HomeMy WebLinkAboutPresentation - Item 3CEconomic & Planning Systems, Inc.The Economics of Land Use800 Wilshire Boulevard, Suite 410 Los Angeles, CA 90017213.489.3838 www.epsys.comEconomic & Planning Systems, Inc.The Economics of Land UseINCLUSIONARY HOUSING FEASIBILITY STUDY AND COMMERCIAL LINKAGE FEE NEXUS STUDYCity of Palm Springs City Council MeetingJuly 24, 2023
Economic & Planning SystemsCity of Palm Springs | 1AGENDA1.Context/Overview2.Planning Commission Feedback3.2023 HCD Income Limits and Gap Analysis4.Commercial Linkage Fee–Maximum Nexus-Based Fees–Approach to Setting Fees–Discussion5.Inclusionary Housing–Ownership–Rental–Discussion6.Questions/Discussion
Economic & Planning SystemsCity of Palm Springs | 2CONTEXT-OVERVIEWCommercial linkage fees and inclusionary housing policies are two of several policy tools available to jurisdictions to support and promote the development of affordable housing units.Studying a commercial linkage fee program and an inclusionary program are one of Palm Spring’s 6thCycle Housing Element commitments.In September 2022, the City authorized an Agreement with Economic and Planning Systems, Inc., (EPS) to explore the feasibility of –1) a commercial linkage fee program, and –2) an inclusionary housing programPresented to the Planning Commission on April 12 and June 28
Economic & Planning SystemsCity of Palm Springs | 3PLANNING COMMISSION FEEDBACKFeedback:–Commercial linkage fee levels: preference for the “economic development lens” approach to setting fees–Inclusionary requirements: balance dual objectives of achieving RHNA and advancing supply affordable housing, while ensuring market rate development remains feasible•address Very Low income cohort–Compare requirements in other tourism-based citiesOther Questions:–How is development on tribal land affected?–How much development potential (not already entitled) remains?–How much fee revenue would be generated?–Will development go elsewhere?
Economic & Planning SystemsCity of Palm Springs | 4HCD INCOME LIMITS, 2023HCD income limits increased for Riverside County from 2022 to 2023–In 2022, median HH income for a 4-person HH was $87,400 – now $94,500–Acutely Low to Low-income categories increased approximately 6% –Median to Moderate-income categories increased approximately 8%BY HOUSEHOLD SIZE
Economic & Planning SystemsCity of Palm Springs | 5GAP ANALYSIS FOR AFFORDABLE UNITS2-3 STORY MULTIFAMILY DEVELOPMENT AT 54 DU/ACRE (900 SQ. FT. UNITS) ABOVE-GRADE STRUCTURED PARKINGTotal Development Cost: ~$463,000$39,780$94,260$299,410$422,804$368,324$163,174$0$100,000$200,000$300,000$400,000$500,000Very Low Income(50% AMI)Lower Income(60% AMI)Moderate Income(110% AMI)Total Supportable Unit ValueAffordability Gap
COMMERCIAL LINKAGE FEE
Economic & Planning SystemsCity of Palm Springs | 71.How many jobs are generated from the new development? 2.How much do these new employees earn?3.How many units of employee housing are needed?4.What is the gap between housing development costs and workforce purchasing power?5.What commercial linkage fee will fill this gap?COMMERCIAL LINKAGE FEE: KEY QUESTIONSWhat is the impact of new, commercial developmenton the need for workforce housing?To answer this, we need to know…
Economic & Planning SystemsCity of Palm Springs | 8COMMERCIAL EMPLOYMENT AND HH GENERATIONHousehold formation rates exclude workers aged 16 – 19 (Bureau of Labor Statistics)Workers per household with earnings is 1.33(2017-2021 Census ACS) CategoryRetail/Restaurant/ServicesOffice/R&D/Medical Offices Lodging Industrial WarehousingPrototype Size (Sq.Ft.) 100,000 100,000 100,000 100,000 100,000Employment Density (Sq.Ft. per Job) 400 250 500 750 1,500Total Employees per 100,000 Sq.Ft. 250 400 200 133 67Employees Forming Households 226 388 194 129 65Total Households per 100,000 Sq.Ft. 170 292 146 97 49AK0
Slide 9AK0 Slides 8 and 9 are not consistentA. Kanat, 2023-07-12T16:28:33.803
