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HomeMy WebLinkAboutStaff Report 4.D 03/05/2018DATE: March 5, 2018 Agenda Item #4.D TO: Honorable Mayor and Members of the City Council through City Manager FROM: Sue Castellucci, Housing Admi .strator Scott Duiven, Senior Planne SUBJECT: Discussion and Direction Regarding Revisions to Petaluma's Inclusionary Policy, and Increases in In -lieu and Commercial Linkage Fees RECOMMENDATION It is recommended that the City Council provide direction regarding Petaluma's inclusionary policy and increasing in lieu and commercial linkage fees. BACKGROUND Since 1975, the California Legislature has recognized that "there exists within the urban and rural areas of the state a serious shortage of decent, safe, and sanitary housing which persons and families of low or moderate income can afford." In 1980, the Legislature declared: "Local and state governments have a responsibility to use the powers vested in them to facilitate the improvement and development of housing to make adequate provision for the housing needs of all economic segments of the community." (Cal. Gov. Code 65580) In 1984, the City of Petaluma formulated and enacted an inclusionary housing policy which reflected the values of the community regarding the provision of housing for the people in the community'most-in-need. The policy, which is a program of the Housing Element, (a chapter of the City's General Plan), is simple, flexible, and enforceable. The policy requires developers of new residential developments to provide affordable housing, but offers them options as to how they fulfill that requirement: 1) build on-site units or dedicate a portion of the project site to the City for affordable units; 2) pay an in -lieu fee, or 3) use alternative methods to meet the intent of the inclusionary requirement subject to approval by the City Council, such as requesting a smaller percentage of on-site units or donating a separate parcel of land to build affordable units. In 2004, the City Council adopted an ordinance implementing a Commercial Linkage Fee for nonresidential development within the City of Petaluma. The construction of nonresidential development is a major factor in attracting new employees to the City of Petaluma but places a strain on an already impacted housing stock. In April, 2017, Economic & Planning Systems (EPS) was retained by the City to update the City's inclusionary housing in -lieu fee for residential projects and the City's commercial linkage fee. In addition, EPS was asked to prepare a nexus -based impact fee study for rental and ownership housing due to past legal challenges to inclusionary programs from homebuilders and property rights advocates. EPS presented their draft nexus study to the Council at a workshop on September 25, 2017. Council directed staff to gather more information on the following: • Potential revenue stream at different levels using Sonoma County's current fee and an average of the other jurisdictions in the area as presented by EPS. • An anticipated revenue stream for the in lieu fee if percentage was increased from 15% to 20%. • To encourage on-site affordable units, increase the percentage of in lieu fee requirement to 18% or 20% for developers who want to pay the fee. San Francisco, Santa Rosa and Sonoma County have made such distinctions between on-site vs. in lieu requirements. • Timeframe for implementation of new fee and making sure the development community is aware of the effective date. • AB 1505 legislation — how will that impact our inclusionary policy and in lieu fee vs. a housing impact fee. • Comparison of the total impact fees between Petaluma and other jurisdictions. DISCUSSION Based on comments from the City Council at the September 2017 workshop, this section is intended to offer additional information that will help clarify alternatives for consideration and City Council direction. 1. Potential Revenues at Different Fee Levels To find the optimal fee levels that are supported by the nexus study with minimal adverse impact on new development, potential revenues that correspond to the fee levels are outlined in the tables below. The Sonoma County fee level and the median level among surveyed jurisdictions were used for the residential housing fee and the Commercial Linkage fee. To prepare legislation direction is sought as to what level the City Council would like to set the inclusionary fee and commercial linkage fee. Subsequent to Council direction, staff with support from EPS, will conduct outreach to the development community (both market rate and nonprofit developers). Residential Development —15% inclusionary fee requirement 2 Petaluma — Current Level Proposed — Sonoma Co. Level Proposed — Median Level Fee/s.f. Revenue Fee/s.f. Revenue Fee/s.f. Revenue For Sale Housing 1,228 units $4.51 $12,233,832 $7.59 $18,641,040 $5.47 $13,434,320 Rental Housing 2,140 units $4.78 $10,434,640 $7.59 $16,567,452 $5.47 $11,939,916 2 Residential Development - I8% inclusionary fee requirement Residential Development - 20% inclusionary fee requirement Petaluma — Current Level Proposed — Sonoma Co. Level Proposed — Median Level — Median level Fee/s.f. Revenue Fee/s.f. Revenue Fee/s.f. Revenue For Sale Housing 1,228 units $5.41 $13,286,960 $9.11 $22,374,160 $6.56 $16,111,360 Rental Housing 2,140 units $5.74 $12,529,700 $9.11 $19,884,880 - $6.56 $14,318,740 Residential Development - 20% inclusionary fee requirement Commercial Development Petaluma — Current Level Proposed — Sonoma Co. Level Proposed — Median level Fee/s.f. Fee/s.f. Revenue Fee/s.f. Revenue Fee/s.f. Revenue For Sale Housing 1,228 units $6.00 $14,736,000 $10.12 $24,854,720 $7.29 $17,904,240 Rental Housing 2,140 units $6.37 $13,903,580 $10.12 $22,089,080 $7.29 $15,913,040 Commercial Development 2. Comparison of Development Impact Fees between Petaluma and Other Jurisdictions The City Council also asked staff to research other communities within Sonoma County and the region to see how Petaluma's overall development impact fees compares to other jurisdictions. As shown in the table provided as Attachment 1, Petaluma's impact fees are close to the average of those surveyed. 3. AB 1505 —Land Use, Zoning Regulations Shortly after the September workshop, the Governor signed AB 1505 which revives the power of cities and counties to impose inclusionary requirements on rental housing developments. The bill overturns the 2009 Appellate Court ruling in Palmer/Sixth Street Properties, L. P. v. City of Los Angeles, which ruled that cities and counties were not permitted to require private developers to restrict rent levels under the State's Costa Hawkins Rental Housing Act. Costa Hawkins limits local governments' ability to establish rent control to properties built before Petaluma — current level Proposed — Sonoma Co. Level Proposed — Median Level Fee/s.f. Revenue Fee/s.f. Revenue Fee/s.f. Revenue Office (264,000 s.f.) $2.34 $617,760 $2.75 $726,000 $2.38 $638,320 Retail (110,807 s.f.) $4.03 $446,552 $4.75 $526,333 $3.57 $395,581 Light Industrial/Warehouse (150,000 s.f.) $2.41 $361,500 $2.84 $426,000 $1.97 $295,500 2. Comparison of Development Impact Fees between Petaluma and Other Jurisdictions The City Council also asked staff to research other communities within Sonoma County and the region to see how Petaluma's overall development impact fees compares to other jurisdictions. As shown in the table provided as Attachment 1, Petaluma's impact fees are close to the average of those surveyed. 3. AB 1505 —Land Use, Zoning Regulations Shortly after the September workshop, the Governor signed AB 1505 which revives the power of cities and counties to impose inclusionary requirements on rental housing developments. The bill overturns the 2009 Appellate Court ruling in Palmer/Sixth Street Properties, L. P. v. City of Los Angeles, which ruled that cities and counties were not permitted to require private developers to restrict rent levels under the State's Costa Hawkins Rental Housing Act. Costa Hawkins limits local governments' ability to establish rent control to properties built before 1995. In 2009, the California Court of Appeals in Palmer/Sixth Street Properties v. City of Los Angeles, held that inclusionary housing requirements for rental units were pre-empted by the Costa Hawkins Rental Housing Act. Since Palmer, many cities and counties have either repealed their inclusionary rental housing requirements or declined to enforce them. AB 1505 supersedes the Courts ruling in Palmer. AB 1505 authorizes (but does not mandate) that local governments may require, as a condition of development of residential rental homes, that new rental housing developments include a specified percentage of affordable units for moderate, low, very low and extremely low income households. The new law does not limit the percentage of units that a jurisdiction may require to be affordable. However, if an inclusionary rental ordinance that is adopted or amended after September 15, 2017 requires more than 15% of the total number of units in the development be affordable to low-income households, the Department of Housing & Community Development (HCD) has the authority to review the ordinance if the jurisdiction has either 1) failed to meet at least 75% of its share of its regional housing need allocation for the above -moderate income category over a five-year period, or 2) failed to submit its annual housing element report for two consecutive years or more. If either of these conditions is met, HCD may request an economic feasibility study meeting specified standards that demonstrates that the inclusionary ordinance does not unduly constrain the production of housing. The above conditions do not apply to Petaluma. Cities or counties that elect to adopt inclusionary rental ordinances pursuant to AB 1505 must provide developers with an alternative means of compliance such as payment of in -lieu fees, dedication of land, or the construction of affordable units off-site. The passage of AB 1505 comes two years after a 2015 ruling of the California Supreme Court which strongly upheld the ability of local governments to adopt inclusionary housing ordinances. Under that ruling, courts will review and uphold. inclusionary housing requirements under the most deferential standard; whether regulation is reasonably related to the public welfare, and will not require the demonstration of a nexus between the development of new market -rate housing and the needs for affordable housing. AB 1505 went into effect January 1, 2018. POLICY OPTIONS Policy options for the Council's consideration are discussed below, and are followed by a staff recommendation. A. HousinL, Impact Fee Versus In -Lieu Fee EPS was retained to conduct a nexus -based impact fee study analyzing the impact that development of market -rate rental housing and ownership housing has on demand for below- market rate housing. Since 2009, there have been legal challenges in requiring on-site affordable units in a residential rental development. In preparing the study, EPS ,provided data that showed a nexus between building market -rate housing units and the demand for affordable housing. The study showed that a maximum Housing Impact Fee of $31.001sf could be supported by the development of market rate rental housing which would generate $33,572 for a 1,020 s.f. rental M unit. The maximum Housing Impact Fee of $26.00/per sf could be supported for market rate ownership housing which would generate $52,000 for a 2,000 s.f. for -sale unit. It was the consensus of the Council at the workshop to not set the fee at the maximum rate and to review other options more in line with neighboring jurisdictions. The EPS calculated maximum fee for the in -lieu fee is $7.59 s.f. for both rental and for -sale developments. The In -Lieu fee for a 2,000 s.f. unit would be $15,180 and for a 1,100 s.f. unit, the in -lieu fee would be $8,439. This is approximately a 68% increase from our current in -lieu fee. Since the passage of AB 1505, some cities are abandoning their Housing Impact Fee ordinances and going back to their inclusionary housing policy because it does not need to demonstrate that an essential nexus exists between the requirement of affordable units and the projected impact on the proposed land use. The inclusionary requirement is more defensible in court due to the Supreme Court decision in 2015 affirming that there is a reasonable relationship between the need and the requirements imposed.. Recommendation: Continue with the City's inclusionary requirement policy rather than adopting a Housing Impact Fee, and set at an amount directed by City Council. B. Percentage of On -Site Units Versus Percentage for In Lieu Fee Council direction has been to require on-site units for both ownership and rental developments. The percentage in our current inclusionary policy is 15% for both on-site units and to pay an in - lieu fee. For developments that do not want to include affordable units, it is at Council's discretion on whether to make the in -lieu payment 15%, 18% or 20% which could incentivize developers to build the affordable units. Potential revenue streams for the three percentages can be found on page 2 & 3 of this report. At the September 2017 workshop, Council indicated it wanted to further discuss the size of development projects requiring inclusionary units, the number of units to be built on-site, and the in -lieu fee payment. For example, only projects of 5 or more units are currently responsible for addressing affordable housing. Council may consider making all new residential units subject to the in -lieu policy. Council may also limit the on-site inclusionary policy to projects of 10 or more units recognizing the challenge of monitoring units spread throughout the City. Keeping track of and monitoring scattered units, to assure that no units are lost, will require additional staff time. It is recommended that Petaluma's inclusionary policy be amended to strengthen the requirement that both for -sale and rental residential developments, include a percentage of affordable housing on-site by amending the 2015-2023 Housing Element (Chapter 11 of the General Plan). Currently, Housing Element Policy 4.2, Program 4.3 states: Policy 4.2 Assign a share of the responsibility for providing affordable housing to the developers of market rate housing and non-residential projects. 5 Program 4.3 — Continue to require residential projects of five or more units to contribute to the provision of below market rate housing in one of the following ways: a. Dedicate 15% of the units on-site or a portion of the project site or property to the City or a non-profit organization for use as affordable housing. b. Within a half -mile radius of the planned SMART stations, developers are encouraged to provide at least 15 percent of the units in a rental housing project at rents affordable to very low and low income households for a minimum period of 30years. c. Within a half -mile radius of the planned SMART stations, developers may be required to provide at least 15 percent of the units in a for -sale project at prices affordable to low and moderate -income households for a minimum period of 30 years. d. The developer can make an in -lieu payment to the City's Housing Fund. e. Use alternative methods, such as requesting a smaller percentage of on-site units or donating a separate parcel of land to build affordable units to meet the intent of the inclusionary requirement, subject to approval by the City Council. Recommendation: Continue to require residential projects of five or more units to contribute to the provision of affordable housing in one of the following ways: 1. Require projects with five or more units to provide 15% of the units on-site for affordable housing or dedicate a portion of the project site or property to the City or a non-profit organization for use as affordable housing for a minimum period of 30 years. 2. The developer may make an in -lieu payment to the City's Housing Fund in an amount equal to a 20% inclusionary requirement, subject to City Council approval. 3. Use alternative methods, such as requesting a smaller percentage of on-site units or donating a separate parcel of land to build affordable units to meet the intent of the inclusionary housing requirement, subject to approval by the City Council. Removing the geographical reference limiting on-site requirements to only parcels located within a half -mile radius of an existing or planned SMART rail station and instead make the policy citywide, is also recommended. C. Commercial Linkage Housing Impact Fee EPS was also retained to update Petaluma's Commercial Linkage Housing Fee and analyze the impact commercial development has on the housing of Petaluma's workforce. As new employment -generating development continues to occur in the City, additional affordable housing will be required to house a portion of the new lower wage workforce. In the nexus study, the maximum fee levels for our commercial linkage fee were calculated as follows: • Office $ 99/sf • Retail/Restaurant $167/sf • Industrial/R&D $ 62/sf 0 It was the consensus of the Council at the workshop, that they were not inclined to set the fee at the maximum rate and wanted other options more in line with neighboring jurisdictions. The potential fee increase and revenue stream that would be generated are presented on pages 2 and 3 of this report. The Commercial Linkage Fee Ordinance was revised in 2011 which included increasing the fee annually using the latest "Engineering News Record Construction Cost Index — 20 City Average" and went into effect on July 1, 2012. There were no increases to the Commercial Linkage Fee before 2012. Recommendation Increase the Commercial Linkage Fee to be comparable to Sonoma County's current Commercial Linkage Fee as shown in the Commercial Development table on page 3 of this report above. D. Timeframe for Implementation of New Fees There was discussion from the Council on when to implement4he new fees. The consensus of the Council was to make the implementation date July 1, 2018 to give the development community plenty of notice as to when the new fee will go into effect. Recommendation: The revision to the Housing Element needs to be accepted by the State's Housing & Community Development Department. When that approval has been granted, and the City Council adopts the change by resolution, the new requirement can go into effect. NEXT STEPS Once staff receives additional direction from the City Council on the specific changes to be made to Petaluma's inclusionary policy, stakeholder meetings will be held with developers and housing advocates. After public input, staff will return to the City Council with action items for consideration and approval. ATTACHMENTS 1. Table - Development Impact Fees 2. Administrative Draft Memorandum from Economic & Planning Systems 3. Draft Ownership Inclusionary Housing In Lieu Fee 4. Draft Nexus -based Affordable Housing Fee Analysis for Ownership Housing 5. Draft Nexus -based Affordable Housing Fee Analysis for Rental Housing 6. Draft Commercial Linkage Fee Nexus Study 7. February 12, 2018 Housing Workshop Staff Report 7 4'Ho0 r CO H N H d M O d d N � CL)C m m m oo m Hzt w H o H m o E o m ri r w m m r� O m Ln 00 14 o N r- O m i H N N a) r-, o c o m LD m in Ln in N m Ln N r, am Ln H ;.:N.. LL a1 0 ih to in in i/T t/? in in -V} in in t/} in O O N ri 00 O r- N to O dt N N 0) N N 't W cc ' J O ' m ' o0 N I J: N ,a of m O (n N dt r- H Ln L 7 N H ri ci c -I M a ,Ln in in t } t)- in. V)- in -kn in. t, _ +' � m Ln m Ln M 01 Kt LD a) O m d' a1 O 0) H d* r- N a) O d' O t0 m E Lio L6 0 (D r- cn al c -I r- Ln a) Ln Ln oo 4+ CL s+ M M N :t Ln M N r- �}' N W Lnrj 0 0 v a m > ai E in -(4 in v)- to to in v)- in in in y'00 00 O v C M N O LP L 4+ l0 N O Q Ocn N �r N .c0 °- LL in in in 00 rn m ct rn O o ri m H m N N Ln M 00 lO O r� dt O r� i' r� Ln N o O M o M a) O ri �. a)d' O 00 lD l0 N C Ln LO L( 3 H H V)- in in in- in in in in in in in O W N -i M M O O 'ci' d' o Ln In 00 ri m O r- O w N o0 N L N to H Ol 'cF' lD 6; O DD nn N l0 lD (D m Ln N M -zzh M Ln 00 m M N N i/)• i/} ih i/� in t/i -Ln -(n i/)- i/? i/? V)? N 00 lD w O bLOCN t.0 r� N M N ' M ' ' ' ' LD . ' Ln r, S m M c I N m L in in in in in in in in in in in in m c0 0o m oo o oo (D Ln r- r� M O ON w O r� H 0 0 0 r -i ' c -I N ' M Ln LD m �t r, m vV..L�.. �G o N M 00 0 0 m r -I (.0 a) M L m ri r -I c -I c -I ri o. in to in -t� in in in to to in to m O 00 rn O o 00 00 0o w w ct Ln O N O dt 00 r -I 't O CD V f� N r -I N Ln ' o on Ln A O w N M Ln M d' N r- Ln 00 H to to to t4 in I in to I in I to I to to I to ' N O M w m d O m N O W o H m m H M r� m 00 m m F;0 M In Ho Ln N O ' n O O r -I 3 -,F, W Ln Lfl N 0 c -I d' d' Ln N E = m E uum 0u - v to in in in in to to I in I to I in in I to 0 2 L2 c0 o (6 Q O U C a '6 - 7 '02cu L ON 0 O E N c�6 -�O O v w O (o w O co U U= a te (n (n (n LL a z Q ATTACHMENT #2 ADMINISTRATIVE DRAFT MEMORANDUM To: Sue Castellucci, City of Petaluma From: Darin Smith, Ashleigh Kanat, and Claire Desser Subject: Affordable Housing Fee Comparison, Feasibility Assessment, and Estimate of Revenue Generation; EPS #161180 Date: September 19, 2017 77ie Economics of Land,Use As part of an overall update of the City of Petaluma's affordable housing policies and fees, Economic & Planning Systems, Inc. (EPS) was retained by the. City to update the City's inclusionary housing in -lieu fee for ownership residential projects and the City's commercial linkage fee. In addition, EPS prepared nexus -based impact fees for rental housing and 1 ownership housing. The preliminary technical analysis is complete, which results in the maximum justifiable fees that may be charged to new development. This memorandum evaluates the feasibility of the potential changes to the City's affordable housing fee programs to inform the optimal fee levels that may be supported with minimal adverse impact on new development. The following analysis examines fees in other jurisdictions in Sonoma and Napa counties and beyond to compare fee levels and then evaluates the effect that different fee levels could have on new residential and commercial development activity in Petaluma. Preliminary fee level recommendations and estimates of the revenue that could be generated at different fee levels are provided. This memorandum is designed to help the City's decision -makers understand the impact of potential changes to the City's fee programs. Economic & Planning Systems, Inc. One Kaiser Plaza, Suite 1410 Oakland, CA 94612 510 841 9190 tel 510 740 2080 fax Oakland Sacramento Denver Los Angeles www.epsys.com 9 Administrative Draft Memorandum September 19, 2017 Affordable Housing Impact Fee Feasibility Assessment Page 2 Key Findings 1. The current affordable housing fees charged by the City of Petaluma are within the range of other comparable jurisdictions. Petaluma does not currently have a nexus -based impact fee for rental residential projects. Rather, developers of rental residential projects have been developing affordable units on- site or opting to pay fees equivalent to the City's current in -lieu fee. The City's current in -lieu fee varies by square footage, and is $4.78 for a 1,020 net square foot market -rate apartment. For comparison purposes, rental nexus fees among the surveyed jurisdictions range from $2.43 to $15.00 per square foot under the same square footage assumptions (Table 1). The City's current ownership in -lieu fee is approximately $9,000 per unit (assuming a 2,000 square -foot home), which is below the median fee of about $11,000 per unit and well under the high of $35,000 per unit, as shown in Table 2. Petaluma may consider maintaining its in -lieu fees for ownership residential projects or increasing them slightly, as they are already at an affordable level for developers. On the commercial fee side, the current industrial and retail linkage fees are slightly above the median fee, and the office fee is almost in the middle of the fee ranges of the other cities and counties, as shown in Table 3. 2. With current fees approximately consistent with the median fees among the jurisdictions surveyed, it may be that only modest affordable housing fee increases can be supported in Petaluma without significantly deterring new development. Petaluma's current ownership in -lieu fee is slightly below the median fee level among the surveyed jurisdictions, while the rental fee is 35 percent above the median but well below the highest fee of $15.00 per square foot. The relatively high value of development in Petaluma may be able to .support marginally higher fees without having a significant deterrent effect on feasibility and rental/for-sale housing production. The City's current commercial linkage fees, however, are about equal to the median fee or higher than the median fee. While modest increases may not deter feasibility, there may not be much potential to increase commercial fees without affecting competitiveness. The supportable level of increase will vary by prototype, mix of land uses, location within the City, and other factors affecting development costs and values. 3. Charging the maximum fees justified by the technical nexus analysis would have negative implications for development feasibility and likely would deter new development. Like any added cost to development, increasing fee levels has an impact on project feasibility. Projects may require higher achievable rents, lower land acquisition costs, or other adjustments to maintain an attractive return on investment. Adopting fees at the maximum levels calculated by EPS would add greatly to projects' costs and likely deter development in Petaluma, so a more modest fee increase is recommended. 4. At the recommended fee levels, the City of Petaluma may expect to generate approximately $49.0 million from new residential development and approximately $1.4 million from new commercial development based on an estimate of development projects in the pipeline. Based on pipeline development of about 2,600 residential units and almost 733,000 square feet of commercial development, EPS estimated potential revenue at various fee levels. No changes to the current fee programs would generate approximately $24.1 million, compared with $50.4 million at the recommended fee levels. ro Administrative Draft Memorandum September 19, 2017 Affordable Housing Impact Fee Feasibility Assessment Page 3 Survey of Fees in Comparable Jurisdictions EPS investigated the affordable housing fee levels of local jurisdictions (i.e., Sonoma County and cities within Sonoma County) as well as other selected jurisdictions within the counties of Napa and Sacramento, and the Bay Area. Through interviews with City Staff and a review of fee schedule documents, the fees were gathered for rental residential, ownership residential, and commercial developments. After consulting with City Staff, these jurisdictions were selected due to their proximity, and in some cases, similarity, to Petaluma. The list of city and county affordable housing fees reviewed is summarized in Tables 1, 2, and 3. It is worth noting that many of the jurisdictions are in the process of either updating or adopting new fee schedules. Nonetheless, low, high, and median fees from the selected jurisdictions are calculated to use as comparisons and to help inform Petaluma decision makers as the City settles on appropriate fee levels. Rental residential impact fees::In some cases, rental nexus fees vary by square foot or are given in different metrics. In order to equate the fees from all of the jurisdictions to a per square foot basis, EPS assumes that rental units contain 1,200 gross square feet, for a net square footage of 1,020 when representing an 85 percent efficiency rate. The lowest fee is in Elk Grove at $2.43 per square foot, and the highest fee is in Walnut Creek at $15 per square foot. Note that these fee levels are well below the EPS -calculated maximum fee of $33 per square foot. 2. Ownership residential in -lieu fees: These in -lieu or ownership nexus fees are illustrated on a per unit basis. Similarly, many of these fees vary by square foot so EPS has assumed that for -sale units are 2,000 square feet. Two of the lowest fee areas are in the City of Sacramento and Elk Grove. Areas within Sacramento County would be expected to have lower impact fees since the cost of living, and particularly rents, are lower there. On the other hand, Novato holds the highest fee level of over $35,000, which specifically applies to developments greater than 20 units. When looking at median home prices, Elk Grove is $389,000, while the median home price in Novato is almost two.times greater at $762,000. Marin County is a more expensive county with a lack of affordable housing, and so Novato may prefer the inclusionary units in large developments rather than a fee payment. For discussion purposes, EPS also calculated in -lieu fees based on an inclusionary percentage of 18 percent and 20 percent, rather than the current 15 percent, in order to test a slightly higher fee level that would encourage on-site provision rather than payment of the fee. For example, the City could maintain the current 15 percent inclusionary requirement for on-site units, but increase the percentage to 18 percent or 20 percent if developers opt to provide units off-site or pay the in -lieu fee. San Francisco and Santa Rosa have made such distinctions between on-site vs. in -lieu requirements. Applying an 18 percent inclusionary requirement would mean Petaluma's in -lieu fee is higher than the median fee among the surveyed jurisdictions but about $8.50 below the high fee. Applying a 20 percent inclusionary requirement would mean Petaluma's in -.lieu fee is higher than the median fee among the surveyed jurisdictions and approximately $1.00 above the 18 percent inclusionary requirement. Commercial linkage impact fees: Petaluma's current commercial fees range from $2.34 per square foot for lodging and office to $4.03 for retail. These fees are some of the highest among jurisdictions in Sonoma County, but jurisdictions in Napa County and elsewhere still charge higher fees. Yountville, for example, has the highest fee across most of the Administrative Draft Memorandum Affordable Housing Impact Fee Feasibility Assessment September 19, 2017 Page 4 commercial land use types; Napa County also has fees over double the median fee level. Among the jurisdictions reviewed, Petaluma's current fees are at or above the median in every commercial category, but still well below the top of the range. Feasibility Analysis It is sometimes argued that affordable housing development impact fees reduce housing production on the grounds that a production requirement or fee is internalized by developers as a burden that effectively increases the cost of development and therefore results in the need for cost-cutting or revenue -raising in other stages of development. Under this logic, developers may not build in jurisdictions with these fees unless they are able to increase the price of market -rate units or pay less for land. Whether market -rate units will be able to command a price increase will be dependent on market strength and may lead to the production of fewer units. Since the fee reduces the otherwise achievable value of development, another possible result is a decrease in land value. This may result in landowners being unwilling to sell and, therefore, may further. constrain housing production. Figure 1 below illustrates these dynamics. Figure 1 Cost Incidence of Inclusionary Requirements 2. Project 3. Project 1. Basic Project with Fixed with Fixed Unit Price Land Price In the third scenario, it is assumed that the landowner will not be willing to sell the property for development at a lower price, perhaps because there is existing development on the site (such as a shopping center or a paid parking lot) that generates a certain amount of value. In this case, the developer is unable to negotiate a lower land price, and the construction costs and profit margin are fixed, and thus the market price must be higher for feasibility than would be required under either of the first two scenarios. Therefore the cost of the fee is borne by the consumers, who are paying more than they otherwise might, which is why the analysis assumes that rents must increase to secure profitability and reasonable return to the developer. The analysis shown below in Table 4 highlights the feasibility of the "rental residential impact fee, the ownership residential in -lieu fee, and the commercial linkage fee at various levels, and demonstrates how the increases in fees can change feasibility. Using a threshold type of 17. Administrative Draft Memorandum Affordable Housing Impact Fee Feasibility Assessment September 19, 2017 Page 5 methodology, this analysis first examines the effect that the EPS -calculated maximum fee will have on each type of development and the implications this will have on required rents or developer profit (assuming a target profit margin of 14 percent and a capitalization rate of 5.5 percent). EPS also assumes that land values will stay the same and therefore rent prices must increase in order to support profit objectives. To further inform the study, neighboring jurisdiction's affordable housing fees help establish a high fee level and a median fee level to use as parameters for the threshold analysis. Ultimately this analysis will indicate how much rents or prices will have to increase under each fee tested to ensure new developments remain financially viable. The analysis starts with five development prototypes, including residential and non-residential uses, and was developed in collaboration with City staff. Snapshots of the existing affordable housing fee rates in Petaluma are displayed (if applicable), relative to the new reference point fees for each type of development. Rental Residential Nexus Fees The maximum fee calculated by EPS, at $33 per square foot, would represent a significant cost increase and require rent increases of almost 6 percent compared to the current circumstance with in -lieu fees on rental housing. Among the rental nexus fees in the selected jurisdictions, the high fee of $15 would require rents to increase by 2.1 percent to not affect developer profit; the median fee level of $3.54 is actually lower than Petaluma's current fee, thus rents would not have to increase at all. These cost differences are clearly more manageable than the EPS - calculated maximum fee burden. Petaluma may want to consider adopting an affordable housing rental residential impact fee similar to surrounding jurisdictions to not negatively impact the City's competitive position. Ownership Residential In -Lieu Fees Petaluma currently requires a 2,000 square foot home to pay an in -lieu fee of $4.51 per square foot, or roughly $9,000 for such a unit. Assuming for -sale units are 2,000 square feet, the EPS - calculated maximum fee of $7.59 per square foot for for -sale housing would be about $15,200 per unit, assuming an underlying inclusionary requirement of 15 percent. Market -rate housing prices would need to increase a negligible amount to adjust to this fee increase. In