HomeMy WebLinkAbout7.1 Inclusionary Zoning and In-Lieu Fee Feasibility Study and Commercial Linkage Fee Nexus StudySTAFF REPORT
CITY COUNCIL
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Agenda Item 7.1
DATE:August 15, 2023
TO:Honorable Mayor and City Councilmembers
FROM:Linda Smith, City Manager
SUBJECT:Inclusionary Zoning and In-Lieu Fee Feasibility Study and Commercial Linkage Fee Nexus StudyPrepared by:Jason Earl,Senior Management Analyst
EXECUTIVE SUMMARY:The City Council will receive a report on the Inclusionary Zoning and Affordable Housing In-Lieu Fee Feasibility Study and the Commercial Linkage Fee Nexus Study. The City Council will be requested to provide feedback and direction on key policy decisions. This feedback will be used to prepare updates to the Inclusionary Zoning Regulations, Affordable Housing In-Lieu Fee, and Commercial Linkage Fee programs in accordance with the City’s Two-Year Strategic Plan. The updates to these programs will be considered for adoption at a future meeting.
STAFF RECOMMENDATION:Receive the report and provide feedback and direction.
FINANCIAL IMPACT:The cost for this project will be charged to the City’s Affordable Housing Fund. There are sufficient funds allocated in the Fiscal Year 2023-24 Adopted Budget for this purpose.
DESCRIPTION:BackgroundThe City of Dublin Two-Year Strategic Plan includes Strategy 2: Housing Affordability, with the following two specific objectives:
Objective 2.b: Ensure the City’s inclusionary zoning regulations incentivize targetedhousing production;and
Objective 2.c: Prepare a nexus study to evaluate the affordable housing commercial linkagefee and affordable housing in-lieu fee for for-sale and rental housing.
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The consulting firm Economic and Planning Systems (EPS) was selected through a competitive process to assist Staff with addressing these Strategic Plan Objectives. The City’s current Inclusionary Zoning Regulations (DMC Chapter 8.68) and Affordable Housing In-Lieu Fee were adopted by the City Council on May 21, 2002 (Ordinance 08-02 and Resolution 56-02 respectively). The Inclusionary Zoning Regulations (IZR) has been amended from time to time, while the In-Lieu Fee is adjusted annually on July 1 based on an inflationary index. The IZR apply to projects with 20 or more units. The City’s current inclusionary requirement is 12.5%, meaning that 12.5% of the units in a market-rate residential project are to be set aside as affordable to lower-income households. A developer may satisfy 40% of this obligation through the payment of in-lieu fees. The current Affordable Housing In-Lieu Fee is $241,131 per affordable unit. The Commercial Linkage Fee was adopted by the City Council on May 03, 2005 (Resolution 70-05) and is adjusted each year by an inflationary index. The current fees are shown in Table 1 below. The Commercial Linkage Fee serves to increase funding for affordable housing due to the nexus between non-residential development and the need it generates for affordable housing. Table 1: Commercial Linkage FeeLand Use Category Commercial Linkage FeeIndustrial$0.65Office$1.68Research & Development $1.09Retail$1.35Services & Accommodations $0.57Staff and the consultant team have reviewed these programs, interviewed market-rate and affordable housing developers who are active in the City and the region, and conducted a survey of the inclusionary requirements, In-Lieu Fees, and Commercial Linkage Fees in other jurisdictions to provide context. Market conditions have changed, and development costs have increased since these programs were initially adopted. As a result, it appears that the inclusionary requirements and the in-lieu fee levels are no longer aligned, and the commercial linkage fees are below what other cities are charging.The City Council will receive a presentation that outlines the findings from this review. The presentation will also highlight how the inclusionary requirement and in-lieu fee programs work from a market and economic perspective, and the implications and tradeoffs of updating these programs. Additionally, the results of the Commercial Linkage Fee nexus analysis, current land use categories, and potential changes to the land use categories will be discussed. This will include a review of the maximum fees that the City could charge, a comparison of fees in peer cities, and a discussion of potential approaches to setting these fees since the nexus-based maximums often exceed what most cities want to charge. The City Council will be requested to provide feedback and direction on key policy decisions. This feedback will be used to prepare updates to the Inclusionary Zoning Regulations, Affordable
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Housing In-Lieu Fee, and Commercial Linkage Fee programs for future consideration and adoption.
