-based, with
projects paying $11,418 per market rate unit. The City is considering a program that
would require developments of seven or more units to build units onsite. The proposed
graduated in-lieu fee schedule would charge a fee per square foot, as opposed to per unit,
and the fee would increase to $20.00 per square foot for a seven-unit project (this fee
level would be used to calculating fractional unit fees, as a seven-unit project would be
required to build a unit on site ). City staff suggested that the fee for a one-unit project be
set to approximate the current fee for a prototypical project. The full fee for a seven unit
project ($20.00 per square foot) is approximately equal to the burden of providing one
affordable unit for the prototypical condominium project in Novato.
Note: The underlying Inclusionary programs for the three cities are fairly different, which
explains much of the difference in the amounts of the in-lieu fee.
Prepared by Keyser Marston Associates, Inc.
File Name: Graduated fees.doc; 3/22/2007; hgr
/7Ci - 7
., .
RESOLUTION NO. 04-11
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
WALNUT CREEK ESTABLISHING A FEE SCHEDULE
PURSUANT TO THE INCLUSIONARY HOUSING ORDINANCE
WHEREAS. the Inclusionary Housing Ordinance (Municipal Code section 10-2.3.901 et
seq.) requires developers of residential projects to include affordable housing units in the project
or, in some cases, to pay a fee in-lieu of including the units;
WHEREAS, Municipal Code section 10-2.3.905 provides that the City Council shall
adopt a resolution setting forth the amount of the fee. The fee shall reflect the average estimated
cost of otherwise providing the required affordable housing units;
WHEREAS, Keyser Marston Associates, a consulting fIrm commissioned by the City to
study housing affordability in Walnut Creek. issued a study in July 2003 detailing the gap
between market prices of housing in the City and prices affordable to very low, low and
moderate income households. The study included a proposed per square foot in lieu fee for
rental and ownership projects based on the affordability gap;
WHEREAS, the fees will be placed in an affordable housing fund and used exclusively
for the development of affordable housing within the City;
WHEREAS, there is a reasonable relationship between the need for affordable housing
and the impacts of market-rate housing development within the City. There is also a reasonable
relationship between the fee's use and the impacts of market-rate housing development.
Development of new market~rate housing encourages new residents to move to the City. These
new residents will place demands on services provided by both the public and private sectors.
Some of the public and private sector employees needed to meet the needs of the new residents
earn incomes that only allow the employees to be able to afford very-low, low or moderate
income housing. This type of affordable housing is in very short supply within the City. The
fees will be used to help increase the supply of affordable housing in the City; and
NOW, THEREFORE, the City Council oftbe City of Walnut Creek resolves as follows:
1. Municipal Code section 10-2.3.904 provides in part that the developer of a residential
development project of2 to 9 units has the option of providing an affordable Wlit on site or
paying an in-lieu fee. The amount of the in-lieu fee shall be based on the following table. The
amount ofthe fee is detennined by first selecting the number of total units in the project from the
left-hand column; then selecting the per square foot fee from the applicable column depending
upon whether the project is a rental or ownership project; and then multiplying that pet square
foot fee times the total square feet of aggregate living area in the entire project.
/7Q-?
. '"
RENTAL OWNEUSHlP
UNIT COUNT FEE/SQ FT FEE /SQ Fr
2 $1.60 $2.00
3 $2.40 $3.00
4 $3.20 $4.00
5 $4.00 $5.00
6 $4.80 $6.00
7 $5.60 $7.00
8 $6.40 $8.00
- $7.20 $9.00
9
-
In-Lieu Fee Per Square Foot
2. Municipal Code section 10-2.3.904(C) provides in part that if the formula for
calculating the nwnber of required affordable uni~s results in a fraction of less than .7, the
developer has the option of paying a fee in-lieu ofptoviding an additional affordable unit. The
in-lieu fee shall be calculated as follows:
Low-Income Rental Units: $111,600 times the fraction ofa unit
Very Low-Income Rental Units: $193,900 times the fraction of a unit
Moderate-Income Ownership Units: $185~000 times the fraction ota unit
Low-Income Ownership Units: $306,350 times the fraction of a unit
Very Low-Income Ownership Units: $394,350 times the fraction ofa unit
The foregoing formula shall also be used to detennine the requisite value of land that may be
dedicated as an alternative to providing affordable units pursuant to Municipal Code section 10-
2.3.906(B).