looking at other city and county for -sale in lieu housing fees, the $7.59 fee calculated by EPS is within the range, though almost 40 percent higher than the median fee. If Petaluma were to increase the fee to the high fee of $17.62 per square foot, this would require home values to increase by 4.4 percent for developers to achieve the assumed profit threshold. An 18 percent inclusionary requirement equates to $9.11, compared with the 15 percent requirement equaling $7.59. A 20 percent inclusionary requirement translates to an in -lieu fee of $10.12. Even at 20 percent, the effect on home prices, assuming fixed land costs and a fixed developer return threshold, is less than 2 percent. Ownership Residential Nexus -Based Fees EPS calculated an alternative fee on for -sale housing based on the nexus relationship between homebuyer income and job creation at lower income levels. That EPS calculation yielded a maximum fee of $26.00 per square foot, which would be the highest among all jurisdictions surveyed for this analysis. Such a fee would require prices to increase by over 7 percent compared to the current Petaluma fee at $4.51 for a 2,000 square foot home. If the.City were to pursue a nexus -based fee for ownership housing, rather than an in -lieu fee that is tied to an 13 Administrative Draft Memorandum Affordable Housing Impact Fee Feasibility Assessment September 19, 2017 Page 6 inclusionary requirement, EPS recommends adjusting the nexus -based fee to be more consistent with the in -lieu fee calculation. Commercial Linkage Impact Fees The maximum justifiable commercial linkage fees are well above the fees observed in comparison jurisdictions and setting fees at the maximum fee level likely would deter new commercial development. Petaluma already charges commercial fees above the median for the jurisdictions reviewed, and charging fees at the upper end of that surveyed group would require rent increases of 5 to 8 percent. The City of Petaluma may wish to consider leaving commercial fees as they are or, alternatively, a modest increase of the commercial linkage fee of $1.00 to $2.00 per square foot, which would have only about a 1 percent impact on required commercial rents. Potential Revenue Generation Given the current fee, EPS -calculated maximum fee, high fee, and median fee, the potential revenues for the City of Petaluma are calculated, as shown in Tables 5 and 6. Revenues from New Residential Development According to Petaluma's 2015-2023 Housing Element, 2,140 units are expected to be charged the rental fee, 1,356 units would be subject to the for -sale in -lieu fee, and 1,228 units would pay the for -sale nexus fee. Projects already built since the Housing Element are removed for the purpose of this analysis. The revenue estimates, are based on the assumption that on average, rental units are 1,020 net square feet and for -sale units are 2,000 square feet. The revenue estimates do not take into account an estimate of the amount of development that would not occur in response to increasing fees. For rental housing, the nexus fee would achieve about $10.4 million applying the current fee (based on the City's in -lieu program), $7.7 million applying the median fee level, and $32.7 million applying the high fee level. While clearly infeasible from a development cost perspective, the maximum fee could generate over $70 million. For ownership housing, the in -lieu fee would generate $12.2 million for the Housing Fund at the current fee level, but $2.6 million more with the median fee. Increasing the current in -lieu fee to the high fee level would generate $47.8 million in total revenues. For purposes of comparison, the for -sale housing nexus fee would apply to approximately 130 fewer units but would still generate more than $11 million based on the current fee. The maximum fee level for ownership projects generates approximately $20.6 million under the in -lieu fee program, while the maximum nexus -based fee generates $63.9 million in revenues. The nexus fee generates about $1.4 million less in revenues than the in -lieu fee at the median fee level, and $4.5 million less with the high fee. Using an 18 percent inclusionary requirement as the basis for calculating the in -lieu fee results in a fee level of $9.11 and would generate $12.5 million more in revenue than the 15 percent inclusionary assumption. Using a 20 percent inclusionary requirement as the basis for calculating the in -lieu fee results in a fee level of $10.12 and would generate $15.2 million more in revenue than the 15 percent inclusionary assumption. The recommendation is to maintain a 15 percent inclusionary requirement under circumstances where the developer is providing units on site. If developers opt to build units off-site or pay the in -lieu fee, EPS recommends increasing the requirement to 18 percent or 20 percent. Iq Administrative Draft Memorandum September 19, 2017 Affordable Housing Impact Fee Feasibility Assessment Page 7 Revenues from New Commercial Development City Staff estimate there to be 264,000 square feet of office space, 110,000 square feet of retail space, and 150,000 square feet of industrial space projects to be built in Petaluma in the coming years. Applying the current fee across all commercial types, new development would generate approximately $618,000 from new office, $447,000 from new retail, and $362,000 from new industrial space. The median fee of $1.97 for industrial space would decrease revenues by 23 percent in relation to the current fee. Similarly, the retail revenues would go down by 13 percent since the median fee is lower than Petaluma's current fee. The high fee levels, which are over $14 per square foot higher than current levels, could generate between $2 million to $5 million. The EPS -calculated maximum fees are well out of the range of feasibility, but would generate revenues well over $9 million. The recommendation is to keep the commercial fees at the current levels, and consistently apply an escalation factor. 15' Administrative Draft Memorandum Affordable Housing Impact Fee Feasibility Assessment Table 1 Rental Residential Impact Fee Comparison Jurisdiction Rental Residential Impact Fee [1] Per Sq. Ft. Per Unit Petaluma [2] $4.78 $4,876 Local Jurisdictions Sonoma County [3] $2.47 $2,521 Cloverdale $3.54 $3,613 Healdsburg Fee adoption in progress Santa Rosa [4] $3.23 $3,290 Windsor Fee adoption in progress Other Jursidictions Napa County [2] [5] $6.47 $6,600 City of Napa [2] $4.76 $4,860 American Canyon [2] [6] $4.18 $4,260 Calistoga Fee adoption in progress St. Helena 2.5% of construction costs Sacramento County $2.68 $2,734 City of Sacramento [7] $2.67 $2,723 Elk Grove [8] $2.43 $2,479 Walnut Creek [9] $15.00 $15,300 Low Fee $2.43 $2,479 High Fee $15.00 $15,300 Median Fee $3.54 $3,613 Note: The City of Petaluma asked EPS to include comparison rental residential nexus fees in Davis, Fairfield, Sonoma (City), Cotati, Sebastopol, Yountville, Folsom, Vallejo, San Rafael, Pleasant Hill and Novato. These jurisdictions have not adopted rental residential nexus fees, so they are excluded from this table. [1] Rental units are assumed to be 1,200 gross sq.ft., or 1,020 net sq.ft., reflecting an efficiency rate of 85%. For comparison purposes, the fee is calculated based on net square footage assumptions. [2] Jurisdiction applies fees on a gross square footage basis. For comparison purposes, the fee is calculated based on net square footage assumptions. [3] Fee varies by square footage, and units smaller than 1,000 sq. ft. are exempt. Note that the prototype assumptions described in footnote #1 reflect a unit that would be exempt from the fee in Sonoma County. As of 2017, the lowest fee is $2,292 at 1,001 sq.ft.; or $2.29 per net sq.ft. [4] Fee varies by square footage. Units between 0 and 909 sq.ft. are charged a fee of $1 per sq.ft. Fee shall not exceed $12,712 per unit.. [5] Units between 1,200 and 2,000 sq.ft. are charged a $9/sq.ft. fee; units between 2,001 and 3,000 sq.ft. are charged $10.75/sq.ft.; units greater than 3,000 sq.ft. are charged $12.25/sq.ft. [6] Fee applies to developments with 5 or more units. [7] The fee per sq.ft. applies to multi -unit dwellings of fewer than 40 dwelling units per net acre. Dwelling units in the Housing Incentive Zone are charged $1.16/sq.ft. [8] Applies to developments with 3 or more units. [8] Rental fee varies by unit count from $1.60 per sq. ft. for a 2 unit development to $15.00 per sq. ft. for developments greater than 10 units. Developments with one unit are exempt. Fee will increase to $18 per sq. ft., regardless of number of units, on January 1, 2018. Sources: Select city websites, fee schedule documents, and interviews with staff; Economic & Planning Systems, Inc. September 19, 2017 Page 8 E Administrative Draft Memorandum Affordable Housing Impact Fee Feasibility Assessment Table 2 Ownership Residential In-Lieu/Impact Fee Comparison September 19, 2017 Page 9 Jurisdiction Median Home Price 2017 [20] Total Inclusionary Requirement Ownership Minimum Inclusionary Requirement Very Low Low Moderate Income Income Income In -Lieu Fee or Ownership Nexus Fee / Unit [1] Petaluma [2] [8] $612,300 15% 7,5% 7.5% $9,022 Local Jurisdictions Sonoma County [3] $585,000 20% 10% 10% $14,898 City of Sonoma [4] $680,000 20% 0%-10% 10%-20% N/A Cloverdale [5] $486,000 15% 15% N/A Cotati [6] $511,000 15% 5% 5% 5% Based on sales price of unit Healdsburg [2] [7] $721,000 15% 5% 5% 5% $10,940 Rohnert Park [2] $501,000 15% 7.5% 7.5% Based on construction costs of market rate dwelling unit Santa Rosa [8] $529,000 15% 15% 2.5% of sales price Sebastopol $831,000 20% 20% N/A Windsor [8] $569,000 Option 1 10% 10% $7,220 Option 2 $569,000 7.5% 7.5% $7,220 Option 3 $569,000 5% 5% $7,220 Other Jurisdictions Napa County [9] $590,000 17%-20% 17%-20% $18,000 City of Napa $577,000 $18,000 American Canyon [2] $500,000 $9,500 Calistoga [10] $651,000 Option 1 20% 20% $12,000 Option 2 $651,000 10% 10% $12,000 St. Helena [11] $1,113,000 20% 20% 2.5% of construction costs of market rate dwelling units Yountville [2] $832,000 15% 5% 5% 5% N/A Sacramento County $327,000 - N/A City of Sacramento [12] $296,000 - 10% $5,360 Folsom [14] 10% 3% 7% Based on sales price of unit and $498,000 # of units Davis [15] $618,000 10%-25% 3.3% - 8.3% 3.3% - 8.3% 3.3% - 8.3% $7,500 - $15,000 Novato [16] $762,000 10%-20% 5%-10% 5%-10% $17,621 - $35,242 Elk Grove $389,000 - $4,132' Walnut Creek [17] Option 1 $846,000 10% 10% $30,000 Option 2 $846,000 7% 7% $30,000 Option 3 $846,000 6% 6% $30,000 Pleasant Hill [18) Option 1 $706,000 10% 10% $13,618 - $27,235 Option 2 $706,000 5% 5% $13,618 - $27,235 San Rafael [19] $965,000 10%-20% 5%-10% 5%-10% N/A Low Requirement/Fee 5% 3% 3.3% 3.3% $4,132 High Requirement/Fee 25% 8.3% 20% 20% $35,242 Median Requirement/Fee 15% 5% 8% 10% $10,940 *Table 2 footnotes on next page FT Administrative Draft Memorandum September 19, 2017 Affordable Housing Impact Fee Feasibility Assessment Page 10 *Table 2 footnotes: Note: The City of Petaluma asked EPS to look at the Inclusionary Requirement and In -Lieu Fee or Ownership Nexus Fee for Fairfield and Vallejo, but these jurisdictions do not have inclusionary requirements nor do they charge an affordable housing fee to ownership residential uses. In Fairfield, RLM zoning (which typically includes single family homes), has no inclusionary requirement. [1] Assumes for sale units are 2,000 sq. ft. This size was gathered from Redfin by taking the average of Sonoma County homes sold in the past year (from 5/25/16 - 5/25/17) that were built from 2016 onward. If there is a fee but not inclusionary requirement, it is an ownership nexus fee. [2] In -lieu fee only applies to developments of 5 or more units. [3] Projects smaller than 1,000 sq. ft. or less are exempt from fee. At least 20 percent of the units in an ownership development must be affordable, 50% of which must be for low income households and 50% for moderate income households. [4] Developments of 5-10 units have an inclusionary requirement of 20% to low or moderate income households. Developments of 10 or more units require that at least 10% of the 20% are affordable to low income households. [5] Inclusionary requirement only applies to developments with 5 or more units. [6] The city council may authorize the use of the following equivalents to adjust the inclusionary housing requirements: (1) Each very low-income unit is equivalent to two units affordable to moderate -income households; and (2) Each low-income unit is equivalent to one and one-half units affordable to moderate -income households. A residential development of nine or fewer units may comply with the requirements by paying an In -lieu fee, ranging from $150/unit for a $75,000 unit to $2,400 for a $125,000 unit and increases $200 per unit for every $5,000 increase in sales price. [7] Inclusionary requirement applies to 7 or more unit developments. Developments of 6 or less units may pay the in -lieu fee. [8] In -lieu fee varies by sq. ft. and is based on assumptions. [9] Attached single family and common interest projects: 17%. Single family detached: 20%. 1,200-2,000 sq. ft. units are charged a $9/sq. ft. fee; 2,001-3,000 sq. ft. units charged $10.75/sq. ft.; 3,000+ sq. ft. units charged $12.25/sq. ft. Residential ownership projects <1,200 sq. ft. exempt. [10] No inclusionary requirement for developments less than 20 units. Projects with between five and 19 dwelling units shall meet their inclusionary housing requirement through the payment of an in -lieu fee. Fees may be updated later this year. [11] Of the affordable units, 1/2 may be for affordable to households whose annual household income does not exceed 100% of median income. [121 Fee of $2.68/sq, ft. applies to single -unit and duplex dwellings less than 20 dwelling units per net acre. Dwelling units in the Housing Incentive Zone charged $1.16 per sgft. [131 Fee is $1554.60 if in Suncreek Specific Plan, whereas fee in Rio Del Oro Specific Plan Area is $4,557. Infill areas do not have an inclusionary requirement, but new development areas have varying inclusionary requirements based on market conditions. [14] Fee applies to 10 or more units. A developer may pay an in -lieu fee calculated as follows to satisfy all of the inclusionary housing requirements: multiply one percent of the lowest priced for -sale residential unit in the proposed subdivision by the total number of for -sale residential units in the proposed subdivision. [15] Fee is $75,000 per affordable unit. EPS assumed a project of 100 units to calculate fee. Projects of 26 units or less have no inclusionary requirement. "Middle" income for inclusionary requirement assumed to mean moderate. Developments of 26-35 units have an inclusionary requirement of 10% middle income; 36-49 unit developments require 15% middle income; 50+ unit developments require 20% middle income. [16] Applies to 7 or more units, unless the City Council has approved an in -lieu fee. Residential projects of 6 or fewer units shall be designed and constructed to include the number of affordable units required or provide in -lieu fees. In -lieu fee varies by number of units: 1-10 units charged $17,621/unit to 20+ units charged $35,242 per unit. Inclusionary requirement shall be split evenly between moderate and low income households, with requirement varying by number of units: 3-6 units have a 10% requirement or in -lieu fee option; 7-10 units have a 10% requirement; 11=11 % and so on to 20+ units =20%. [17] Inclusionary requirement varies by number of units. Developments with 2 to 9 units must provide one unit to a moderate income household. Developments of 10 or more units pay $15 per sq. ft. [181 In -lieu fee of $272,350 per affordable unit. EPS assumed a project of 100 units to calculate fee. [19] Inclusionary requirement varies by number of units. Developments with 2 - 10 units require 10% split evenly between low and moderate income households; 11 - 20 require 15%; 20+ require 20%. [20] Median home prices were gathered from Zillow 2017 data. Sources: Select city websites, fee schedule documents, and interviews with staff; Economic & Planning Systems, Inc. qu Administrative Draft Memorandum September 19, 2017 Affordable Housing Impact Fee Feasibility Assessment Page 11 Table 3 Commercial Linkage Fee Comparison Commercial Linkage Fee (per Sq.Ft.) Jurisdiction Hotel Retail Office Industrial/ Warehouse Industrial Petaluma [2] [4] $2.34 $4.03 $2.34 $2.41 $2.49 Local Jurisdictions $6.00 $3.55 $3.55 $3.50 $3.50 Sonoma County [1] $2.75 $4.75 $2.75 $2.84 $2.84 City of Sonoma N/A N/A N/A N/A N/A Cloverdale [2] $0.80 $0.80 $0.80 $0.56 $0.56 Cotati [2] [3] $2.08 $3.59 $2.08 $2.15 $2.15 Healdsburg N/A N/A N/A N/A N/A Rohnert Park [2] [4] $0.69 $1.19 $0.69 $0.71 $0.71 Sebastopol [2] [4] $2.08 $3.59 $2.08 $2.15 $2.15 Other Jurisdictions Napa County [5] $9.00 $7.50 $5.25 $3.60 $4.50 City of Napa $6.00 $3.55 $3.55 $3.50 $3.50 American Canyon $0.76 $0.76 $0.76 $0.51 $0.51 Calistoga [2] 613.72 / $1,room $3.50 $2.42 $1.78 $1.78 St. Helena [2] [6] $3.80 $5.21 $4.11 $1.26 $1.26 Yountville [7] $9,236.441 $18.47 $18.47 $18.47 $18.47 room Sacramento County [8] [9] $0.92 $0.77 $0.97 $0.26 $0.61 City of Sacramento $2.38 $2.00 $2.50 $0.68 $1.57 Folsom [2] [4] $1.50 $1.50 $1.50 $1.50 $1.50 Walnut Creek [10] $5.00 $5.00 $5.00 $5.00 $5.00 San Rafael $317,974 per affordable unit for all non-residential development Low Fee $0.69 $0.68 $0.69 $0.26 $0.51 High Fee $9.00 $18.47 $18.47 $18.47 $18.47 Median Fee $2.21 $3.57 $2.38 $1.97 $1.97 Note: The City of Petaluma asked EPS to include comparison commercial linkage fees in Davis, Fairfield, Sonoma (City), Healdsburg, Santa Rosa, Windsor, Vallejo, Pleasant Hill, and Novato. These jurisdictions have not adopted commercial linkage fees, so they are excluded from this table. [1] Commercial projects smaller than 2,000 sq.ft. are exempt. [2] Light IndustriaUWarehouse uses are assumed to be covered under the Industrial fee category. [3] The "Commercial" fee is $2.08/sq. ft., which is assumed to apply to Hotel and Office developments. Developments smaller than 2,000 sq.ft. are exempt from fees, and the first 2,000 sq.ft. of commercial developments (Hotel, Office) are categorically exempt as well. [4] "Commercial" fee was assumed to apply to Hotel and Office. [5] Warehouse uses under 30,000 sq.ft. are classified as industrial uses. [6] St. Helena's industrial category includes wineries. [7] Restaurants are subject to a fee of $369.73/seat. The "Commercial" fee is $18.47/sq.ft. and is assumed to apply to Retail, Office, Light Industrial/Warehouse, and Industrial. [8] Research and development facilities are charged $0.82/sq.ft. The "Commercial" fee is $0.77/sq.ft. and is assumed to apply to retail uses. [9] The Industrial fee is labeled by the City as "Manufacturing." [10] Fee update in progress. Sources: Select city websites, fee schedule documents, and interviews with staff; Economic & Planning Systems, Inc Administrative Draft Memorandum September 19, 2017 Affordable Housing Impact Fee Feasibility Assessment Page 12 Table 4 Petaluma Feasibility Analysis for Affordable Housing Fees Item Rental Housing (Nexus) For -Sale Housing (in -Lieu) For -Sale Housing (Nexus) Office Retail Light Industrial Warehouse Petaluma - Current Fee $4.78 [1] $4.51 $4.51 $2.34 $4.03 $2.41 EPS -Calculated Maximum Fee $33.00 $7.59 $26.00 $99.00 $167.00 $62.00 Change from Current Fee $28.22 $3.08 $21.49 $96.66 $162.97 $59.59 + Required Profit Margin (14%) $3.95 $0.43 $3.01 $13.53 $22.82 $8.34 Added Cost Above Current Fee $32.17 $3.51 $24.50 $110.19 $185.79 $67.93 Current Market Rent or Price [2] $2.60 $343.34 $343.34 $1.70 $1.90 $1.10 Required Market Rent or Price [3] $2.75 $346.85 $367.84 $2.21 $2.75 $1.41 % Increase 5.7% 1.0% 7.1% 29.7% 44.8% 28.3% High Fee from Comparable Areas $15.00 $17.62 $17.62 $18.47 $18.47 $18.47 Change from Current Fee $10.22 $13.11 $13.11 $16.13 $14.44 $16.06 + Required Profit Margin (14%) $1.43 $1.84 $1.84 $2.26 $2.02 $2.25 Added Cost Above Current Fee $11.65 $14.95 $14.95 $18.39 $16.46 $18.31 Current Market Rent or Price [2] $2.60 $343.34 $343.34 $1.70 $1.90 $1.10 Required Market Rent or Price [3] $2.65 $358.29 $358.29 $1.78 $1.98 $1.18 % Increase 2.1% 4.4% 4.4% 5.0% 4.0% 7.6% Median Fee from Comparable Areas $3.54 $5.47 $5.47 $2.38 $3.57 $1.97 Change from Current Fee -$1.24 $0.96 $0.96 $0.04 -$0.46 -$0.45 + Required Profit Margin (14%) -$0.17 $0.13 $0.13 $0.01 -$0.06 -$0.06 Added Cost Above Current Fee -$1.41 $1.09 $1.09 $0.05 -$0.52 -$0.51 Current Market Rent or Price [2] $2.60 $343.34 $343.34 $1.70 $1.90 $1.10 Required Market Rent or Price [3] $2.59 $344.43 $344.43 $1.70 $1.90 $1.10 % Increase -0.2% 0.3% 0.3% 0.0% -0.1% -0.2% [1 ] Petaluma's current rental fee is based on the in -lieu housing fees from 2017. The fee was calculated by taking the $4,876 per unit fee and dividing it by 1,020 net square feet. [2] Current market rent for office, retail, and industrial space was gathered from Costar 2017 data in Petaluma. Market price of for -sale housing is an average of Zillow 2016-2017 data on median home sale price in Petaluma. Market price rent for rental housing was derived from the Rental Residential Nexus Study model on Table 4. [3] This analysis assumes a 5.5 percent capitalization rate. Sources: City of Petaluma; Zillow; CoStar; Economic & Planning Systems, Inc III fA y J E L D m c i m T3 G N C a � I Q C Q 0 m 0 aEi+� OI u Z c � � Q � 2..1 0 0' 0 0 d) 0 0 e m N 0 N 0 co �� N 0 C R Q' N ffi N 69 N FAL-. N S-�• ETO °_ E 0 0 0 0 IL 0 w 0o IL 0 E» 0 iA W m 6r� as10 n Ii w is w p li y v T 0 0 0 M 0 v U" E N ONO^ A A a Iii E>> 0 N1,- 00 1* N CA N c c 0 0 O :0 E C N Nt 0 O> E I- 'O 5 J ' Cr 61 N Ir)3 GA �T 6Ve -6 °1 �1 ` N Q j2 d N o to y cr 0 C N C LL E CD O 1(j co h m N O 'O d d (D c O r OHO a^- � C p N N Z' > �" N f` h N M lll 4 0 O O O a = ih ra FN0• cN0 to 64 t~-- fi? 'h fR N tr o 'A :s t CA d N y 01 L w O) O) 0 0 �, rn is C E co T � O (Mp N O N O w O IIA O C O ll. N () C 7 N ��V T O> O O 0 W y 0 0 m M 12 J N O N CSI O r O O W vi SO ti. Q' h9 V).FA ; O O Y U 70_ .,o.-. AN E 2 ao r*.: % .- IO .- IA 4c x E- 0 N 0) c E CWT . - V O/ C d (D 'UO 7 T $ 7 O U O E a N o c LL y N y I$ j ld _A 5 Z N 7 �w z rn rn .03 vsi , m •� •� S7 w C _ .F.. •7 U f.�A n z � � � yi � � .Q j� �- �. N 2..1 N O N O N O C0 to O O W O 69 M o It e d E 0 O n. p M 0^) t� c) tH b1 64 O U') O CO O O O ( O co 0 � h Sri zi co 00 co O rn O Cl) O O .- to M co coN ER Hi (fl O O O rn (D coo ER � to co 1 O h O O CO � � o � C) — o N co O y Cl) I PI OO N �V C" 01 O :3 N c O e d E 0 O n. p M 0^) t� c) tH b1 64 O U') O CO O O O ( O co 0 � h Sri zi co 00 co O rn O Cl) O O .- to M co coN ER Hi (fl O O O rn (D coo ER � to co 1 O h O O CO � � o � m U) n 0 to) 0 O :3 N c O U o L � D� m ATTACHMENT #3 Administrative Draft Report The Economics of'Lund Use Ownership Inclusionary Housing . In -Lieu Fee ME Prepared for: City of Petaluma Prepared by: Economic & Planning Systems, Inc. August 29, 2017 Economic & Planning Systems, Inc. One Kaiser Plaza, Suite 1410 Oakland, CA 94612 510 841 9190 tel EPS #161180 510 740 2080 fax Oakland Sacramento Denver Los Angeles www.epsys.com 3 Table of Contents EXECUTIVE SUMMARY.................................................................................................... 1 1. METHODOLOGY..................................................................................................... 2 Maximum Affordable Housing Rents............................................................................ 2 AffordabilityGap Analysis.......................................................................................... 3 In -Lieu Fee Calculations.............................................................................................5 Appendices APPENDIX A: Sonoma County Utility Allowances List of Tables Table 1 Summary of In -Lieu Fee Calculation....................................................................1 Table 2 2017 Affordable Housing Income Limits for Sonoma County...................................2 Table 3 2017 Maximum Supported Rents by Income Category...........................................3 Table 4 Affordability Gap Analysis -- Rental Product Type..................................................4 Table 5 In -Lieu Fee Calculation......................................................................................6 go EXECUTIVE SUMMARY Economic & Planning Systems, Inc. (EPS) was retained by the City of Petaluma to review and update the City's affordable housing fees, including the inclusionary housing In -Lieu fee. In this report, EPS calculates the in -lieu fee that corresponds to the requirements reflected in the City's current inclusionary housing ordinance based on current market conditions. The City's current inclusionary housing ordinance requires developers of for -sale housing developments to provide 15 percent of the units at income -restricted, below -market -rate prices. Of the 15 percent, one-half must be available to moderate income households (households earning up to 120 percent of Area Median Income (AMI)), and the remaining half must be offered to low income households (households earning up to 80 percent of AMI). This report estimates the subsidies that may be required of the City to support affordable housing in the event that developers do not build the units themselves, and presents calculations meant to inform the adoption of an "in -lieu fee" that may be imposed on such development under the current ordinance. As shown below. in Table 1, EPS calculates an in -lieu fee of $15,177 per market -rate unit. Table 1 Summary of In -Lieu Fee Calculation In -Lieu Fee Source: Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. W Low Moderate per per Item (80% AMI) (120% AMI) Total Affordable Unit Market -Rate Unit Units 7.5 7.5 15 15 100 Value/Unit $237,000 $312,636 Total Value $1,777,500 $2,344,773 $4,122,273 Costs/Unit $376,000 $376,000 Total Costs $2,820,000 $2,820,000 $5,640,000 Subsidy per Unit $139,000 $63,364 Total Subsidy Required $1,042,500 $475,227 $1,517,727 $101,182 $15,177 Source: Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. W 1. 'METHODOLOGY The City's current inclusionary housing ordinance requires developers of for -sale housing developments to provide 15 percent of the units at income -restricted, below -market -rate prices. Of the 15 percent, one-half must be available to moderate income households (households earning up to 120 percent of Area Median Income (AMI)), and the remaining half must be offered to low income households (households earning up to 80 percent of AMI). Through an affordability gap analysis, this report estimates the subsidy needed to produce multifamily rental housing that is affordable to low- and moderate -income households (80 and 120 percent of AMI) in the event that developers do not build the units themselves. Maximum Affordable Housing Rents The maximum rents affordable to low- and moderate -income households are calculated as a factor of the income level of the intended occupants. The income levels are set for the entire County of Sonoma by the California Department of Housing and Community Development (HCD) on an annual basis. Table 2 shows the income limits for 2017, which vary by the number of people in the household. The average owner -occupied household in Petaluma has 2.68 people, and the average renter -occupied household has 2.78 people. Moreover, the Area Median Income for a family of three in Sonoma County is $75,500 in 2017, as shown below. Table 2 2017 Affordable Housing Income Limits for Sonoma County 2017 Maximum Income Income Group and Definition 3 -Person Household Very Low >30% to <_50% AMI $39,650 Low >50% to <_80% AMI $63,450 Median (Base) >80% to <_100% AMI $75,500 Moderate >100% AMI to <_120% AMI $90,650 Source: Sonoma County 2017 Income Limits, California Housing and Community Development (HCD). EPS has assumed a housing cost to income ratio of 30 percent and has used this factor to calculate the annual spending on housing at the low and moderate income levels. Then the annual spending on utilities is subtracted from the annual spending on housing to determine the maximum rent that a household can pay, as summarized on Table 3 below. A low income household can pay up to $1,345 on monthly rent, while a moderate income household can pay $2,025. Further detail on utility allowances for Sonoma County is available in Table A-1. Economic & Planning Systems, Inc. 77 Table 3 Income Category Ownership Inclusionary Housing In -Lieu Fee Administrative Draft Report 08129/2017 2017 Maximum Supported Rents by Income Category Annual HH Income AMI (3 -Person) Max Rent Assumptions [1] Annual Annual Spending on Spending on Housing [1] Utilities [2] Annual Rent Monthly Rent Low 80% $63,450 $19,035 $2,892 $16,143 $1,345 Moderate 120% $90,650 $27,195 $2,892 $24,303 $2,025 [1] Assumes a housing costs to income ratio of 30 percent. Includes rent plus utilities. [2) Assumes annual utility expenditures consistent with the Sonoma County CDC limits for a 2 -bedroom unit (assumes use of electricity for heating and cooking). Utility costs effective October 2016. Sources: Sonoma County Community Development Commission; California Housing and Community Development; Economic & Planning Systems, Inc. Affordability Gap Analysis Product Type The analysis assumes that new lower-income households would be housed in affordable units similar to the type of multifamily construction currently observed in the City. The assumed prototype reflects multifamily construction at 45 dwelling units to the acre with surface parking.l This building prototype is generally cost-effective to construct, as it makes efficient use of land and does not involve overly expensive construction materials or techniques. California State law (California Health and Safety Code Section 50052.5) assumes that a 2 -bedroom unit is occupied by a 3 -person household, and this assumption is used in this analysis. Consistent with input from the City, EPS assumes that the typical gross square footage of a 2 -bedroom rental unit in Petaluma will be approximately 1,150 square feet. Applying an efficiency ratio of 85 percent to account for shared lobbies, hallways, etc., results in net square footage of 978 square feet. Development Cost Assumptions Affordable housing development costs include land costs, direct costs (e.g., labor and materials), and indirect or "soft" costs (e.g., architecture, entitlement, marketing, etc.). For rental projects, operating costs also must be incorporated into the analysis. Data from recent Petaluma developments and recent Petaluma land transactions have been combined with EPS's information from various market -rate and affordable housing developers to estimate appropriate development cost assumptions for use in Petaluma. These assumptions are shown on Table 4 and indicate that the total cost per unit for rental apartments is about $376,000. 1 Based on allowable zoning in the Central Petaluma Specific Plan Area. Economic & Planning Systems, Inc. Ownership Inclusionary Housing In -Lieu Fee Administrative Draft Report 08/29/2017 Table 4 Affordability Gap Analysis -- Rental Product Type [1] Based on allowable zoning in Central Petaluma Specific Plan. [2] An efficiency ratio of 85% is applied to the gross unit size to calculate the net unit size. [3] For this analysis, EPS has assumed an average unit for income -qualified worker households would be 2 - bedrooms. State law (Health and Safety Code Section 50052.5) indicates that a 2 -bedroom unit should be assumed to be occupied by a 3 -person household. [4] Assumption of one parking space/unit based on market preferences, although 0.5 spaces/unit is the minimum requirement. [5] Based on two recent land sale transactions in the City: 307 Petaluma Boulevard and 951 Petaluma Boulevard. [6] Includes on-site work, offsite work, vertical construction, general requirements, overhead and builder fees. The cost estimate reflects wood -frame construction, surface parking, no basement, and union labor. [7) Includes costs for architecture and engineering; entitlement and fees; project management; appraisal and market study; marketing, commissions, and general administration; financing and charges; insurance; developer fee and contingency. [8) Based on 2017 income limits for a three-person household in Sonoma County. (9) Assumes housing costs (e.g., rent and utilities) to be 30% of gross household income. (10] Operating expenses are generally based on data reported by CoStar and reflective of properties in Petaluma. Estimates are inclusive of utility costs and property taxes, except Very Low and Low properties which are exempt from property taxes. [11) The capitalization rate is used to determine the current value of a property based on estimated future operating Income, and is typically a measure of estimated operating risk. The capitalization rate used in this analysis is based on CoStar reported transaction data for 2014 - 2017 transactions in Sonoma County. [12) The total supportable unit value is determined by dividing the net operating income by the capitalization rate. Sources: City of Petaluma; California Housing and Community Development (HCD); RS Means; IRR Monitor Investor Survey; and Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. 4P: s ow b eoP� ; �� ,s s Px= o .p„�� r ���, � n�R .... _ Z, 3 - 4 Stories Multifamily Building with Surface Parking Low Income Moderate Income (80%AMI) (120%AMI) Development Program Assumptions Density/Acre [1] 45 45 Gross Unit Size 1,150 1,150 Net Unit Size [2] 978 978 Number of Bedrooms 2 2 Number of Persons per 2 -Bedroom Unit [3] 3 3 Parking Spaces/Unit [4] 1.00 1.00 Cost Assumptions Land/Acre [5] $1,131,000 $1,131,000 Land/Unit $25,133 $25,133 Direct Costs Direct Construction Costs/Net SF [6) $185 $185 Direct Construction Costs/Unit (rounded) $213,000 $213,000 Parking Construction Costs/Unit $5,000 $5,000 Subtotal, Direct Costs/Unit $218,000 $218,000 Indirect Costs as a % of Direct Costs [7] 40% 40% Indirect Costs/Unit $87,200 $87,200 Profit Margin (% of all costs) 140% 14% Profit (rounded) $46,000 $46,000 Total Cost/Unit (rounded) $376,000 $376,000 Maximum Supported Home Price Household Income [8] $63,450 $90,650 Revenue to Property Owner/Year [9] $19,035 $27,195 (less) Operating Expenses per Unit/Year [10] ($6,000) ($10,000) Net Operating Income $13,035 $17,195 Capitalization Rate [11] 5.5% 5.5% Total Supportable Unit Value [12] $237,000 $312,636 Affordability Gap ($139,000) ($63,364) [1] Based on allowable zoning in Central Petaluma Specific Plan. [2] An efficiency ratio of 85% is applied to the gross unit size to calculate the net unit size. [3] For this analysis, EPS has assumed an average unit for income -qualified worker households would be 2 - bedrooms. State law (Health and Safety Code Section 50052.5) indicates that a 2 -bedroom unit should be assumed to be occupied by a 3 -person household. [4] Assumption of one parking space/unit based on market preferences, although 0.5 spaces/unit is the minimum requirement. [5] Based on two recent land sale transactions in the City: 307 Petaluma Boulevard and 951 Petaluma Boulevard. [6] Includes on-site work, offsite work, vertical construction, general requirements, overhead and builder fees. The cost estimate reflects wood -frame construction, surface parking, no basement, and union labor. [7) Includes costs for architecture and engineering; entitlement and fees; project management; appraisal and market study; marketing, commissions, and general administration; financing and charges; insurance; developer fee and contingency. [8) Based on 2017 income limits for a three-person household in Sonoma County. (9) Assumes housing costs (e.g., rent and utilities) to be 30% of gross household income. (10] Operating expenses are generally based on data reported by CoStar and reflective of properties in Petaluma. Estimates are inclusive of utility costs and property taxes, except Very Low and Low properties which are exempt from property taxes. [11) The capitalization rate is used to determine the current value of a property based on estimated future operating Income, and is typically a measure of estimated operating risk. The capitalization rate used in this analysis is based on CoStar reported transaction data for 2014 - 2017 transactions in Sonoma County. [12) The total supportable unit value is determined by dividing the net operating income by the capitalization rate. Sources: City of Petaluma; California Housing and Community Development (HCD); RS Means; IRR Monitor Investor Survey; and Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. 