Economic & Planning SystemsCity of Palm Springs | 9CategoryRetail/Restaurant/ServicesOffice/R&D/Medical Offices Lodging Industrial WarehousingTotal Households 170 292 146 97 49Total Households (up to 120% AMI) 161 177 137 85 45Total Required Subsidy $58,684,718 $57,807,953 $49,283,972 $19,819,142 $15,138,531Maximum Nexus-Based Fee (per Sq.Ft.) $587 $578 $493 $198 $151Adjusted Maximum Nexus Based Fee $485 $478 $408 $164 $125Figures are rounded to nearest whole number.COMMERCIAL MAXIMUM FEE CALCULATIONThe number of households in each income category is multiplied by the corresponding affordability gap to arrive at the total required subsidy. The total subsidy is divided by the prototypical building square footage (100,000 sq.ft. of development) to calculate the maximum fee per square foot.Adjusted to exclude workers who both work and live in Palm Springs (2019 LEHD)
Economic & Planning SystemsCity of Palm Springs | 10NEXUS-BASED MAXIMUM VS FEASIBLE FEE LEVELSNexus results indicate maximum-justifiable fee levels. BUT, the nexus results typically cannot reasonably be absorbed by new development.i.e., the maximum-justifiable fee levels would likely render new non-residential development infeasibleFeasibility analysis seeks to determine what level of fee/inclusionary requirement can be absorbed by developers while still allowing a reasonable return.Often informed by a survey of fee levels in other citiesWithin Coachella Valley, only Palm Desert has a commercial linkage fee program
Economic & Planning SystemsCity of Palm Springs | 11EXAMPLES OF COMMERCIAL LINKAGE FEES IN OTHER CITIESLand Use Category Palm Desert[1]Fontana [2]Glendale West HollywoodSanta MonicaSan Diego San Luis ObispoNapa Palo AltoOffice (Per Sq. Ft.) $0.50 $1.15 $4.00 $9.39 $13.34 $2.12 $6.00 $3.55 $42.90Retail (Per Sq. Ft.) $1.00 $1.66 $4.00 $9.39 $11.61 $1.28 $6.00 $3.55 $24.97Industrial (Per Sq. Ft.) $0.33 $0.12 $4.00 $9.39 $8.97 ‐‐$5.00 $3.50 ‐‐Hotel (Per Sq. Ft.) $620 (Per Room) $0.71 $4.00 $9.39 $3.65 $1.28 $6.00 $6.00 $24.97[1] Palm Desert hotel fee shown is for "Non-Resort Hotel". The "Resort Hotel" fee is higher at $1,000 per room. [2] Fontana's linkage fee program (San Bernardino County) has additional land use categories of "Hospital/Medical" at $1.43 per sq. ft. and "Warehouse/Distribution" at $0.13 per sq. ft.
Economic & Planning SystemsCity of Palm Springs | 12POTENTIAL APPROACHES TO SETTING FEESRecommended fee levels are well below supportable maximumsOption #1 Option #2 Option #3high of $5, low of $4high of $6, tier proportionallyeconomic development lensRetail/Restaurant/Services (Per Sq. Ft.)$485 $5.00 $6.00 $3.00Office/R&D/Medical Offices (Per Sq. Ft.$478 $5.00 $6.00 $6.00Industrial (Per Sq. Ft.)$164 $4.00 $2.00 $6.00Warehousing (Per Sq. Ft.)$125 $4.00 $1.50 $6.00Hotel (Per Sq. Ft.)$408 $5.00 $5.00 $3.00Adjusted Maximum FeeLand Use Category
Economic & Planning SystemsCity of Palm Springs | 13POTENTIAL REVENUE GENERATEDSince 2000, the City has experienced an average of nearly 109,000 sq. ft. of commercial development annually, with lows of less than 10,000 sq. ft. and highs of over 250,000 sq. ft. IF development continues at the same rate…And IF all new development is net new…And IF all development is charged the same rate…A linkage fee set at $3 per sq. ft., would generate approximately $327,000 annually on averageA linkage fee set at $6 per sq. ft., would generate approximately $654,000 annually on average
Economic & Planning SystemsCity of Palm Springs | 14DISCUSSION PROMPTSIn the context of the City’s RHNA (2,557 units, including 545 Very Low-income units, 408 Low-income units, and 461 Moderate-income units), do you think a commercial linkage fee would help generate revenue to invest in affordable housing?Potential use of commercial linkage fee revenue: -Direct subsidy to affordable housing developer-Land acquisition-Acquisition/Rehabilitation and Conversion to deed-restricted units-Preservation of affordable units-Local match to improve competitiveness for tax credit projectsWhat approach to setting fee revenues is most appropriate for Palm Springs?
INCLUSIONARY HOUSING
Economic & Planning SystemsCity of Palm Springs | 160%5%10%15%20%25%Jurupa Valley Temecula Montclair Encinitas(Option #1)Encinitas(Option #2)Carlsbad Monterey Santa Cruz PasadenaVery LowLowModerateRENTAL INCLUSIONARY REQUIREMENTS IN CALIFORNIA CITIES AS OF MAY 2023$15,400/unit $2,925/unit$36.71 to $76.68/sq. ft.
Economic & Planning SystemsCity of Palm Springs | 170%5%10%15%20%25%Jurupa Valley Calimesa Temecula Montclair Encinitas(Option #1)Encinitas(Option #2)Carlsbad Monterey Santa Cruz PasadenaVery LowLowModerateOWNERSHIP INCLUSIONARY REQUIREMENTS IN CALIFORNIA CITIES AS OF MAY 2023$15,400/unit $8,529/unit$33.72 to $78.95/sq. ft.