3. The foregoing formula will be reviewed and the in-lieu fee amounts re-established if
necessary, within a four~year period from the date this Resolution is adopted, and thereafter, a
minimwn of every five years, coinciding with the Housing Element update.
4. Effective Date. The fees specified in this Resolution shall take effect sixty (60) days
following the adoption of this Resolution.
PASSED AND ADOPTED by the City COlUlcil of the City of Walnut Creek at a regular
meeting thereof held on the 3rd day of February 2004, by the following called vote:
AYES:
Councilmembers: Hicks, Rainey, Skrel, Regalia, Mayor Abrams
NOES:
. Councilmembers: None
ABSENT:
Councilmembers: None
/s/ Charlie Abrams
Mayor of the City of Walnut Creek
C'
/7q- /
'I. ,
Attest:
/s/ Barbara M. Rivara. CMC
City Clerk of the City of Walnut Creek
I HEREBY CERTIFY that the foregoing resolution was duly and regularly passed and
adopted by the City Council of the City of Walnut Creek, County of Contra Costa, State of
California., at a regular meeting of said Council held on the 3rd day of February 2004.
/J~rr;. ~
City Clerk of the City of Walnut Creek
, /7a-10
.
HOUSING AND REDEVELOPMENT
Council Meeting Date: March 25. 2003
Staff Report #: 03-035
No!-~: 4~p+e4.
Agenda item # F2
REGULAR BUSINESS: Adoption of a Resolution Approving Below Market Rate
(BMR) Housing Program In Lieu Fees for Housing
Developments of Five to Nine Units
RECOMMENDA TION
The Housing Commission recommends adoption of Below Market Rate (BMR) Housing
Program in lieu fees for housing developments of five to nine units.
BACKGROUND
On May 15, 2001, the City Council approved Ordinance No. 90S, which addresses the Below
Market Rate Housing Program, resulting in the following Municipal Code Sections.
(Ordinance No. 905 is Attachment B.) Section 16.96.020 Residential Development Projects
(1) Applicability states that the Below Market Rate Housing Program applies to residential
housing projects of five (5) or more units seeking a development permit, building permit or
variance, as well as to condominium conversions. Section 16.96.020 (2) Requirements
states that "for projects of less than 20 units, the developer shall provide not less than 10
percent of the units at below market rates to very low-, low- and moderate-income
households. If the number of units required for a residential development project includes a
fraction of a unit, the developer shall provide either a whole unit or a prorated in lieu payment
on account of such fraction as determined in the Below Market Rate Housing Program
Guidelines. "
The BMR Guidelines previously established a fee of 3% of the sale price for market rate units
for which no BMR unit is provided. This fee applies to all developments subject to the Below
Market Rate Housing Program. Thus it currently applies to developments of five to nine units
as well as larger developments. However, when the City Council approved Ordinance No.
905, it requested that the Housing Commission bring forward a proposal for in lieu fees
responding to the particular needs of developments of five (5) to nine (9) housing units.
The Housing Commission reviewed the BMR Housing Program Guidelines at its
April 3, May 20, June 5, October 17, November 6 and December 4,2002 meetings to discuss
revisions to the BMR Guidelines including a proposal setting in lieu fees for developments of
five to nine units. Because of public notice requirements for a proposal for a new
development fee, the Housing Commission separated the main body of the revised Below
Market Rate Housing Program Guidelines from the proposal for an in lieu fee schedule for
/70 -II
Page 2 of 4
Staff RepOlt # 03-035
developments of five (5) to nine (9) units. On December 17, 2002 the City Council approved
the BMR Guidelines.
The Housing Commission recommendation to adopt the new in lieu fees is proposed as an
amendment to the BMR Guidelines to be a new Section 4.3.1. (See Attachment A.)
ANAL YSIS
The Below Market Rate Housing Program was developed in response to the scarcity of
housing that households with very low, low and moderate incomes can afford and the scarcity
of land available for housing development. Below Market Rate housing units preferably, and
in lieu fees if BMR units cannot be built, are required of new developments to address the
need for lower cost housing that is not met by the marketplace. Ordinance No. 905
established five unit developments as the smallest size of developments required to
participate in the Below Market Rate Housing Program. Previously, this requirement applied
to developments of 10 or more units.