4P: s ow b eoP� ; �� ,s s Px= o .p„�� r ���, � n�R .... _ Z, Ownership Inclusionary Housing In -Lieu Fee Administrative Draft Report 08/29/2017 Revenue Assumptions To calculate the values of the affordable units, assumptions must be made regarding the applicable income level (low and moderate) and the percentage of household income spent on housing costs. In addition, translating these assumptions into unit prices and values requires estimates of operating expenses and capitalization rates. The following assumptions were used in these calculations: Income Levels—This analysis estimates the subsidy required to produce units for households earning up to 80 and 120 percent of AMI for a three-person household. In 2017, AMI in Sonoma County for these households is $75,500, as shown in the California Department of Housing and Community Development's (HCD's) income limits chart (see Table 2). Percentage of Gross Household Income Available for Housing Costs—HCD standards on overpaying for rent indicate that households should pay no more than 30 percent of their gross income on housing costs. For this analysis, EPS has assumed that all households spend 30 percent of their gross income on housing costs. Operating Costs for Rental Units—This analysis assumes that apartment operators incur annual operating costs of $6,000 per unit, which include the cost of utilities, for units affordable at 80 percent of AMI or below. EPS has assumed the units for moderate income households would have similar operating costs but would be built by for-profit builders and thus also subject to property taxes, increasing their annual operating cost to $10,000 per unit. Affordability Gap Results Table 4 shows the subsidies required for construction of rental apartments for households at low and moderate -income levels. As shown, a unit affordable to a household earning 80 percent of AMI is expected to require a subsidy of roughly $139,000. A household at 120 percent of AMI falls requires a subsidy of $63,350. It is worth noting that the affordability gaps estimated in this analysis are not as large as they might be using other also -valid assumptions. For example, the funding gaps for low income units assume that prices are set at 80 percent of median income, while State law indicates low-income unit prices may be set at 70 percent of median income. This methodology used by EPS yields higher unit values and thus results in lower fees than would result from less conservative assumptions. In -Lieu Fee Calculations As shown on Table 5, a typical "low" income unit will require a subsidy of roughly $139,000, while a "moderate" income unit will require a subsidy of roughly $63,350. For a theoretical 100 - unit housing development, 15 total affordable units would be required, with an aggregate subsidy of $1.52 million for those 15 units. As shown below, this translates to a weighted average subsidy of roughly $101,200 per affordable unit. If those units are not produced within the project, but rather than City is expected to subsidize their construction elsewhere in the. community, the 100 market -rate units in the project would be subject to an in -lieu fee of $15,177 per market -rate unit. Economic & Planning Systems, Inc. 0 Ownership Inclusionary Housing In -Lieu Fee Administrative Draft Report 08/29/2017 Table 5 In -Lieu Fee Calculation Item Low (80% AMI) Moderate (120% AMI) Total In -Lieu Fee per per Affordable Unit Market -Rate Unit Units 7.5 7.5 15 15 100 Value/Unit $237,000 $312,636 Total Value $1,777,500 $2,344,773 $4,122,273 Costs/Unit $376,000 $376,000 Total Costs $2,820,000 $2,820,000 $5,640,000 Subsidy per Unit $139,000 $63,364 Total Subsidy Required $1,042,500 $475,227 $1,517,727 $101,182 $15,177 Source: Economic & Planning Systems, Inc. While it is useful to think of the total in -lieu fee as it may apply to each market -rate unit, it is also useful to know the fee per affordable unit, as some projects will be required to provide a certain number of units but may meet any fractional obligation through payment of a fee. For example, under the current inclusionary housing ordinance, which requires 15 percent inclusionary units, a 17 -unit project would be required to provide 2.55 affordable units. If two units are provided on site, the additional 0.55 -unit requirement could be met by charging a fee of 0.55 times the $101,182 per affordable unit fee, or a total payment of $55,650. Economic & Planning Systems, Inc. APPEN DIX A: Sonoma County Utility Allowances M Ownership Inclusionary Housing In -Lieu Fee Administrative Draft Appendix A 08/29/2017 Table A-1 Sonoma County Community Development Commission - Utility Allowances per Month, Attached Dwellings Item Number of Bedrooms 2 -Bedrooms Electricity [1 ] $71 Other Allowances Other Electric $26 Water $43 Sewer $71 Garbage $20 Range $4 Refrigerator Subtotal, Other Allowances $170 Total Utility Allowance per Month $241 [1] Assumes use of electricity for space heating, cooking, and water heating. Sources: Sonoma County Community Development Commission Utility Allowances (effective October 2016); Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. I­­M—�­,_—.: _2017 0$29— ATTACHMENT #4 Administrative Draft Report Nexus -Based Affordable Housing .,,he Economics«f Land Use Fee Analysis for Ownership Housing Prepared for: City of Petaluma Prepared by: Economic & Planning Systems, Inc. Economic& Planning Systems, Inc. August 29, 2017 One Kaiser Plaza, Suite 1410 Oakland, CA 94612 510 841 9190 tel 510 740 2080 fax EPS #161180 Oakland Sacramento Denver Los Angeles www.epsys.coni m Table of Contents EXECUTIVESUMMARY.................................................................................................... 1 1. AFFORDABILITY GAP ANALYSIS.................................................................................. 7 Product -Type ......................................................................................................... 7 DevelopmentCost Assumptions..................................................................................9 RevenueAssumptions...............................................................................................9 Affordability Gap Results.......................................................................................... 10 2. DEMAND -BASED NEXUS FEE CALCULATION................................................................. 11 Market -Rate Household Income Levels...................................................................... 11 Household Expenditures and Job Creation by Income Level .......................................... 12 Demandfor Public -Sector Workers............................................................................ 14 Combined Demand for Income -Qualified Workers....................................................... 15 FeeCalculation....................................................................................................... 17 Appendices: APPENDIX A: Household Expenditures and Employment Generation APPENDIX B: Worker Household Generation 0 List of Figures and Tables Figure 1 Illustration of Nexus -Based Housing Fee Methodology............................................2 Table 1 Summary of Maximum Supportable Nexus -Based Housing Fees or Unit Requirements In Lieu of Fees...................................................................6 Table 2 Affordability Gap Analysis -- Rental Product Type..................................................8 Table3 Income Limits for Affordable Housing..................................................................9 Table 4 Required Income by Unit Type - Market -Rate Ownership Homes ........................... 12 Table 5 Summary of Worker and Household Generation per 100 Market -Rate Units ............16 Table 6 Nexus -Based Housing Fee Calculations (Home Price of $500,000) .........................18 Table 7 Nexus -Based Housing Fee Calculations (Home Price of $625,000) ......................... 19 Table 8 Nexus -Based Housing Fee Calculations (Home Price of $750,000) ......................... 20 Table 9 Nexus -Based Housing Fee Calculations (Home Price of $875,000) ......................... 21 0 EXECUTIVE SUMMARY Economic & Planning Systems, Inc. (EPS) was retained by the City of Petaluma to conduct a nexus study analyzing the impact that development of market -rate ownership housing has on demand for below -market -rate housing and, based on the results, to determine the defensible . nexus -based fee that could be charged to market -rate ownership residential development. The technical approach used herein quantifies the impacts that the introduction of market -rate ownership units have on the local economy and the demand for additional affordable housing. As new households occupying market rate housing are added to the community, local employment expands to provide the goods and services required by the new households. To the extent that these new jobs do not pay adequate wages for the employees to afford market -rate housing in the community, the new households' spending is creating a need for affordable housing. A nexus -based affordable housing fee is, therefore, based on the impact of the new market -rate homes on the demand for affordable housing. The fee calculated in this study represents the maximum fee that may be charged to new market -rate ownership housing units to mitigate their impacts on the affordable housing supply. Fee revenue may be collected by the City and used to subsidize the production of new affordable units for lower-income households not accommodated by market -rate projects. Calculating the impact of market -rate development in the City on affordable housing needs and the fees needed to mitigate those impacts, involves three main analytical steps: • Step #1. Estimate the typical subsidy required to construct units affordable at various income levels (the "affordability gap"). Step #2. Determine the market -rate households' demand for goods and services, the jobs created by that demand, and the affordable housing needs of workers in those jobs. Step #3. Combine the affordability gap with the affordable housing demand projections to compute the maximum supportable nexus -based affordable housing fees per market -rate unit. These technical steps are illustrated in Figure 1 and detailed in the body of this Report and the attached appendices. The findings regarding each of these steps are presented below. Economic & Planning Systems, Inc. 1 /:p"..Al nwa.--x l--V—ub»i.-,. ,._mrcy+ox ..s �—una�mv_on_3,.— Is Tq � � ■ & 2 72 ©5 k3 k(1) . Ra ■ 0� 2 IF /0®�2 off t mE2) e :3 � { ƒt�fLL \ � .2 e& e\/ � ( � k « m \ U CL R/ � .f C § 2(% tqa k2 t%E E a) Z f f�� E CL 00 em■ GO)'0 k0 c 3 t 77@ \ 7]¥ � /In- ARE -p>� M kk ID ck \\� . \ t 0k. � � \ moo§ «J �2 tea#% M0R7 k k�k� / k. \� e q 0) 0 . Ra /fes§ /0®�2 off t mE2) e :3 ®��qE fR/ 0L ƒt�fLL f .2 e& e\/ \0��km3 ( 7 > Ul m \ U CL R/ . .f C § 2(% tqa k2 t%E E a) Z f f�� E CL 2�\ em■ GO)'0 c t 77@ 7]¥ /In- M kk ID ck . \ t 0k. . 2\ g2 moo§ ¥k« / k. \� e q Nexus -Based Affordable Housing Fee Analysis for Ownership Housing Administrative Draft Report 0812912017 Step #1. The cost to construct housing units affordable to many households exceeds the value of those units based on the prices the households can afford to pay. The estimated subsidy required to construct affordable housing units in Petaluma ranges from roughly $268,800 for Very Low Income households earning up to 50 percent of AMI to $63,350 for Moderate Income households earning up to 120 percent of AMI. An "affordability gap analysis" evaluates whether or not the cost to construct affordable units exceeds the value of units that are affordable to lower- and moderate -income households. For each affordable housing income level—households with incomes at 50, 80, and 120 percent of Area Median Income (AMI)—this analysis estimates the subsidy required to construct affordable housing units. The affordability gap analysis assumes that the average affordable unit for all income levels will be a 2 -bedroom unit in a .multifamily development in a three- to four-story building, which is assumed to be occupied by three people on average. The average density assumed is 45 dwelling units per acre, consistent with zoning in the Central Petaluma Specific Plan Area. The estimated costs to acquire land and construct the prototypical affordable unit are based on recent City of Petaluma development projects and transactions, as well as other development cost data sources. A household's ability to pay is estimated based on standard percentages of income available for housing costs at each household income level. Income available for housing costs is then converted into a monthly affordable rent and a capitalized unit value. This unit value is then compared to the costs of development to determine the subsidy required to make the unit affordable to each income level. Step #2. The demand for affordable housing created by the expenditures of new households in Petaluma increases along with the market -rate price (and related household income). For example, a $500,000 home is estimated to create demand for 0.17 affordable housing units, while an $875,000 home creates demand for 0.3 affordable units. Any justified nexus -based fee is based on the total demand for affordable housing units generated by construction of market -rate units. The link (or nexus) between market -rate housing and increased demand for affordable housing is that residents of market -rate units demand goods and services that rely on wage earners (for example, retail sales clerks) some of whom cannot afford market -rate housing and thus require affordable housing. Because more expensive housing units require homeowners to have higher incomes, and higher Income households create more jobs through their spending, the nexus impacts and thus the justified fees for for -sale units vary according to the price range of the market -rate units. Typically, occupants of higher -priced homes are required to have higher household incomes than occupants of less expensive homes. Thus, more expensive units create and/or support more jobs as a result of their occupants' spending patterns. Consequently, nexus impacts and the justified fees for market -rate homes vary by value of the home. This analysis evaluates the demand for affordable housing generated by a range of ownership housing price points. For each selected value, the demand -based nexus fee calculation involves the following steps: Economic & Planning Systems, Inc. 3 ➢:V616�1161t6611 �N a�a_a•ou .bw�••r+o tawt�ct cv m.a� Nexus -Based Affordable Housing Fee Analysis for Ownership Housing Administrative Draft Report 08/29/2017 A. Market -Rate Household Income Levels. The expected price of the unit is based on market data regarding the actual distribution of home prices in the City. The required income levels of households occupying new market -rate housing are derived based on the assumed home prices, typical mortgage assumptions, and using standard housing cost expenses as a proportion of overall household income. For example, a typical household purchasing a $500,000 home will spend approximately $26,000 per year on a mortgage (principle and interest), assuming a 10 percent down payment, a 4 percent interest rate, and a 30 -year term. Additional housing expenses include property taxes and insurance, resulting in annual housing -related expenses of $33,500. This household would need to earn an annual income of approximately $111,750, if it spends 30 percent of its income on housing costs. B. Household Expenditures. Based on the household income computed in Step A, Consumer Expenditure Survey data is used to evaluate the typical spending patterns of the household. This analysis provides an estimate of how much the household spends on specific categories of expenditures, such as "Food at Home." As the households' income increases along with the price and size of the market -rate units, the total spending on goods and services also increases. The Consumer Expenditure Survey also indicates that these relationships are not linear (e.g., a household with twice the income does not necessarily spend twice as much on food). C. Job Creation and Worker Households. Having estimated the households' spending on various items, that spending is then converted into an estimation of jobs created. For each expenditure category, data regarding average worker wages and the ratio between gross business receipts and wages are used to translate these household expenditures into the total number of private -sector workers. For selected public -sector jobs that typically grow in proportion to the local population size (e.g., teachers, protective service workers), the demand for new workers is estimated by relating current levels of employment in such categories to the current population and applying this ratio to future development. Because each new worker does not represent an independent household (Petaluma has an average of 1.69 workers per working household), the total number of new households created is somewhat less than the number of new jobs created. This analysis assumes that workers form households with others earning similar wages. EPS has further adjusted the household formation rates to reflect the fact that a certain proportion of workers will not form their own households, particularly those of younger ages.1 D. Worker Households by Income Category. Each worker household generated is assigned to an income category—represented as a proportion of AMI ranging from 50 to 120 percent— based on its estimated gross wages. This provides the total number of households generated at each income level by construction of market -rate units at various sizes and price points. The results indicate that residents of smaller, lower-priced units generate fewer worker households requiring affordable housing than do residents of larger, higher -priced units. 1 BLS data Indicates that 12.5 percent of retail/restaurant workers are age 16-19, but an average of only 1.9 percent of workers overall (this factor is applied to other industries). EPS has assumed that such young workers do not form their own households. Economic & Planning Systems, Inc. 4 r.{Islaoa ueueamxwssyve c aqunue»®v . m._w— un w s www ea czar os m.a Nexus -Based Affordable Housing Fee Analysis for Ownership Housing Administrative Draft Report 0812912017 These steps of the nexus -based fee calculation provide the total number of income -qualified workers required to meet the needs for goods and services generated by market -rate for -sale housing. The number of workers servicing market -rate housing (for each of the selected values) is then converted to total income qualified households and each household is assumed to require one housing unit. Step #3. This analysis calculates the fees that could be charged to fully mitigate the impact that new market -rate ownership housing has on Petaluma's affordable housing demand at various representative unit values. These fees could range from $32,226 for $500,000 homes to $55,473 for $875,000 homes. The nexus fee is calculated by applying the number of affordable units needed by income qualified households to the affordability gap for each housing income category. This calculation Is made for several different home values. Table 1 summarizes the maximum nexus -based fees calculated for representative for -sale home values. The City may also consider whether to allow developers to provide affordable units within their developments, rather than paying the nexus - based fee. Table 1 illustrates the proportions of affordable units that correspond to the fee calculation and demands created by the market -rate units. For instance, a project offering $625,000 homes would effectively mitigate the demand being created by the market -rate units if it provided 0.2 affordable units for each market -rate unit. It is understood that a lower fee level below the maximum fee may be appropriate given a range of development feasibility and economic development considerations. The lower fee may also be appropriate due to the fact that affordable housing development is not the sole responsibility of rental housing developers, as the City, State, and federal government have other programs and resources that can offset some affordable housing production costs. Feasibility considerations are evaluated by EPS in a separate memorandum. The City can weigh the implications of charging a nexus -based fee (as calculated in this report) versus the in -lieu fee (calculated separately). Economic & Planning Systems, Inc. 5 I:il.-p611QOMm.-,.-g.-W�%",,.- .Haa,-"O—swr- a+nnm -, caLn.— qI § a $� LL. 0 § It / ra § § 2 2 \ 0 � LL _ � 0 _ 2 2 k § z ■ 5 2 0 CL 2 § � § . � 0 � E ■ 2 ■ a � 2 � f . � . � i . � \ . f -0 CO CO M | \k�q � ,13 w \ / z $ %//CN ca 0)oo-- @0 . E / \ � . .� IVL §. \\�\ � . �,m2 0 § A . Q/ 2 % .'VI- kD //.// rr oo00g ƒ Raaf e \/ / C� � (D k . ZZI. \ U¢ 2272 0 26 aamw J¥ . 2222 e§ \ C 2 ®® E � d zcm.00n mm = , §2 9k�k / q%Jg 0)\ §K /a .5 "D 2 Q mm U a 2� scmE 2 7 \ I / m . 37 q / / 0000. f4 -cr 0 _ j0 a ERRR RKS% U) ® u $LO fl- co 2 % ( � $ ) . 1. AFFORDABILITY GAP ANALYSIS For any nexus -based affordable housing fee calculation, it is necessary to estimate the subsidy required to construct affordable housing units. Table 2 shows the subsidy needed to produce multifamily rental housing that is affordable to very low- through moderate -income households (50 through 120 percent of AMI). Product Type While the nexus fees calculated herein are based on demands created by market -rate ownership housing that may be single family or multifamily, the analysis assumes that new lower-income worker households would actually be housed in affordable units similar to the type of multifamily construction currently observed in the City. The assumed prototype reflects multifamily construction at 45 dwelling units to the acre with surface parking. This building prototype is generally cost-effective to construct, as it makes efficient use of land and does not involve overly expensive construction materials or techniques. California State law (California Health and Safety Code Section 50052,5). assumes that a 2 -bedroom unit is occupied by a 3 -person household, and this assumption is used in this analysis. Consistent with input from the City, EPS assumes that the typical gross square footage of a 2 -bedroom rental unit in Petaluma will be approximately 1,150 square feet. Applying an efficiency ratio of 85 percent to account for shared lobbies, hallways, etc., results in net square footage of 978 square feet. This analysis estimates the subsidy that would be required to build for -rent housing for the lower-income worker households. Economic & Planning Systems, Inc. 7 Nexus -Based Affordable Housing Fee Analysis for Ownership Housing Administrative Draft Report 08/29/2017 Table 2 Affordability Gap Analysis -- Rental Product Type (1) Based on allowable zoning in Central Petaluma Specific Plan. [2] An efficiency ratio of 85% is applied to the gross unit size to calculate the net unit size. [3] For this analysis, EPS has assumed an average unit for income -qualified worker households would be 2 -bedrooms. State law (Health and Safety Code Section 50052.5) indicates that a 2 -bedroom unit should be assumed to be occupied by a 3 - person household. (4] Assumption of one parking space/unit based on market preferences, although .5 spaces/unit is the minimum requirement. (5) Based on two recent land sale transactions in the City: 307 Petaluma Boulevard and 951 Petaluma Boulevard. (6) Includes on-site work, offsite work, vertical construction, general requirements, overhead and builder fees. The cost estimate reflects wood -frame construction, surface parking, no basement, and union labor. [7] Includes costs for architecture and engineering; entitlement and fees; project management; appraisal and market study; marketing, commissions, and general administration; financing and charges; insurance; developer fee and contingency. [8] Based on 2017 income limits fora three-person household in Sonoma County. [9] Assumes housing costs (e.g., rent and utilities) to be 30% of gross household Income. [10] Operating expenses are generally based on data reported by Costar and reflective of properties in Petaluma. Estimates are inclusive of utility costs and property taxes, except Very low and Low properties which are exempt from property taxes. [11] The capitalization rate is used to determine the current value of a property based on estimated future operating income, and is typically a measure of estimated operating risk. The capitalization rate used in this analysis is based on CoStar reported transaction data for 2014.2017 transactions in Sonoma County. (12] The total supportable unit value is determined by dividing the net operating income by the capitalization rate. Sources: City of Petaluma; California Housing and Community Development (HCD); RS Means; IRR Monitor Investor Survey; and Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. 8 P. t6tOP2 161180 rci/aa ySmrs ¢ryM{l6IIN i Lm O mN y k R L p16 MftR�v�(M OD Mhv 3 - 4 Stories Multifamily Building with Surface Parking Very Low Low Moderate Income Income Income (50% AMI) (80% AMI) (120% AM[) Development Program Assumptions Density/Acre [1] 45 45 45 Gross Unit Size 1,150 1,150 1,150 Net Unit Size [2] 978 978 978 Number of Bedrooms 2 2 2 Number of Persons per 2 -Bedroom Unit [3] 3 3 3 Parking Spaces/Unit [4] 1.00 1.00 1.00 Cost Assumptions Land/Acre [5] $1,131,000 $1,131,000 $1,131,000 Land/Unit $25,133 $25,133 $25,133 Direct Costs Direct Construction Costs/Net SF [6] $185 $185 $185 Direct Construction Costs/Unit (rounded) $213,000 $213,000 $213,000 Parking Construction Costs/Unit $5,000 $5,000 $5,000 Subtotal, Direct Costs/Unit $218,000 $218,000 $218,000 Indirect Costs as a % of Direct Costs [7] 40% 40% 40% Indirect Costs/Unit $87,200 $87,200 $87,200 Profit Margin (% of all costs) 14% 14% 14% Profit (rounded) $46,000 $46,000 $46,000 Total Cost/Unit (rounded) $376,000 $376,000 $376,000 Maximum Supported Home Price Household Income [8] $39,650 $63,450 $90,650 Revenue to Property Owner/Year [9] $11,895 $19,035 $27,195 (less) Operating Expenses per Unit/Year [10] ($6,000) ($6,000) ($10,000) Net Operating Income $5,895 $13,035 $17,195 Capitalization Rate [11] 5.5% 5.5% 5.5% Total Supportable Unit Value [12] $107,182 $237,000 $312,636 Affordability Gap ($268,818) ($139,000) ($63,364) (1) Based on allowable zoning in Central Petaluma Specific Plan. [2] An efficiency ratio of 85% is applied to the gross unit size to calculate the net unit size. [3] For this analysis, EPS has assumed an average unit for income -qualified worker households would be 2 -bedrooms. State law (Health and Safety Code Section 50052.5) indicates that a 2 -bedroom unit should be assumed to be occupied by a 3 - person household. (4] Assumption of one parking space/unit based on market preferences, although .5 spaces/unit is the minimum requirement. (5) Based on two recent land sale transactions in the City: 307 Petaluma Boulevard and 951 Petaluma Boulevard. (6) Includes on-site work, offsite work, vertical construction, general requirements, overhead and builder fees. The cost estimate reflects wood -frame construction, surface parking, no basement, and union labor. [7] Includes costs for architecture and engineering; entitlement and fees; project management; appraisal and market study; marketing, commissions, and general administration; financing and charges; insurance; developer fee and contingency. [8] Based on 2017 income limits fora three-person household in Sonoma County. [9] Assumes housing costs (e.g., rent and utilities) to be 30% of gross household Income. [10] Operating expenses are generally based on data reported by Costar and reflective of properties in Petaluma. Estimates are inclusive of utility costs and property taxes, except Very low and Low properties which are exempt from property taxes. [11] The capitalization rate is used to determine the current value of a property based on estimated future operating income, and is typically a measure of estimated operating risk. The capitalization rate used in this analysis is based on CoStar reported transaction data for 2014.2017 transactions in Sonoma County. (12] The total supportable unit value is determined by dividing the net operating income by the capitalization rate. Sources: City of Petaluma; California Housing and Community Development (HCD); RS Means; IRR Monitor Investor Survey; and Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. 