ENVIRONMENTAL REVIEW:Receiving this informational report and providing direction is not subject to the requirements of the California Environmental Quality Act (CEQA), pursuant to CEQA Guidelines Section 15306 (Information Collection).
STRATEGIC PLAN INITIATIVE:Strategy 2: Housing Affordability.Objective 2B: Ensure the City’s inclusionary zoning regulations incentivize targeted housingproduction.Objective 2C: Prepare a nexus study to evaluate the affordable housing commercial linkage fee and affordable housing in-lieu fee for for-sale and rental housing.
NOTICING REQUIREMENTS/PUBLIC OUTREACH:The City Council Agenda was posted.
ATTACHMENTS:None.
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Economic & Planning Systems, Inc.
The Economics of Land Use
1330 Broadway, Suite 450 Oakland, CA 94612
510.841.9190 www.epsys.com
COMMERCIAL LINKAGE FEE
NEXUS STUDY UPDATE
AND
INCLUSIONARY HOUSING
PROGRAM UPDATE
Prepared for the City of Dublin
City Council
August 15, 2023
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Economic & Planning Systems City of Dublin | 1
AGENDA
1)Commercial Linkage Fee
–Nexus Overview and Logic
–Land Use Categories and Key Assumptions
–Maximum Nexus-Based Fee Calculation
–Fee Survey
–Feedback Requested: Potential Approaches to Setting Fees
2)Inclusionary Housing Requirements and In-Lieu Fee
–Changing Market Conditions
–Current Inclusionary Program (Ownership & Rental)
•Gap Analysis
•Developer Subsidy Calculation and Feasibility Assessment
•Fee Survey Comparison with Other Jurisdictions
–Program Observations
–Implications for Update
–Feedback Requested: Potential Approaches to Updating Requirements
and Tradeoffs
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COMMERCIAL LINKAGE FEE
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1.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 QUESTIONS
What is the impact of new commercial development on the need for
workforce housing?
To answer this, we need to know…
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% of Workers Total
Employment Sq.Ft. per Total Workers Forming Households per
Category Worker per 100k Sq.Ft.Households 100k Sq. Ft.
Commercial 472 212 92.3%115
Lodging 3,000 33 98.0%19
Office/R&D 307 326 98.0%188
Industrial 862 116 98.0%67
COMMERCIAL EMPLOYMENT AND HH GENERATION
Workers per
household with
earnings is 1.70
(2017-2021
Census ACS)
Household formation
rates exclude workers
aged 16 – 19
(Bureau of Labor
Statistics)
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INCOME DISTRIBUTION OF WORKER HOUSEHOLDS
Every occupation in an employment/land use category is assigned an
income level and the number of jobs for each occupation in the industry
is used to estimate the proportion of worker households in each income
category.
For example, 87% of worker households in Lodging are classified as Low Income.
Very Low Low Moderate Above Moderate
50% AMI 80% AMI 120% AMI >120% AMI
Commercial 0.0%90.4%3.5%6.0%
Lodging 0.5%87.1%3.0%9.4%
Office/R&D 0.0%26.3%14.0%59.7%
Industrial 0.0%43.4%36.2%20.4%
Income Level
[1] Designation of household income assumes a 3-person household and 1.7 workers per household,
based on American Community Survey data.
Employment
Category1
Sources: JobsEQ, 2022; California Housing and Community Development (HCD); Economic & Planning
Systems, Inc.
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$170,280
$249,840
$329,700
$599,140
$521,558
$441,998
$362,138
$92,698
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
Very Low Income
(50% AMI)
Lower Income
(60% AMI)
Low Income
(70% AMI)
Moderate Income
(110% AMI)
Total Supportable Unit Value Affordability Gap
Affordability gaps for each income level graphed. The total cost of
development is $691,800.
GAP ANALYSIS FOR AFFORDABLE UNITS
85 DU/ACRE (1,000 SQ. FT. UNITS), WRAPPED PARKING
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COMMERCIAL MAXIMUM FEE CALCULATION
The 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
the 9.4% of workers
who both work and live
in Dublin (2020 LEHD)
Maximum Fee Adjusted Maximum
per sq. ft.per sq. ft.