Rate of Production The Housing Commission recommended the fee, among other reasons,
for its ability to contribute funds for the production of BMR housing. The Housing
Commission recognizes the priority for BMR units to be developed as a developer's
contribution, rather than fees. The Commission acknowledged a recent low rate of
production of projects of five to nine housing units (Attachment C). Thus the Housing
Commission recognized that in the near future the monetary contribution from BMR in lieu
fees collected from developments of five to nine units, but still is not likely to be large.
Specifically, since November 1997,90 housing units have been approved for development.
Attachment C, "Projects by Size," shows the size of new developments receiving permits and
the number of units developed in each. None of the 90 units were new developments of five
to nine units, although two projects added four units each to existing developments of two
units each, producing six units total for each. These two projects would not be subject to the
BMR Program as it only applies to new units. Because of the scarcity of appropriately zoned
developable land in Menlo Park, it is likely that this trend of very little development in projects
of five to nine units will continue, and that the in lieu fees collected from developments of this
size will have a minor impact on the BMR Fund. Nevertheless, all in lieu fees that are
collected can be used to develop BMR units and to address the shortage of housing.
The Housing Commission listed the following four criteria, which it used to formulate its
recommendation for BMR in lieu fees for projects of five to nine units.
1) New BMR Units Preferred - The BMR Program, including the portion dealing with
projects of five to nine units, has a stated primary objective of producing new BMR
units rather than the payment of in lieu fees. BMR units, whether produced as
inclusionary housing in market rate developments or as a result of expenditure of BMR
Housing Funds, are desired by the City because of the scarcity of housing affordable
to many employees who work in Menlo Park and because of the high cost of housing
to residents. Many residents pay a high proportion of their incomes to rent here, and
many employees commute considerable distances from housing that they can afford.
/7CL-Ic1...
Page 3 of4
Staff Report # 03-035
BMR housing units alleviate this problem by providing housing that residents who rent
in the City and employees who work in the City can afford.
2) Lesser Economies of Scale in Smaller Projects - Smaller developments are known
to have lesser economies of scale than larger developments. BMR in lieu fees should
reflect this higher cost per unit of development that smaller projects experience, so as
not to discourage small project development.
3) Fees Should Increase Gradually by Project Size - If fees are set at rates that
increase by project size, the change in fee amount for incrementally larger projects
should be gradual. Small increments in fees would reflect increasing economies of
scale and would prevent providing an incentive to build smaller projects to avoid
paying the BMR in lieu fee.
4) User Friendly - It is desirable to have a fee structure that is simple to understand and
use.
Fee Structure The Housing Commission considered three alternative fee structures, then
revised one of them to produce the recommended fee structure, which is described below.
See Attachment 0, "Alternatives for In Lieu Fee for 5 to 9 Unit Projects."
Housing units
Fee rate
1, 2 and 3
4,5 and 6
7, 8 and 9
1 % of the sale price
2% of the sale price
3% of the sale price
As an example of how this structure would apply, consider a housing development of seven
units. Three units would pay 1 % of the sale price, three units would pay 2% of the sale price,
and one unit would pay 3% of the sale price. If the units sold for $600,000 each, the fees
would be:
1 % group
2% group
3% group
$600,000 x 1% x 3 + $18,000
$600,000 x 2% x 3 = $36,000
$600,000 x 3% x 1 = $18,000
Total
$72,000
The individual units paying each rate would be designated in the BMR Agreement. Each
group would be representative of the various sizes of units in the project and would be
distributed throughout the project.
Proposed Text - The text of the proposed Amendment to the BMR Guidelines to establish in
lieu fees for housing projects of five to nine units can be found as Attachment A.
Notice of the public hearing for the BMR in lieu fees for housing developments of five to nine
units was published in the Almanac on February 26 and March 5, 2003. If approved, the
effective date of the Resolution will be March 11, 2003. The BMR in lieu fee would then take
effect 60 days after the effective date of the Resolution.
IMPACT ON CITY RESOURCES
170-13
Page 4 of 4
Staff Report # 03-035
BMR in lieu fees paid into the BMR Housing Fund will depend on the projects proposed for
development and will have a minor, positive impact on the amount of funds available to
develop very low, low and moderate income housing in Menlo Park.
POLICY ISSUE
Establishing a graduated schedule for in lieu fees for residential developments of five to nine
units will have a minor but positive impact on the development of housing for very low, low
and moderate income families. The fee structure responds to the higher per unit costs on a
graduated basis that is experienced by small developments. The fee also meets nexus
requirements because it is charged to those who produce market rate housing using the
scarce commodity of developable, appropriately zoned land, and because it is dedicated to
providing the needed Below Market Rate housing.