8 P. t6tOP2 161180 rci/aa ySmrs ¢ryM{l6IIN i Lm O mN y k R L p16 MftR�v�(M OD Mhv Nexus -Based Affordable Housing Fee Analysis for Ownership Housing Administrative Draft Report 08/29/2017 Development Cost Assumptions Affordable housing development costs include land costs, direct costs (e.g., labor and materials), and indirect or "soft" costs (e.g., architecture, entitlement, marketing, etc.). For rental Petaluma developments and recent Petaluma land transactions have been combined with EPSs information from various market -rate and affordable housing developers to estimate appropriate development cost assumptions for use in Petaluma. These assumptions are shown on Table 2 and demonstrate that the total cost per unit for rental apartments is about $376,000. Revenue Assumptions To calculate the values of the affordable units, assumptions must be made regarding the applicable income level (very low, low, and moderate) and the percentage of household income spent on housing costs. In addition, translating these assumptions into unit prices and values requires estimates of operating expenses and capitalization rates. The following assumptions were used In these calculations: • Income Levels—This analysis estimates the subsidy required to produce units for households earning up to 50, 80, and 120 percent of AMI for a three-person household. In 2017, AMI in Sonoma County for these households is $75,500, as shown in the California Department of Housing and Community Development's (HCD's) income limits chart (see Table 3). Percentage of Gross Household Income Available for Housing Costs—HCD standards on overpaying for rent indicate that households should pay no more than 30 percent of their gross income on housing costs. For this analysis, EPS has assumed that all households spend 30 percent of their gross income on rent costs. Operating Costs for Rental Units—This analysis assumes that apartment operators incur annual operating costs of $6,000 per unit, which include the cost of utilities, for units affordable at 80 percent of AMI or below. EPS has assumed the units for moderate income households would have similar operating costs but would be built by for-profit builders and thus also subject to property taxes, increasing their annual operating cost to $10,000 per unit. Table 3 . Income Limits for Affordable Housing Income Group and Definition 2017 Maximum Income 3 -Person Household Very Low >30% to 550% AMI $39,650 Low >50% to 580% AMI $63,450 Median (Base) >80% to 5100% AMI $75,500 Moderate >100% AMI to :5120% AMI $90,650 Source: Sonoma County 2017 Income Limits, California Housing and Community Development (HCD). Economic & Planning Systems, Inc. 9 I:It6t000 t6ItB0 ba ne C pY u Hy ltblt� h O MyNe.a RW w rtrm pmt ca_ s.ar Nexus -Based Affordable Housing Fee Analysis for Ownership Housing Administrative Draft Report 08/29/2017 Affordability Gap Results Table 2 shows the subsidies required for construction of rental apartments for households at very- low, low, and moderate -income levels. As shown, a unit affordable to a household earning 50 percent of AMI is expected to require a subsidy of roughly $268,800, while a unit affordable to a household at 120 percent of AMI is expected to require a subsidy of about $63,350. A household at 80 percent of AMI falls in between with a required subsidy of $139,000. These rental housing affordability gaps then were used to calculate the justified nexus -based fees by multiplying the required subsidy by the number of units required to house workers providing goods and services to new market -rate housing development. This methodology is discussed in more detail in the following chapter. It is worth noting that the affordability gaps estimated in this analysis are not as large as they might be using other also -valid assumptions. For example, the funding gaps for low income units assume that prices are set at 80 percent of median income, while State law indicates low-income unit prices may be set at 70 percent of median income. This methodology used by EPS yields higher unit values and thus results in lower maximum fees than would result from less conservative assumptions. Economic & Planning Systems, Inc. 10 Lp610CW 16ll8W6 bWyVeusWrymgl6L y r, m, a Ana a sma. a r w rtr c tp»oa �.0 0 2. DEMAND -BASED NEXUS FEE CALCULATION The maximum supportable nexus -based fees are based on both the affordability gap and the estimated impact that new market -rate units have on the need for affordable units, as reflected in the number of income -qualified local workers required to support the residents of market -rate homes and the total subsidy required to construct housing for those workers. This approach is based on the following logic: (a) residents of market -rate housing have disposable incomes and require a variety of goods and services (including private sector goods and services and government services); (b) the provision of those goods and services will create employment demand for some workers who make moderate or lower incomes and cannot afford market -rate housing; and (c) fees charged to market -rate projects can mitigate the impact of those projects on the increased need for affordable housing. Market -Rate Household Income Levels Households with larger incomes typically spend more on goods and services, thereby creating additional lower income jobs; which in turn generate a greater demand for affordable housing. To assess the impact that market -rate homes have on the need for affordable housing, EPS estimated the typical Income required to purchase market -rate housing units at various price points In Petaluma, as shown in Table 4. An online survey of recent home sales of newly -constructed homes indicate a range of values from as low as $500,000 to well -above $1 million, with a concentration between $500,000 and $875,000. The required income levels of households occupying new market -rate housing are derived based on the assumed home prices, typical mortgage assumptions, and using standard housing cost expenses as a proportion of overall household income. For example, a typical household purchasing a $500,000 home will spend approximately $26,000 per year on a mortgage (principle and interest), assuming a 10 percent down payment, a 4 percent interest rate, and a 30 -year term. Additional housing expenses include property taxes and insurance, resulting in annual housing -related expenses of $33,500. This household would need to earn an annual income of approximately $111,750, if it spends 30 percent of its income on housing costs. As shown, required household incomes range from approximately $111,750 for a $500,000 home to roughly $195,550 for an $875,000 home. Changes in housing market and financing conditions can have a significant effect on the calculations in this study. Economic & Plann/ng Systems, Inc. 11 Ig1610W 116 &� t6ILW BKd +_O ro hp Xu M h bRP 9mtSOD 09_]S.0.v Nexus -Based Affordable Housing Fee Analysis for Ownership Housing Administrative Draft Report 08/29/2017 Table 4 Required Income by Unit Type - Market -Rate Ownership Homes [1] Average home prices reflect the range of home prices observed for newly built homes in the past three years. [2] Down payments vary from 5 to 20 percent, depending on the price of the home and the income qualifications of the buyer. [3] Annual mortgage reflects down payment assumption, a 30 -year mortgage and a 4 percent interest rate. [4] Property taxes and insurance togethter represent 1.5 percent of the home price. [5] Assumes housing costs (e.g., rent and utilities) to be 30% of gross household income. Sources: City of Petaluma; Trulia; Economic & Planning Systems, Inc. Household Expenditures and Job Creation by Income Level Having established the income requirements for purchasing homes at various values, the fee calculation then requires an analysis of the household spending patterns at those required income levels. Consistent with nexus fee calculations and impact analysis for schools, parks, roads, etc., this analysis also assumes that all households renting new market -rate units in Petaluma are "net new" households to the City. To assume otherwise—for instance, that only those buyers of new housing units relocating from outside Petaluma should be counted in the impact analysis—would require assuming that the homes left by those households relocating within Petaluma would be demolished or left vacant in perpetuity. This would only be the case were the City experiencing a significant loss of population and housing inventory, as has occurred, for instance, in Detroit. Petaluma, on the other hand, has experienced slight population increases in the past seven years. The Consumer Expenditure Survey from the United States Bureau of Labor Statistics provides data for households at a variety of income levels, detailing the amounts that typical households spend on things like Food at Home, Apparel and Services, and Vehicle Maintenance and Repairs. Interestingly, household expenditures by category are not uniformly proportional to household income levels. For example, households earning around $111,745 (adequate buy a $500,000 home) spend roughly 11.4 percent of their income on food and drink (at home and eating out), while households earning $195,554 who can afford to buy a $875,000 home spend only about 9.6 percent of their income on food and drink. Because of these and other differences in proportionate spending, the expenditure profile varies at different income levels; however, the Economic & Planning Systems, Inc. 12 vn,a,wawa„eoww qua us„m_ka v a .. mH s wse �a n_m,i_os �.a Required Income by Home Price Minimum Down Payment Annual Property Taxes Annual Annual Household Home Price [1] [2] Mortgage [3] + Insurance [4] Housing Costs Income Required [5] $500,000 10% $26,024 $7,500 $33,524 $111,745 $625,000 10% $32,529 $9,375 $41,904 $139,681 $750,000 10% $39,035 $11,250 $50,285 $167,618 $875,000 10% $45,541 $13,125 $58,666 $195,554 [1] Average home prices reflect the range of home prices observed for newly built homes in the past three years. [2] Down payments vary from 5 to 20 percent, depending on the price of the home and the income qualifications of the buyer. [3] Annual mortgage reflects down payment assumption, a 30 -year mortgage and a 4 percent interest rate. [4] Property taxes and insurance togethter represent 1.5 percent of the home price. [5] Assumes housing costs (e.g., rent and utilities) to be 30% of gross household income. Sources: City of Petaluma; Trulia; Economic & Planning Systems, Inc. Household Expenditures and Job Creation by Income Level Having established the income requirements for purchasing homes at various values, the fee calculation then requires an analysis of the household spending patterns at those required income levels. Consistent with nexus fee calculations and impact analysis for schools, parks, roads, etc., this analysis also assumes that all households renting new market -rate units in Petaluma are "net new" households to the City. To assume otherwise—for instance, that only those buyers of new housing units relocating from outside Petaluma should be counted in the impact analysis—would require assuming that the homes left by those households relocating within Petaluma would be demolished or left vacant in perpetuity. This would only be the case were the City experiencing a significant loss of population and housing inventory, as has occurred, for instance, in Detroit. Petaluma, on the other hand, has experienced slight population increases in the past seven years. The Consumer Expenditure Survey from the United States Bureau of Labor Statistics provides data for households at a variety of income levels, detailing the amounts that typical households spend on things like Food at Home, Apparel and Services, and Vehicle Maintenance and Repairs. Interestingly, household expenditures by category are not uniformly proportional to household income levels. For example, households earning around $111,745 (adequate buy a $500,000 home) spend roughly 11.4 percent of their income on food and drink (at home and eating out), while households earning $195,554 who can afford to buy a $875,000 home spend only about 9.6 percent of their income on food and drink. Because of these and other differences in proportionate spending, the expenditure profile varies at different income levels; however, the Economic & Planning Systems, Inc. 12 vn,a,wawa„eoww qua us„m_ka v a .. mH s wse �a n_m,i_os �.a Nexus -Based Affordable Housing Fee Analysis for Ownership Housing Administrative Draft Report 0812912017 $750,000 and $875,000 home buyers are in the same household expenditure group and thus contain the same percentages. These spending patterns can be viewed in Tables A-1 to A-4 in Appendix A. The household's typical expenditures were converted to the number of jobs created by its spending. The first step in this process is to determine how much of an industry's gross receipts are used to pay wages and employee compensation. EPS relied on data from the Economic Census,2 which provides employment, gross sales, and payroll data by industry for Sonoma County. In certain instances, where local data was not available for a specific industry, EPS relied on statewide Economic Census data for that industry. To link the Economic Census data and the Consumer Expenditure Survey data, EPS made determinations as to the industries involved with expenditures in various categories. For example, purchases in the Consumer Expenditure Survey's "Food at Home" category would likely Involve the Economic Census's "Food & Beverage Stores" industry, where gross receipts were more than eight times the employees' wages. By contrast, purchases in the Consumer Expenditure Survey's "Entertainment Fees and Admissions" category were attributed to the Economic Census' "Arts, Entertainment, and Recreation" industry, where gross receipts are only four times the employees' wages. Where more than one Economic Census category was attributable to a Consumer Expenditure Survey category, EPS estimated the proportion of expenditures associated with each Economic Census category. After determining the amount of the household's expenditures that were used for employee wages, EPS estimated the number of employees those aggregate wages represent. EPS calculated the number of workers supported by that spending using the average wage per worker (also from the 2015 Economic Census). After accounting for CPI adjustments, these wages ranged from a low of roughly $17,500 per year for workers in the Clothing and Clothing Accessories Stores industry to a high of almost $103,700 in Legal Services. A range of occupations and incomes exist in a given industry sector. For instance, the methodology used to generate Tables B-1 to B-4 in Appendix B distinguishes between the typical incomes of workers in different types of retail stores (e.g., "food and beverage stores" versus "general merchandise stores"), rather than assuming all retail sector workers earn the same income. However, the average wage is used for each sub -category of industry employment and represents a reasonable proxy for the range of incomes in that group. While some employees will have higher wages and require lower subsidies, others will have lower incomes and require higher subsidies. Using the average approximates the total housing subsidy needed by workers in that industry. To calculate the number of households supported by the expenditures of market -rate housing units, EPS estimated the employees' household formation rates. Importantly, employees generated from the increase in housing units do not all form households; some employees, in the retail and food services industries in particular, are young workers and do not form households. Data from the Bureau of Labor Statistics indicates that 12.5 percent of retail/restaurant workers 2 The Economic Census and Consumer Expenditure Survey and were published in 2012 and 2015, respectively, but are current as of 2016. EPS converted all numbers to 2017 dollars using the Consumer Price Index (CPI) for the San Francisco Metropolitan Statistical Area (MSA) from the Bureau of Labor Statistics. Economic & Planning Systems, Inc. 13 /+It6tOW1t61I6GbsmtMg Nars¢pttep6l) ,�,n _��6„6,m� Nexus -Based Affordable Housing Fee Analysis for Ownership Housing Administrative Draft Report 08/29/2017 are age 16 to 19, but an average of only 1.9 percent of workers in the workforce overall. EPS applied these discounts to household formation by type of business to get a more accurate calculation of households formed by the employees and the average total incomes of those households. To get the overall households' income rather than the individual workers', the wages of workers forming households were multiplied by the average of approximately 1.69 workers per working household in Petaluma.3 This assumption implies the workers In a given household will have roughly equivalent pay per hour. While certainly there will often be some variation in wages per employee within a household, on average this assumption is. reasonable because it implies comparable levels of education and training among all workers in a household. The average household incomes then are allocated to various income categories to estimate the number of affordable housing units demanded in each income category (50 through 120 percent of AMI). A simplified example of these calculations follows: A. Number of Households (prototype project) 1,000 B. Average Household Income (in the project) $125,000 C. Aggregate Household Income (A x B) $125 million D. Average Income Spent on Retail (Consumer Expenditure Survey) $40,000 E. Aggregate Retail Spending (A x D) $40 million F. Retail Gross Receipts:. Payroll Ratio (Economic Census) 9:1 G. Estimated Retail Payroll (E + F) $4.44 million H. Average Retail Wage (Economic Census) $28,500 I. Estimated Total Retail Jobs (G + H) 156 J. Percent Age 20+ (Bureau of Labor Statistics) 87.5% K. Total Retail Workers Forming Households 136 L. Average Workers/Household (Census Data) 1.78 M. Estimated Households Created (K+L) 76 N. Average Household Income (H x L) $50,730 O. Income Category Low -Income (up to 80% of AMI) In this simplified example, 1,000 new market -rate homes sold to households earning $125,000 per year would create demand for 76 housing units for retail workers with household Incomes typically between 50 and 80 percent of AMI. Actual calculations and impact distinctions by type of household expenditure for various home values are shown in the series of tables presented in Appendix B. Demand for Public -Sector Workers In addition to the jobs created by the spending of the new market -rate households, this analysis also aims to, evaluate the number of public -sector employees generated by the public service demands of new market -rate households. Rather than a comprehensive computation of public - sector employment, the analysis alms to be conservative by sampling only certain public -sector 3 Workers per working household based on American Community Survey (ACS) Census data as of 2015. Although ACS data reported is based on historical figures, these figures can vary somewhat based on ongoing revisions to the ACS data. Economic & Planning Systems, Inc. 14 /:,I61WW{f61ID Y�s�You Rpnt{I61IM/@m OarsM1pKSRd fdrn OeRi Os�M1]_0.9 M.6 Nexus -Based Affordable Housing Fee Analysis for Ownership Housing Administrative Draft Report 0812912017 jobs (e.g., teachers, transportation providers, and public safety providers) that are expected to grow in proportionate measure to household growth. Data from the 2015 Occupational Employment Survey for the Santa Rosa MSA was used to determine the number of these public -sector employees needed to serve new market -rate development. This data was generated by the California Employment Development Department (EDD) and provides employment and wage information for a variety of occupational categories. EPS reviewed the` data and sampled occupations that were public sector -related. Based on the ratio of the selected public -sector jobs to the total households in the MSA, EPS estimates that approximately 43 government jobs or 25 households with a government employee are required per 1,000 total households (Table A-5). These figures are conservative (i.e., low) because numerous types of public -sector jobs are not included in this analysis (such as federal postal workers, County health and human services workers, etc.). Also, please note that EPS has no basis to distinguish differences in the number of public -sector workers demanded by households based on different income levels or in different sizes of units, so the same numbers of public -sector jobs are assumed to be generated by units of all sizes and prices. Combined Demand for Income -Qualified Workers The total number of income -qualified households required to support the expenditure and public - sector service needs of new market -rate units were determined based on the affordable housing income limits from, HCD for a 3 -person household. Table 3 summarizes the HCD income limits used to compute the total number of income -qualified households generated by construction of market -rate units.`+ The number of income -qualified households required to provide goods and services to new housing units is detailed in Appendix S. The nexus methodology used herein computes the total number of income -qualified households generated by market -rate homes (as shown in Table 5) and calculates the impact fee based on the estimated cost to subsidize the production of units to meet that affordable housing demand. This analysis assumes that the fees on residential development will fund required affordable housing for all new workers generated. In practice, only a portion of Petaluma's workers resides In the City as many workers commute In to the City from other areas for a variety of reasons, one of which is the relative cost of housing among different communities.. However, if every jurisdiction were to adopt a policy that it would only fund housing for the fraction of its locally generated workers that chooses to live within the City, in aggregate the region's affordable housing demand would be grossly underrepresented and underfunded, 4 To correspond to the available data regarding employee wages, the 2017 Sonoma County affordable housing income limits from HCD were used to determine the number of Income -qualified households based on household expenditures. Economic & Planning Systems, Inc. 15 02 ! m . E CO % / 2 k = ©2 S $ R t . , Q) k k § ` | o E f ' § co k / _w // | _ 7 0 $ 0 % 0 \ k© o R R@ R f £ .be -j E£ c m c f e 0 Z / � . c 5 D f g 0 2 J . §22 — WWF £ . 2 f&% t-��NI e / § 2 y U) �� k k ' m i_ B �.\ 6 q ■ m # m c k 0 . ©■ ® @ © @ R % 2 7 kE /qkq2. . L- o m k \ OL 0 0 0 \ .0 - 0 a) (D k/$(o CL ° . . « • j c k \ ±k �\ § . \ E e § � — ® > d 76 = \ �=E SCR \\�27 . ¥ 0 § S $ � % � k "a CM o f { ' £ $o � E ¥., % ® E @ $• . &o LOT 2 / § a) o 000 Lff�2 £ E ® = C) C) ff§1 R ƒ kKk kk-E 3 ® - omw= 2 A.a « A §75 k �/gk 3RkR/ $ 02 Nexus -Based Affordable Housing Fee Analysis for Ownership Housing Administrative Draft Report 0812912017 Fee Calculation The affordability gap analysis quantifies the subsidy required to construct affordable housing at various income levels. Analysis of consumer expenditures that rely on lower wage workers provides an estimate of the total number of income -qualified households generated by new for - sale units. Then for each category of market -rate ownership units, the nexus -based fee is calculated by applying the total number of income -qualified households generated to the affordability gap computed for each affordable household income level. The analysis provides the maximum supportable nexus -based fees for new ownership housing, development in Petaluma. Tables 6 through 9 show the impact fee calculation for market -rate homes based on value. The total impact fees required for a representative project of 100 units is calculated by multiplying the number of affordable units required per income level by the cost of subsidizing such housing. All income -qualified households are assumed to be housed in multifamily units and the subsidies needed are calculated as the affordability gaps shown in Table 2. The resulting maximum Impact fee for market -rate ownership units ranges from $32,226 for a $500,000 home to $55,473 for an $875,000 home (Table 1). These fee estimates result in the maximum fee range between $22 and nearly $27 per square foot. While the City has the option of adopting fees up to the maximum levels calculated, there may be a variety of reasons to adopt the fee level below the maximum, including insufficient wages relative to development costs. Market forces, land use regulations, construction costs, and entitlement costs also affect housing affordability. In addition, revenue generated through this fee program is just one source of potential subsidy funds to help finance affordable housing projects. Imposing a maximum fee on the residential and commercial linkage fee would also result in the double -counting of Impacts attributed to new housing and new commercial uses. Finally, adoption of the maximum fees for certain employment categories would represent a very large addition to the costs of development, and could hamper the City's economic development and competitiveness objectives. Other California communities—including Sunnyvale, Mountain View, Santa Rosa, and Walnut Creek, among others—have made reductions to the maximum allowable fee when adopting their fee program, for reasons such as those cited above. The notion of the appropriate fee level will be further explored by EPS in subsequent analyses. Economic & Planning Systems, Inc. 17 /:Pblro0U6llB0An w yYw{RgvtV6L�_hb v Ow eMgH mSIIAy 4 daRF Pnt19P_09 ]9.drc 0 a v Z d d W d N R m N 3 d Z 0 i -- ani CD N N" CO � O C14 co Np tt m cm N C6 0 M ORI R r. ai o R' 0 0 C rte+ 0 L — N Z' 3 0 � J � c c c Z) :3 D T T 2-0.n comm o QQQI- w E C CL N C .d N f0 N .c IL LU to fV m v a 99 9ca N N CDD cin r N m U. V k f U) z 0 R k I S 2 0 � 2 C «A 0 a2� 2—« 2IL »aI < 22■ 0 cr 22 2 § � � o22q cmom �(0o /7©2 2k q g1-oo m�aq \@/ Eo ■ 00 �»2 f_32 kkk ■ ■ ■ 2222 0 0 0 @ \kkP- k k \ k @ 2 k to / cu m V) k m (D k k � U) b MmIg a) 0 U) k r. 04. q N G) tL r-. r rN� o N 'c w L C o IL aa�i� Q L O O d Q � cLC d C*l �rrMCO-00 1)C(O(0y MC�O 64 6o � OCCOO Oct O M N M co 6%6% co t- O) CO of M � N r U C N >. CD C .0 c (6 CL 06 U 0 pC U W N O U) P 010 LL U) m § 0) z / w § p (0 cn a! c) 00Co� L%®2 22 7 kkA 2%U 2�® Rq�a R/R e ■ o $22- o o o 3 k$\/ k \ 2 k k m k N � � $ k 2 \ b % 0) k k U) (q APPENDICES: Appendix A: Household Expenditures and Employment Generation Appendix B: Worker Household Generation 0 APPENDIX A: Household Expenditures and Employment Generation a m o g o o J 8 8 _ 8 [JNy %y (M i J m {Fsi O c! I'iCy �m n 0 N Nt0 q N m M m 0 (a O N W m m t _ CI EU G 6 m Cl O C N N O G O O m m m m m m m m m O1m, m m m m E E a N �O1 N N N N mm Nn�] i 0 LNN R 0 m 0 (a m m m tz G 3 at3r m m m N O a) m N c! 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[%1 c m W • • -, 0 1 Worker Household Generation Is Table B-1 Income Levels for Worker Households Worker Household Generation per 1,000 Market Rate Units - Home Price of $500,000 City of Petaluma Ownership Residential Nexus Study; EPS #161180 Industry Total Workers Total Worker Households [1] Very Low Income Low Income Households Households Moderate Income Households Above Moderate Income Households Retail Unspecified Retail 7.8 4.0 0.0 4.0 0.0 0.0 Food ✓£ Beverage Stores 29.9 15.5 0.0 15.5 0.0 0.0 Food Services and Drinking Places 100.6 52.1 52.1 0.0 0.0 0.0 Health and Personal Care Stores 3.5 1.8 0.0 1.8 0.0 0.0 General Merchandise 5.8 3.0 0.0 3.0 0.0 0.0 Furniture and Home Furnishings Stores 5.5 2.9 0.0 2.9 0.0 0.0 Building Material and Garden Equipment and Supplies Dealer 4.6 2.4 0.0 0.0 2.4 0.0 Electronics and Appliance Stores 10.0 5.2 0.0 5.2 0.0 0.0 Clothing and Clothing Accessories Stores 8.6 4.5 4.5 0.0 0.0 0.0 Motor Vehicle and Parts Dealers 16.1 8.3 0.0 0.0 0.0 8.3 Gasoline Stations 4.8 2.5 2.5 0.0 0.0 0.0 Sporting Goods, Hobby, and Musical Instrument Stores 7.9 4.1 4.1 0.0 0.0 0.0 Miscellaneous Store Retailers 8.9 4.6 0.0 4.6 0.0 0.0 Nonstore Retailers 0.5 0.3 0.0 0.0 0.3 0.0 Arts, Entertainment, 8: Recreation 10.4 5.4 0.0 5.4 0.0 0.0 Medicat/Health Ambulatory Health Care Services 3.3 1.9 0.0 0.0 0.0 1.9 General Medical and Surgical Hospitals 2.0 1.1 0.0 0.0 0.0 1.1 Nursing and Residential Care Facilities 8.5 4.9 0.0 4.9 0.0 0.0 Social Assistance 5.0 2.9 0.0 2.9 0.0 0.0 Services Personal and Household Goods Repair and Maintenance 17.9 10.3 0.0 10.3 0.0 0.0 Services to Buildings and Dwellings 18.9 11.0 0.0 11.0 0.0 0.0 Waste Management and Remediation Services 4.8 2.8 0.0 0.0 2.8 0.0 Real Estate and Rental and Leasing 1.0 0.6 .0.0 0.0 0.6 0.0 Personal Care Services 11.2 6.5 6.5 0.0 0.0 0.0 Dry Cleaning and Laundry Services 2.1 1.1 0.0 1.1 0.0 0.0 Auto Repair and Maintenance 13.1 7.6 0.0 7.6 0.0 0.0 Veterinary Services 2.0 1.2 0.0 0.0 1.2 0.0 Photographic Services 0.9 0.5 '0.0 0.5 0.0 0.0 Educational Services 15.4 8.9 0.0 8.9 0.0 0.0 Accounting 4.2 2.4 0.0 2.4 0.0 0.0 Architectural, Engineering, and Related 1.1 0.6 0.0 0.0 0.0 0.6 Specialized Design Services 1.4 0.8 0.0 0.0 0.0 0.8 Death Care Services 2.0 1.2 0.0 0.0 1.2 0.0 Legal Services 1.0 0.6 0.0 0.0 0.0 0.6 Government 42.9 24_9 0 0 1,3 0.00 14,$ Total Workers and Households 383.5 208.3 69.6 93.4 8.3 28.2 Total Income -Qualified HH Generated Per 1,000 Market -Rate Units 171.3 60.6 93.4 8.3 Total Income -Qualified HH Generated Per 100 Market -Rate Units 17.1 7.0 9.3 0.8 [t] Assumes 1.69 workers per worker household in the City of Petaluma based on data from the US Census, ACS 2011-2015. Includes a 12.5% discount for retail and 1.9% discount for other industries to account for workers under age 20. Source: Economic & Planning Systems, Inc. B-1 Economy & Planning Systems, Inc. 8/2912017 Im Table B-2 Income Levels for Worker Households Worker Household Generation per 1,000 Market Rate Units - Home Price of $625,000 City of Petaluma Ownership Residential Nexus Study; EPS #161180 [1] Assumes 1.69 workers per worker household in the City of Petaluma based on data from the US Census, ACS 2011-2015. Includes a 12.5% discount for retail and 1.9% discount for other industries to account for workers under age 20. Source: Economic & Planning Systems, Inc. B-2 Eoonomlc 8 Planning Systems, Inc. 8/29/2017 Na Above Very Low Moderate Moderate Total Total Worker Income Low Income Income Income Industry Workers Households [1] Households Households Households Households Retail Unspecified Retail 8.5 4.4 0.0 4.4 0.0 0.0 Food & Beverage Stores 33.1 17.1 0.0 17.1 0.0 0.0 Food Services and Drinking Places 114.3 59.2 59.2 0.0 0.0 0.0 Health and Personal Care Stores 3.9 2.0 0.0 2.0 0.0 0.0 General Merchandise 6.4 3.3 0.0 3.3 0.0 0.0 Furniture and Home Furnishings Stores. 6.5 3.4 0.0 3.4 0.0 0.0 Building Material and Garden Equipment and Supplies Dealer 5.2 2.7 0.0 0.0 2.7 0.0 Electronics and Appliance Stores 11.1 5.8 0.0 5.8 0.0 0.0 Clothing and Clothing Accessories Stores 9.4 4.9 4.9 0.0 0.0 0.0 Motor Vehicle and Parts Dealers 19.9 10.3 0.0 0.0 0.0 10.3 Gasoline Stations 5.1 2.6 2.6 0.0 0.0 0.0 Sporting Goods, Hobby, and Musical Instrument Stores 10.8 5.6 5.6 0.0 0.0 0.0 Miscellaneous Store Retailers 10.4 5.4 0.0 5.4 0.0 0.0 Nonstore Retailers 0.7 0.4 0.0 0.0 0.4 0.0 Arts, Entertainment, & Recreation 14.4 7.5 0.0 7.5 0.0 0.0 MedicaUHealth Ambulatory Health Care Services 3.7 2.2 0.0 0.0 0.0 2.2 General Medical and Surgical Hospitals 2.2 1.3 ' 0.0 0.0 0.0 1.3 Nursing and Residential Care Facilities 11.6 6.7 0.0 6.7 0.0 0.0 Social Assistance 9.0 5.2 0.0 5.2 0.0 0.0 Services Personal and Household Goods Repair and Maintenance 20.4 11.7 0.0 11.7 0.0 0.0 Services to Buildings and Dwellings 22.9 13.3 0.0 13.3 0.0 0.0 Waste Management and Remediation Services 4.9 2.9 0.0 0.0 2.9 0.0 Real Estate and Rental and Leasing 1.2 0.7 0.0 0.0 0.7 0.0 Personal Care Services 13.1 7.6 7.6 0.0 0.0 0.0 Dry Cleaning and Laundry Services 2.3 1.2 0.0 1.2 0.0 0.0 Auto Repair and Maintenance 15.3 8.9 0.0 8.9 0.0 0.0 Veterinary Services 2.5 1.4 0.0 0.0 1.4 0.0 Photographic Services 1.4 0.8 0.0 0.8 0.0 0.0 Educational Services 27.5 16.0 0.0 16.0 0.0 0.0 Accounting 5.1 3.0 0.0 3.0 0.0 0.0 Architectural, Engineering, and Related 1.4 0.8 0.0 0.0 0.0 0.8 Specialized Design Services 1.7 1.0 0.0 0.0 0.0 1.0 Death Care Services 2.4 1.4 0.0 0.0 1.4 0.0 Legal Services 1.2 0.7 0.0 0.0 0.0 0.7 Government 42.9 24.9 0.0 1-3 010 14.8 Total Workers and Households 452.6 246.1 79.9 117.0 9.6 31.0 Total Income -Qualified HH Generated Per 1,000 Market -Rate Units (2] 206.4 79.9 117.0 9.5 Total Income -Qualified HH Generated Per 100 Market -Rate Units [2] 20.6 8.0 11.7 0.9 [1] Assumes 1.69 workers per worker household in the City of Petaluma based on data from the US Census, ACS 2011-2015. Includes a 12.5% discount for retail and 1.9% discount for other industries to account for workers under age 20. Source: Economic & Planning Systems, Inc. B-2 Eoonomlc 8 Planning Systems, Inc. 8/29/2017 Na Table B3 Income Levels for Worker Households Worker Household Generation per 1,000 Market Rate Units - Home Price of $750,000 City of Petaluma Ownership Residential Nexus Study; EPS #161180 Industry Total Workers Very Low Total Worker Income Low Income Households [1] Households Households Moderate Income Households Above Moderate Income Households Retail Unspecified Retail 8.5 4.4 0.0 4.4 0.0 0.0 Food & Beverage Stores 36.6 19.0 0.0 19.0 0.0 0.0 Food Services and Drinking Places 137.5 71.2 71.2 0.0 0.0 0.0 Health and Personal Care Stores 4.2 2.2 0.0 2.2 0.0 0.0 General Merchandise 8.9 4.6 0.0 4.6 0.0 0.0 Furniture and Home Furnishings Stores 8.2 4.2 OA 4.2 0.0 0.0 Building Material and Garden Equipment and Supplies Dealer 5.6 2.9 0.0 0.0 2.9 0.0 Electronics and Appliance Stores 12.4 6.4 0.0 6.4 0.0 0.0 Clothing and Clothing Accessories Stores 13.8 7.1 7.1 0.0 0.0 0.0 Motor Vehicle and Parts Dealers 16.3 8.5 0.0 0.0 0.0 8.5 Gasoline Stations 4.6 2A 2.4 0.0 0.0 0.0 Sporting Goods, Hobby, and Musical Instrument Stores 16.5 8.5 8.5 0.0 0.0 0.0 Miscellaneous Store Retailers 13.7 7.1 0.0 7.1 0.0 0.0 Nonstore Retailers 0.9 0.5 0.0 0.0 0.5 0.0 Arts, Entertainment, & Recreation 19.8 10.3 0.0 0.0 0.0 10.3 Medical/Health Ambulatory Health Care Services 4.6 2.7 0.0 0.0 0.0 2.7 General Medical and Surgical Hospitals 2.7 1.6 0.0 0.0 0.0 1.6 Nursing and Residential Care Facilities 13.4 7.8 0.0 7.8 0.0 0.0 Social Assistance 9.6 5.6 0.0 5.6 0.0 0.0 Services Personal and Household Goods Repair and Maintenance 22.5 12.8 0.0 12.8 0.0 0.0 Services to Buildings and Dwellings 27.0 15.7 0.0 15.7 0.0 0.0 Waste Management and Remediation Services 4.8 2.8 0.0 0.0 2.8 0.0 Real Estate and Rental and Leasing 1.2 0.7 0.0 0.0 0.7 0.0 Personal Care Services 15.4 8.9 8.9 0.0 0.0 0.0 Dry Cleaning and Laundry Services 3.4 1.8 0.0 1.8 0.0 0.0 Auto Repair and Maintenance 16.0 9.3 0.0 9.3 0.0 0.0 Veterinary Services 3.2 1.8 0.0 0.0 1.8 0.0 Photographic Services 2.5 1.4 0.0 1.4 0.0 0.0 Educational Services 52.6 30.6 0.0 30.6 0.0 0.0 Accounting 5.7 3.3 0.0 3.3 0.0 0.0 Architectural, Engineering, and Related 1.5 0.9 0.0 0.0 0.0 0.9 Specialized Design Services 1.8 1.1 0.0 0.0 0.0 1.1 Death Care Services 2.7 1.6 0.0 0.0 1.6 0.0 Legal Services 1.3 0.8 0.0 0.0 0.0 0.8 Government 42.9 24.9 0.0 1.3 0.0 14.8 Total Workers and Households 542.4 295.2 98.2 137.4 10.3 40.6 Total Income -Qualified HH Generated Per 1,000 Market -Rate Units [2] 246.9 98.2 137.4 10.3 Total Income -Qualified HH Generated Per 100 Market -Rate Units [2] 24.6 9.8 13.7 1.0 [t] Assumes 1.69 workers per worker household in the City of Petaluma based on data from the US Census, ACS 2011-2015. Includes a 12.5% discount for retail and 1.9% discount for other industries to account for workers under age 20. Source: Economic & Planning Systems, Inc. B-3 Economic & Planning Systems, Inc. 8!2912017 0-1 Table B-4 Income Levels for Worker Households Worker Household Generation per 1,000 Market Rate Units - Home Price of $876,000 City of Petaluma Ownership Residential Nexus Study; EPS #161180 Industry Retail Unspecified Retail Food & Beverage Stores Food Services and Drinking Places Health and Personal Care Stores General Merchandise Furniture and Home Furnishings Stores Building Material and Garden Equipment and Supplies Dealer Electronics and Appliance Stores Clothing and Clothing Accessories Stores Motor Vehicle and Parts Dealers Gasoline Stations Sporting Goods, Hobby, and Musical Instrument Stores Miscellaneous Store Retailers Nonstore Retailers Arts, Entertainment, & Recreation Medical/Health Ambulatory Health Care Services General Medical and Surgical Hospitals Nursing and Residential Care Facilities Social Assistance Services Personal and Household Goods Repair and Maintenance Services to Buildings and Dwellings Waste Management and Remediation Services Real Estate and Rental and Leasing Personal Care Services Dry Cleaning and Laundry Services Auto Repair and Maintenance Veterinary Services Photographic Services Educational Services Accounting Architectural, Engineering, and Related Specialized Design Services Death Care Services Legal Services Government Total Workers and Households Total Income -Qualified HH Generated Per 1,000 Market -Rate Units [2) Total Income -Qualified HH Generated Per 100 Market -Rate Units [2) Above Very Low Moderate Moderate Total Total Worker Income Low Income Income Income Workers Households [1) Households Households Households Households 9.9 5.1 0.0 5.1 0.0 0.0 42.7 22.1 0.0 22.1 0.0 0.0 160A 83.1 83.1 0.0 0.0 0.0 4.9 2.5 0.0 2.5 0.0 0.0 10.4 5.4 0.0 5.4 0.0 0.0 9.5 4.9 0.0 4.9 0.0 0.0 6.5 3.4 0.0 0.0 3.4 0.0 14.5 7.5 0.0 7.5 0.0 0.0 16.1 8.3 8.3 0.0 0.0 0.0 19.1 9.9 0.0 0.0 0.0 9.9 5.4 2.8 2.8 0.0 0.0 0.0 19.3 10.0 10.0 0.0 0.0 0.0 15.9 8.3 0.0 8.3 0.0 0.0 1.0 0.5 0.0 0.0 0.5 0.0 23.1 12.0 0.0 12.0 0.0 0.0 5.4 3.1 0.0 0.0 0.0 3.1 3.2 1.8 0.0 0.0 0.0 1.8 15.6 9.1 0.0 9.1 0.0 0.0 11.2 6.5 0.0 6.5 0.0 0.0 26.2 15.0 0.0 15.0 0.0 0.0 31.5 18.3 0.0 18.3 0.0 0.0 5.6 3.3 0.0 0.0 3.3 0.0 1.5 0.8 0.0 0.0 0.8 0.0 17.9 10.4 10.4 0.0 0.0 0.0 4.0 2.1 0.0 2.1 0.0 0.0 18.7 10.9 0.0 10.9 0.0 0.0 3.7 2.1 0.0 0.0 2.1 0.0 2.9 1.7 0.0 1.7 0.0 0.0 61.4 35.7 0.0 35.7 0.0 0.0 6.7 3.9 0.0 3.9 0.0 0.0 1.8 1.0 0.0 0.0 0.0 1.0 2.2 1.2 0.0 0.0 0.0 1.2 3.2 1.8 0.0 0.0 1.8 0.0 1.6 0.9 0.0 0.0 0.0 0.9 42.94.99 OS 1_3 0_0 14.8 625.6 340.2 114.6 172.1 12.0 32.8 298.7 114.5 172.1 12.0 29.9 11.5 17.2 1.2 [t] Assumes 1.69 workers per worker household in the City of Petaluma based on data from the US Census, ACS 2011-2015. Includes a 12.5% discount for retail and 1.9% discount for other industries to account for workers underage 20. Souroe: Economic & Planning Systems, Inc. B-4 Economic & Planning Systems, Inc. &29/2017 0 ATTACHMENT #5 Administrative Draft Report Nexus -Based Affordable Housing .,he onont«<<,,f.Land Use, Fee Analysis for Rental Housing Prepared for: City of Petaluma Prepared by: Economic & Planning Systems, Inc. August 29, 2017 Economic & Planning Systems, Inc. One Kaiser Plaza, Suite 1410 Oakland, CA 94612 510 841 9190 tel EPS # 161180 510 740 2080 fax Oakland Sacramento Denver Los Angeles www.epsys.com is Table of Contents EXECUTIVESUMMARY.................................................................................................... 1 1. AFFORDABILITY GAP ANALYSIS.................................................................................. 7 ProductType............................................................................................................ 7 DevelopmentCost Assumptions.................................................................... .......9 RevenueAssumptions...............................................................................................9 AffordabilityGap Results.......................................................................................... 10 2. DEMAND -BASED NEXUS FEE CALCULATION................................................................. 11 Market -Rate Household Income Levels...................................................................... 11 Household Expenditures and Job Creation by Income Level .......................................... 12 Demand for Public -Sector Workers............................................................................ 