Commercial 115 108 $38,033,090 $380 $344
Lodging 19 18 $6,249,035 $62 $57
Office/R&D 188 75 $20,154,873 $202 $183
Industrial 67 53 $12,726,728 $127 $115
Employment
Category
Total Required
Subsidy
Total
Households
Total Households
(Up to 120% AMI)
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NEXUS-BASED MAXIMUM VS FEASIBLE FEE LEVELS
Nexus 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 infeasible
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EXAMPLES OF COMMERCIAL LINKAGE FEES IN OTHER CITIES
Commercial (Retail)Lodging Office/R&D Industrial
Dublin $1.35 $0.57 $1.09-1.68 $0.65
San Ramon $4.32 $4.32 $4.32 $3.24
Danville
Pleasanton $5.21 $3.59 $8.68 $14.42
Livermore $2.38 $3.34 $1.53 $0.21-1.52
Fremont $11.33 $11.33 $11.33 $5.67
Hayward
Walnut Creek $5.00 $5.00 $5.00 $5.00
Concord
no commercial linkage fee program
no commercial linkage fee program
no commercial linkage fee program
Commercial Linkage Fee per Sq. Ft.
In Dublin, the current fee represents 4 to 7 percent of the total impact fee
burden.
–In other Tri-Valley cities, the affordable housing fee burden ranges from 0 (Danville,
which has no program) to 46 percent (Pleasanton Industrial).
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POTENTIAL APPROACHES TO SETTING FEES
Recommended fee levels are well below supportable maximums.
Category Option 1 Option 2 Option 3
$10, level High of $10,
tier proportionally
Economic
development lens
Commercial $1.35 $344 $10.00 $10.00 $5.00
Lodging $0.57 $57 $10.00 $1.50 $5.00
Office/R&D $1.09-1.68 $183 $10.00 $5.00 $10.00
Industrial $0.65 $115 $10.00 $3.00 $10.00
Adjusted
Maximum Fee
per Sq. Ft.
Current Fee per
Sq. Ft.
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INCLUSIONARY HOUSING
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CURRENT INCLUSIONARY PROGRAM
A developer is seeking to build a 100-unit project in Dublin.
12.5% overall inclusionary requirement
•60% Moderate
•40% Low
OR pay in-lieu fee for up to 40% of
inclusionary requirement
•Remaining 60% must build
12.5% overall inclusionary requirement
•50% Moderate
•30% Low
•20% Very Low
OR pay in-lieu fee for up to 40% of
inclusionary requirement
•Remaining 60% must build
OWNERSHIP
(assume single-family detached)
RENTAL
(assume multi-family)
The in-lieu fee as of July 2023 is $241,131 per inclusionary unit.
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MARKET CONDITIONS CHANGE OVER TIME
This chart demonstrating price index since 2002 offers a partial explanation as to why in
today’s market:
(1)higher inclusionary requirements are difficult to meet;
(2)in-lieu fees fail to align with the requirement despite inflationary adjustments.
-30
-10
10
30
50
70
90
110
130
150
2000 2005 2010 2015 2020
Pr
i
c
e
I
n
d
e
x
Price Index - Construction Costs, Multifamily Rents, Single Family Home Sales
Construction Cost Index (ENR)Multi-family Market-Rate/Affordable Rents (Costar)Single Family Home Sales (Zillow)
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The total cost of development is $1,137,288.
GAP ANALYSIS FOR MARKET-RATE SINGLE-FAMILY DETACHED
10 DU/ACRE (2,400 SQ. FT. UNITS), 4-BEDROOM
$217,100
$353,500
$558,300 $626,600
$920,188
$783,788
$578,988 $510,688
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
Very Low
Income
(50% AMI)
Low
Income
(70% AMI)
Median
Income
(100% AMI)
Moderate
Income
(110% AMI)
Supportable Home Price Affordability Gap
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DEVELOPER OPTIONS
SINGLE FAMILY DETACHED (OWNERSHIP)
Outcome: The total subsidy for Option 2 is less, and therefore preferred by developers.