ENVIRONMENTAL REVIEW
Revision of the Below Market Rate Housing Program Guidelines is not a project under
California Environmental Quality Act guidelines.
Gretchen Hillard Don de la Pena
Housing and Redevelopment Manager Director of Housing and Redevelopment
Report Author
PUBLIC NOTICE: Public Notification was achieved by posting the agenda, with this agenda
item being listed, at least 72 hours prior to the meeting.
ATTACHMENTS
A. Draft Section 4.3.1 proposed to be added to Below Market Rate Housing Program
Guidelines. (The existing Section 4.3.1 will become Section 4.3.2)
B. Ordinance No. 905 adopted May 15, 2001
C. Projects by Size
D. Alternatives for In Lieu Fee for 5 to 9 Unit Projects
/7a-1t-(
Table 10
Possible Graduated In-Lieu Fee Schedules
Inclusionary Housing Update
City of Novato, CA
WORK/NG DRAFT
Condominium Prototype With Full In-lieu Fee at $20/SF
Moderate Fee Averaqe Unit Total Fee
Units Owed Owed/SF Size Fee/Unit Paid
Full In-Lieu Fee 15% $20.00/SF 1,400 SF/unit $28,000
Proiect Size
One Unit 0.15 $8.21/SF $11,500 $11,500
Two Units 0.30 $10.18/SF $14,250 $28,500
Three Units 0.45 $12.14/SF $17,000 $51,000
Four Units 0.60 $14.11/SF $19,750 $79,000
Five Units 0.75 $16.07/SF $22,500 $112,500
Six Units 0.90 $18.04/SF $25,250 $151,500
Seven Units or More 1.05 $20.00/SF $28,000 $196,000
Note.: 7rOfosed. Not o..c/.optec/. 6.1-; ~r.:.1 ~ IUlt y~1
rt-vitwed.
Totals may not sum due to rounding.
Keyser Marston Associates, Inc.
16109.014/For Sale Proto wBO.xls; Table 10; 3/20/2007; hgr
Page 15
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Exhibit c
CUPERTINO BELOW MARKET RATE HOUSING IN-LIEU FEE ANALYSIS
Keyser Marston Associates (KMA) analyzed the City of Cupertino's Residential Housing
Mitigation Program and calculated the maximum supportable in-lieu fees for ownership
and rental housing. The City's current fee is $1.15 per square foot, significantly below
the supportable level. Our findings are presented in the tables accompanying this text.
Below, we provide a brief overview of the tables.
Ownership Housing
Market Survey
. KMA conducted a survey of new housing developments in Cupertino in order to
develop a prototypical project reflecting what market rate developers are typically
building in the City. For the purposes of the in-lieu fee analysis, the prototype
development should represent a lower end average of the range of new houses,
so KMA focused on new condominiums or town home developments.
. Table 1 shows the results of our survey. There have been two recent attached
market rate developments marketed in Cupertino. The first is Villagio Cupertino,
condominiums by Silverstone Communities that average 1,140 square feet and
are a mix of one, two and three bedroom units. They have base list prices
between $450,000 and $800,000, or $550 to $620 per square foot, or $580 on
average.
. The second is Sterling Square, town homes developed by Taylor Woodrow
Homes. The units are a mix of three and four bedroom homes and an average of
1,825 square feet. They have base list prices between $900,000 and $1,050,000,
or $500 to $550 per square foot, or $534 on average.
. A third project, Metropolitan by Menlo Equities, is currently under construction.
While estimated sales prices are not readily available, the project is a mix of two
and three bedroom units. The two bedroom units are about 1,100 square feet
each, and the three bedroom units about 1,500 square feet.
. Based on our survey and discussions with City staff, KMA estimated that a
typical new condominium or townhome development in Cupertino would have 20
units averaging three bedrooms, 1,400 square feet, and selling for about $550
per square foot, or $770,000.
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Affordable Home Prices
. KMA calculated updated affordable home prices for the moderate and median
income categories. In 2004, KMA assisted the City in an update to the Below
Market Rate home prices. At that time, KMA recommended basing the moderate
income home prices on 30% of 110% of the Area Median Income. The most
recently published home prices in the City's Mitigation Manual suggest that the
City agreed with this pricing strategy. In our most recent discussion with City
staff, however, KMA was directed to base the moderate income home prices on
120% of Area Median Income, which results in higher sales prices than the 2004
methodology. The median income home prices are based on 30% of 90% of
Area Median Income, which is consistent with the 2004 revisions.