14 Combined Demand for Income -Qualified Workers....................................................... 15 FeeCalculation ......................:............................................................................ 17 Appendices: APPENDIX A: Household Expenditures and Employment Generation APPENDIX B: Worker Household Generation List of Figures and Tables Figure 1 Illustration of Nexus -Based Housing Fee Methodology............................................2 Table 1 Summary of Maximum Supportable Nexus -Based Housing Fees orUnit Requirements In Lieu of Fees...................................................................6 Table 2 Affordability Gap Analysis -- Rental Product Type..................................................8 Table 3 Income Limits for Affordable Housing..................................................................9 Table 4 Required Income by Unit Type - Market -Rate Rental Apartments ..........................12 Table 5 Summary of Worker and Household Generation per 100 Market -Rate Units ............16 Table 6 Nexus -Based Housing Fee Calculations (For -Rent Studio Apartment) ..................... 18 Table 7 Nexus -Based Housing Fee Calculations (For -Rent 1 -Bedroom Apartment) .............. 19 Table 8 Nexus -Based Housing Fee Calculations (For -Rent 2 -Bedroom Apartment) .............. 20 Table 9 Nexus -Based Housing Fee Calculations (For -Rent 3 -Bedroom Apartment) .............. 21 11 EXECUTIVE SUMMARY Economic & Planning Systems, Inc. (EPS) was retained by the City of Petaluma to conduct a nexus study analyzing the impact that development of market -rate rental housing has on demand for below -market -rate housing and, based on the results, to determine the defensible nexus -based fee that could be charged to market -rate rental residential development. The technical approach used herein quantifies the impacts that the introduction of market -rate rental apartments have on the local economy and the demand for additional affordable housing. As new households occupying market rate housing are added to the community, local employment expands to provide the goods and services required by the new households. To the extent that these new jobs do not pay adequate wages for the employees to afford market -rate housing in the community, the new households' spending Is creating a need for affordable housing. A nexus -based affordable housing fee is, therefore, based on the impact of the new market -rate homes on the demand for affordable housing. The fee calculated in this study represents the maximum fee that may be charged to new market -rate rental housing units to mitigate their impacts on the affordable housing supply. Fee revenue may be collected by the City and used to subsidize the production of new affordable units for lower-income households not accommodated by market -rate projects. Calculating the impact of market -rate development in the City on affordable housing needs and the fees needed to mitigate those impacts, involves three main analytical steps: Step #1. Estimate the typical: subsidy required to construct units affordable at various income levels (the "affordability gap"). Step #2. Determine the market -rate households' demand for goods and services, the jobs created by that demand, and the affordable housing needs of workers in those jobs. Step #3. Combine the affordability gap with the affordable housing demand projections to compute the maximum supportable nexus -based affordable housing fees per market -rate unit. These technical steps are illustrated in Figure 1 and detailed in the body of this Report and the attached appendices. The findings regarding each of these steps are presented below. Economic & Planning Systems, Inc. 1 16IO 16118OF btr r+l syRe. ✓pM 6LN/n w_WWK+ Sad 3* #ct WOM_NI P939.0. Tq L 3 Gf Y. -a m C � C ;+ i 0 �Cr (1)cr a) �v Z >.a c E2a)a)o OE 006-6 0 Ol C Y 00 E O y EZ 0 'O LL .pY o 0 3 f = L' Q d >o L t 7 'a O C M C. !C M .a L. d m3 O� Qa>COLUc)o(o IZUNw v=O "DZo E CL W Q- N v oN �U v 0 C a t E c (D a> a) a) Y 72_ _ U C 01- N o C tt=aD.8, I Z 20 ,� 3a =g da U CL N P. 0 a �uc CO C. p Z e U)�C—I) -a m C � C ;+ i 0 Q O 0 0 �v >.a c E2a)a)o OE 006-6 0 Y 00 E O V N > � a' EZ 0 'O LL .pY o 0 3 f = L' C C f0 d >o L t 7 'a O C M U k2 .a N 'O a)C d m3 . � rL Qa>COLUc)o(o IZUNw v=O "DZo U_ a CL W Q- N v 6 — Q U = C t CA c (D Y C � N o I Z C 3a =g da L CL W d1 X V''E EZCEZ zzm �lNCY tom=� G.d C• R Q win 3 ami .1 .'o_. Q N U W rm Nexus -Based Affordable Housing Fee Analysis for Rental Housing Administrative Draft Report 0812912017 Step #1. The cost to construct housing units affordable to many households exceeds the value of those units based on the rents the households can afford to pay. The estimated subsidy required to construct affordable housing units in Petaluma ranges from roughly $268,800 for Very Low Income households earning up to 50 percent of AMI to $63,350 for Moderate Income households earning up to 120 percent of AMI. An "affordability gap analysis" evaluates whether or not the cost to construct affordable units exceeds the value of units that are affordable to lower- and moderate -income households. For each affordable housing income level—households with incomes at 50, 80, and 120 percent of Area Median Income (AMI)—this analysis estimates the subsidy required to construct affordable housing units. The affordability gap analysis assumes that the average affordable unit for all income levels will be a 2 -bedroom unit in a multifamily development in a three- to four-story building, which is assumed to be occupied by three people on average. The average density assumed is 45 dwelling units per acre, consistent with zoning in the Central Petaluma Specific Plan Area. The estimated costs to acquire land and construct the prototypical affordable unit are based on recent City of Petaluma development projects and transactions, as well as other development cost data sources. A household's ability to pay is estimated based on standard percentages of income available for housing costs at each household income level. Income available for housing costs is then converted into a monthly affordable rent and a capitalized unit value. This unit value is then compared to the costs of development to determine the subsidy required to make the unit affordable to each income level. Step #2. The demand for affordable housing created by the expenditures of new households in Petaluma increases along with the market -rate rent price (and related renter income). For example, a studio unit that rents for $1,050 per month is estimated to create demand for 0.08 affordable housing units, while a 3 -bedroom unit that rents for $3,200 per month creates demand for 0.21 affordable units. Any justified nexus -based fee is based on the total demand for affordable housing units generated by construction of market -rate units. The link (or nexus) between market -rate housing and increased demand for affordable housing is that residents of market -rate units demand goods and services that rely on wage earners (for example, retail sales clerks) some of whom cannot afford market -rate housing and thus require affordable housing. Because more expensive housing units require renters to have higher incomes, and higher Income households create more jobs through their spending, the nexus impacts and thus the justified fees for rental units vary according to the rental price range of the market -rate units. Typically, larger apartments (i.e., more bedrooms) command higher rents, so their occupants are required to have higher household incomes than renters of smaller units. Thus, larger units create and/or support more jobs as a result of their occupants' spending patterns. Consequently, nexus impacts and the justified fees for market -rate rental apartments vary by unit size. Economic & Planning Systems, Inc. 3 Nexus -Based Affordable Housing Fee Analysis for Rental Housing Administrative Draft Report 08/2912017 This analysis evaluates the demand for affordable housing generated by a range of for -rent unit sizes. For each unit size, the demand -based nexus fee calculation involves the following steps: A. Market -Rate Household Income Levels. The expected rental price of the unit is based on market data regarding the actual asking rents of apartments of various sizes. The required income levels of households occupying new market -rate housing are derived based on the rental rate, assuming standard housing cost expenses as a proportion of overall household income. For example, a typical household renting a market -rate one -bedroom unit for around $2,200 per month would have an income of roughly $96,300, if it spends 30 percent of its income on housing costs (rent and utilities). B. Household Expenditures. Based on the household income computed in Step A, Consumer Expenditure Survey data is used to evaluate the typical spending patterns of the household. This analysis provides an estimate of how much the household spends on specific categories of expenditures, such as "Food at Home." As the households' income increases along with the price and size of the market -rate units, the total spending on goods and services also increases. The Consumer Expenditure Survey also indicates that these relationships are not linear (e.g., a household with twice the income does not necessarily spend twice as much on food). C. Job Creation and Worker Households. Having estimated the households' spending on various items, that spending is then converted into an estimation of jobs created. For each expenditure category, data regarding average worker wages and the ratio between gross business receipts and wages are used to translate these household expenditures into the total number of private -sector workers. For selected public -sector jobs that typically grow in proportion to the local population size (e.g., teachers, protective service workers), the demand for new workers is estimated by relating current levels of employment in such categories to the current population and applying this ratio to future development. Because each new worker does not represent an independent household (Petaluma has an average of 1.69 workers per working household), the total number of new households created is somewhat less than the number of new jobs created. This analysis assumes that workers form households with others earning similar wages. EPS has further adjusted the household formation rates to reflect the fact that a certain proportion of workers will not form their own households, particularly those of younger ages.1 D. Worker Households by Income Category. Each worker household generated is assigned to an income category—represented as a proportion of AMI ranging from 50 to 120 percent— based on its estimated gross wages. This provides the total number of households generated at each income level by construction of market -rate units at various sizes and price points. The results indicate that residents of smaller, lower-priced units generate fewer worker households requiring affordable housing than do residents of larger, higher -priced units. 1 BLS data indicates that 12.5 percent of retail/restaurant workers are age 16-19, but an average of only 1.9 percent of workers overall (this factor Is applied to other industries). EPS has assumed that such young workers do not form their own households. Economic & Planning Systems, Inc. 4 P„s, M Nexus -Based Affordable Housing Fee Analysis for Rental Housing Administrative Draft Report 0812912027 These steps of the nexus -based fee calculation provide the total number of income -qualified workers required to meet the needs for goods and services generated by market -rate rental housing. The number of workers servicing market -rate housing (at each apartment unit size) is then converted to total income qualified households and each household is assumed to require one housing unit. Step #3. This analysis calculates the fees that could be charged to fully mitigate the impact that new market -rate rental housing has on Petaluma's affordable housing demand at various representative unit sizes. These fees could range from $14,484 for studio apartments to $38,671 for 3 -bedroom apartments. The nexus fee is calculated by applying the number of affordable units needed by income qualified households to the affordability gap for each housing income category. This calculation is made for several different apartment sizes based on bedroom counts. Table 1 summarizes the maximum nexus -based fees calculated for representative rental unit sizes. The City may also consider whether to allow developers to provide affordable apartment units within their projects, rather than paying the nexus -based fee. Table 1 illustrates the proportions of affordable units that correspond to the fee calculation and demands created by the market -rate units. For instance,,a project offering two-bedroom units would effectively mitigate the demand being created by the market -rate units if It -provided 0.179 affordable units for each market -rate unit. It is understood that a lower fee level below the maximum fee may be appropriate given a range of development feasibility and economic development considerations. The lower fee may also be appropriate due to the fact that affordable housing development is not the sole responsibility of rental housing developers, as the City, State, and federal government have other programs and resources that can offset some affordable housing production costs. Feasibility considerations are evaluated by EPS in a separate memorandum. Economic & Planning systems, Inc. 5 .116100MU6t180M a �yM1v yep 1t6t180iG LF vAt.m Sad �dAQaRF GaCL11_09 m,d� � 0 J 5 A 2 c ■ § � tr 2 c � 0 § e U. ■ c _ 2 m m k 0 z ■ � 0 ■ A � § ( . ■ ■ 0 t, k ■ U) ■ � � $ � / k //// oco0)00 co /mak cr . � $ � ! � C) . \ . © ¥bOR k 000� m � @ . CL . \ � b 22CR g. �aM� m . / ( . E. k CD \ @0C\l2 k wawacr { ƒ k m 7 co . co / s & . . � I'-qqw \ MI-©- K%k% k k +646464 (D / k \ ( /q�R k' Nt o. e� MC6 f� 64 222 ® Ek aECY 2R .U)■ goo ¥@ gRCD2 nE U) / / § § § / LO 0 0 0 @ .2« -a$ $ 0 /23I U- R m - gym � ! . � $ � ! � ! . ! � . � � k . � . � . \ � k / . E. CD \ / � { ƒ / m 7 / s w® k § k \ 0 1. AFFORDABILITY GAP ANALYSIS For any nexus -based affordable housing fee calculation, it is necessary to estimate the subsidy required to construct affordable housing units. Table 2 shows the subsidy needed to produce multifamily rental housing that is affordable to very low- through moderate -income households (50 through 120 percent of AMI). Product Type While the nexus fees calculated herein are based on demands created by market -rate rental housing that may be single family or multifamily, the analysis assumes that new lower-income worker households would actually be housed in affordable units similar to the type of multifamily construction currently observed in the City. The assumed prototype reflects multifamily construction at 45 dwelling units to the acre with surface parking. This building prototype is generally cost-effective to construct, as it makes efficient use of land and does not involve overly expensive construction materials or techniques. California State law (California Health and Safety Code Section 50052.5) assumes that a 2 -bedroom unit is occupied by a 3 -person household, and this assumption is used in this analysis. Consistent with input from the City, EPS assumes that the typical gross square footage of a 2 -bedroom rental unit in Petaluma will be approximately 1,150 square feet. Applying an efficiency ratio of 85 percent to account for shared lobbies, hallways, etc., results in net square footage of 978 square feet. This analysis estimates the subsidy that would be required to build for -rent housing for the lower-income worker households. Economic& Planning Systems, Inc. 7 '1... 001161t800pma Ms pM14 w4ep 11f6tl�hN maJm tlN u5E4 Ch0.z4F yvL201)_Oe l9.hv M Nexus -Based Affordable Housing Fee Analysis for Rental Housing Administrative Draft Report 08/29/2017 Table 2 Affordability Gap Analysis -- Rental Product Type [1] Based on allowable zoning in Central Petaluma Specific Plan. [2) An efficiency ratio of 85% Is applied to the gross unit size to calculate the net unit size. [3] For this analysis, EPS has assumed an average unit for income -qualified worker households would be 2 -bedrooms. State law (Health and Safety Code Section 50052.5) indicates that a 2 -bedroom unit should be assumed to be occupied by a 3 - person household. [4) Assumption of one parking spacelunit based on market preferences, although .6 spacestunit is the minimum requirement. 151 Based on two recent land sale transactions in the City: 307 Petaluma Boulevard and 951 Petaluma Boulevard. [6] Includes on-site work, offsite work, vertical construction, general requirements, overhead and builder fees. The cost estimate reflects wood -frame construction, surface parking, no basement, and union labor. [7] Includes costs for architecture and engineering; entitlement and fees; project management; appraisal and market study; marketing, commissions, and general administration; financing and charges; insurance; developer fee and contingency. [8) Based on 2017 Income limits for a three-person household in Sonoma County. [9] Assumes housing costs (e.g., rent and utilities) to be 30% of gross household income. [101 Operating expenses are generally based on data reported by CoStar and reflective of properties in Petaluma. Estimates are inclusive of utility costs and property taxes, except Very Low and Low properties which are exempt from property taxes. [111 The capitalization rate is used to determine the current value of a property based on estimated future operating Income, and is typically a measure of estimated operating risk. The capitalization rate used in this analysis is based on Costar reported transaction data for 2014 - 2017 transactions in Sonoma County. (121 The total supportable unit value is determined by dividing the net operating income by the capitalization rate. Sources: City of Petaluma; California Housing and Community Development (HCD); RS Means; IRR Monitor Investor Survey; and Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. 8 r. tatow us,t us,t�yr y r aMsa w nacmn or zsa M 3 -4 Stories Multifamily Building with Surface Parking Very Low Low Moderate Income Income Income (50% AMI) (80% AMI) (120%AMI) Development Program Assumptions Density/Acre [1) 45 45 45 Gross Unit Size 1,150 1,150 1,150 Net Unit Size [2] 978 978 978 Number of Bedrooms 2 2 2 Number of Persons per 2 -Bedroom Unit (3) 3 3 3 Parking Spaces/Unit [4] 1.00 1.00 1.00 Cost Assumptions LandfAcre [5] $1,131,000 $1,131,000 $1,131,000 Land/Unit $25,133 $25,133 $25,133 Direct Costs Direct Construction Costs/Net SF [61 $185 $185 $185 Direct Construction Costs/Unit (rounded) $213,000 $213,000 $213,000 Parking Construction Costs/Unit $5,000 $5,000 $5,000 Subtotal, Direct Costs/Unit $218,000 $218,000 $218,000 Indirect Costs as a % of Direct Costs [71 40% 40% 40% Indirect Costs/Unit $87,200 $87,200 $87,200 Profit Margin (% of all costs) 14% 14% 14% Profit (rounded) $46,000 $46,000 $46,000 Total Cost/Unit (rounded) $376,000 $376,000 $376,000 Maximum Supported Home Price Household Income [8] $39,650 $63,450 $90,650 Revenue to Property Owner/Year [91 $11,895 $19,035 $27,195 (less) Operating Expenses per UnitlYear [10] ($6,000) ($6,000) ($10,000) Net Operating Income $5,695 $13,035 $17,195 Capitalization Rate 1111 5.5% 5.5% 5.5% Total Supportable Unit Value [121 $107,182 $237,000 $312,636 Affordability Gap ($268,818) ($139,000) ($63,364) [1] Based on allowable zoning in Central Petaluma Specific Plan. [2) An efficiency ratio of 85% Is applied to the gross unit size to calculate the net unit size. [3] For this analysis, EPS has assumed an average unit for income -qualified worker households would be 2 -bedrooms. State law (Health and Safety Code Section 50052.5) indicates that a 2 -bedroom unit should be assumed to be occupied by a 3 - person household. [4) Assumption of one parking spacelunit based on market preferences, although .6 spacestunit is the minimum requirement. 151 Based on two recent land sale transactions in the City: 307 Petaluma Boulevard and 951 Petaluma Boulevard. [6] Includes on-site work, offsite work, vertical construction, general requirements, overhead and builder fees. The cost estimate reflects wood -frame construction, surface parking, no basement, and union labor. [7] Includes costs for architecture and engineering; entitlement and fees; project management; appraisal and market study; marketing, commissions, and general administration; financing and charges; insurance; developer fee and contingency. [8) Based on 2017 Income limits for a three-person household in Sonoma County. [9] Assumes housing costs (e.g., rent and utilities) to be 30% of gross household income. [101 Operating expenses are generally based on data reported by CoStar and reflective of properties in Petaluma. Estimates are inclusive of utility costs and property taxes, except Very Low and Low properties which are exempt from property taxes. [111 The capitalization rate is used to determine the current value of a property based on estimated future operating Income, and is typically a measure of estimated operating risk. The capitalization rate used in this analysis is based on Costar reported transaction data for 2014 - 2017 transactions in Sonoma County. (121 The total supportable unit value is determined by dividing the net operating income by the capitalization rate. Sources: City of Petaluma; California Housing and Community Development (HCD); RS Means; IRR Monitor Investor Survey; and Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. 8 r. tatow us,t us,t�yr y r aMsa w nacmn or zsa M Nexus -Based Affordable Housing Fee Analysis for Rental Housing Administrative Draft Report 08129/2017 Development Cost Assumptions .Affordable housing development costs include land costs, direct costs (e.g., labor and materials), and indirect or "soft" costs (e.g., architecture, entitlement, marketing, etc.). For rental Petaluma developments and recent Petaluma land transactions have been combined with EPSs information from various market -rate and affordable housing developers to estimate appropriate development cost assumptions for use in Petaluma. These assumptions are shown on Table 2 and demonstrate that the total cost per unit for rental apartments is about $376,000. Revenue Assumptions To calculate the values of the affordable units, assumptions must be made regarding the applicable income level (very low, low, and moderate) and the percentage of household income spent on housing costs. In addition, translating these assumptions into unit prices and values requires estimates of operating expenses and capitalization rates. The following assumptions were used in these calculations: • Income Levels—This analysis estimates the subsidy required to produce units for households earning up to 50, 80, and 120 percent of AMI for a three-person household. In 2017, AMI in Sonoma County for these households is $75,500, as shown in the California Department of Housing and Community Development's (HCD's) income limits chart (see Table 3). Percentage of Gross Household Income Available for Housing Costs—HCD standards on overpaying for rent indicate that households should pay no more than 30 percent of their gross income on housing costs. For this analysis, EPS has assumed that all households spend 30 percent of their gross income on rent costs. Operating Costs for Rental Units—This analysis assumes that apartment operators incur annual operating costs of $6,000 per unit, which include the cost of utilities, for units affordable at 80 percent of AMI or below. EPS has assumed the units for moderate income households would have similar operating costs but would be built by for-profit builders and thus also subject to property taxes, increasing their annual operating cost to $10,000 per unit. Table 3 Income Limits for Affordable Housing Income Group and Definition 2017 Maximum Income 3 -Person Household Very Low >30% to 550% AMI $39,650 Low >50% to 580% AMI $63,450 Median (Base) >80% to _<100% AMI $75,500 Moderate >100% AMI to 5120% AMI $90,650 Source: Sonoma County 2017 Income Limits, California Housing and Community Development (HCD). Economic & Planning Systems, Inc. 9 ubtwo tbtlevrvro vstr. w o ntbtle �a� rswmm m rta�rc mt o� zae a Nexus -Based Affordable Housing Fee Analysis for Rental Housing Administrative Draft Report 08/29/2017 Affordability Gap Results Table 2 shows the subsidies required for construction of rental apartments for households at very- low, low, and moderate -income levels. As shown, a unit affordable to a household earning 50 percent of AMI is expected to require a subsidy of roughly $268,800, while a unit affordable to a household at 120 percent of AMI is expected to require a subsidy of about $63,350. A household at 80 percent of AMI falls in between with a required subsidy of $139,000. These rental housing affordability gaps then were used to calculate the justified nexus -based fees by multiplying the required subsidy by the number of units required to house workers providing goods and services to new market -rate housing development. This methodology is discussed in more detail in the following chapter. It is worth noting that the affordability gaps estimated in this analysis are not as large as they might be using other also -valid assumptions. For example, the funding gaps for low income units assume that prices are set at 80 percent of median income, while State law indicates low-income unit prices may be set at 70 percent of median income. This methodology used by EPS yields higher unit values and thus results in lower maximum fees than would result from less conservative assumptions. Economic & Planning Systems, Inc. Me 2. DEMAND -BASED NEXUS FEE CALCULATION The maximum supportable nexus -based fees are based on both the affordability gap and the estimated impact that new market -rate rental units have on the need for affordable units, as reflected in the number of income -qualified local workers required to support the residents of market -rate apartments and the total subsidy required to construct housing for those workers. This approach is based on the following logic: (a) residents of market -rate housing have disposable incomes and require a variety of goods and services (including private sector goods and services and government services); (b) the provision of those goods and services will create employment demand for some workers who make moderate or lower incomes and cannot afford market -rate housing; and (c) fees charged to market -rate projects can mitigate the impact of those projects on the increased need for affordable housing. Market -Rate Household Income Levels Households with larger incomes typically spend more on goods and services, thereby creating additional lower income jobs, which in turn generate a greater demand for affordable housing. To assess the impact that market -rate rental units have on the need for affordable housing, EPS estimated the typical income required to rent a market -rate apartment at various bedroom sizes In Petaluma, as shown in Table 4. Average rents for various 1-, 2-, and 3 -bedrooms were gathered using Costar. Group's estimates of average monthly rents from 2006 through 2016. Studio apartment rents were based on data reported by CoStar in 2017 alone due to less data availability. Generally, new apartment rents are slightly higher than rental rates for existing rental housing stock, both because the newer units are of better -than -average quality and because the higher rents are required to cover the costs of construction. The 1-, 2-, and 3- bedroom rents were informed by rents at The Artisan as well as average rents for all apartments. Assuming utility costs for each unit size based on the Sonoma County Community Development Commission allowances, the minimum household income needed to rent each unit is then calculated, predicated on the assumption that a household will spend 30 percent of their income on housing costs (rent and utility payments combined). As shown, required household incomes range from approximately $48,500 for a studio apartment to roughly $140,900 for a 3 -bedroom apartment. Changes In -housing market and financing conditions can have a significant effect on the calculations in this study. economic & Planning Systems, Inc. 11 rlt6maa v61 ems . mow. ntbllbu nv « wary w rtcmycp Ov n.ex Nexus -Based Affordable Housing Fee Analysis for Rental Housing Administrative Draft Report 08/29/2017 Table 4 Required Income by Unit Type - Market -Rate Rental Apartments Required Income by Unit Type Minimum Average Monthly Monthly Utility Monthly Rent Annual Rent Annual Household Apartment Size Rent 11] Cost [2] and Utilities and Utilities Income Required 13] r Formula A B C=A+B D=C'12 E=D/30% Studio $1,050 $163 $1,213 $14,556 $48,620 1 -Bedroom $2,200 $208 $2,408 $28,896 $96,320 2 -Bedroom $2,900 $241 $3,141 $37,692 $125,640 3 -Bedroom $3,200 $322 $3,522 $42,264 $140,880 [1) Average monthly rent for studio is based on data reported by CoStar in 2017. 1, 2, and 3 -bedroom unit apartment rent is based on data reported by Costar reflecting apartments built between 2006 and 2016. [2) Assumes annual utility expenditures consistent with the 2016 Sonoma County CDC limits (assumes use of electricity for heating and cooking). [3] Assumes a housing costs to income ratio of 30 percent. Source: City of Petaluma; Trulia; CoStar; Sonoma County Community Development Commission; Economic & Planning Systems, Inc. Household. Expenditures and Job Creation by Income Level Having established the income requirements for renting apartments of various sizes, the fee calculation then requires an analysis of the household spending patterns at those required Income levels. Consistent with nexus fee calculations and impact analysis for schools, parks, roads, etc., this analysis also assumes that all households renting new market -rate units in Petaluma are "net new" households to the City. To assume otherwise—for instance, that only those buyers or renters of new housing units relocating from outside Petaluma should be counted in the impact analysis—would require assuming that the homes left by those households relocating within Petaluma would be demolished or left vacant in perpetuity. This would only be the case were the City experiencing a significant loss of population and housing inventory, as has occurred, for instance, in Detroit. Petaluma, on the other hand has experienced a slight population increase within the past seven years. The Consumer Expenditure Survey from the United States Bureau of Labor Statistics provides data for households at a variety of income levels, detailing the amounts that typical households spend on things like Food at Home, Apparel and Services, and Vehicle Maintenance and Repairs. Interestingly, household expenditures by category are not uniformly proportional to household income levels. For example, households earning around $48,500 (adequate to rent a studio apartment) spend roughly 12.2 percent of their income on food and drink (at home and eating out), while households earning $140,900 who can afford to rent a three-bedroom apartment spend only about 10.1 percent of their Income on food and drink. Because of these and other differences in proportionate spending, the expenditure profile varies at different income levels; however, the two- and three-bedroom apartments are in the same household expenditure group Economic & Planning Systems, Inc. 12 rv6lom�I6lmow a� snow. .Ubll� w� �a� wr a.na rtaaac.mll os m.e Q Nexus -Based Affordable Housing Fee Analysis for Rental Housing Administrative Draft Report 0812912017 and thus contain the same percentages. These spending patterns can be viewed in Tables A-1 to A-4 in Appendix A. The renter household's typical expenditures were converted to the number of jobs created by its spending. The first step in this process is to determine how much of an industry's gross receipts are used to, pay wages and employee compensation. EPS relied on data from the Economic Census,2 which provides employment, gross sales, and payroll data by industry for Sonoma County. In certain instances, where local data was not available for a specific industry, EPS relied on statewide Economic Census data for that industry. To link the Economic Census data and the Consumer Expenditure Survey data, EPS made determinations as to the industries involved with expenditures in various categories. For example, purchases in the Consumer Expenditure Survey's "Food at Home" category would likely involve the Economic Census's "Food & Beverage Stores" industry, where gross receipts were more than eight times the employees' wages. By contrast, purchases in the Consumer Expenditure Survey's "Entertainment Fees and Admissions" category were attributed to the Economic Census' "Arts, Entertainment, and Recreation" industry, where gross receipts are only four times the employees' wages. Where more than one Economic Census category was attributable to a Consumer Expenditure Survey category, EPS estimated the proportion of expenditures associated with each Economic Census category. After determining the amount of the household's expenditures that were used for employee wages, EPS estimated the number of employees those aggregate wages represent. EPS calculated the number of workers supported by that spending using the average wage per worker (also from the 2015 Economic Census). After accounting for CPI adjustments, these wages ranged from a low of roughly $17,500 per year for workers in the Clothing and Clothing Accessories Stores industry to a high of almost $103,700 in Legal Services. A range of occupations and incomes exist in a given industry sector. For instance, the methodology used to generate Tables B-1 to B-4 in Appendix B distinguishes between the typical incomes of workers in different types of retail stores (e.g., "food and beverage stores" versus "general merchandise stores"), rather than assuming all retail sector workers earn the same income. However, the average wage is used for each sub -category of industry employment and represents a reasonable proxy for the range of incomes in that group. While some employees,will have higher wages and require lower subsidies, others will have lower incomes and require higher subsidies. Using the average approximates the total housing subsidy needed by workers in that industry. To calculate the number of households supported by the expenditures of market -rate housing units, EPS estimated the employees' household formation rates. Importantly, employees generated from the increase in housing units do not all form households; some employees, in the retail and food services industries in particular, are young workers and do not form households. Data from the Bureau of Labor Statistics indicates that 12.5 percent of retail/restaurant workers are age 16 to 19, but an average of only 1.9 percent of workers in the workforce overall. EPS 2 The Economic Census and Consumer Expenditure Survey and were published in 2012 and 2015, respectively, but are current as of 2016. EPS