Option 1
Comply with
inclusionary
requirement
Build 12 inclusionary units
5 Low x $783,788 per unit =$3,918,940
7 Moderate x $510,688 per unit =$3,574,816
Total Subsidy $7,493,756
Option 2
Pay in-lieu
fee and
build
minimum
inclusionary
Build 7 inclusionary units
3 Low x $783,788 per unit =$2,351,364
4 Moderate x $510,688 per unit =$2,042,752
$4,394,116
Pay in-lieu fee on 5 units
5 Units x $241,131 per unit =$1,205,655
Total Subsidy $5,599,771
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The total cost of development is $613,295.
GAP ANALYSIS FOR MARKET-RATE MULTI-FAMILY RENTAL
65 DU/ACRE (1,100 SQ. FT. UNITS), 3 TO 5-STORY WRAPPED PARKING
$170,280
$376,380
$569,280 $599,140
$443,015
$236,915
$44,015 $14,155
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
Very Low
Income
(50% AMI)
Low
Income
(80% AMI)
Median
Income
(100% AMI)
Moderate
Income
(110% AMI)
Total Supportable Unit Value Affordability Gap
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DEVELOPER OPTIONS
MULTIFAMILY (RENTAL)
Outcome: The requirement and fee align, but is it feasible?
Option 1
Comply with
inclusionary
requirement
Build 12 inclusionary units
4 Very Low x $443,015 per unit =$1,772,060
2 Low x $236,915 per unit =$473,830
6 Moderate x $14,155 per unit =$84,930
Total Subsidy $2,330,820
Option 2
Pay in-lieu
fee and
build
minimum
inclusionary
Build 7 inclusionary units
2 Very Low x $443,015 per unit =$886,030
1 Low x $236,915 per unit =$236,915
4 Moderate x $14,155 per unit =$56,620
$1,179,565
Pay in-lieu fee on 5 units
5 Units x $241,131 per unit =$1,205,655
Total Subsidy $2,385,220
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FEE SURVEY OF LOCAL JURISDICTIONS
SINGLE FAMILY DETACHED (OWNERSHIP)
City
Overall
Inclusionary
Requirement Income Targets
Project Size
Threshold
Last
Ordinance
Update
Dublin 12.5%60% Moderate
40% Low
20 units $241,131 per inclusionary unit 2002
Fremont 15%66% Low
33% Moderate
All units $44.00 per sq. ft.2021
Concord 10%
6%
Moderate
Low
5 units $9.00 per sq. ft.2017
San Ramon 10%Moderate 10 units $15.70 per sq. ft.2019
Hayward 10%Moderate 2 units $23.46 per sq. ft.2018
Walnut Creek 10%
7%
6%
Moderate
Low
Very Low
All units $21.86 per sq. ft.2017
Livermore 15%50% Moderate
50% Low
11 units $39.94 per sq. ft. (under 11
units)
11+ units must build
2015
Danville 10%Moderate 10 units 2014
Pleasanton 20%Moderate
Low
Very Low
15 units $50,480 per dwelling unit 2000*
In-Lieu Fee
market gap calculation
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FEE SURVEY OF LOCAL JURISDICTIONS
SINGLE-FAMILY DETACHED (OWNERSHIP)
$241,131 *
$44
$9
$15.70 $23.46
$21.86
$39.94
$50,480 †
0%
5%
10%
15%
20%
25%
Option 1 Option 2 Option 1 Option 2 Option 3
Dublin Fremont Concord San
Ramon
Hayward Walnut Creek Livermore Danville Pleasanton
Moderate Low Very Low
* Fee is provided on a per inclusionary unit basis
† Fee is provided on a per dwelling unit basis
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FEE SURVEY OF LOCAL JURISDICTIONS
MULTIFAMILY (RENTAL)
City
Overall
Inclusionary
Requirement Income Targets
Project Size
Threshold
Last
Ordinance
Update
Dublin 12.5%50% Moderate
20% Low
30% Very Low
20 units $241,131 per inclusionary unit 2002
Fremont 10%Low All units $17.50 per sq. ft.2021
Concord 10%
6%
Low
Very Low
15 units $0.00 per sq. ft.2021
San Ramon 15%50% Low
50% Very Low
5 units $14.63 per sq. ft. (under 10
units)
10+ units must build
2019
Hayward 6%50% Low
50% Very Low
2 units $23.46 per sq. ft.2018
Walnut Creek 10%
6%
Low
Very Low
All units $21.86 per sq. ft.2017
Livermore 15%50% Low
50% Very Low
11 units 2015
Danville 15%Moderate 10 units 2014
Pleasanton 15%Low
Very Low
10 units $50,480 per dwelling unit 2000*
In-Lieu Fee
market gap calculation
In-lieu fee N/A; must build
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FEE SURVEY OF LOCAL JURISDICTIONS