. For the purposes of calculating the affordable sales prices, KMA made the
following assumptions:
. HOA dues of $300 per month, based on what is charged at the Sterling
Square development. Insurance at $1,000 per year, based on the City's
assumptions from 2004.
. Utilities at $1,704, based on the City's 2004 assumptions. The Santa
Clara Housing Authority's Utility Allowances do not appear to have
changed significantly since this estimate was calculated.
· A 30 year mortgage with 7% interest and a 5% down-payment.
· Property taxes at 1.05%.
. The updated affordable prices are shown in Table 2. A three-bedroom moderate
unit would be priced at $367,000 and a three-bedroom median unit would be
priced at $257,000.
Affordability Gaps per Unit
. KMA then calculated the 'affordability gaps' per unit, or the lost revenue to the
developer when a unit is designated affordable (see Table 3). It is calculated by
subtracting the market rate price from the affordable price. If a three-bedroom
town home is restricted to moderate income households, the affordability gap is
the affordable price less the market price, or ($367,000 - $770,000 = ($403,000)).
For median income units, the affordability gap is ($513,000).
Total Affordability Gaps and Equivalent In-Lieu Fee
. Table 4 calculates the total affordability gap for the prototypical 20 unit
condominium/town home project. With a 15% BMR requirement, the project owes
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three affordable units, half of which are priced for median-income households
and half for moderate. For the purposes of calculating the fee, we do not round to
the nearest whole unit, but allow the number of units owed to result in fractional
units. Therefore, the 20 unit project owes 1.5 moderate units and 1.5 median
units.
The total affordability gap for the income-restricted units is $1,374,000. KMA
used this figure to estimate the in-lieu fee that would result in the same total
affordability gap for the developer. KMA calculated the in-lieu fee on a square
foot basis, which is consistent with the current in-lieu fee; unlike the current fee,
however, we do not include garage space. To generate a fee of $1,374,000 with
20 units averaging 1,400 square feet, the in-lieu would have to be $49 per square
foot.
Rental Housing
Market Survey
. There have been no market rate apartment projects developed recently in
Cupertino. The newest units were built between 1997 and 1999. KMA conducted
a market survey to determine current rent levels at these newer units. Table 5
summarizes our findings. In general, market rate rents have yet to return to their
2000 levels, although they are steadily increasing. Currently, rents are averaging
around $2.00 per square foot, or $2,100 per month for a two-bedroom unit.
. KMA assumes the average new market rate apartment unit would be an 1,100
square foot two-bedroom unit. Because current market rents do not support new
apartment development, we cannot rely on market rents to calculate affordability
gaps. Instead, KMA calculated the required market rent by estimating
development costs for a new apartment project and working backwards to an
implied rent level for project feasibility. For the purposes of the analysis, KMA
assumes development costs in the range of $300,000 per unit. Given the high
land costs and the recent increases in the cost of construction, this figure may
underestimate actual development costs in Cupertino. Assuming a cap rate of
6.5%, we estimate the net operating income required to support these
development costs. To the net operating income, we add operating expenses of
$7,500 per unit per year, which includes property taxes, common area
maintenance and utilities, water, trash collection, maintenance and reserves. We
estimate that market rents would have to average $2,250 a month to support
development costs of about $300,000 per unit.
Affordable Rents
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. Table 6 provides a calculation of the affordable rent levels for low income (60%
of Area Median Income) and very low income (50% of AMI) households.
Consistent with previous estimates for the City, we assume 30% of income is
spent on housing. Estimated utility allowances are again based on the City's
2004 estimates. Under the revised rent calculation, a two-bedroom low-income
unit would rent for $1,347 per month and a two-bedroom very-low income unit
would rent for $1,116 per month.
Affordability Gaps per Unit
. Table 7 provides a comparison of feasible market rate rents for a new apartment
unit to the affordable rents from Table 6. Assuming 30% of income goes towards
housing (including utilities), this rent level is affordable to a household earning
$93,000, or 98% of AMI.
. Table 7 also calculates the supportable unit value for the affordable units using
the same assumptions detailed above. A low-income unit can support
development costs of $133,300 while a very-low income unit can support
$90,600.