converted all numbers to 2017 dollars using the Consumer Price Index (CPI) for the San Francisco Metropolitan Statistical Area (MSA) from the Bureau of Labor Statistics. Economic & Planning Systems, Inc. 13 �Itstt.tt usnm num a�mx. emr mrta Kmt os maw ip Nexus -Based Affordable Housing Fee Analysis for Rental Housing Administrative Draft Report 08/29/2017 applied these discounts to household formation by type of business to get a more accurate calculation of households formed by the employees and the average total incomes of those households. To get the overall households' income rather than the individual workers', the wages of workers forming households were multiplied by the average of approximately 1.69 workers per working household in Petaluma.3 This assumption implies the workers in a given household will have roughly equivalent pay per hour. While certainly there will often be some variation in wages per employee within a household, on average this assumption is reasonable because it implies comparable levels of education and training among all workers in a household. The average household incomes then are allocated to various income categories to estimate the number of affordable housing units demanded in each income category (50 through 120 percent of AMI). A simplified example of these calculations follows: A. Number of Households (prototype project) 1,000 B. Average Household Income (in the project) $125,000 C. Aggregate Household Income (A x B) $125 million D. Average Income Spent on Retail (Consumer Expenditure Survey) $40,000 E.' Aggregate Retail Spending (A x D) $40 million F. Retail Gross Receipts: Payroll Ratio (Economic Census) 9:1 G. Estimated Retail Payroll (E _ F) $4.44 million H. Average Retail Wage (Economic Census) $28,500 I. Estimated Total Retail Jobs (G - H) 156 J. Percent Age 20+ (Bureau of Labor Statistics) 87.5% K. Total Retail Workers Forming Households 136 L. Average Workers/Household (Census Data) 1.78 M. Estimated Households Created (K+L) 76 N. Average Household Income (H x L) $50,730 O. Income Category Low -Income (up to 80% of AMI) In this simplified example, 1,000 new market -rate apartments rented to households earning $125,000 per year would create demand for 76 housing units for retail workers with household Incomes typically between 50 and 80 percent of AMI. Actual calculations and Impact distinctions by type of household expenditure for various rental unit sizes are shown in the series of tables presented in Appendix B. Demand for Public -Sector Workers In addition to the jobs created by the spending of the new market -rate households, this analysis also aims to evaluate the number of public -sector employees generated by the public service demands of new market -rate households. Rather than a comprehensive computation of public - sector employment, the analysis aims to be conservative by sampling only certain public -sector 3 Workers per, working household based on American Community Survey (ACS) Census data as of 2015. Although ACS data reported is based on historical figures, these figures can vary somewhat based on ongoing revisions to the ACS data. Economic & Planning Systems, Inc. 14 P.p6I P t6L bh 4 uGpntlt61160 hLMy_RnN M1tnn SNO �6M RatP prLIOD_Ol lAda am Nexus -Based Affordable Housing Fee Analysis for Rental Housing Administrative Draft Report 08/29/2017 jobs (e.g., teachers, transportation providers, and public safety providers) that are expected to grow in proportionate measure to household growth. Data from the 2015 Occupational Employment Survey for the Santa Rosa MSA was used to determine the number of these public -sector employees needed to serve new market -rate development. This data was generated by the California Employment Development Department (EDD) and provides employment and wage information for a variety of occupational categories. EPS reviewed the data and sampled occupations that were public sector -related. Based on the ratio of the selected public -sector jobs to the total households in the MSA, EPS estimates that approximately 43 government jobs or 25 households with a government employee are required per 1,000 total households (Table A-5). These figures are conservative (i.e., low) because numerous types of public -sector jobs are not included in this analysis (such as federal postal workers, County health and human services workers, etc.). Also, please note that EPS has no basis to distinguish differences in the number of public -sector workers demanded by households based on different income levels or in different sizes of units, so the same numbers of public -sector jobs are assumed to be generated by units of all sizes and prices. Combined Demand for Income -Qualified Workers The total number of income -qualified households required to support the expenditure and public - sector service needs of new market -rate units were determined based on the affordable housing Income limits from HCD for a 3 -person household. Table 3 summarizes the HCD income limits used to compute the total number of income -qualified households generated by construction of market -rate units.4 The number of income -qualified households required to provide goods and services to new housing units is detailed in Appendix B. The nexus methodology used herein computes the total number of income -qualified households generated by market -rate units (as shown in Table 5) and calculates the impact fee based on the estimated cost to subsidize the production of units to meet that affordable housing demand. This analysis assumes that the fees on residential development will fund required affordable housing for all new workers generated. In practice, only a portion of Petaluma's workers resides in the City as many workers commute In to the City from other areas for a variety of reasons, one of which is the relative cost of housing among different communities. However, if every jurisdiction were to adopt a policy that it would only fund housing for the fraction of its locally generated workers that chooses to live within the City, in aggregate the region's affordable housing demand would be grossly underrepresented and underfunded. 4 To correspond to the available data regarding employee wages, the 2017 Sonoma County affordable housing income limits from HCD were used to determine the number of Income -qualified households based on household expenditures. Economic & Planning Systems, Inc. 15 ..ubtew t6ll6ova �I M r v amL6Lbo r n R rc�n maw o- rta cmt) w zse� ,L;M ¥N ! . R k ! // c e 0 ¥ 1- g C . | $# g k$ 0 06 £ . k o ! %Q Cy �k�0 #Q ■ I £ t2 E § k | �© ©m § /f / �2 - 0) @ # a a 0 m . -15 2 j/ \ | # - o § 2 t m a k ° ■ ■ . 5 0 , " \ § \ \ �0 0 2oq� 2 9 a E= w a w o e t . . ) ° k k ] ® f - ) c # . . \ ) ■ \ k z §2 2 om■w w £ d(D. /\ ®. I\ E § 2Y$ k2 K 0�0 R J2 2 = . &£ 2 . .. � ■ -6 2 k© _b. qm#c @ a � o ¢ q % _ k \ ®kk k 0 S p / . « , ■ @ @ Iq >Iq . . 0 kgIt$' cc k% 0& 0 ( /' \ % . . 0 2 (D Wim§§ 000d gg32 f$d77 ƒ �\�0 ® opoco o f��k�� 22��k k { �0r ty I ®^ 2222- % ■ ■ mic_CO E k0123 2 7 § LA E ■ f £ ° E ® 2 »o■ ` 2 r 4) §§ k k k$ c$ w 2 wk (k�a� k 2 \II/ 1 LL/ ca k / A cc Nexus -Based Affordable Housing Fee Analysis for Rental Housing Administrative Draft Report 08/29/2017 Fee Calculation The affordability gap analysis'quantifies the subsidy required to construct affordable housing at various income levels. Analysis of consumer expenditures that rely on lower wage workers provides an estimate of the total number of income -qualified households generated by new for - rent units. Then for each category of market -rate rental units, the nexus -based fee is calculated by applying the total number of income -qualified households generated to the affordability gap computed for each affordable household income level. The analysis provides the maximum supportable nexus -based fees for new rental housing development in Petaluma. Tables 6 through 9 show the impact fee calculation for market -rate rental units by number of bedrooms. The total impact fees required for a representative project of 100 units is calculated by multiplying the number of affordable units required per income level by the cost of subsidizing such housing. All income -qualified households are assumed to be housed in multifamily units and the subsidies needed are calculated as the affordability gaps shown in Table 2. The resulting maximum impact fee for market -rate rental units ranges from $14,484 for a studio apartment to $38,671 for a 3 -bedroom apartment (Table 1). These fee estimates result in the maximum fee range between $24 and nearly $40 per square foot. While the City has the option of adopting fees up to the maximum levels calculated, there may be a variety of reasons to adopt the fee level below the maximum, including insufficient wages relative to development costs. Market forces, land use regulations, construction costs, and entitlement costs also affect housing affordability. In addition, revenue generated through this fee program is just one source of potential subsidy funds to help finance affordable housing projects. Imposing a maximum fee on the residential and commercial linkage fee would also result in the double -counting of impacts attributed to new housing and new commercial uses. Finally, adoption of the maximum fees for certain employment categories would represent a very large addition to the costs of development, and could hamper the City's economic development and competitiveness objectives. Other California communities—including Sunnyvale, Mountain View, Santa Rosa, and Walnut Creek, among others—have made reductions to the maximum allowable fee when adopting their fee program, for reasons such as those cited above. The notion of the appropriate fee level will be further explored by EPS in subsequent analyses. Economic & Planning Systems, Inc. 17 a X 2 ami LL 'a N N R m N d Z N d co M to to Oct 'tO Cvj ti (0M 60- N 64 °C) co OC)OM 00 co N 6% to VF} 0)1-14:10 N4Oap opo J V N 0 J C G C > > 0 N N N ca m N Q Q Q a N y n 4 W co CV N N B B 99 N N 00 G E ccoC O(7 � C\j O (O � Ef} Efl 69 O V- 11-1 OR cO ap 6 ,t E O O O .0. J G N X3-0 0 D D D N N N m c0 m -avv_ Q Q d — i 15- (D co a co co C N a) U) m :o m 'o m co N 0 0 co W f6 C C E a) E n. a U LU cfl CV p CD a)o 99 w (D a) ui U) CDD 12 U) ii m d U. v d N R m N 3 X N Z r O 2 MI- MU) 01) M Cl) C6 co o v R C Cli co M N 69 Ei? fA N M mi O) 1` O7 6 I< X - pO O 82 J C N — N L O >� t4. Z) Z) D N N N wo N w m '2 "d '2 O O O ;a w C N tf (0 CL 0 m c al .3 N .Q c6 •o tp m is cn O U N N W N N N (:56 N N M U) - C O fV U W � � N LU lot k � � a o 0 CL C k . LL 2 a � k . � §x %qI2 z%* < 27� " D % 22M 0k 22 . 7 IL � -E @oma tom �R% ® LM 2%2 ® CL 2 « C w E $ CL 75 �2 . -@C)@ � ) 06 \ $Ad. L. '2 . 0 q § . % k o ■ : / . / / e § E c m ) $ »0 f // \ C a2 w k \\D % [ .. . o ■ ■ m 2 u w ®® -2 k § o 0 6 30: § $ N LU lot APPENDICES: Appendix A: Household Expenditures and Employment Generation Appendix B: Worker Household Generation APPENDIX A: Household Expenditures and Employment Generation M o. .2 '8 ra g g r, r, g g ag r, * -e g g g * * ofb8 8 8 8 8 S 9 A-1 a 2 M zi M 2 n 3 =i M Iq q Ct Pt �f t2 sk 9 IM R R g g r, r, g g ag r, * -e g g g * * ofb8 8 8 8 8 S 9 A-1 a m 3 K LL � oa W 0U) tU) Qz W m 9 m 'O Q=a m y O e ZR el xxo a �Z o � ex elpox ae6Ree g,x e r, r, ZR S V V Y? O N O O O O O S O C 0 M O S O O S O 8 8 :22: 2 x x x x x E $p� E N @ J rA y 3 m m °' m �yyi r m o o m m chigg w�a�. ysy yy 0 OC c c 0. 0 L7 @ @@QN S (3 6. ° U'� ¢ Q 32 1Q�� I p x y� t g tl 4 C p f e A-2. r r n m m m m m b N b u? N N rm r n r m m m m O b W W W b m Q YI r m n ao m Q m ao au W W W b t� m h rm N n m C! CI C r f m ti� Iml1 ('l r C G C �� h Nm W lV IA r d (V g O W ® H 4b! 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M N O c0 CM O O O PI N = V s V � _O 3 Q aE W P to M W N M U} O MI OA Lo M P CO P O P N C O y O V aE= CL W o rn CN CN 00 00 00 co R Es w ti w o s aro aro aro aro coo 00 ono 00 coo CP P P P P P P P P U) an r O —00 N V N r Cl) to v C>0 OV O 0ao M to U) 'p V r 00 (O N N N CV N P -It 0) IL W y_ `° U) c°fo v W 3 W C of K U o Z m u4i m Ec m n afli' o a) a W d aUi (n X U C (� .. ;u c n W t'S 2 to O NW. 15 CL N x NN W N Q U CL X W t - V V— V o Wm ca p O O (D =jO (2 d♦+ v(D N op =(c = Z •� 00)� �aca� v� N m ii U) m :3 rm- ) 'O : uh"Si O C O O V d d 0 ani 0 N a) 8 c] U W U O U CL E CO 8 v E �i &v a:v d= m.o cn i°. 109 (� *' (L a W Y w W CO m m CO m Cn cin � n m A-13 E r 12 E t0 w O n 3 c m o C N CD m � •Q G j cco E a) ti w 16 0 o U � N Y a 40 N w N to W 3 m c0 f0 NN C 0 0 N ) 3 �2�2 a3 N L 0 T3 P O N W m c � m co m z (D o 0 m o O M N N•L� (�� tOG 3 tL1C _ w a �0 EEL o mo L y Co -06 to '6a h o rn P L N 0 o N m V U � t t 0 O3 v v (0 16 0) 3 OC N N a, U E 0- c0 iO1 Et N N O Co C 6yE N � N O O V 4 W U) c c> m� `c n U vm 0 o to o - O`O 0) U) C U) _ � N O V o �N yt � ri CoA En o c> U> �E3gQrof �9EFE I IL* APPENDIX B: Worker Household Generation 117 Table B-1 Income Levels for Worker Households Worker Household Generation per 1,000 Market Rate Units - For Rent Studio Apartment City of Petaluma Rental Residential Nexus Study; EPS #161180 Above Very Low Moderate Moderate Total Total Worker Income Low Income Income Income Industry Workers Households [1] Households Households Households Households Retail Unspecified Retail Food & Beverage Stores Food Services and Drinking Places Health and Personal Care Stores General Merchandise Furniture and Home Furnishings Stores Building Material and Garden Equipment and Supplies Dealer Electronics and Appliance Stores Clothing and Clothing Accessories Stores Motor Vehicle and Parts Dealers Gasoline Stations Sporting Goods, Hobby, and Musical Instrument Stores Miscellaneous Store Retailers Nonstore Retailers Arts, Entertainment, & Recreation Medical/Health Ambulatory Health Care Services General Medical and Surgical Hospitals Nursing and Residential Care Facilities Social Assistance Services Personal and Household Goods Repair and Maintenance Services to Buildings and Dwellings Waste Management and Remediation Services Real Estate and Rental and Leasing Personal Care Services Dry Cleaning and Laundry Services Auto Repair and Maintenance Veterinary Services Photographic Services Educational Services Accounting Architectural, Engineering, and Related Specialized Design Services Death Care Services Legal Services Government Total Workers and Households Total Income -Qualified HH Generated Per 1,000 Market -Rate Units Total Income -Qualified HH Generated Per 100 Market -Rate Units 4.6 2.4 0.0 2.4 0.0 0.0 15.4 8.0 0.0 8.0 0.0 0.0 40.9 21.2 21.2 0.0 0.0 0.0 2.1 1.1 0.0 1.1 0.0 0.0 2.6 1.3 0.0 1.3 0.0 0.0 2.8 1.4 0.0 1.4 0.0 0.0 2.1 1.1 0.0 0.0 1.1 0.0 5.8 3.0 0.0 3.0 0.0 0.0 3.6 1.8 1.8 0.0 0.0 0.0 8.4 4.4 0.0 0.0 0.0 4.4 2.7 1.4 1.4 0.0 0.0 0.0 3.5 1.8 1.8 0.0 0.0 0.0 4.3 2.2 0.0 2.2 0.0 0.0 0.4 0.2 0.0 0.0 0.2 0.0 3.7 1.9 0.0 1.9 0.0 0.0 1.5 0.9 0.0 0.0 0.0 0.9 0.9 0.5 0.0 0.0 0.0 0.5 3.6 2.1 0.0 2.1 0.0 0.0 1.8 1.1 0.0 1.1 0.0 .0.0 8.0 4.6 0.0 4.6 0.0 0.0 10.8 6.3 0.0 6.3 0.0 0.0 2.7 1.6 0.0 0.0 1.6 0.0 0.5 0.3 0.0 0.0 0.3 0.0 4.5 2.6 2.6 0.0 0.0 0.0 0.9 0.5 0.0 0.5 0.0 0.0 7.4 4.3 0.0 4.3 0.0 0.0 1.0 0.6 0.0 0.0 0.6 0.0 0.3 0.2 0.0 0.2 0.0 0.0 6.5 3.8 0.0 3.8 0.0 0.0 2.0 1.2 0.0 1.2 0.0 0.0 0.5 0.3 0.0 0.0 0.0 0.3 0.7 0.4 0.0 0.0 0.0 0.4 1.0 0.6 0.0 0.0 0.6 0.0 0.5 0.3 0.0 0.0 0.0 0.3 42.9 24.9 0_0 L 0_0 14_8 200.6 109.9 28.8 46.6 4.3 21.6 79.6 28.8 46.5 4.3 8.0 2.9 4.7 0.4 [1) Assumes 1.69 workers per worker household in the City of Petaluma based on data from the US Census, ACS 2011-2015. Includes a 12.5% discount for retail and 1.9% discount for other industries to account for workers under age 20. Source: Economic & Planning Systems, Inc. B-1 Economic & Planning Systems, Inc. 9 /2 912 0 1 7 I Table B-2 Income Levels for Worker Households Worker Household Generation per 1,000 Market Rate Units - For Rent 1 -Bedroom Apartment City of Petaluma Rental Residential Nexus Study; EPS #161180 Above Very Low Moderate Moderate Total Total Worker Income Low Income Income Income Industry Workers . Households [1] Households Households Households Households Retail Unspecified Retail Food & Beverage Stores Food Services and Drinking Places Health and Personal Care Stores General Merchandise Furniture and Home Furnishings Stores Building Material and Garden Equipment and Supplies Dealer Electronics and Appliance Stores Clothing and Clothing Accessories Stores Motor Vehicle and Parts Dealers Gasoline Stations Sporting Goods, Hobby, and Musical Instrument Stores Miscellaneous Store Retailers Nonstore Retailers Arts, Entertainment, S Recreation MedicaUHealth Ambulatory Health Care Services General Medical and Surgical Hospitals Nursing and Residential Care Facilities Social Assistance Services Personal and Household Goods Repair and Maintenance Services to Buildings and Dwellings Waste Management and Remediation Services Real Estate and Rental and Leasing Personal Care Services Dry Cleaning and Laundry Services Auto Repair and Maintenance Veterinary Services Photographic Services Educational Services Accounting Architectural, Engineering, and Related Specialized Design Services Death Care Services Legal Services Government Total Workers and Households Total Income -Qualified HH Generated Per 1,000 Market -Rate Units ]2] Total Income -Qualified HH Generated Per 100 Market -Rate Units [2] 6.7 3.5 0.0 3.5 0.0 0.0 25.8 13A 0.0 13A 0.0 0.0 86.7 44.9 44.9 0.0 0.0 0.0 3.0 1.6 0.0 1.6 0.0 0.0 5.0 2.6 0.0 2.6 0.0 0.0 4.8 2.5 0.0 2.5 0.0 0.0 3.9 2.0 0.0 0.0 2.0 0.0 8.6 4.4 0.0 4.4 0.0 0.0 7.4 3.9 3.9 0.0 0.0 0.0 13.9 7.2 0.0 0.0 0.0 7.2 4.1 2.1 2.1 0.0 0.0 0.0 6.8 3.5 3.5 0.0 0.0 0.0 7.7 4.0 0.0 4.0 0.0 0.0 0.6 0.2 0.0 0.0 0.2 0.0 9.0 4.6 0.0 4.6 0.0 0.0 2.9 1.7 0.0 0.0 0.0 1.7 1.7 1.0 0.0 0.0 0.0 1.0 7.3 4.2 0.0 4.2 0.0 0.0 4.3 2.5 0.0 2.5 0.0 0.0 15A 8.8 0.0 8.8 0.0 0.0 16.3 9.4 0.0 9.4 0.0 0.0 4.1 2.4 0.0 0.0 2.4 0.0 0.9 0.5 0.0 0.0 0.5 0.0 9.7 5.6 5.6 0.0 0.0 0.0 1.8 1.0 0.0 1.0 0.0 0.0 11.3 6.6 0.0 6.6 0.0 0.0 1.7 1.0 0.0 0.0 1.0 0.0 0.8 0.4 0.0 0.4 0.0 0.0 13.3 7.7 0.0 7.7 0.0 0.0 3.6 2.1 0.0 2.1 0.0 0.0 1.0 0.6 0.0 0.0 0.0 0.6 1.2 0.7 0.0 0.0 0.0 0.7 1.7 1.0 0.0 0.0 1.0 0.0 0.8 0.5 0.0 0.0 0.0 0.5 42.9 24.9 0_0 1.3_Q 0 4.8 336.6 183.0 60.0 80.7 7.2 26.4 147.9 60.0 80.7 7.2 14.8 6.0 8.1 0.7 [1] Assumes 1.69 workers per worker household in the City of Petaluma based on data from the US Census, ACS 2011-2015. Includes a 12.5% discount for retail and 1.9% discount for other industries to account for workers under age 20. Source: Economic & Planning Systems, Inc. B-2 Economic & Planning Systems, Inc. 829/2017 ]a Table B-3 Income Levels for Worker Households Worker Household Generation per 1,000 Market Rate Units - For Rent 2 -Bedroom Apartment City of Petaluma Rental Residential Nexus Study; EPS #161180 Industry Total Workers Very Low Total Worker Income Low Income Households [1] Households Households Moderate Income Households Above Moderate Income Households Retail Unspecified Retail 7.6 3.9 0.0 3.9 0,0 0.0 Food & Beverage Stores 29.8 15A 0.0 15.4 0.0 0.0 Food Services and Drinking Places 102.8 53.2 53.2 0.0 0.0 0.0 Health and Personal Care Stores 3.5 1.8 0.0 1.8 0.0 0.0 General Merchandise 5.8 3.0 0.0 3.0 0.0 0.0 Furniture and Home Furnishings Stores 5.9 3.0 0.0 3.0 0.0 0.0 Building Material and Garden Equipment and Supplies Dealer 4.7 2.4 0.0 0.0 2.4 0,0 Electronics and Appliance Stores 10.0 5.2 0-0 5.2 0.0 0.0 Clothing and Clothing Accessories Stores 8.4 4.4 4.4 0.0 0.0 0.0 Motor Vehicle and Parts Dealers 17.9 9.3 0.0 0.0 0.0 9.3 Gasoline Stations 4.6 2.4 2.4 0.0 0.0 0.0 Sporting Goods, Hobby, and Musical Instrument Stores 9.7 5.0 5.0 0.0 0.0 0.0 Miscellaneous Store Retailers 9.4 4.9 0.0 4.9 0.0 0.0 Nonstore Retailers 0.6 0.3 - 0.0 0.0 0.3 0.0 Arts, Entertainment, & Recreation 13.0 6.7 0.0 0.0 0.0 6.7 Medical/Health Ambulatory Health Care Services 3.3 1.9 0.0 0.0 0.0 1.9 General Medical and Surgical Hospitals 2.0 1.1 0.0 0.0 0.0 1.1 Nursing and Residential Care Facilities 10.4 6A 0.0 6.1 0.0 0.0 Social Assistance 8.1 4.7 0.0 4.7 0.0 0.0 Services Personal and Household Goods Repair and Maintenance 18.4 10.5 0.0 10.5 0.0 0.0 Services to Buildings and Dwellings 20.6 11.9 0.0 11.9 0.0 0.0 Waste Management and Remediation Services 4.4 2.6 0.0 0:0 2.6 0.0 Real Estate and Rental and Leasing 1.1 0.6 0.0 0.0 0.6 0.0 Personal Care Services 11.8 6.8 6.8 0.0 0.0 0.0 Dry Cleaning and Laundry Services 2.1 1.1 0.0 1.1 0.0 0.0 Auto Repair and Maintenance 13.8 8.0 0.0 8.0 A.0 0.0 Veterinary Services 2.2 1.3 0.0 0.0 1.3 0.0 Photographic Services 1.2 0.7 0.0 0.7 0.0 0.0 Educational Services 24.7 14.4 0.0 14.4 0.0 0.0 Accounting 4.6 2.7 0.0 2.7 0.0 0.0 Architectural, Engineering, and Related 1.2 0.7 0.0 0.0 0.0 0.7 Specialized Design Services 1.5 0.9 0.0 0.0 0.0 0,9 Death Care Services 2.2 1.3 0.0 0.0 1.3 0.0 Legal Services 1.1 0.6 0.0 0.0 0.0 0.6 Government 42.9 24.9 0_0 1,3 0_0 14.8 Total Workers and Households 411.3 223.9 71.9 98.7 8.5 36.1 Total Income -Qualified HH Generated Per 1,000 Market -Rate Units [2] 179.1 71.9 98.7 8.5 Total Income -Qualified HH Generated Per 100 Market -Rate Units [2] 17.9 7.2 9.9 0.9 [t] Assumes 1.69 workers per worker household in the City of Petaluma based on data from the US Census, ACS 2011-2015. Includes a 12.5% discount for retail and 1.9% discount for other industries to account for workers under age 20. Source: Economic & Planning Systems, Inc. B-3 Economfo & Planning Systems, Inc. ar2R,2017 Table B-4 Income Levels for Worker Households Worker Household Generation per 1,000 Market Rate Units - For Rent 3 -Bedroom Apartment City of Petaluma Rental Residential Nexus Study; EPS #161180 Industry Total Workers Above Very Low Moderate Moderate Total Worker Income Low Income Income Income Households [1] Households Households Households Households Retail Unspecified Retail 8.5 4.4 0.0 4.4 0.0 0.0 Food & Beverage Stores 33.4 17.3 0.0 17.3 0.0 0.0 Food Services and Drinking Places 115.3 59.7 59.7 0.0 0.0 0.0 Health and Personal Care Stores 3.9 2.0 0.0 2.0 0.0 0.0 General Merchandise 6.5 3.3 0.0 3.3 0.0 0.0 Furniture and Home Furnishings Stores 6.6 3.4 0.0 3.4 0.0 0.0 Building Material and Garden Equipment and Supplies Dealer 5.3 2.7 0.0 0.0 2.7 0.0 Electronics and Appliance Stores 11.2 5.8 0.0 5.8 0.0 0.0 Clothing and Clothing Accessories Stores 9.5 4.9 4.9 .0.0 0.0 0.0 Motor Vehicle and Parts Dealers 20.1 10.4 0.0 0.0 0.0 10.4 Gasoline Stations 5.2 2.7 2.7 0.0 0.0 0.0 Sporting Goods, Hobby, and Musical Instrument Stores 10.9 5.7 5.7 0.0 0.0 0.0 Miscellaneous Store Retailers 10.5 5.4 0.0 5.4 0.0 0.0 Nonstore Retailers 0.7 0.4 0.0 0.0 0.4 0.0 Arts, Entertainment, & Recreation 14.6 7.5 0.0 7.5 0.0 0.0 Medical/Health Ambulatory Health Care Services 3.7 2.2 0.0 0.0 0.0 2.2 General Medical and Surgical Hospitals 2.2 1.3 0.0 0.0 0.0 1.3 Nursing and Residential Care Facilities 11.7 6.8 0.0 6.8 0.0 0.0 Social Assistance 9.1 5.3 0.0 5.3 0.0 0.0 Services Personal and Household Goods Repair and Maintenance 20.6 11.8 0.0 11.8 0.0 0.0 Services to Buildings and Dwellings 23.1 13.4 0.0 13A 0.0 0.0 Waste Management and Remediation Services 5.0 2.9 0.0 0.0 2.9 0.0 Real Estate and Rental and Leasing 1.2 0.7 0.0 0.0 0.7 0.0 Personal Care Services 13.2 7.6 7.6 0.0 0.0 0.0 Dry Cleaning and Laundry Services 2.3 1.2 0.0 1.2 0.0 0.0 Auto Repair and Maintenance 15.4 9.0 0.0 9.0 0.0 0.0 Veterinary Services 2.5 1.4 0.0 0.0 1.4 0.0 Photographic Services 1.4 0.8 0.0 0.8 0.0 0.0 Educational Services 27.7 16.1 0.0 16.1 0.0 0.0 Accounting 5.2 3.0 0.0 3.0 0.0 0.0 Architectural, Engineering, and Related 1 A 0.8 0.0 0.0 0.0 0.8 Specialized Design Services 1.7 1.0 0.0 0.0 0.0 1.0 Death Care Services 2.5 1.4 0.0 0.0 1.4 0.0 Legal Services 1.2 0.7 0.0 0.0 0.0 0.7 Government 42.9 24.9 2_0 1_3 0.0.0 14.8 Total Workers and Households 456.0 248.0 80.6 118.0 9.6 31.1 Total Income -Qualified HH Generated Per 1,000 Market -Rate Units [2] 208.2 80.6 118.0 9.6 Total Income -Qualified HH Generated Per 100 Market -Rate Units [2] 20.8 8.1 11.8 1.0 ]1] Assumes 1.69 workers per worker household in the City of Petaluma based on data from the US Census, ACS 2011-2015. Includes a 12.5% discount for retail and 1.9% discount for other industries to account for workers under age 20. Source: Economic & Planning Systems, Inc. B-4 Economic & Planning Systems, Inc. 8/29!2017 121 771e Economics lnf'LfanclNe (IUD Economic & Planning Systems, Inc. One Kaiser Plaza, Suite 1410 Oakland, CA 94612-3604 510.841.9190 tel 510. 740.2080 fax Oakland Sacramento Denver Los Angeles www.epsys.com ATTACHMENT #6 Administrative Draft Report Commercial Linkage Fee Nexus Study Prepared for: City of Petaluma Prepared by: Economic & Planning Systems, Inc. August 29, 2017 EPS #161180 Table of Contents 1. INTRODUCTION AND EXECUTIVE SUMMARY.................................................................... 1 . Background..............................................................................................................1 Purpose...................................................................................................................1 Authority.................................................................................................................1 Summary............................................................................................................. 2 Sources................................................................................................................... 4 Organizationof Report....................................................................... ....................4 2. REQUIRED NEXUS FINDINGS FOR FEE PROGRAM.............................................................. 5 Purposeof Fee..........................................................................................................5 Useof Fee..................................................................................... .....I............... 5 Relationship between Use of Fee and Type of Development............................................5 Relationship between Demand for Affordable Housing and Type of Project ....................... 5 Relationship between Amount of Fee and Cost of Public Benefit Attributed to New Development............................................................................................................ 5 3. METHODOLOGY AND FEE CALCULATION........................................................................ 6 Employment Categories.............................................................................................. 6 Occupational Category and Wage Distribution...............................................................7 Distribution of Workers by Land Use Type .............................................. ................ 10 EmploymentDensities............................................................................................. 10 Household Formation............................................................................................... 10 Housing Development Costs and Affordability Gap ...................................................... 12 FeeCalculation....................................................................................................... 15 Appendices: APPENDIX A: Assumptions and Sources APPENDIX B: Occupation Distribution by Employment Category List of Tables Table 1 Summary of Maximum Allowable Fees and Current Fee Levels................................3 Table 2 Sonoma County Income Category Definitions (2017) .............................................3 Table3 Employment Category Descriptions .................................................................6 Table 4 Adjustment Factors - Converting National Wages to Santa Rosa MSA Wages ............8 Table 5 Illustration of Employees' Household Income Calculation........................................9 Table 6 Income Distribution of Worker Households by Employment Category ..................... 11 Table 7 Household Generation Rates by Employment Category ........................................ 11 Table 8 Affordability Gap Analysis -- Rental Product Type................................................14 Table 9 Fee Calculation - Commercial........................................................................... 16 Table10 Fee Calculation - Retail.................................................................................... 17 Table 11 Fee Calculation - Industrial.............................................................................. 18 Table12 Fee Calculation Lodging................................................................................. 19 Table 13 Fee Calculation - Assisted Living....................................................................... 20 Table14 Fee Calculation - Medical ................................................. ............................. 21 124 1. INTRODUCTION AND EXECUTIVE SUMMARY Background The City of Petaluma (City) adopted its commercial linkage fee in 2003. Given adoption of the new 2015-2023 Housing Element, as well as a number of changes in local housing supply, regional housing needs, and broader economic and housing trends, the City retained Economic & Planning Systems, Inc. (EPS) to re -affirm the need for and update the affordable housing impact fee for new commercial (i.e., nonresidential) development. Purpose EPS was retained by the City of Petaluma to conduct a nexus study that quantifies the relationship between the growth in nonresidential land uses and the demand for and cost of affordable housing for the local workforce. As a development Impact fee, the nonresidential linkage fee (fee) can only be charged to new development and must be based on the impact of new development on the need for resources to subsidize the development of new affordable housing. The purpose of this report is to provide the nexus (or reasonable relationship) between new nonresidential development that occurs in the City and the need for additional affordable housing as a result of this new development. Fee revenue may be collected by the City and used to subsidize the production of new affordable units for lower-income households. Authority This study serves as the basis for requiring development impact fees under AB 1600 legislation, as codified by the Mitigation Fee Act (California Government Code sections 66000 et seq,). This section of the Mitigation Fee Act sets forth the procedural requirements for establishing and collecting development Impact fees. These procedures require that a reasonable relationship, or nexus, must exist between a governmental exaction and the purpose of the condition. In 1991, the Ninth Circuit U.S. Court of Appeals upheld the City of Sacramento's nonresidential linkage fee.' In that case, the court found that the City of Sacramento's fee program "substantially advanced a legitimate interest." EPS is using a similar methodology to the nexus study reviewed in that case to develop the City of Petaluma's fee program. 1 Commerclal Builders of Northern California v. City of Sacramento, 941 F2d 872 (1991). Economic& Planning Systems, Inc. 1 P.p61KVIt61Ie6@amNvsq.Y W M1116LI60YC mCmm tlNatt-- a�arte.