The purpose of this memorandum is to transmit to the City Council and Redevelopment Agency Board (hereinafter referred jointly as Agency) information regarding inclusionary housing options to assist the Agency in directing staff in drafting an Inclusionary Housing Ordinance and in-lieu fee structure for future Agency consideration.

At its meeting of February 18, 2003, the Agency-appointed Blue Ribbon Task Force on Affordable Housing (Task Force) set forth recommended affordable housing programs, including adoption of an Inclusionary Zoning Ordinance to integrate affordable units within market rate developments. Following the presentation, staff was authorized to initiate steps to implement the Task Force�s recommendations and was further instructed to again return with information about inclusionary housing as a prelude to drafting Inclusionary Housing Ordinance and in-lieu fee structure for consideration by the Agency.

Inclusionary zoning or inclusionary housing is a requirement adopted by a host of local jurisdictions to reserve a specific percentage of residential units affordable for lower and moderate-income households in new residential developments. As of 1998, 75 California jurisdictions (generating 24,000 affordable units) have adopted local inclusionary housing ordinances that affect housing developed within a community based upon each jurisdiction's determination of its local housing needs. Interest in inclusionary housing ordinances continues unabated. As of January 2003, the number of ordinances Statewide increased to 105. Local examples include the City of Pasadena (adopted its ordinance in 2002), the cities of Los Angeles and Long Beach (currently undertaking inclusionary studies) and the City of Glendale (currently weighing the merits of an inclusionary program).

The principal purpose of inclusionary housing is to increase the supply of affordable housing in conjunction with market rate housing, which can be particularly effective in an "up" housing market. Inclusionary zoning also fosters greater economic integration, particularly important in a "job rich" and high housing cost market as Burbank to allow lower paid workers to find housing close to employment.

Three techniques have been used by jurisdictions in promulgating inclusionary mandates:

• Adoption of inclusionary program within the housing element and adoption of an ordinance;
• Adoption of inclusionary program within the housing element with implementation on a project-by-project basis; or
• A general statement of local housing policy coupled with project-by-project implementation.

The first option, adoption of an implementing ordinance, is preferable because it is less likely to be viewed as capricious (as in the case of project-by-project actions) or too general (in the instance of housing element policy or programs alone).

A review of inclusionary housing programs statewide suggests these common characteristics:

• The most effective inclusionary programs are mandatory but allow flexibility in the manner in which requirements are met. The use of offsets (e.g., density bonus, reduced parking) reduces the cost to the developer, which serves to improve compliance.
• All programs are structured and implemented similarly, taking the form of a basic percentage requirement for inclusionary units, accompanying targeted income levels and compulsory lengths of affordability. Requirements are applicable to single-family and multifamily projects above a minimum size threshold, such as ten units.
• Inclusionary units develop affordable housing consistent with the character of the market rate units. While most programs allow affordable housing to meet different design standards than market rate housing, integrating affordable housing into new development can result in affordable housing indistinguishable from market units.

Inclusionary housing programs have a long history in California; largely because housing prices have traditionally been among the highest in the nation. Up until the 1970s, housing prices within California were on par with the national average, but began to rise sharply during the inflationary period in the early 1970s and as heavy in-migration placed substantial pressure on the housing market. The passage of Proposition 13 and limitation on property tax revenue caused jurisdictions to begin depending increasingly on development impact fees to fund infrastructure development for new housing. Consequently, development fees in California are among the highest in the country, contributing to further housing costs for consumers.

Inclusionary housing programs were introduced in the 1970s in Northern California in response to growth control measures implemented in several Bay area communities. Within Southern California, the City of Irvine and County of Orange were the first jurisdictions to develop inclusionary housing programs initially developed as a result of legal challenges (rezoning of 2,058 acres to industrial/commercial development without providing any development of affordable housing) rather than within the context of growth control mechanisms.

A severe economic recession and a more conservative political climate in the 1990s affected both local and state viewpoints of inclusionary housing programs. Faced with rising costs and a diminishing housing market, the construction industry began actively to oppose inclusionary housing programs, viewing them as a significant constraint upon development. In the late 1990s, a resurgence of interest in inclusionary zoning occurred, largely related to an improving economy and increasing housing rents and prices.

The primary argument against inclusionary housing is that the costs in making units affordable are simply passed on to the market rate owner in the form of higher sales prices or to the tenant in the form of increased rents. If housing demand is elastic (price sensitive), developer profit is reduced because costs cannot be passed on to the consumer. Other arguments against inclusionary housing include: unfeasibility for small development projects; prices for inclusionary units may not be significantly below market rents; and restricted units may not be targeted to the housing needs of the jurisdiction.

Critics also argue that inclusionary housing policy, particularly because of in-lieu fees, significantly impact land values. It is interesting to note that Keyser Marston Associates (KMA) found that land values, while impacted in the short term, will return to current levels within approximately two and one-half to four years, subject to the amount of in-lieu fees paid by the developer.¹ KMA found:

• If the purchase price did not reflect inclusionary housing impacts and if property values do not significantly appreciate, the residential developers will achieve lower returns than projected at the time of purchase.
• In the short-term, land values will decline as developers reduce the amount they are willing to pay for land in response to additional costs associated with inclusionary housing requirements and in-lieu fees. Consequently, some property owners will tend to hold their property for future appreciation.
• As land values appreciate and inclusionary housing policy becomes "an entrenched component in the entitlement process, the impacts created by the inclusionary housing policy will diminish in importance." KMA concludes that "At that point, the market will have absorbed the costs" associated with the policy, "and the achievable land prices/developer returns will have adjusted accordingly."

