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Home My WebLink About5ACITY COUNCIL STAFF REPORT DATE: APRIL 8, 2021 NEW BUSINESS SUBJECT: INCLUSIONARY HOUSING PROGRAM FROM: David H. Ready, Esq., Ph.D., City Manager BY: Jeffrey S. Ballinger, City Attorney SUMMARY: To encourage the development of more affordable housing within the City of Palm Springs, the City may require housing developers to provide a percentage of their units at affordable levels, through an inclusionary-housing ordinance. This agenda item provides the City Council with an opportunity to discuss inclusionary housing ordinance, so that the City Council can provide direction to City Staff and the City Attorney with regard to any such program. RECOMMENDATION: 1. Discuss inclusionary housing program and provide direction to City Staff and City Attorney. STAFF ANALYSIS: "lnclusionary housing" ordinances adopted by cities and counties require market-rate housing developments or rental housing developments to include a specified percentage of homes that are affordable to low-and moderate-income households. These ordinances often establish a standard requiring that between 5 and 25 percent of the residential units constructed be available to low-and moderate-income households.1 The primary reason for adopting an inclusionary-housing ordinance is to encourage the development of more affordable housing throughout a community. State law does not yet require cities to adopt an inclusionary-housing ordinance, but many cities consider 1 California Land Use Practice (Cal CEB 2019), § 6.2. ITEMNO. S--'{\ 1 City Council Staff Report April 8, 2021 --Page 2 lnclusionary Housing Program an inclusionary-housing ordinance to be vital to satisfying their state-required housing obligations. 2 For over 50 years, State law has required cities like Palm Springs to "adopt a comprehensive, long-term general plan for the physical development of the ... city."3 Through its general plan and otherwise, the City must "facilitate the improvement and development of housing to make adequate provision for the housing needs of a// economic segments of the community,"4 including the City's allocated share of regional housing needs for "extremely low, very low, low-, and moderate-income households."5 The State requires cities to "provide incentives, such as density bonuses, to developers who voluntarily include affordable housing in their proposed development projects. "6 These ·incentives help, but are often not enough to ensure that needed affordable housing gets built. So, many cities choose to adopt an inclusionary-housing ordinance. As of 2019, more than 170 cities and counties in California have inclusionary housing ordinances.7 There are several options that the City should consider in contemplating an inclusionary housing ordinance, such as: • Should the City focus on affordable rental units or for-sale units, or both? • Should the City prioritize the integration of affordable units into market-rate projects? • How much of a project does the City want to require be set aside for affordable housing? For-sale units or affordable rental units, or both? This choice affects some of the City's other options, such as whether it may require affordable units to be provided on-site. 2 See generally California Building Industry Assn. v. City of San Jose (2015) 61 Cal.4th 435 ("CBIA"), 444--446. 3 Cal. Gov. Code § 65300, enacted by Stats. 1965, ch. 1880, § 5, pp. 4334, 4336, operative Jan. 1, 1967. 4 Gov. Code§ 65580, subd. (d), emphasis added; see also§ 65583. 5 Gov. Code§ 65853, subds. (a)(1) & (c)(2). 6 CB/A, supra, at 445, citing Gov. Code§ 65915. 7 California Land Use Practice (Cal CEB 2019), § 6.2; CB/A, supra, at 446. 2 City Council Staff Report April 8, 2021 --Page 3 lnclusionary Housing Program For-Rent Considerations The City may require that a certain percentage of rental units be made affordable. But, the City may not require the developer to provide the units on-site without including alternative means of compliance, such as paying an in-lieu fee, making a land donation, off-site construction, or acquiring and rehabilitating existing affordable units.8 Thus, the City must allow the developer to opt-out of providing the affordable rental units on-site. If the Council wishes to consider a new inclusionary housing requirement, it would be useful to analyze how the proposed percentage of affordable units required would dovetail with the qualifying percentages of affordable housing under the density bonus statute (Government Code§ 65915) and what the ramifications would be. For-Sale Considerations The City has more flexibility in imposing inclusionary-housing requirements on for-sale projects. Namely, the City does not have to allow the developer to opt out of providing affordable units on-site, though the City must allow the developer the option of providing the on-site affordable units as rental units, even though the rest of the project is for- sale.9 Whether the affordable units are built on-site merits particular consideration by the Council. On-site or Off-site? Another issue that the City should consider is whether to require the affordable units to be located on-site (i.e., integrated into the new development) or off-site. This choice has significant legal implications. If the City requires affordable units to be located on- site, then the requirement may be imposed as a land-use restriction and price control under the City's police power, since the mandate to provide a certain percentage of the units for lower-income households is a restriction on the use of land.10 However, if the City does not require affordable units to be provided on-site, but instead allows a developer to pay an in-lieu fee or dedicate land elsewhere, that fee or dedication would 8 Government Code§ 65850 and subd. (g). 