�_ml onn.a� I Commercial Linkage Fee Nexus Study Administrative Draft Report 08/29/17 Required Nexus Findings • Identify the purpose of the fee. • Identify how the fee is to be used. • Determine how a reasonable relationship exists between the fee's use and the type of development project on which the fee is imposed. • Determine how a reasonable relationship exists between the demand for the affordable housing and the type of development project on which the fee is imposed. • Demonstrate a reasonable relationship between the amount of the fee and the cost of the public benefit attributable to the development on which the fee is imposed. Summary As new employment -generating development continues to occur in the City, additional affordable housing will be required to house a portion of the new lower wage workforce. The cost to construct new housing units Is higher than can be supported by the rents or home prices that many workers will be able to pay. The difference between costs and affordable rent levels is considered an `affordability gap." The costs allocated to new nonresidential development through this fee reflect this affordability gap that would need to be filled in order to provide housing for additional workforce demanded by nonresidential development. Table 1 summarizes the maximum justifiable fee by land use category. The methodology used to establish maximum justifiable fees is described in the subsequent chapters. It is understood that a lower fee level below the maximum fee may be appropriate given a range of development feasibility and economic development considerations. The lower fee may also be appropriate due to the fact that affordable housing development is not the sole responsibility of nonresidential developers, as the City, State, and federal government have other programs and resources that can offset some affordable housing production costs. This notion will be further explored by EPS In subsequent analyses. Economic & Planning Systems, Inc. 2 M, Commercial Linkage Fee Nexus Study Administrative Draft Report 08/29117 Table 1 Summary of Maximum Allowable Fees and Current Fee Levels [1] Effective July 1, 2017. Source: City of Petaluma; Economic & Planning Systems, Inc. These and other data sources are identified on the tables provided throughout this report. In addition, data from recent Petaluma developments and land transactions have been combined with EPSs information from various market -rate and affordable housing developers to estimate appropriate development cost assumptions for use in Petaluma. Table 2 presents the income categories that are relevant for this fee program. EPS uses acronyms in several of the tables provided and those acronyms are also included in Table 2 for reference. Table 2 Sonoma County Income Category Definitions (2017) Maximum Fee Current Fee Employment Category per sq. ft. per sq. ft. [1] Office $99 $2.34 Retail/Restaurant $167 $4.03 Industrial/R&D 1 $62 $2.41 Lodging $141 $2.34 Assisted Living $121 $2.34 Medical $59 $2.34 [1] Effective July 1, 2017. Source: City of Petaluma; Economic & Planning Systems, Inc. These and other data sources are identified on the tables provided throughout this report. In addition, data from recent Petaluma developments and land transactions have been combined with EPSs information from various market -rate and affordable housing developers to estimate appropriate development cost assumptions for use in Petaluma. Table 2 presents the income categories that are relevant for this fee program. EPS uses acronyms in several of the tables provided and those acronyms are also included in Table 2 for reference. Table 2 Sonoma County Income Category Definitions (2017) Source: Sonoma County 2017 Income Limits, California Housing and Community Development (HCD). Economic & Planning Systems, Inc. 3 /7 Maximum Affordability Category Acronym Percentage of Maximum Income Threshold Source County Median 3 -person household Very Low Income VLI 0-50% $39,650 HCD Low Income LI 50-80% $63,450 HCD Median Income Median 80-100% $75,500 HCD Moderate Income Moderate 100-120% $90,650 HCD Source: Sonoma County 2017 Income Limits, California Housing and Community Development (HCD). Economic & Planning Systems, Inc. 3 /7 Commercial Linkage Fee Nexus Study Administrative Draft Report 08/29/17 Sources To estimate the fee, EPS relied on numerous sources of data, including the following: • U.S. Bureau of Labor Statistics (BLS) "May 2016 National Industry -Specific Occupational Employment and Wage Estimates". • State Department of Housing and Community Development (HCD) annual income limits for 2017. • U.S. Census Bureau American Community Survey (ACS). • Input from City of Petaluma's staff regarding affordability levels, recently developed affordable housing projects, market assumptions, and nexus study methodology. Organization of Report Following this Introduction and Executive Summary, this study includes the following chapters: • Chapter 2 presents the nexus findings based on the methodology. • Chapter 3 describes the methodology used to calculate the fee. Economic & Planning Systems, Inc. 2. REQUIRED NEXUS FINDINGS FOR FEE PROGRAM Purpose of Fee The fee program updated through this Nexus Study will fund the development and preservation of affordable housing projects in the City as required by the increase in local, lower -wage workers employed by new nonresidential development. The businesses that occupy new nonresidential buildings will hire employees, many of whom will have difficulty finding suitable local housing they can afford. Use of Fee The fee will be collected by the City. The funds are used to provide assistance for production, acquisition of at -risk units, or rehabilitation of affordable housing. The fee also may fund the studies and administration to support the fee program. Relationship between Use of Fee and Type of Development The development of new nonresidential land uses in the City will generate need for additional workers. The wages of a significant portion of the new employees will be Inadequate to support sufficient rent prices to attract residential developers to provide housing opportunities without further subsidy. The fee will be used to help to fill the "affordability gap" for housing development and increase the number of homes available for the local workforce. Relationship between Demand for Affordable Housing and Type of Project The City and EPS have Identified five employment categories for which a separate fee has been calculated. The proportion of lower wage workers and the number of square feet per employee for each employment category has been assessed to ensure a proper nexus is established. Relationship between Amount of Fee and Cost of Public Benefit Attributed to New Development EPS estimated the gap between the cost of developing new rental housing and the achievable value of the new rental units based on prices affordable at different income levels for households below certain income levels. The affordable rents yielded unit values below the cost of construction, indicating and "affordability gap." To estimate the maximum fee for each nonresidential development category, this gap was then multiplied by the number of lower wage workers anticipated by the new development projects and the number of households of various Income categories those workers are likely to form. As the fee is one of several mechanisms for generating resources for or reducing the cost of housing development, a fee level below the maximum calculated fee may be appropriate. Economic & Planning Systems, Inc. 5 6Iro01t611BOM MaHwrsSyN nsy pa 116L90 2M i d ps fm5 W _A2 P RFy tMll M I9.M¢ 3. METHODOLOGY AND FEE CALCULATION Employment Categories Employment categories utilized in this analysis are presented in Table 3 along with a description of the types of businesses that are included in each category. In general, each employment category is intended to be associated with a particular type of building or land use, to which the fees can be applied. The City has asked EPS to evaluate six distinct categories to better match potential land uses and nexus linkages to employment categories. While most employment categories are discretely associated with a particular type of building, others may be Interchangeable as tenants may shift between building types (e,g., commercial space locating in retail space). This analysis bases its employment projections on NAICS codes, as defined In Appendix B, considered the most typical tenants for each land use category. Table 3 Employment Category Descriptions Employment Category Description and Examples Office Employers engaged in business activity with limited direct access from the general public; businesses focused on professional and financial services. Examples include finance, insurance, real estate, law, engineering, and science and technology. Retail/Restaurant Businesses selling food, merchandise, entertainment, and personal services to the general public. Examples include eating and drinking establishments, grocery stores, drug stores, clothing stores, general merchandise stores, beauty salons, movie theaters, and gas stations. Industrial/R&D Employers engaged in business activity with limited direct access from the general public; businesses focused on assembling, distributing, or repairing products, and businesses focused on the testing and invention of new materials, products, or processes. Examples include warehouses, auto repair, and self -storage facilities. Lodging Temporary accommodations for non-residents. Examples include resorts, hotels, motels, and bed and breakfast inns. Assisted Living Facilities focused on providing assisted living services. Examples include continuing care facilities, nursing homes, rehabilitation centers, hospice care facilities. Medical Healthcare -based facilities including hospitals, doctor's offices, dental offices, etc. Source: City of Petaluma; Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. 6 Vauw sneaewrn-<..aee usuau z4w cr�wxw=r su d,rta�tmi o9 n.ee El Commercial Linkage Fee Nexus Study Administrative Draft Report 08/29/17 Occupational Category and Wage Distribution EPS used U.S. Bureau of Labor Statistics (BLS) National Industry -Specific Occupational Employment and Wage Estimates for 2016 - the most recent year available - to estimate the wages earned by employees in Industry sectors related to the employment categories. This BLS data set includes wage data at both the national and Metropolitan Statistical Area (MSA) levels, with the Santa Rosa MSA covering Sonoma County. Wage data for the MSA are provided for occupations for all industries in aggregate, while national -level wage data are provided by industry sector (e.g., "management" workers in retail Industries versus in healthcare services). To account for regional wage disparities, EPS calculated wage adjustment factors as displayed in Table 4 to show that Sonoma County wages exceed national averages across almost all occupation categories, except "management" and "business and financial operations" which had slightly lower wages. EPS applied these adjustment factors to the nationwide income level data by industry sector to estimate the wages for Sonoma County. EPS used BLS nationwide data regarding industries and occupation categories to estimate the proportion of occupations likely to be represented under each employment category. For example, EPS evaluated the occupation categories for the lodging Industry to determine the proportional distribution of occupations for the employment category "Lodging." North American Industry Classification System (NAICS) sector 721000 ("Accommodation") shows that nationwide 4.31 percent of the jobs in the lodging industry are taken by managers while 28.17 percent are in the category of buildings and grounds cleaning and maintenance (see Table B-4). The occupational distribution for all designated employment categories is provided in Appendix B. The wages within each occupation were multiplied by 1.69, the average number of workers per working household In the City, according to the Census Bureau's American Community Survey data. The resulting figure Is assumed to represent the annual household income assuming workers form households with those of similar earning potential. While certainly there will be some variation in wages per employee within a household, In the absence of more specific data, this analysis assumes comparable levels of education and training among all workers in a household. Table 5 presents an example of this calculation. Economic& Planning Systems, Inc. 7 P.11610W t6tI80M rohu gXa RqM 61180 VetiYm;WmrcNNli Gpe Rr Swtl Jin ARN pa LM Oe ]9. by Commercial Linkage Fee Nexus Study Administrative Draft Report 08/29/17 Table 4 Adjustment Factors - Converting National Wages to Santa Rosa MSA Wages Occupation Category US Average Wage Santa Rosa MSA - Sonoma County Average Wage Santa Rosa MSA - Sonoma County % of US Average Management $118,020 $114,690 97.2% Business and Financial Operations $75,070 $74,740 99.6% Computer and Mathematical Science $87,880 $91,810 104.5% Architecture and Engineering $84,300 $91,860 109.0% Life, Physical, and Social Science $72,930 $81,700 112.0% Community and Social Services $47,200 $54,840 116.2% Legal Occupations $105,980 $108,180 102.1% Education, Training and Library $54,520 $56,220 103.1% Arts, Design, Entertainment, Sports, and Media $58,390 $59,960 102.7% Healthcare Practitioner and Technical $79,160 $90,350 114.1% Healthcare Support $30,470 $41,700 136.9% Protective Services $45,810 $61,770 134.8% Food Preparation and Serving $23,850 $29,050 121.8% Buildings and Grounds Cleaning and Maintenance $28,010 $33,020 117.9% Personal Care and Service $26,510 $31,040 117.1% Sales and Related Occupations $40,560 $40,720 100.4% Office and Administrative Support $37,260 $42,580 114.3% Farming, Fishing and Forestry $27,810 $30,430 109.4% Construction and Extraction $48,900 $60,260 123.2% Installation, Maintenance, and Repair $46,690 $54,890 117.6% Production $37,190 $38,770 104.2% Transportation and Material Moving $36,070 $37,150 103.0% Sources: Bureau of Labor Statistics National Industry -Specific Occupational Employment and Wage Estimates, May 2016; Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. 8 rv6loro v611sau wwm w w ro ubllw w c k o,F seww rcam� _mi �a.ea FE 133 . cc 0 . C A 2 S ° � �\ $ t � f § C m co 7 ° u f m — m % § % U & §. o E .k S � . � \_ 0 . 4 ) - 2 § U) \ Co k . \ @ k. $ > ° 0 $ j e k 0 § a ) 2 O a ® 0 R e m q Co � m E w 2 m \ m I 2 m q m o C q O ) . \ ƒ 7 » E o f ® � f § o ± m c / ƒ 0 g \ 0 A \ § o k 4- o § � 2 � 0 _ƒ k 0 § k o $ k Co \ S � / / / E k J & / § � M U w k a LU k § f C £ m S k ° \ 7 ƒ V) e $ / % \ ■ § 2 3 q f E B / K R k § ' w % » § t 4 % m § FE 133 Commercial Linkage Fee Nexus Study Administrative Draft Report 08129117 Distribution of Workers by Land Use Type After identifying income ranges for each occupation and employment category, EPS summed the percentages of occupations by income bracket. These proportions of anticipated household Income brackets by employment category are presented in Table 6. As shown, Retail and Lodging are expected to generate significant numbers of households at the low income level, while more jobs in the Industrial and Commercial uses are expected to yield household incomes at or above Moderate income levels. Employment Densities Certain land use categories operate with, varying levels of employment requirements. Industrial uses, for example, often do not require a significant number of employees but do require a significant amount of building square footage. Office space, on the other hand, may not require a significant amount of square footage, but often requires a significant number of employees. The number of building square feet anticipated for an employee is termed the "employment density" of each employment category. Based on prior nexus studies, input from City staff, Independent research, and experience with other comparable cities, EPS estimated the employment density for each of the employment categories as shown in Table 7 with more detail in Appendix Table A-1. Using those employment density assumptions, EPS estimated the number of employees that would occupy a 100,000 -square foot building for each employment category. Household Formation EPS then estimated the number of households represented by those employees calculated on Table 7. First, EPS adjusted for the fact that younger workers may not be at the age to form their own households. Data from the Bureau of Labor Statistics indicate that young workers age 16 to 19 represent only about 1.9 percent of the overall workforce. However, the majority of these young workers are in the retail/restaurant Industries, where they represent 12.5 percent of the overall industry employment. EPS has assumed that these young workers age 16 to 19 would not form their own households. Second, EPS has assumed that, on average, new households formed in response to growing employment opportunities would have 1.69 wage- earning workers. This assumption Is based on the Census Bureau's American Community Survey 2011-2015 data regarding the number of Petaluma's residents who are "workers" in households that have workers. The combination of these adjustments results in the assumption that approximately seven households are formed for every ten new employees. This analysis assumes that the fees on nonresidential development will fund required affordable housing for all new workers generated. In practice, only a portion of Petaluma's workers resides In the City as many workers commute In to the City from other areas for a variety of reasons, one of which is the relative cost of housing among different communities. However, if every jurisdiction were to adopt a policy that it would only fund housing for the fraction of Its locally generated workers that chooses to live within the City, In aggregate the region's affordable housing demand would be grossly underrepresented and underfunded. Economic & Planning Systems, Inc. 10 <:116taa f6ft6oaa w we nt6lta w mac« K.wt tr 9 F sna gem azca atm„oa r9.e 1 >, fU a+ -opt �r-OONCD ,_ OS L d O O O O O O 0 n V:a00Nt; dN '". ci�co(r`�� o ca N ) totoarn�cco� a w J O �p� E Q 01 v c 5 0 00 N 0) MOOe-0)000� t C O C O N a) i+ 3 O C � 0 0 m U0000000 In (P cl rn ry L E M M 0 0 M ti J p� N i N c 00 m . 0 25 Na)t-(OM N�Cl) d Oa.7 O Q uj ,C CD O d N co O o 0 0 0 0 o C O U df ao o rn to 0) m O c O to-66gcc; o O Oornrnrn rnOrn N C Q= w b a) NC <OL m O _ J c �o ED " (n OOhO�t� 0 O 0V N�NNM p� tlai'o Y N L 9' E M 3 V - 0 0 0 o `° p W C 0 0 0 0 0 0 W)000 C 3 0 0 0) 0 00 N cr to l6 a�g�o O J Fv°' y d E > U (A C O O���QNm � d o E rn Nm O d ttS v c U o O to t0 N N Q �p N >� v'' N E 0E _y =3a'v�i-� W � C: 70 1 >, 135 -opt �r-OONCD ,_ OS O dN Q ca N E N totoarn�cco� a w J �p� E Q v c 5 0 00 N 0) MOOe-0)000� t C O C CV C Yp O J 3 O 0 N m U0000000 C O Oo J p� N i � N m . Nu N Na)t-(OM N�Cl) aj Oa.7 O Q ,C O N _C2, e � v N Y YC D 0 0 0 0 0 0 C G_ O Oornrnrn rnOrn N C Q= w b 5 <OL m O C � 3 �o ED " (n OOhO�t� N17 O O 0V N�NNM p� tlai'o N L o aNi c 0 ur o o N u O 01 o G.N W)000 N t}co to It Cl) cr to l6 a�g�o m 45.8 0 Fv°' y IW6 t7U O���QNm � d 135 Commercial Linkage Fee Nexus Study Administrative Draft Report 08/29/17 Housing Development Costs and Affordability Gap EPS has assumed that the average type of housing for Petaluma's lower-income workers would be a 2 -bedroom apartment unit In a three to four-story building. The assumed prototype reflects multifamily construction at 45 dwelling units to the acre with surface parking. This building prototype Is generally cost-effective to construct, as it makes efficient use of land and does not involve overly expensive construction materials or techniques, California State law (California Health and Safety Code Section 50052.5) assumes that a 2 -bedroom unit is occupied by a 3 -person household, and this assumption is used In this analysis. Consistent with Input from the City, EPS assumes that the typical gross square footage of a 2 -bedroom rental unit in Petaluma will be approximately 1,150 square feet. Applying an efficiency ratio of 85 percent to account for shared lobbies, hallways, etc., results in net square footage of 978 square feet, Development Cost Assumptions Affordable housing development costs include land costs, direct costs (e.g., labor and materials), and indirect or "soft" costs (e.g., architecture, entitlement, marketing, etc.). For rental projects, operating costs also must be incorporated into the analysis. Data from recent Petaluma developments and land transactions have been combined with EPS's information from various market -rate and affordable housing developers to estimate appropriate development cost assumptions. These assumptions are shown on Table S. Revenue Assumptions To calculate the values of the affordable units, assumptions must be made regarding the applicable Income level (very low, low, and moderate) and the percentage of household income spent on housing costs. In addition, translating these assumptions into unit prices and values requires estimates of operating expenses and capitalization rates. The following assumptions were used in these calculations: • Income Levels—This analysis estimates the subsidy required to produce units for households earning up to 50, 80, and 120 percent of AMI for a three-person household. In 2017, AMI In Sonoma County for these households is $75,500, as shown in the California Department of Housing and Community Development's (HCD's) income limits chart (see Table 2). • Percentage of Gross Household Income Available for Housing Costs—HCD standards on overpaying for rent indicate that households should pay no more than 30 percent of their gross income on housing costs. For this analysis, EPS has assumed that all households spend 30 percent of their gross income on rent costs. Operating Costs for Rental Units—This analysis assumes that apartment operators Incur annual operating costs of $6,000 per unit, which include the cost of utilities, for units affordable at 80 percent of AMI or below. EPS has assumed the units for moderate Income households would have similar operating costs but would be built by for-profit builders and thus also subject to property taxes, Increasing their annual operating cost to $10,000 per unit. Economic & Planning Systems, Inc. 12 Commercial Linkage Fee Nexus Study Administrative Draft Report 08/29/17 Affordability Gap Results Table 8 shows the subsidies for construction of for -rent apartments for households at various Income levels. Across all categories, the cost of constructing, the unit is higher than the value of the unit. This is considered the "affordability gap," and serves as the basis for calculating the subsidies required to provide housing for the employees who will be working in new nonresidential development in Petaluma. In other words, this analysis suggests that rents affordable to moderate income households and below cannot support the costs of new construction without subsidy. It is worth noting that the affordability gaps estimated in this analysis are not as large as they might be using other also -valid assumptions. For example, the funding gaps for low income units assume that prices are set at 80 percent of median income, while State law Indicates low-income unit prices may be set at 70 percent of median income. This methodology used by EPSr yields higher unit values and thus results in lower maximum fees than would result from less conservative assumptions. Economic & Planning Systems, Inc. 13 137 Commercial Linkage Fee Nexus Study Administrative Draft Report 08/29/17 Table 8 Affordability Gap Analysis -- Rental Product Type Direct Costs 3 - 4 Stories Multifamily Building 14% 14% Direct Construction Costs/Net SF [6] with Surface Parking $185 $185 Very Low Low Moderate $213,000 Income Income Income Item (50% AMI) (80% AMI) (120% AMI) Development Program Assumptions Indirect Costs as a % of Direct Costs [7] 40% 40% Density/Acre [1] 45 45 45 Gross Unit Size 1,150 1,150 1,150 Net Unit Size [2] 978 978 978 Number of Bedrooms 2 2 2 Number of Persons per 2 -Bedroom Unit [3] 3 3 3 Parking Spaces/Unit [4] 1.00 1.00 1.00 Cost Assumptions Land/Acre [5] $1,131,000 $1,131,000 $1,131,000 Land/Unit $25,133 $25,133 $25,133 Direct Costs 14% 14% 14% Direct Construction Costs/Net SF [6] $185 $185 $185 Direct Construction Costs/Unit (rounded) $213,000 $213,000 $213,000 Parking Construction Costs/Unit $5,000 $5,000 $5,000 Subtotal, Direct Costs/Unit $218,000 $218,000 $218,000 Indirect Costs as a % of Direct Costs [7] 40% 40% 40% Indirect Costs/Unit $87,200 $87,200 $87,200 Profit Margin (% of all costs) 14% 14% 14% Profit (rounded) $46,000 $46,000 $46,000 Total Cost/Unit (rounded) $376,000 $376,000 $376,000 Maximum Supported Home Price Household Income (8] $39,650 $63,450 $90,650 Revenue to Property Owner/Year [9] $11,895 $19,035 $27,195 (less) Operating Expenses per Unit/Year [10) ($6,000) ($6,000) ($10,000) Net Operating Income $5,895 $13,035 $17,195 Capitalization Rate [11] 5.5% 5.5% 5.5% Total Supportable Unit Value [12] $107,182 $237,000 $312,636 Affordability Gap ($268,818) ($139,000) ($63,364) [1] Based on allowable zoning in Central Petaluma Specific Plan. [2] An efficiency ratio of 85% Is applied to the gross unit size to calculate the not unit size. [3] For this analysis, EPS has assumed an average unit for Income -qualified worker households would be 2 -bedrooms. State law (Health and Safety Code Section 50052.5) indicates that a 2 -bedroom unit should be assumed to be occupied by a 3 -person household. [4] Assumption of one parking space/unit based on market preferences, although .5 spaces/unit Is the minimum requirement. (5) Based on two recent land sale transactions in the City: 307 Petaluma Boulevard and 951 Petaluma Boulevard. [6] Includes on-site work, offsite work, vertical construction, general requirements, overhead and builder fees. The cost estimate reflects wood -frame construction, surface parking, no basement, and union labor. [7] includes costs for architecture and engineering; entitlement and fees; project management; appraisal and market study; marketing, commissions, and general administration; financing and charges; Insurance; developer fee and contingency. [8] Based on 2017 Income limits for a three-person household in Sonoma County. (9] Assumes housing costs (e.g., rent and utilities) to be 30% of gross household income. (10] operating expenses are generally based on data reported by CoStar and reflective of properties in Petaluma. Estimates are inclusive of utility costs and property taxes, except Very Low and Low properties which are exempt from property taxes. [11] The capitalization rate Is used to determine the current value of a property based on estimated future operating income, and is typically a measure of estimated operating risk. The capitalization rate used in this analysis is based on Costar reported transaction data for 2014 - 2017 transactions in Sonoma County. (12] The total supportable unit value is determined by dividing the net operating Income by the capitalization rate. Sources: City of Petaluma; California Housing and Community Development (HCD); RS Means; IRR Monitor Investor Survey; and Economic ✓3< Planning Systems, Inc. Economic & Planning Systems, Inc. 14 1.{I61UAp6Le0 HWrc fwv gYt..mV µv1p61160 4n ma_ mmuc4 bye fix SEd dpMB prLMV_09 ]9.hv Commercial Linkage Fee Nexus Study Administrative Draft Report 08129117 Fee Calculation Tables 9 through 14 provide the maximum nonresidential housing fee calculations for.each of the six employment categories. Assuming a 100,000 -square foot nonresidential building prototype for each employment category, the number of new households by income category is multiplied by the per-unit affordability gap to determine the level of subsidy required to provide housing for the new worker households. The adjusted affordability gap is then divided by the size of the assumed building to determine a maximum fee per building square foot. While the City has the option of adopting fees up to the maximum levels calculated, EPS does not recommend the City adopt the entire maximum fee. There are several factors compounding the issue of housing affordability; insufficient wages relative to development costs constitutes just one factor. Market forces, land use regulations, construction costs, and entitlement costs also affect housing affordability. In addition, revenue generated through this fee program is just one source of potential subsidy funds to help finance affordable housing projects. Finally, adoption of the maximum fees for certain employment categories would represent a very large addition to the costs of development, and could hamper the City's economic development and competitiveness objectives. As the fee is one of several mechanisms for generating resources for or reducing the cost of housing development, the fee level below the maximum calculated fee may be appropriate. Other California communities—including Sacramento, Walnut Creek, and the County of Sonoma, among others—have made reductions to the maximum allowable fee when adopting their fee program, for reasons such as those cited above. The notion of the appropriate fee level will be further explored by EPS in subsequent analyses. Economic & Planning Systems, Inc. 15 rublrowubllsa�>a a •.aawmm ubtla rx w n s.F«u y nem w aR�cml) ae n.e a WE Commercial Linkage Fee Nexus Study Administrative Draft Report 08/29/17 Table 9 Fee Calculation - Commercial Item Worker Households per 100k sq. ft. Affordability Gap per household Total Gap Table References: Table 7 Table 8 Aggregate Financing Gap per 100K Sq. Ft Affordability Level Very Low Income 0 $268,818 $0 Low Income 37 $139,000 $5,143,000 Moderate 75 $63,364 $4,752.273 Total 112 $9,895,273 Fee Calculation formula Total Financing Gap a $9,895,273 Total Building Sq. Ft. b 100,000 Maximum Fee per Sq. Ft. c = a / b $98.95 Source: Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. 16 P. t6IPM lt6tle04[W W6v }Ye.vaVeutV611600 4rtu_m wU 3ysF aStrd AM6. paRR v MIl_�H.ha NO Commercial Linkage Fee Nexus Study Administrative Draft Report 08/29/17 Table 10 Fee Calculation — Retail Worker Households Affordability Gap Total Gap Item per 100k sq. ft. per household Table References: Table 7 Table 8 Aggregate Financing Gap per 100K Sq. Ft Affordability Level Very Low Income 0 $268,818 $0 Low Income 118 $139,000 $16,402,000 Moderate 5 $63,364 $316,818 Total 123 $16,718,818 Fee Calculation formula Total Financing Gap a $16,718,818 Total Building Sq. Ft. b 100,000 Maximum Fee per Sq. Ft. c = a ib $167.19 Source: Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. 17 P.II6tMO 11611800.ca mpNe uiF pmtU6Jf60 ON W� mmxNdleFcs ewna ��mJs ov naa 14I Commercial Linkage Fee Nexus Study Administrative Draft Report 08/29/17 Table 11 Fee Calculation — Industrial Item Worker Households per 100k sq. ft. Affordability Gap per household Total Gap Table References: Table 7 Table 8 Aggregate Financing Gap per 100K Sq. Ft Affordability Level Very Low Income 18 $268,818 $4,838,727 Low Income 1 $139,000 $139,000 Moderate 19 $63,364 $1,203,909 Total 38 $6,181,636 Fee Calculation formula Total Financing Gap a $6,181,636 Total Building Sq. Ft. b 100,000 Maximum Fee per Sq. Ft. c = a /b $61.82 Source: Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. 18 P.11610WsV6tlBO K eHw gYm, SNI{I6tIB0 PLn CxuwVnl L11— - 111dy'-6 LYaRrtepaLMll 142 Commercial Linkage Fee Nexus Study Administrative Draft Report 08/29117 Table 12 Fee Calculation - Lodging Item Worker Households per 100k sq. ft. Affordability Gap per household Total Gap Table References: Table 7 Table 8 Aggregate Financing Gap per 100K Sq. Ft Affordability Level Very Low Income 0 $268,818 $0 Low Income 96 $139,000 $13,344,000 Moderate 12 $63,364 $760,364 Total 108 $14,104,364 Fee Calculation formula Total Financing Gap a $14,104,364 Total Building Sq. Ft. b 100,000 Maximum Fee per Sq. Ft. c - a ib $141.04 Source: Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. 19 P.U6100P Ubtl i bu an gN Wy MU6ILN P nLmy,Ca xrtL lNay f SIIN AS Pvt Repvti0l)_09 M.0 a 1L43 Commercial Linkage Fee Nexus Study Administrative Draft Report 08129/17 Table 13 Fee Calculation — Assisted Living Worker Households Affordability Gap Total Gap Item per 100k sq. ft. per household Table References: Table 7 Table 8 Aggregate Financing Gap per 100K Sq. Ft Affordability Level Very Low Income 0 $268,818 $0 Low Income 80 $139,000 $11,120,000 Moderate 16 $63,364 $1.013.818 Total 96 $12,133,818 Fee Calculation formula Total. Financing Gap a $12,133,818 Total Building Sq. Ft. b 100,000 Maximum Fee per Sq. Ft. c = a ib $121.34 Source: Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. 20 1144 Commercial Linkage Fee Nexus Study Administrative Draft Report 08/29/17 Table 14 Fee Calculation - Medical Worker Item Households Affordability Gap Total Gap per 100k sq. ft. per household Table references: Table 8 Table 8 Aggregate Financing Gap per 100K Sq. Ft Affordability Level VLI 0 $268,818 $0 LI - 80 11 $139,000 $1,529,000 Moderate 69 $63,364 $4,372,091 Total 80 $5,901,091 Fee Calculation formula Total Financing Gap a $5,901,091 Total Building Sq. Ft. b 100,000 Maximum Fee per Sq. Ft. c = a ib $59.01 Source: Economic & Planning Systems, Inc. Economic & Planning Systems, Inc. 21 P.1161KMlt6tISUM+Lv lmsSgY a,W vt{I6ItB0V l CmmYN Ayefx SM A RatRryvLE 1l_�Ddv 145 iA APPENDICES: Appendix A: Assumptions and Sources Appendix B: Occupation Distribution by Employment Category 0 Assumptions and Sources lq1 O co r P �D U) a to v r m a) LL d Y V C J o N L c E f� E NO c 0 r Q E t�Qa V O O m i§ O d u)LOLOLO P P P P O O O O N CV N N P P P P P P P P O O O O N N N N (6 (Q a) f6 E E E E tip �2 3) w w w w N N N a) a � O UUcoU .i->' Z �' Z' ' E c c c a a = a E E E E E E E E o O O O C) C) (00 EEE PCOM0) O , [� cq _ P Cl) N P a) Y O N c O �, 3 CL cv E E N w N O O t) r + _ t O 0 CL O OCM a O E�c°'an o1°z� v U) x a) Z a) m a) a) c0 •rb'(d O a) C C C C N G C C C @>> E E O O > O O O O Q C QCLOL0. E E E E O m a) a) a) a) — w 23 (on - 0 L c c c c y 0 YC: o� 0000te"x0 v -a -a -a a) v a) (D a) () > a) mmc�'oma`>m (1) (n 0) U) U) U) as a. as a. a. wwwwww a) N a) 0 a) a) 0 0 0 0 0 0 aaaaan. 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C A C fZy� V cQ�j p O .0 E C l0 C C G1 -O N N U LL C f0 'P m� N N C c N ,O m LL 'Cc ca W m c 0 C C� CL iJ p � p) S7 c CL _U m c c 0 m m �°wa`in aa) a mvs 10.E m m m m 8_�n1t- rnm mN o mU�Q[i c c io E N N O C7 c 'in m 'O O O C m N= j O m > `1 N f6 C C m c Q E� �� Vin- c o m cyE E16� co v'v`4avc 2C'QL) �U �w =xma gED0 U)ou" ,A B-6 C W 155 BATE: February 12, 2018 TO: Honorable Mayor and Members of the City Council FROM: John C. Brown City Manager SUBJECT: Housing Workshop RECOMMENDATION It is recommended the City Council consider options to: 1. Provide for short-term housing of persons displaced by the Sonoma Complex fire; 2. Increase the quantity and affordability of housing stock; 3. Consider adopting a Just Cause Evictions ordinance for Petaluma; and 4. Provide policy direction as appropriate. BACKGROUND This report assumes the reader is familiar with the terms and concepts used. To provide definitions would be unwieldy for the present need, which is an initial consideration of policy options. The City Council will be familiar with terms and concepts. A review of the City's 2015-2023 Housing Element may be of assistance to the lay reader, and provides background with respect to the City's past performance and current housing policy. The affordability of housing in Petaluma has long been of interest to Petaluma City Councils, but increased as the real estate market recovered at the end of the Recession. City programs have done much to provide housing for every income level, with emphasis on first-time home -buyers, verylow, low and moderate income residents, and the homeless, all when funding was more plentiful. Housing affordability was part of Council goal discussions in January 2017. The Council determined to review housing -related development impact fees to generate funding for affordable housing projects, and adopted the priority, "Identify and implement programs to increase affordable housing", in its 2017 and 2018 goals. A task included with this priority is "seek to provide housing for all income levels". The Sonoma Complex fires in October 2017 destroyed thousands of homes in Santa Rosa and the unincorporated County, leaving many thousands displaced. This additional demand for housing further impacts the availability and affordability of regional housing. Petaluma's most recent analysis of vacancy rates for rental housing, which focuses on multi -family facilities of 30 twits or more, shows 35 vacant units - a vacancy rate of approximately 1 percent. 20 Protecting the affordability of rental housing and the rights of tenants, through rent control and with restrictions on eviction, is also important to many in the community. Advocates discussed renter protections with the City Council during the January 2017 goal setting session. Although the Council did not wish to pursue Citywide rent control, several Councilmembers indicated openness to further discussion of protecting renters from unjust evictions. The demand for rental protections has intensified following the fires. . Until 2012, the City was able to partner with non -profits to build affordable housing projects. A list of housing achievements through 2014 is provided as Attachment 1. Petaluma was able to address Regional Housing Needs Allocation (RHNA) targets set by the Association of Bay Area Governments (ABAG) for very low, low, moderate, and above moderate housing for Petaluma including housing for seniors. Petaluma's primary source of funding was the 20 percent set-aside required of the City's Redevelopment Agency (Redevelopment) which generated about $3 million annually. Petaluma established development impact fees: housing in -lieu and commercial linkage fees, which supplemented Redevelopment funding. The City also asks housing developers to include affordable housing in market -rate developments (inclusionary housing). Affordable housing can also be obtained through density bonuses; increasing the number of units of housing that can be built, in exchange for affordable housing units. The affordability of projects, inclusionary units and density bonus units are protected by long-term agreements, typically a minimum of 30 years. These are monitored for compliance, and are renewable. Targets for inclusionary housing are 15 percent of the total units, and can be built on- or off-site. Although the Council can require inclusionary housing under certain circumstances, the choice to build inclusionary housing or pay housing fees has been largely optional. The cost to build one unit of affordable housing in Petaluma was estimated last year at $376,000. The housing in -lieu fee is set on a sliding scale, dependent on square footage. But, for illustration, fees collected on a 2,000 square foot unit amount to $9,022. Commercial linkage fees differ between construction types, but average $2.93 per sq. ft. between all categories. To compare the cost of building to paying fees: the inclusionary requirement for a subdivision with 100 homes of 2,000 square feet each.is 15 units. At $376,000 per unit, this would cost the developer $5.64 million to build. The in -lieu fee, at $9,022 per unit, would cost the developer $0.9 million. Most developers have chosen to pay the fees. Redevelopment funding was abolished in 2012. Since 2012, impact fees are the City's primary remaining source to subsidize affordable housing. Annual collection of these fees depends on the amount and type of development activity, and is estimated at $1.24 million for 2017/18. In addition to the long-term affordability guarantees associated with publically financed projects, the City provides tenant protection through its mobile home park rent control program. The program protects residents who have not entered into long-term leases with the park owner; and is operated for the City by the County of Sonoma. City staff manages the program, and communicates regularly with park residents, owners, and the County. Petaluma has a total of 868 mobile home spaces, which are considered part of our affordable housing stock. Of that total, 352 are subject to rent control. Owners may increase rents annually, using an increase factor based on the Consumer Price Index (CPI). Increases greater than CPI, or more frequent than annually, require an arbitration hearing. The program is budgeted in 2017/18 at $14,000. Actual costs depend on the number, and length of hearings. 