Recommendation to the Davis City Council for Changes in Davis’ Affordable Housing Ordinance

By The Sierra Club Yolano Group Management Committee

June 27, 2023

Introduction

The Davis Affordable Housing Ordinance is now implemented on a temporary basis. Renewal with some modest changes is anticipated this evening.

However, the existing Affordable Housing Ordinance has provisions which we believe do not provide social justice, equity, and fairness in terms of meeting the needs of the City’s low-income population because it is biased toward the financial benefit of developers rather than maximizing the availability of affordable income housing in Davis.

Following please find our recommendations for immediate changes to update the City's temporary Affordable Housing Ordinance for ownership development projects. Additionally, we suggest the City embark on a concerted effort to further revise the ordinance to make it more equitable and understandable to developers and the general public for both ownership and rental development projects as more fully described below.

Recommendation for Immediate Change

1) Eliminate Accessory Dwelling Units (ADUs) as an acceptable alternative to provide on-site Affordable Housing – Prior to the immediate renewal of the Affordable Housing Ordinance, we strongly recommend completely eliminating the provision whereby ADUs are allowed as fulfillment for up to 50% of a For Sale project’s affordable housing obligations as currently exists.

2) Substantially increase in-lieu fees if chosen by a developer as an acceptable alternative to provide on-site or offsite Affordable Housing – We recommend that in-lieu fees be substantially increased so that it is no longer a financially preferable option for developers to pursue.  We endorse the staff recommendation to have an "in lieu fee to represent the full cost to build an actual unit."

Recommendations for Further Changes in the Very Near Future

3) Increase the minimum percentages of affordable housing required in most developments –

a) For rental multifamily developments and ownership detached housing, increase the standard 15% requirement for onsite or offsite affordable housing units to 25% (15% Very Low Income and 10% Low Income).

b) For ownership and rental mixed use and stacked-flat condominiums, increase the affordable housing requirement from 5% to 10% (5% Very Low Income and 5% Low Income) and eliminate the exemption for such units in the core area from the requirements of the Affordable Housing Ordinance.

4) Increase the minimum parcel size for land donated to alternatively meet affordable housing requirements to 4 acres – Experts in the field of non-profit low income housing project financing have stated that land donation requirements of lesser sizes are not feasible to finance given the realities of financing requirements and available tax credits.

We elaborate on each of these recommendations further below.

 

Recommended Changes to the Current Ordinance

1) Completely Eliminate the Maximum 50% Allowance for Accessory Dwelling Units (ADU) – The Accessory Dwelling Unit is typically viewed as a very modestly-sized standalone, self-contained structure on a private property parcel which has its own entrance, bathroom, and kitchen facilities. The current Affordable Housing Ordinance allows for up to 50% of a project’s required affordable housing component to be satisfied by the placement of ADUs in a project.

However, there is not even a rudimentary definition in the existing Davis Affordable Housing Ordinance of what constitutes an acceptable ADU in terms of its size and required amenities. Allowing ADUs to partially satisfy the requirement for affordable units in new projects is believed to have been first implemented when The Cannery housing project Development Agreement was being negotiated. At the time, the stated understanding was that that the units would be subsequently rented by homeowners to lower income workers or students and thus decrease demand for other low income housing stock in the City. However, there is absolutely nothing in the Affordable Housing Ordinance that mandates the units be rented at all, much less rented at an affordable price.

Further, to our knowledge the City has never polled owners of ADUs in The Cannery to verify that any of the units have been rented and at what rate. It is believed the vast majority are used simply as office space or for living quarters for other family members of the primary household and not rented at reduced or subsidized rates to low income renters. Thus, the entire premise for allowing ADUs to replace subsidized purchase or rental by low-income residents has been circumvented to the developers’ obvious financial advantage.

If ADUs are allowed to replace subsidized ownership or rental housing as partial fulfillment of developers’ affordable housing obligation, it must be accompanied by a) a strict definition of what is an acceptable ADU and b) a mechanism for monitoring to ensure that the units are actually subsequently rented and at a price making them accessible to true low-income renters.