. Table 8 calculates the affordability gaps. The affordability gap is the difference
between the unit value supported by a market rate unit and the value supported
by an affordable unit. The affordability gap for a low income unit is ($166,700)
and for a very-low income unit, ($209,400).
Total Affordability Gaps and Equivalent In-Lieu Fee
. Table 9 takes the affordability gaps per unit and calculates the total affordability
gap and the equivalent in-lieu fee. A 120-unit apartment project would owe 7.2
(40% of 15%) low-income units and 10.8 (60% of 15%) very-low income units.
(We use fractional units for the purpose of this analysis.) The total affordability
gap from this obligation is $3,461,760. To generate a fee of $3,461,760 with 120
units averaging 1,100 square feet, the in-lieu would have to be $26 per square
foot.
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TABLE 1
MARKET SALE PRICES - SINGLE-FAMILY ATTACHED PROJECTS
IN-LIEU FEE UPDATE
CITY OF CUPERTINO, CA
Unit Mix Bd. Ba. Bldq.SF Price $/SF
VILLAGlO CUPERTINO (2006)
20 Units 80 units planned. 19
Amber 4 1 1 743 $453,880 $611 currently sold.
Rose 2 2 2 1,116 $633,880 $568
Orchid 2 2 2 1,125 $671,880 $597
Jasper 3 3 2 1,193 $736,880 $618
Chime 3 2 2 1,230 $676,880 $550
Lotus 3 3 2 1,350 $750,880 $556
Magnolia 2 3 2.5 1.433 $799,880 $558
19 1,139 $658,985 $582
STERLING SQUARE (2006)
29 Units 51 units planned. 25
Plan 3 7 3 2.5 1,670 $918,000 $550 currently sold.
Plan 2 7 3 2.5 1,714 $945,000 $551
Plan 1 6 4 3.5 1,942 $1,009,000 $520
Plan 4 ~ 4 3.5 2,058 $1.035,000 $503
25 1,825 $970,800 $534
TRA VIGNE VILLAS (2004)
46 Units Sold out.
Plan 4 10 2 2 938 $450,000 $480
Plan 1 12 2 2 973 $462,000 $475
Plan 2 10 2 2 1,088 $465,000 $427
Plan 3 14 2 2 1,198 $483,000 $403
46 1,059 $466,435 $444
AVERAGE (Wt.) 44 1,482 $814,893 $558
Source: Hanley Wood. Searches conducted August 2006 and Summer 2004.
Keyser Marston Associates, Inc.
11413.006/001-009.xls; Table 1; 8/30/2006; kh/mc
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TABLE 2
UPDATED BMR HOUSING PRICES
MEDIAN, MODERATE INCOME HOUSEHOLDS
IN-LIEU FEE UPDATE
CITY OF CUPERTINO, CA
1-Bdrm 2-Bdrm 3-Bdrm 4-Bdrm 5-Bdrm
DERATE INCOME
Income @ 120% County Median $101,280 $114,000 $126,600 $136,680 $146,880
Income Allotted to Housing @ 30% of Income 30,384 $34,200 37,980 41,004 44,064
(Less) Ongoing Expenses 1 9,230 $9,700 10,160 10,530 10,890
Income Available for Mortgage $21,154 $24,500 $27,820 $30,474 $33,174
r Maximum Purchase Price' $279,000 $323,000 $367,000 $402,000 $437,000 I
DIAN INCOME
Income @ 90% County Median $75,960 $85,500 $94,950 $102,510 $110,160
Income Allotted to Housing @ 30% of Income 22,788 $25,650 28,485 30,753 33,048
(Less) Ongoing Expenses 1 8,310 8,660 9,000 9,280 9,560
Income Available for Mortgage $14,478 $16,990 $19,485 $21,473 $23,488
I Maximum Purchase Price' $191,000 $224,000 $257,000 $283,000 $310,000 I
MO
ME
1 Includes utilities, homeowner association dues and property taxes based on unit value.
2 Debt @ 7.00% interest (7.98% mortgage constant) & down payment @ 5.00 % of home price.
Keyser Marston Associates, Inc.
11413.006/001-009.xls; Table 2; 8/30/2006; mtn
TABLE 3
AFFORDABILlTY GAPS
IN-LIEU FEE UPDATE
CITY OF CUPERTINO, CA
WORKING DRAFT
Prototype:
Attached Row or Townhouse (condominium)
20 Units
AveraQe Unit
Size
$/SF
Sales Price
Market Price
1,400 SF
Three Bedrooms
$550
$770,000
Affordable
Sales Price
Affordability
Gap
Median (90% AMI)
$257,000
($403,000)
($513,000)
Moderate (120% AMI)
$367,000
Sources: See Tables 1 and 2 for calculation of the affordable sales prices. Square footage and
market price based on proposed projects and new homes sales compiled by Hanley Wood; Keyser
Marston Associates.