Conversely, inclusionary housing clearly has become a growing trend in California. As of January 2003, over 105 jurisdictions statewide have adopted some form of citywide inclusionary housing program. In a time in which housing has become increasingly less affordable, inclusionary housing can be an integral element of a jurisdiction's affordable housing strategy. Inclusionary housing creates mixed-income projects negating the potential sequestering of lower income populations into specific neighborhoods.

Inclusionary housing ordinances all consider the extent to which an inclusionary obligation is applicable; that is, the number of units required for a development, when inclusionary units are produced in a project, the income levels to be targeted (viz., very low, low, moderate-income), the size and type of developments that are covered in an ordinance, as well as the term of affordability and the types of features required for inclusionary units (e.g., size, location and amenities).

A survey of 75 California local jurisdictions (Journal of the American Planning Association, 1998) revealed characteristics of inclusionary programs that are summarized below.

• MAGNITUDE OF INCLUSIONARY OR PRODUCTION REQUIREMENT

• Affordability Percentage

The range of affordability varies from 5 to 50 percent, with 61 percent of inclusionary programs restricting affordability for 10 to 15 percent of project units.

• Targeted Income Group

Most surveyed California jurisdictions with inclusionary ordinances require both low and moderate-income and over half provide for very low-income. Income distributions for surveyed jurisdictions are as follows:

• Low and moderate income � 87 percent
• Very low, low and moderate income � 53 percent
• Moderate income � five programs

A jurisdiction�s regional housing needs assessment or RHNA, Housing Element and Consolidated Plan describe a jurisdiction's affordable housing needs and establish a nexus between housing need and an inclusionary zoning ordinance.

• Type of Residential Development

• Project Size Threshold

Most inclusionary housing ordinances exempt smaller projects from inclusionary requirements with a typical minimum project size of ten units. Smaller projects of ten units or less may either be exempted or pay in-lieu fees to address the issue of unfeasibility.

• Tenure Type Threshold

Most programs apply to single and multifamily housing alike. Some jurisdictions, though, link income categories to tenure, resulting in production of lower and very low-income households of only rental units and moderate-income units only for ownership units.

• Timing of Production of Inclusionary Units

It is important to note that inclusionary ordinances set forth a timing requirement for the development of inclusionary units. Most ordinances stipulate that inclusionary units are produced concurrent with market rate units instead of phasing affordable units permitting a developer to stagger development of the restricted units.

To ensure affordable units remain affordable to the same income group, inclusionary housing ordinances typically include a period of affordability that range from no restrictions for the resale of for-sale units to a period extending into perpetuity. A third of inclusionary housing programs utilize rolling resale controls in which the term of affordability is reinstated upon each resale or require the term of affordability to continue permanently. Most programs (61 percent) require the affordability period to extend for at least 30 years. This is consistent with the Agency's Mortgage Assistance Program, which requires owners to share in their properties' appreciation if a sale occurred during the 30-year affordability period.

• ON-SITE UNITS

Inclusionary zoning ordinances also consider the size, exterior appearance and basic amenities of inclusionary units in comparison to market units also being developed on-site. While the preponderant number of programs does not require market rate and affordable residential units to be identical, most programs mandate units be similar in appearance and be distributed throughout the development rather than be segregated.

• WAIVER OR REDUCTION OF INCLUSIONARY REQUIREMENT

As a means to assure a jurisdiction avoids any unconstitutional application of an inclusionary ordinance, a procedure allowing a developer to apply for a waiver or exemption is prudent, as was done by the City of Napa in successfully withstanding a legal challenge. A waiver for economic hardship is a case in point in the event that the developer is deprived of all economical use of the land (not simply a loss of profit margin).

• DEVELOPER ALTERNATIVES TO ON-SITE CONSTRUCTION

Most jurisdictions provide for one or more of the following options rather than requiring all units to be on-site:

• Land Dedication

This option allows a developer to donate a site to the jurisdiction on which the required number of inclusionary units may be developed typically by a nonprofit developer.

• In-Lieu Fees

This option permits a developer to pay an amount on par with the cost of building the mandated inclusionary units. The amount of the in-lieu fee required by a jurisdiction stems from a fee study to identify a legally justifiable fee schedule. These fees serve to bridge the affordability gap for producing units in the same number and type of inclusionary units at the same income levels as would have been required on-site. Particularly important to developers, in-lieu fees in California range between $6,000 to $36,000 per unit and are used to support other housing programs, e.g., land acquisition, rent subsidies, rehabilitation and new construction.