9 Gov. Code§ 65589.8. The statute appears to allow the City to require that rental units be built on-site when the developer elects to provide affordable rental units instead of affordable for-sale units in a for- sale project, as it emphasizes that the city may require "construction" of the units as determined by the city. 1° CB/A, supra, at 444. 3 City Council Staff Report April 8, 2021 --Page 4 lnclusionary Housing Program likely be deemed an "exaction", subject to all the nexus and proportionality requirements that a city must satisfy to justify a fee and avoid an unconstitutional taking.11 The City shoulders less of a legal burden in justifying the inclusionary-housing requirement if it limits itself to requiring affordable units on-site (at least as to for-sale units), instead of requiring the payment of in-lieu fees -though allowing fees as an alternative (instead of requiring fees as the only option) can avoid the exaction problem. If there is at least one, non-exaction alternative available to the developer, the City does not have to shoulder the higher legal burden of justifying any of the alternatives as an exaction. In addition to the legal issues just discussed, the choice of on-site versus opt-out alternatives also has significant policy implications. Federal and state governments recognize that affordable housing is often better implemented in a community when the affordable housing is distributed throughout the community. "This integration of affordable units into market-rate projects creates opportunities for households with diverse socioeconomic backgrounds to live in the same developments and have access to the same types of community se_rvices and amenities."12 Allowing for an in-lieu fee or off-site dedication means less diversity within a particular development and can result in less diversity in the City too, as fees and off-site alternatives are aggregated and used to develop affordable housing in only particular parts of the City. The City can encourage the development of on-site, affordable units by directly requiring it for for-sale projects and by incentivizing it in all projects, whether for-sale or for-rent. One of the best ways to incentivize it in a for-rent project is to offer a "discount" on the percentage of required affordable units, if the units are built on-site. How much to require? As noted above, some cities require 25 percent of a new housing project to be affordable units. Palm Springs may set its own percentage. To incentivize the production of on-site units integrated into market-rate projects, the City may establish a lower percentage of units if provided on-site (e.g., 15 percent), and a higher percentage for off-site alternatives (e.g., 20 or 25 percent).13 In certain situations, the City will have to justify anything more than 15 percent with specific findings and support those findings with a robust economic feasibility study. If the City both: (1) requires that more than 15 percent of rental units in a project be made 11 Any such fee would need to be justified by a study, conducted by a consultant, to demonstrate he nexus and proportionality requirements imposed by caselaw. 12 CB/A, supra, at 462. 13 E.g., CB/A, supra, at 450-51. 4 City Council Staff Report April 8, 2021 --Page 5 lnclusionary Housing Program affordable for households with 80 percent or less of the area median income: and (2) either (a) does not meet at least 75 percent of its regional housing needs allocation for above-moderate housing, or (b) fails to submit its annual housing element report for two consecutive years, then the State Department of Housing and Community Development ("HCD") has a right to review the City's inclusionary housing ordinance and require the City to make justifying findings, supported by a study. If the Council wishes to explore an inclusionary requirement for rentals in an amount greater than 15 percent, it might consider also commissioning an economic feasibility study. This would forestall any surprises in the event of an HCD request for such a study. The primary constraints on how much to require are practical ones, based on project economics and market incentives. The more units that the City requires, the less appealing the project might be to developers to actually carry out. But, this can be offset by providing other compensating incentives, particularly under the City's state- mandated density-bonus ordinance. Any affordable units that the City might require through its inclusionary-housing ordinance will also count toward the thresholds for density-bonuses and related incentives and concessions under state law, which can be significant.14 Therefore, the City Council should discuss these issues and provide direction to City staff as to whether, and what type of inclusionary housing program to bring back to Council for further consideration. ENVIRONMENTAL ASSESSMENT: This action is not subject to environmental review under the California Environmental Quality Act, since it constitutes only a study at this point. Should the City Council ultimately adopt an inclusionary housing ordinance, such ordinance may be subject to further environmental review. FISCAL IMPACT: An inclusionary housing ordinance is not likely to have any direct financial impact on the City. If the City establishes an in-lieu fee, a study will be necessary to justify the amount of that fee. Such studies typically run approximately $50,000. In addition, to the extent the City Council establishes lower development impact fees for affordable housing, the establishment of an inclusionary housing program will increase 14 Latinos Unidos Del Valle De Napa Y Solano v. County of Napa (2013) 217 Cal.App.4th 1160, 1168--69. 5 City Council Staff Report April 8, 2021 -Page 6 lnclusionary Housing Program the number of affordable · units, thereby reducing the amount of development impact fees that are collected. SUBMITTED BY: Director of Development Services David H. Ready, E5q., ~ City Manager 6