Totals may not sum due to rounding.
Keyser Marston Associates, Inc.
11413.006/001-009.xls; Table 3; 8/30/2006; hgr
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TABLE 4
EQUIVALENT IN-LIEU FEE CALCULATION - ATTACHED PROTOYPE
IN-LIEU FEE UPDATE
CITY OF CUPERTINO, CA
WORKING DRAFT
CondominiumlTownhome Prototvpe Development Proqram
Unit
Avq. Unit Size
Number of Units
Three Bedroom Units
1,400 SF 1
20
Units Required
Affordabilitv
Gap per Unit
Total Gap
15% of Units 3.0
Moderate Units 1.5 ($403,000) ($604,500)
Median Units 1.5 ($513,000) ($769,500)
($1,374,000)
Equivalent In-Lieu Fee Calculation $49/SF 1,400 SF/Unit ($1,374,000)
1. Square footage does not include garage space.
Totals may not sum due to rounding.
Keyser Marston Associates, Inc.
11413.006/ 001-009.xls; Table 4; 8/30/2006; hgr
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TABLE 5
CURRENT MARKET RENTS - SUMMARY
NEWER APARTMENT UNITS
IN-LIEU FEE UPDATE ANALYSIS
CITY OF CUPERTINO, CA
1 BR 2 BR 3 BR Notes
Sq.Ft. Rent $/Sq. Ft. Sq. Ft. Rent $/Sq. Ft. Sq.Ft. Rent $/Sq. Ft.
Newer Apartment Buildings
Aviare 747 $1,450 $1.94 957 $1,695 $1.77
Built: 1997; 20415 Via Paviso (140 units) 829 $1,550 $1.87 1,010 $1,995 $1.98
Arioso 534 $1,400 $2.62 1,197 $2,325 $1.94 Sold in 2005 for $286,000/unit.
Built: 1999: 19608 Pruneridge (201 units) 546 $1,400 $2.56 1,213 $2,250 $1.85 Sold in 2000 for $238,OOO/unit.
792 $1,700 $2.15 1,237 $2,275 $1.84 Flats.
829 $1,800 $2.17 About 30 du/acre.
Cupertino Park Center 753 $1,320 $1.75 896 $1,830 $2.04 Podium Garage (240 sp.).
Built: 1998; 20380 Stevens Creek (120 units) 647 $1,285 $1.99 953 $1,870 $1.96 85 du/acre.
668 $1,280 $1.92 1,165 $2,025 $1.74
753 $1,230 $1.63 1,340 $2,460 $1.84
1078 $1,900 $1.76 950 $1,945 $2.05
702 $1,260 $1.80 1,059 $1,995 $1.88
897 $1,735 $1.93 1,186 $2,460 $2.07
929 $1,862 $2.00 1,266 $3,550 $2.80
ForQe Homestead 709 $1,600 $2.26 929 $1,850 $1.99 1,262 $2,463 $1.95
Built: 1997; 20691 Forge Way (196 units) 739 $1,700 $2.30 988 $1,975 $2.00
The Hamptons at Cupertino 734 $1,655 $2.25 1,132 $2,465 $2.18 1,211 $2,480 $2.05 Flats and townhouses.
Built: 1998; 19500 Pruneridge (342 units) 753 $1,915 $2.54 945 $2,045 $2.16 1,387 $2,875 $2.07 27 du/acre.
Structured pkg.
Archstone Cupertino 728 $1,500 $2.06 1,043 $1,960 $1.88 1,508 $2,755 $1.83 Sold in 2006 for $283,OOO/unit.
Built: 1998; 5608 Stevens Creek (311 units) 774 $1,610 $2.08 1,060 $2,070 $1.95 Flats and townhouses.
1,112 $2,030 $1.83 39 du/acre.
1,142 $2,160 $1.89 Podium structured parking
IAverage (Unweighted) 757 1,558 $2.06 1,085 $2,154 $1.99 1,342 2,643 $1.97
. Sources: Real Facts, Rent.com., Apartments.com
Keyser Marston Associates, Inc.