Approximately two-thirds of all jurisdictions allow for payment of fees in-lieu of construction. Of the numerous methods by which fees are calculated, the most common are these:

• A set fee multiplied by the number of required affordable units (20 percent)
• The difference between affordable sales price and median sales price of comparable units multiplied by the number of required units (15 percent)
• A set fee per unit multiplied by the number of market-rate units in the residential development (14 percent)
• A fee predicated on a percentage of the value of the land multiplied by the number of affordable units (13 percent)
• A fee based on a percentage of average or median sales price of market-rate units (13 percent)
• A fee based on a percentage of market-rate construction or building costs (10 percent)
• A set fee per square foot of building area (7 percent)
• The difference between moderate and low-income household income limits multiplied by the percent of units required to be affordable (6 percent)
• A fee based on a percentage of the cost of subsidizing construction of affordable units at prevailing density levels (3 percent)
• Off-Site Construction

Jurisdictions may permit developers to produce inclusionary units on another site the developer owns or acquires.

• Credit Transfers

This option allows developers to receive credits against their inclusionary obligations through other means, such as producing more inclusionary units on one project than required to offset an obligation on another development.

• INCENTIVES AND CONCESSIONS
• Fee Waiver, Reduction or Deferral
• Increased Densities
• Reduction or Modification of Zoning and Development Standards
• Expedited Application and Permit Processing

• Financial Incentives

Staff is eliciting Agency direction on several key points for the purpose of establishing a framework in which staff may draft an ordinance. The following recommendations will help guide staff. While preparing a draft ordinance, however, staff will again seek the input of those in the community with an abiding interest in inclusionary housing.

Recommendation: Staff suggests the Agency give direction to analyze a requirement that (a) 15 percent of all newly constructed for-sale units will be affordable to low and moderate-income (LMI) households², and that (b) 15 percent of all newly constructed rental units will be affordable to lower-income (LI) households, one-half of which will be affordable to very low-income (VLI) households³.

Additionally, incentives would be provided to include L-income for-sale units and to increase the number of VLI units as elaborated below.

Recommendation: Consistent with Agency practice, the period of affordability should extend in perpetuity (which may be defined, for example, as meaning the useful life of the building, the life of the land use controls or a finite period of time, typically 99 years), with resale provisions tied to the for-sale units. Staff will analyze providing flexibility with this requirement to accommodate individual cases of hardship. The development of inclusionary units would occur concurrently with the construction of market-rate units.

Recommendation: Residential projects less than ten units would be exempt from the inclusionary zoning ordinance. Additionally, residential developments begun before enactment of the ordinance (e.g., developer obtained a variance, conditional use permit or development review approval) would be exempt from the requirements of the ordinance.

Recommendation: Inclusionary housing obligations for a project can be satisfied through an in-lieu fee paid to an inclusionary housing trust fund based upon fees determined through a fee study, construction of units off-site or a land donation. The fee study will be subject to the requirements of the Mitigation Fee Act, commonly referred to as AB 1600. The purpose of the fee study is to determine, among other things, the following: (1) whether there is a reasonable relationship between the use of the fee and the type of development project on which it is imposed; (2) whether there is a reasonable relationship between the need for affordable housing and the type of development project on which the fee is imposed, and; (3) proportionality between the amount of the fee and the cost of providing additional affordable housing as proposed in the ordinance.

To encourage developers to include more VLI units or larger bedroom units (three or more bedrooms) for LI households, a credit would be provided based upon an affordability gap analysis that would determine the extent of credit warranted. A credit could be allotted to increase, for instance, the number of VLI units. For illustrative purposes only, the Agency could credit two units for every VLI unit or 1.5 unit for every LI unit that exceeds the required threshold. To assure the economic viability of a project, the Agency would consider the use of local funds, such as Low and Moderate-Income Housing and HOME funds.

When preparing an inclusionary ordinance, it is important to ensure consistency with the newly updated State density bonus law. This law requires that developers be given certain concessions in return for their providing a set number of affordable housing units in their developments. Whereas Burbank has a density bonus ordinance in our Code, the recent changes to the State density bonus law (AB 1866) requires an amendment to the Code to ensure compatibility with the new law. Staff is still in the process of researching the changes to the law and understanding their full implications for development in the city. It is important that whatever inclusionary requirement the City adopts that it be congruent with the State density bonus law to achieve the City's affordable housing goals. In formulating an inclusionary requirement, it is essential to acknowledge the incentives for the provision of affordable housing that are now available by law.

Preparation of this report does not affect the General Fund. Implementation of an inclusionary housing ordinance is anticipated, however, to significantly leverage the Agency's cost in expanding the supply of affordable housing.

It is recommended that the Agency approve the recommended guidelines described above and instruct staff to return with a draft Inclusionary Housing Ordinance that is responsive to provisions mandated under recent State law (AB 1866), either under one or separate ordinances, and an in-lieu fee structure. The next step will involve preparing an in-lieu fee study (Keyser Marston Associates to be retained) and eliciting public comment during the formation of a draft ordinance that will be submitted in approximately 180 days.

¹ KMA prepared an analysis for the City of Pasadena ("Inclusionary Housing Ordinance: Land Value Impact", April 2, 2001) summarizing order of magnitude estimates of land value impacts effected by an inclusionary housing policy.

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