MULTIFAMILY (RENTAL)
$17.50
$0 $21.86
N/A $50,480 †
$241,131 *
$14.63
$23.46
0%
2%
4%
6%
8%
10%
12%
14%
16%
Option 1 Option 2 Option 1 Option 2
Dublin Fremont Concord San Ramon Hayward Walnut Creek Livermore Danville Pleasanton
Moderate Low Very Low
* Fee is provided on a per inclusionary unit basis
† Fee is provided on a per dwelling unit basis
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PROGRAM OBSERVATIONS
Working Well Needs Consideration
•Clear inclusionary guidelines for
developers
•Must-build component means
that some inclusionary units are
still built – no lag or erosion of
effectiveness
•Program is no longer aligned
with market conditions
•Current on-site inclusionary for
rental product may not
demonstrate feasibility
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IMPLICATIONS FOR UPDATE
To align the inclusionary program with current market conditions,
the City may:
Example considerations / tradeoffs:
Do nothing
Update
requirement Raise fee
Alter income
targets Combination
Stick with 12.5% overall on-site
Raise the fee or lean towards more Moderate
housing; may still pose feasibility challenges on
rental side
Incorporate Low and Very Low Lower overall on-site requirement
Maintain lower in-lieu fee Lower overall on-site requirement
Consider which options achieve the City’s affordable housing goals.
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FEEDBACK REQUESTED – COMMERCIAL LINKAGE FEE
Potential Approaches to Setting Fees
1.What are the City’s primary objectives for this update?
a)Meet Housing Element goals of creating housing for different
income levels
b)Generate fee revenue to put towards affordable housing
c)Encourage nonresidential development in Dublin
d)Other?
2.Acknowledging that the nexus-based fee is too high, is there a
policy-based “high” fee we can begin to target?
•Current fees represent 4 to 7 percent of aggregate fee burden
•A “high” of $10 would increase aggregate fee burden share to 27 to
45 percent
3.Is there a preferred approach (e.g., level across land use
categories, proportional to nexus, “economic development” lens,
other?)
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FEEDBACK REQUESTED – INCLUSIONARY HOUSING/IN-LIEU FEE
Potential Approaches to Updating Requirements and Tradeoffs
1.What are the City’s primary objectives for this update?
a)Ensure affordable housing is built
b)Generate fee revenue to put towards affordable housing
c)Ensure feasibility even if it means reducing requirements
d)Keep requirements low to encourage market rate development and limit need for
negotiated agreements
e)Other?
2.Does the current inclusionary requirement (12.5 percent) need modification?
a)Ownership?
b)Rental?
3.Which income targets should the requirements include?
a)Ownership: Low and Mod, all Mod? (Very Low is not recommended)
b)Rental: Very Low, Low, and Mod? Some other combination?
4.Does the in-lieu fee need modification?
a)Ownership?
b)Rental?
5.At what project size should inclusionary requirements kick in?
a)Current program = 20 units; commonly observed = 5 to 10 units
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NEXT STEPS
Commercial Linkage Fee
–Finalize Commercial Linkage Fee Recommendations
–Prepare Draft Nexus Study report
–Bring back to Council for review (September/October)
–Revise Ordinance and bring to Council for adoption (December)
Inclusionary Housing
–Prepare Draft Feasibility Evaluation
–Prepare preliminary Inclusionary Housing Requirement Recommendations
and bring back to Council (September/October)
–Finalize Inclusionary Housing Requirement Recommendations and update
Ordinance and take to Planning Commission for recommendation
(October/November)
–Bring final recommendations and updated Ordinance to Council for
adoption (December)
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