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TABLE 6
AFFORDABLE RENT CALCULATIONS
VERY-LOW AND LOW INCOME HOUSEHOLDS
IN-LIEU FEE UPDATE ANALYSIS
CITY OF CUPERTINO, CA
I.
1-Bdrm 2-Bdrm 3-Bdrm
Low Income
Income @ 60% County-Median $50,640 $57,000 $63,300
% of Income Allotted to Housing 30% 30.0% 30%
Monthly Housing Expenses $1,266 $1,425 $1,583
(Less) Utilities Expenses (59) (78) (94)
I Monthly Rent $1.207 $1,347 $1,489 I
Very-Low Income
Income @ 50% County Median $42,450 $47,750 $53,050
% of Income Allotted to Housing 30.0% 30.0% 30.0%
Monthly Housing Expenses $1,061 $1,194 $1,326
(Less) Utilities Expenses (59) (78) (94)
I Monthly Rent $1,002 $1,116 $1,232 I
II.
Keyser Marston Associates, Inc.
11413.006/001-010.xls; Table 6; 8/30/2006;hgr
TABLE 7
SUPPORTABLE UNIT VALUES
APARTMENT UNITS - TWO BEDROOMS
IN-LIEU FEE UPDATE ANALYSIS
CITY OF CUPERTINO, CA
Two BR Unit -- 1,100 SF
(Three Person Household)
Income
Target
%AMI(1)
Rent
Month Year
Less
Op Exp(3)
Annual
Household Income
NOI
Market Rent
Apartment Unit
$2,250 (2) $27,000
($7,500)
$19,500
98%
$93,120
Affordable Rent
Low Income
$1,347 $16,164
($7,500)
$8,664
60%
$57,000
Very-Low Income
50%
$47,750
$1,116 $13,389
$5,889
($7,500)
Rent and Values Per Square Foot
Market
$2.05
Low Income
$1.22
Very-Low Income
$1.01
(1) AMI = Area Median Income, which is $95,000 for a three person household in Santa Clara County, 2006.
(2) See Table R-2 for affordable rent calculations. Market rate rent assumes an 1,100 SF unit at $2.05/SF. This rent level reflects 'normalized' market conditions. Current rents for
new 2BR units are approximately $2,000 to $2,100 per month, which do not support current development costs. In 2000, the same apartment was renting for $2,500 to $2,600.
(3) General operating expenses based on average operating expenses from similar size apartment projects ($4,500). Property taxes are based on unit value. It is important to note
that property tax-exemption is NOT assumed in this analysis.
(4) Net operating income capitalized at 7%. Rounded to nearest 100.
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N 11413.006/001-010.xls; Table 7; 8/30/2006;hgr
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Unit
Value
Supported(4)
$300,000
$133,300
$90,600
$273
$121
$82
TABLE 8
AFFORDABILlTY GAPS PER UNIT
APARTMENT UNITS - TWO BEDROOMS
IN-LIEU FEE UPDATE ANALYSIS
CITY OF CUPERTINO, CA
Apartment Proiect Tvpe
Total Development
Costs (Rounded)
Affordable Unit
Value
Affordability
Gap Per Unit1
Two BR Unit --1,100 SF
(Three Person Household)
Low Income
$300,000
$133,300
Very-Low Income
$300,000
$90,600
($166,700)
($209,400)
1Gap is the difference between development cost (value supported at market rents) and value supported at affordable rents.
Keyser Marston Associates, Inc.
11413.006/001-01 O.xls; Table8; 8/30/2006;hgr
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TABLE 9
EQUIVALENT IN-LIEU FEE CALCULATION - RENTAL PROTOYPE
IN-LIEU FEE UPDATE ANALYSIS
CITY OF CUPERTINO, CA
WORKING DRAFT
Apartment Prototype Development ProQram
Unit
AVQ. Unit Size
Number of Units
Two Bedroom Units
1,100 SF 1
120
Units Required
Affordabilitv
Gap per Unit
Total Gap
15% of Units 18.0
Low Units 7.2 $166,700 $1,200,240
Very Low Units 10.8 $209,400 $2,261,520
$3,461,760
Equivalent In-Lieu Fee Calculation $26/SFI 1,100 SF/Unit $3,461,760
1. Square footage does not include garage space.
Totals may not sum due to rounding.
Keyser Marston Associates, Inc.
11413.006/001-010.xls; Table 9; 8/30/2006;hgr
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