14�� The loss of Redevelopment revenues has cut funding for staffing. Two positions are allocated to Housing and only one is funded. The Housing Division has also supported a portion of the cost of a Senior Planner to assist with Housing Element compliance and long range planning. Less of these services are being purchased. Staff costs are apportioned to the various program budgets. Increasing the activities conducted by the Housing division will require additional staff — and more revenue. DISCUSSION This section addresses four subject areas, temporary emergency housing to alleviate displacement of victims of the Sonoma Complex fires, housing affordability, housing supply, and renter protections. Temporary, Emergency Housing Directly affected by the fires, the City of Santa Rosa and the County of Sonoma have considered and taken a number of actions to address the need for emergency housing. It's been suggested that other Sonoma County cities adopt emergency measures to alleviate the need for emergency housing. In October, November, and December 2017, the County considered options to provide emergency housing. Urgency actions adopted by the County were: • A moratorium on the issuance of short term vacation rentals. • Suspension of occupancy limits on seasonal fannworker housing, to extend from 180 to 365 days a year. • Rental of existing guest houses and pool houses for interim housing for fire victims. • Rental of existing promotional or marketing accommodations, farmstays, bed & breakfast inns, resorts, retreats, camps or other similar uses for interim housing. • Fee waivers for accessory dwellings for: 1. Building and zoning permit fees. 2. Development fees up to 750 s.f. —waived; Development fees up to 751-1000 s.f. — 50% of the fee. • Safe Parking — at designated county -owned facilities, managed independently of the County. Displaced persons have registration priority. • Safe Parks on privately -owned sites. Permission by the owner with approval by Sonoma County Community Development Commission. • Recreational vehicles can be used as housing under certain criteria listed in the ordinance. • Recreational vehicles, tent camps, and campgrounds permitted in Recreation and Visitor - Serving Commercial Districts, with requirements for sewer, water and electrical hookups. • Residential use of recreational vehicles and manufactured homes for temporary emergency housing in public facilities and industrial zones. • Expansion of existing mobile home parks — subject to issuance of zoning permit. • Use and rental of existing dwellings and recreational vehicles on agricultural parcels as long as it meets the standards for sewer, water, and electrical. • Temporary use of manufactured homes on fire damaged lots by displaced persons. Many of these provisions are in effect until December 2019. The moratorium on vacation rentals is set for reconsideration later this month. Healdsburg, Windsor, Sebastopol and Cloverdale also took actions in 2017 to provide temporary emergency housing for those displaced by the fires. These extend from one to two years, depending on the city, and include: Healdsburg • Vehicles generally used for human habitation and tiny houses may be parked and occupied on private property. • Increased allowable area of an accessory dwelling unit up to a maximum of 850 square feet and 2 bedrooms. • Attached and detached garages on single-family dwelling lots 6,000 square feet or larger may be converted to an accessory dwelling unit or bedroom and are not required to provide additional parking or replacement parking for the primary unit. • Every effort will be made to review accessory dwelling units within 60 days of submittal of a complete application to the building division. Windsor • One trailer, manufactured home or similar structure, or recreational vehicle may be located on developed residential properties. • A recreational vehicle may also be allowed in the front driveway area of the property provided that it does not encroach into the public right-of-way when parked. • Use of an existing residential accessory structure, such as a pool house, guest house, recreation room or studio space. • Multiple units on developed residential properties, not to exceed maximum allowable density. • Temporary units on vacant residential properties, not to exceed maximum allowable density. • Temporary units may be placed on vacant commercial properties, but not on developed commercial properties. • Temporary expansion of existing emergency shelter uses. • Temporary expansion of Wine Country RV Park. Sebastopol • One travel trailer or recreational vehicle may park on private residential property, for a maximum of 18 months (with conditions). Cloverdale • One mobile home trailer, travel trailer, house car, or tiny house can be parked on private residential property for a two-year period (subject to conditions). • 6 residential units may be located on the ground floor of a commercial property. The actions on these lists come with a range of strict conditions, which provide for health, safety, and community protections. For example, requirements for connection to water, sewer and electrical services; lot coverage and set -back requirements; waterway and tree protection; building and fire safety permitting and inspection; and refuse collection, to name the more common conditions. These all require some level of enforcement, initially or ongoing. Some County of Sonoma actions are specific to the unincorporated area, such as farmworker housing; agricultural zoning; and farm stays, resorts, and camps. Likewise, some of what the ru County has done, like Santa Rosa, is specific to parcels affected by the fires. These provisions are not applicable to Petaluma. Actions taken by other jurisdictions were by urgency ordinance, and date to October, November, and December 2017. Some extensions were approved last month, but no new actions. Actions taken by communities farther from the burned area are less extensive than those that are closer. Petaluma staff has not quantified how much displacement these actions have alleviated, how much relief is still needed, or how much relief Petaluma can provide by taking similar actions. It seems probable displaced residents have connections to jobs, schools, and the like in the Santa Rosa area, and will want to locate as closely there as they can. Petaluma's relative distance from Santa Rosa and from burned areas may make it less attractive as an emergency housing location. As well, Petaluma neighborhoods are sensitive to encroachment into setbacks, on -street parking, recreational vehicles parked in public right of ways, and increased traffic. Accordingly, it is recommended the Petaluma City Council consider a limited number of options, for a shorter period of time 12 months. If demand for additional emergency housing or time is shown, the Council can add to this list when that may be necessary. Recommended for your consideration are: Rental of existing guest houses, pool houses for interim housing for fire victims. One recreational vehicle or travel trailer may be allowed on a residential property, industrial or business park property provided: o it does not encroach into the public right-of-way when parked. o is permitted by applicable CC&R's. o is properly connected to water, sewer, and electric services (the use of a generator is prohibited). o the user of the vehicle has obtained consent from the property owner prior to parking the vehicle. o it is parked a minimum of 20 feet from a habitable building on an adjacent property. o it is a model year 1998 or newer. o it shall include working fire extinguisher, working smoke detector and working carbon monoxide detector. o a temporary occupancy permit has been granted by the Building Official, contingent upon satisfaction of all other requirements. Conditions recommended for RV parking are similar to those adopted in other communities. Given the neighborhood sensitivities previously noted, it is recommended consideration of these two actions occur in conjunction with noticed hearings, to provide for adequate public input. The Council may also wish to consider:. • A moratorium on the issuance of short term vacation rentals; and • Development impact fee waivers for accessory dwelling units The City's short-term vacation rental program requires operators to obtain permits and pay transient occupancy tax. Operator compliance with those requirements has been limited. The City has contracted to identify, notify, and require those operating without permits to come into compliance. Approximately 80 non -permitted rentals were identified, around 20 have obtained permits. It is recommended the Council does not establish a moratorium on vacation rentals, but rather allows P this process to continue until the City has registered and received permit fees, and transient occupancy taxes from all known operators. With respect to accessory dwelling units (ADUs), Petaluma has already taken several steps to encourage their construction. We increased the maximum size to 720 square feet, which is more accommodating of multiple residents. We relaxed parking requirements; ADUs need not provide parking if they are within I/2 mile of a transit hub, in a historic district, or within one block of a car - share; and development impact fees are discounted from those charged to a single family dwelling unit (SDU). SDUs currently pay about $41,459 in impact fees. ADU's pay approximately $12,100. The City is also allowing junior accessory dwelling units, those that are inside an existing housing unit. Those have no off-street parking requirements, and are not assessed for impact fees. These steps appear to be working, 13 ADU's were permitted last year and 3 are currently in process. It is not clear that additional relaxation of requirements is necessary to, or would encourage, an increase in the numbers of ADU's being built. Council could go farther, and waive impact fees on ADUs. This is not recommended, as the City's fee program does not provide for waivers, and fees would need to be paid from the General Fund, or Housing funds. The Council could also widen the area in which parking is not required, by increasing the number of transit locations from which distances are measured, or simply eliminate parking requirements for all ADU's. No other changes related to emergency housing are recommended at this time. Housing Affordability Petaluma's adopted 2015-23 Housing Element contains policies and actions to increase housing affordability, some of which were codified in December 2014 and are tools currently available to developers. Some of the opportunities identified in the Housing Element to encourage affordable housing include: • Reduced parking standards • Second units (ADU's) • Density bonuses and other incentives • Inclusionary housing • Expedited project review for below-market projects • Subsidies for affordable housing Since 2012, housing fees are our primary source to subsidize affordable housing. The estimate from both fee sources this fiscal year is about 1/3 of the annual amount Redevelopment provided. A portion of the impact fees supports program costs and non-profit partners. If all fees collected were banked, and used to build affordable housing projects, it would still take several years to accumulate the funding needed to make a project work for non-profit developers. Accordingly, the City Council determined to review these fees during the 2017 and 2018 goal period. A fee study was completed in 2017, and a workshop to consider changes to the City's housing fee structures was conducted with the Council in October 2017. The fee study justified significant increases for both housing in -lieu and commercial linkage fees, and provides a calculation for a new housing impact fee. The Council was mindful of the effect fee increases would have ou 101 development, on the sale price of homes, and on rents, and determined to proceed conservatively with any changes. The Council appeared open to increasing the housing in -lieu fee from the average of $9,022 for a 2000 square foot home to $15,180, and to adjust the commercial linkage fee to an amount similar to that charged by Sonoma County. The Council indicated a strong interest in requiring inclusionary housing wherever permitted by law, and increasing the percentage from 15 to 20 if the inclusionary housing is provided off. -site. Housing fees will return to the City Council at its March 5, 2018 meeting for further review and what is expected to be the final direction to implement fee changes effective July 1, 2018. The City's development impact fee structure is project -based, and those projects were identified as necessary to mitigate the impacts identified in the General Plan Environmental Impact Report. Fee waivers and reductions are;one means of incentivizing private developers to build affordable housing. Petaluma does not offer these because of how our fees are structured. The City could, through the General Fund or through Housing fees, supplant some portion of these fees for private housing projects, in exchange for affordable units, but the General Fund does not have the fiscal capacity to do so. Housing funds are very limited, and have been used to -date to support partnerships with non -profits. As well, fee waivers and subsidies will subject developers to prevailing wage standards, which can significantly increase the cost of construction, diminishing or negating the positive effect of a waiver or subsidy. A policy consideration for the Council, however, is whether you want to use housing fees to incentivize private development. Petaluma currently incentivizes affordable housing through density bonuses. The City's density bonus ordinance was updated in 2014 and allows for up to a 35% increase in density consistent with State law. This applies to those areas outside of the Central Petaluma Specific Plan area. Within the Central Petaluma Specific Plan there is no upper limit to density so there is no need for a density bonus. As a policy matter, the Council could offer a bonus of greater than 35%, although staff has no information at this time to suggest a larger number would encourage more affordable housing than does 35%. A Zoning Ordinance amendment and General Plan amendment (Housing Element) would be necessary to increase that percentage. Housing Supply ABAG sets our RHNA targets for new construction for very low, low, moderate, and above - moderate income residents. State law also requires the City to develop projection of needs at each of these income levels, and policies and programs to meet those needs. The 2015-23 Housing element provides a summary of those projections, and actions needed to address them. R1 NA allocations for 2015-23 total 745 units. Of those, 423 are very low, low, or moderate income units. A total of 334 units were built between 2015 and 2017. Nearly all were market rate units, 173 single family dwellings and 151 apartments. Ten units were built for moderate incomes. Adjusting the targets to account for built units, the RHNA target for market rate housing, for the full 8 -year period was met, leaving 413 very low, low, or moderate units to be built over the next five years. A review of projects that are currently under construction, have received entitlements, or are in the approval pipeline (Attachment 2) shows 2,061 units will come on-line during the 2015-23 planning horizon. Of these, 879 are single family units, and 1,282 are multi -family units. Within this, 75 units are inclusionary housing. In addition, the City is partnering with two non -profits, by providing land, to build an additional 53 units of affordable senior/veteran's housing, and 40 single M_ family homes, 30 of which would be for -sale below-market housing. Applications for these two projects are not yet complete, but are expected soon, and will be expedited. Applying this new construction to our housing targets, total new construction exceeds the RHNA target for market rate housing by 1,988 units. The RHNA target for affordable housing is reduced but not met, leaving 248 units still to be built. New construction also exceeds the revised City projection for market rate housing, by 174 units. There should be no shortage of market rate housing at the end of the planning period, but more work is needed to encourage below-market rate housing. Increasing the housing impact fees will meet some of that need, but making development less costly, through process and legislative improvements, and making more space available for housing development, can also help. Since 2009, when M -Group was engaged to provide current planning services to the City, staff has worked to streamline the development review process, which can reduce the overall cost of development and decrease the time required to complete build units. Some of these changes are no longer recent, and may not come immediately to mind: • Implemented a Development Review Committee: Collaborative weekly meetings to coordinate among departments, provide initial concept feedback to applicants, to problem solve, and to provide predictability and ensure consistency in review process. • Established a consent agenda for the Planning Commission (PC): facilitates small project review of design modifications conditioned by PC. • Eliminated preliminary Site Plan and Architectural Review (SPAR). SPAR approvals for projects that require both PC and City Council are now conditionally approved by PC so projects do not need to return after Council approves legislative items. • Completeness reviews are conducted within 30 -days for nearly all entitlement projects • Administrative reviews are conducted by staff for Minor Use Permits (and simple SPAR), eliminating public hearings and resulting in savings of time and cost to applicants. • A warrants process is utilized for code deviations for projects subject to the SmartCode. That review is incorporated into the SPAR process. • Public Hearings: Staff guides projects to increase likelihood of passage at public hearing. Overall, the number of public hearings per project has decreased. Many projects receive approval from PC at fust public hearing. • Templates were developed to allow for efficient production of CEQA clearance documents such as Initial Studies/Negative Declarations and documented Exemptions. They allow for all CEQA work below the EIR level to be completed by our planning staff rather than outside consultants. This saves time and money for applicants and allows projects to flow through the process more smoothly. • Planning staff also shortens processing times by completing certain technical studies in- house rather than requiring sending out RFPs for specialized consultants. This includes preparation of Historic Resource Evaluations and preliminary screening for Air Quality Impacts using adopted standards and available on-line modeling tools. • Infill housing projects are environmentally cleared using Categorical Exemptions where possible. Petaluma voters established the Urban Growth Boundary (UGB) in 1998 to promote efficient use of developable lands in the City and to prevent urban sprawl. The UGB is in place until 2025, and has EN been effective in achieving its goals. As a result, there is little "green field" left on which to build, and future development will be in -fill. Infill development is becoming more difficult, due to property constraints including access, floodplain or contamination issues, and exactions associated with the City's planned transportation system, and neighborhood opposition to increased traffic or other quality of life concerns. Some of these constraints, such as flood plain issues or contamination, may essentially render a property un -buildable. In any case, overcoming these constraints adds to the cost of development, and impacts housing affordability. These constraints, in effect, result in a shortage of buildable land. Petaluma anticipated this shortage and addressed it through mixed-use zoning. The zoning designation combines uses on the same parcel, and is generally envisioned as vertical in nature. For example, commercial retail on a ground floor, office space on a second floor, and residential units above. This is an urban development pattern, and is not always consistent with the product types developers believe consumers want, or is supported by present market conditions. There currently exists high demand for housing: This is less the case for commercial retail space, or office space. Developers have indicated an interest in changing mix towards housing that stands free of combined uses, which the current mixed-use code does not typicallyallow. Staff is now working on a zoning code amendment that will allow Residential uses in the MU1B zoning district consistent with both General Plan policy and existing IZO regulatory text. This will. be a meaningful change to allow consideration of housing through a CUP process on several large parcels where it currently cannot be built. This change would affect five separate areas, two of which could be expected to be developed with housing in the current planning period (Attachment 3). This includes a potential 124 units at Deer Creek Village and 112 units at Corona Road/N. McDowell site, for a potential total of approximately 236 units. This action is tentatively scheduled for Planning Commission consideration on February 27, 2018, with City Council action to follow. Planning staff is also currently working closely with Advanced Planning, the City Engineer, and the City Attorney's Office to initiate the move toward traffic analyses based on Vehicle Miles Traveled (VMT) consistent with new state laws and policies to encourage urban infill. This will directly affect nearly all development in Petaluma and will potentially allow for more streamlined traffic analysis and encourage alternate modes of transport. An opportunity identified in the Housing Element is "Residential redevelopment in other [zoning] districts". Discussed in that section is the ability, with a Conditional Use Permit (CUP), to construct housing above ground level in certain commercial districts. This option has not been aggressively promoted by planning staff. Going forward, however, they will inform property owners and applicants of projects involving shopping centers in C1 and C2 zones that housing is an allowed use in most of them with approval of a CUP. This may open up some hidden housing opportunities. Beyond that, it is recommended the City Council consider amendments to the zoning code to allow housing to be built in a wider range of zoning, such as in business parks, and allowing it to be built in commercial districts — including on the ground floor, utilizing the CUP process. There is space on the upper floors in some of our older business parks that may lend itself to housing. This could potentially house some of the employees working there or nearby. Larger empty spaces in shopping centers may become much harder to fill as society shifts to more on-line buying. Allowing housing there will maximize the use of existing space, increase walkability, and support the City Council's goal for a» age -friendly community. 0 Importantly, re -use of existing space can reduce construction cost and increase housing affordability. These changes would require changes to the Zoning Ordinance and potentially to the General Plan. Preparing for this workshop, staff was asked to provide suggestions as to policies and code changes the Council can implement that would promote the construction of affordable housing. The preceding lists, and suggestions, as well as the program of work included in the Housing Element, are what has been suggested. This workshop provides the Council the opportunity to consider these potential changes, as well as to suggest changes it may be thinking about. Renter Protections Housing advocates have approached the City Council seeking renter protections: Citywide rent control, and Just Cause eviction legislation. The City Council has considered expanding the City's mobile home park rent control program to include rental units on a Citywide basis, and has thus far determined not to do so. The Costa Hawkins Act exempts properties built after 1995 from regulation of rents. Much of the City's rental housing stock predates 1995, and the Council has been reluctant to implement protections that apply to only a segment of renters by virtue of the age of the unit they happen to be renting. As well, staffing and program costs are a serious consideration. With the dissolution of Redevelopment, funding no longer exists to support more than the costs of the City's existing rent control program. Citywide rent control would require a significant increase in staffing resources and costs, for which no dedicated funding source exists. Effort is currently underway to implement rent control on a statewide basis. That effort, if successful, could provide rental protection without action at the local level. More recently, housing advocates have approached the Council urging adoption of Just Cause eviction legislation. In essence, Just Cause means that a landlord may not terminate a tenancy, or refuse to renew a lease, for any reason other than one that is allowed by the ordinance. Examples of reasons for cause would include nonpayment of rent, intentional damage to the rental, or the presence of unauthorized occupants. Because rents are not regulated, the Costa Hawkins Act does not apply to Just Cause evictions. While Just Cause legislation has been sought from other jurisdictions in Sonoma County, none have thus far adopted an ordinance. In reviewing the issue, staff learned that some form of this regulation now exists in 17 California communities. Nearly all of this regulation appears to be linked to rent control. Staff identified two cities, Glendale and San Diego, that do not regulate rents but have enacted eviction protections. Both ordinances require a landlord to state in the termination notice the reason that justifies the termination, and both ordinances are well over a decade in age — and as such have stood the test of time. Of the two, Glendale's appears the stronger. Inasmuch as the Council has indicated it does not want to expand Petaluma's rent control activities, one of these two ordinances might provide the model for a Petaluma ordinance, if the Council wishes to proceed in that direction. Glendale Glendale adopted its ordinance in 2002. It prohibits evictions that fall outside its stated allowable causes, or exceptions, and prohibits retaliation against a tenant for asserting their rights under the ordinance or State law. Its provisions, in Summary, are: Just Carse. At the time landlord delivers a 30-, 60-, or 3 -day notice, landlord must also provide the tenant with a written notice that recites the "landlord's legal grounds for terminating the tenancy and tenant's rights to relocations benefits, if applicable. Reasons Allowed for Just Cause Evictions: • Nonpayment of rent, breach of a "lawful obligation or covenant," nuisance, or illegal use of the premises or permitting any illegal use within 1,000 feet of the unit. "Illegal use" specifically includes all offenses involving illegal drugs, such as marijuana (without a doctor's prescription). • When an unauthorized subtenant not approved by the landlord is in possession at the end of a lease term. When a tenant refuses to allow the landlord access "as permitted or required by the lease or by law". When the landlord offers a lease renewal of at least one year, serves a notice on the tenant of the offer at least 90 days before the current lease expires, and the tenant fails to accept within 30 days. When the landlord plans to demolish the unit or perform work on it that costs at least eight times the month's rent, and the tenant's absence is necessary for the repairs; or when the landlord is removing the property from the rental market, or seeks to have a spouse, grandparent, brother, sister, in-law, child or resident manager (if there is not an alternate unit available) move into the unit. Under state law, these grounds may be used only if the tenancy is month-to-month, and 30 or 60 days' written notice is given. The landlord must pay the tenant relocation expenses of two months' rent for a comparable unit plus $1,000. Exceptions: Leases of one year or more. Relocation: Tenants entitled to relocation fee of twice the fair market rent, plus $1,000, in certain instances. In an eviction lawsuit brought by the landlord to recover possession of the rental, the tenant may raise as an affirmative defense the landlord's failure to abide by any provision of the ordinance. Penalties - The first two violations within a 12 -month period are treated as infractions. Fines of $250, and $500, are imposed, respectively for these violations. A third violation in any one year period is treated as a misdemeanor. Glendale contracts with an independent partner, like our own Petaluma People Services Center (PPSC), to administer this program, and prosecutes penalties internally. Staff was not able to isolate the cost of this program. Discussions with PPSC suggest they might be able to operate this program for about the same cost as our mobile home park rent control program. Prosecution of violations would be administered by the City Attorney's Office. San Diego The City of San Diego's ordinance was adopted in 2004, and is titled "Tenants' Right to Know Ordinance". It states the reasons for which evictions can be made, for tenancies that have exceeded two years in length, with exceptions. It does not provide for relocation assistance, or for penalties associated .with violations. Its provisions, in summary, are: Just Cause At the time the landlord delivers a 30-, 60-, or 3 -day notice, the landlord must also provide the tenant with a written notice that recites the landlord's legal grounds for terminating the tenancy. Exceptions to the Ordinance Institutional facilities, such as schools; government-owned or subsidized property subject to substantially similar or great state or federal eviction controls; rentals to boarders in the landlord's principal residence, where landlord and tenant share facilities; hotel, motel, rooming house rentals that are not single -room occupancy hotel rooms; mobile homes; transient occupancies. Does not apply to tenancies of less than two years. San Diego provides Fair Housing services through Legal Aid Society of San Diego. With respect to eviction issues, Legal Aid provides advice, including whether the Landlord is complying with their ordinance. Tenants who believe they are being unjustly evicted will cause a landlord to go through the unlawful detainer procedure through the courts. Legal Aid takes cases for tenants who are dealing with unlawful detainer issues. Reasons Allowed for Just Cause Evictions • Refusal to give the landlord reasonable access to the rental unit for the purpose of making repairs or improvements, or for the purpose of inspection as permitted or required by the lease or by law, or for the purpose of showing the rental unit to prospective purchaser or mortgagee. • Nonpayment of rent, violation of a "a lawful and material obligation or covenant of the tenancy," commission of a nuisance or illegal use of the premises. • Refusal "after written request of a landlord" to sign a lease renewal; "for a further term of like duration with similar provisions." • To make necessary repairs or perform construction when removing the tenant is reasonably necessary to do the job, provided the landlord has obtained all necessary permits from the city. • When the landlord intends to withdraw all rental units in all buildings or structures on a parcel of land from the rental market, or when the landlord, a spouse, parent, grandparent, brother, sister, child, grandchild, or a resident manager plans to occupy the rental unit. These grounds may be used only if the tenancy is month to month (under state law, you're entitled to 60 days' written notice). In considering Just Cause eviction legislation, if the Council wishes to proceed in that direction, staff recommends a structure that provides effective protection, but minimizes staff time and cost to the City. From the staff perspective, legislation that creates a civil cause of action would be ideal; one where the City has no direct responsibility for enforcement or administration, that provides the tenant a legal tool that can be used by them in court. We found no such model as we researched the Wh issue, and would need to develop one for the City. The policy questions for the City Council at this time are, does the Council wish to proceed with Just Cause legislation, if so, using one of the Glendale or San Diego models, or task staff with developing legislation that creates a civil cause of action without direct City involvement. Housing is a broad subject and much was not discussed in this report. It includes specific recommendations, but is also intended to create opportunities for the Council to make changes in our current policies, practices, and provisions. Our Senior Planner in charge of advanced planning, our Housing Administrator, representatives of M -Group, and the City Attorney will join me in attending the February 12, 2018 workshop to answer questions you may have and.to engage in dialog regarding housing in Petaluma. FINANCIAL IMPACTS Once the Council has indicated its policy preferences, cost estimates can be developed. As noted elsewhere in this report, City staffing and funding for additional housing -related activities and programs is very limited and would need to be augmented if policy choices intensify City program responsibilities. ATTACHMENTS 1. Exhibit C of Petaluma's 2015-23 Housing Element 2. Summary of Current Projects with Housing Components 3. Map —MUIB Sites 4. Just Cause and Retaliatory Conviction Ordinance, Glendale, CA 5. Tenants' Right to Know Regulations, San Diego, CA go