Economic & Planning SystemsCity of Palm Springs | 18WHAT IS DEVELOPMENT FEASIBILITY?A feasibledevelopment provides a sufficient return on investment to incentivize a “go” decision•Value of development exceeds the costs•Project generates competitive rate of return•Financial returns reflect project risksValueDeveloper Profit/ ReturnSoft Costs (incl. fees)Direct/ Construction CostsLandProject Value Project Cost
OWNERSHIP INCLUSIONARY PROGRAM
Economic & Planning SystemsCity of Palm Springs | 20OnsiteInclusionary RequirementVery Low Low ModerateActualRecommended TargetOption 110.0%0.0% 5.0% 5.0%$17.01 $20.00Option 210.0%0.0% 0.0% 10.0%$14.24 $15.00Option 315.0%0.0% 5.0% 10.0%$24.13 $25.00In-Lieu Fee (per sq.ft.)INCLUSIONARY PROGRAM OPTIONS FOR DISCUSSION-OWNERSHIPConsiderations:Target in-lieu fee per sq. ft. between $15 and $25Include two or more income levels in each program (blended incomes)–Challenging to qualify Very Low-income households for ownership housing–Blend Low - and Moderate-income levels only
Economic & Planning SystemsCity of Palm Springs | 210.00%5.00%10.00%15.00%20.00%25.00%30.00%35.00%40.00%No Inclusionary MaximumFeasible Fee($58.48/sq.ft.)Option 1Option 2Option 3Profit MarginTESTING FEASIBILITY SCENARIOS -OWNERSHIPFigure shows the profit margin achieved under different scenarios:–15% profit margin threshold–Current market-rate development exceeds the feasibility thresholdsTarget $15-25 based on statewide trends of in lieu fees15% profit margin required for feasibilitySINGLE-FAMILY DETACHED DEVELOPMENT
Economic & Planning SystemsCity of Palm Springs | 22OWNERSHIP INCLUSIONARY PROGRAM - EXAMPLEExample Development: 25 market-rate units, single-family detached project, 2,000 sq. ft. per unitOnsite Inclusionary Requirement: –10% Total : 5% Low and 5% Moderate–In-lieu fee: $20 per sq. ft.Onsite Build:–25 units x 10% = 2.50 affordable units (1.25 Moderate and 1.25 Low)–Overall inclusionary requirement results in 2 units onsite (1 Moderate and 1 Low). The fractional unit (0.5 or higher) can round up so that 3 units are built on site or pay a fee.In-Lieu Fee:–2,000 sq.ft. x $20 = $40,000 per unit or $1,000,000 for 25 units
RENTAL INCLUSIONARY HOUSING
Economic & Planning SystemsCity of Palm Springs | 24OnsiteInclusionary RequirementVery Low Low ModerateActualRecommended TargetOption 110.0%2.5% 2.5% 5.0%$14.91 $15.00Option 26.0%3.0% 3.0% 0.0%$17.65 $20.00Option 315.0%2.5% 2.5% 10.0%$15.10 $20.00In-Lieu Fee (per sq.ft.)INCLUSIONARY PROGRAM OPTIONS FOR DISCUSSION -RENTALConsiderations:Target in lieu fee per sq. ft. between $15 and $20Include two or more income levels in each program (blended incomes)–Preference to incorporate Very Low, if feasible–Adding Very Low-income requirement constrains overall requirement and/or increases associated in lieu fee
Economic & Planning SystemsCity of Palm Springs | 250.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%No Inclusionary MaximumFeasible Fee($81.50/sq.ft.)Option 1Option 2Option 3Yield-on-CostTESTING FEASIBILITY SCENARIOS -RENTALFigure shows the yield-on-cost achieved under different scenarios:–5.50% yield-on-cost threshold–Current market-rate development exceeds the feasibility thresholdsTarget $15-20 based on statewide trends of in lieu fees5.50% yield-on-cost required for feasibilityMULTIFAMILY DEVELOPMENT
Economic & Planning SystemsCity of Palm Springs | 26RENTAL INCLUSIONARY PROGRAM - EXAMPLEExample Development: 25 market-rate units, multifamily rental project, 1,000 sq. ft. per unitOnsite Inclusionary Requirement: –10% Total : 2.5% Very Low, 2.5% Low, and 5% Moderate–In-lieu fee: $15 per sq. ft.Onsite Build:–25 units x 10% = 2.50 affordable units (1.25 Moderate, 0.625 Low, and 0.625 Very Low)–Overall inclusionary requirement results in 2 units onsite (1 Moderate and 1 Low). The fractional unit (0.5 or higher) can round up so that 3 units are built onsite or pay a fee.In-Lieu Fee:–1,000 sq.ft. x $15 = $40,000 per unit or $375,000 for 25 units
Economic & Planning SystemsCity of Palm Springs | 27DISCUSSION PROMPTSIn the context of the City’s RHNA (2,557 units, including 545 Very Low-income units, 408 Low-income units, and 461 Moderate-income units), do you think either of the tools discussed could help the City achieve more affordable housing?Both on-site units and in-lieu fee revenue can advance City’s affordable housing objectives.Inclusionary housing: –What level of inclusionary is most appropriate in Palm Springs?•for rental developments?–targeting which income cohorts?•for for-sale developments?–targeting which income cohorts?
Economic & Planning SystemsCity of Palm Springs | 28Next Steps