However, given the costs and difficulties of implementing such a monitoring mechanism, we recommend that ADUs simply no longer be allowed to count as Affordable Housing, period. In summary, we believe ADUs can be a valuable way to increase the amount of available housing overall, but they are a very poor way to provide subsidized Affordable Housing and functionally impossible to monitor ongoing compliance.

This proposed change can be easily accomplished by simply deleting the following section of the Affordable Housing Ordinance:

18.05.050 (a) (2) (C) (ii) On-site construction of accessory dwelling units for rental to fulfill up to half of the requirement;

2) Substantially Increase the In-Lieu Fees Allowed for up to 50% of the Affordable Housing Unit Requirements to Make it Financially Disadvantageous for a Developer to Employ – The Affordable Housing Ordinance should always require subsidized ownership or rental housing to be built if at all physically possible. In rare instances where site considerations may preclude construction of Affordable Housing on the site, in-lieu fees may be an appropriate alternative means of satisfying the developers’ Affordable Housing obligations. Under the current Affordable Housing Ordinance, up to 50% of the Affordable Housing obligations can be satisfied by payment of in-lieu fees which are not specifically defined and are variable under the current Affordable Housing Ordinance.

However, there is potentially substantial downside to the City and the low-income community and substantial upside financial impacts to the developer(s) when this alternative mechanism is used to satisfy the affordable housing obligations. That is, if the in-lieu fee is so low as to provide a financial incentive to the developer to simply pay in-lieu fees to avoid actual construction of affordable housing, this will likely result in less construction of affordable housing. The Staff Report indicates the current In-Lieu fee is $81,979.

But the cost to construct even a very modest 2-bedroom apartment by a developer for use as subsidized rental housing is now in the range of $250,000 or more. Clearly there is an enormous advantage to a developer to forego construction of an affordable housing unit if they can otherwise just pay to the City a fee that represents only about fraction of that amount.

Further, way too much latitude is given to Council to change the minimum in-lieu fees based on what a developer can convince them is feasible. Davis has a history of concessions given to developers who claim that requirements normally demanded for projects “don’t pencil out” and then they are given waivers by the City because the City Staff and Council do not have the financial acumen and experience to push back.

Thus, we strongly recommend that in-lieu fees be immediately increased to eliminate the financial incentive for developers to pursue them. Of course, this will have the added benefit of providing additional funding to the City for future construction or maintenance of Affordable Housing projects.

The Staff Report acknowledges this by stating, “Both the Social Services Commission and the City Council have expressed interest in recalculating the in lieu fee to represent the full cost to build an actual unit. It is staff’s intent to return with a proposed fee that represents this concept. This fee would then be included in the guidelines, which would be approved by resolution.” 

We agree and urge that this change be given an immediate fast-track, high priority status.

3. Increase the minimum percentages of affordable housing required in most developments –

a) For rental multifamily developments and ownership detached housing, increase the standard 15% requirement for onsite and offsite affordable housing units to 25% (15% Very Low Income and 10% Low Income).

b) For ownership and rental mixed use and ownership stacked-flat condominiums, increase the affordable housing requirement from 5% to 10% (5% Very Low Income (and 5% Low Income) and eliminate the exemption for such units in the core area from the requirements of the Affordable Housing Ordinance.

We believe the findings on the economics of housing arid development by Cascadia Partners are overly conservative and these percentages can be increased without harming project viability. For instance, the State of California has allowed the Builders Remedy to be invoked in cities that do not meet the Regional Housing Needs Allocation (RHNA) housing requirements but mandates a 20% minimum affordable housing requirement. Some cities also impose a 20% affordable housing requirement (e.g. Larkspur). The higher prices commanded by Davis real estate (for sale and rental) provide for higher profit margins to developers thereby allowing increased affordable housing contributions.

We believe the imposition of a greater minimum requirement and the removal of the exemption for such developments in the core area is reasonable given that one development project has already been proposed under the Builder's Remedy in the core area providing for such a 20% level of affordable housing. This demonstrates the economics of stacked flat condominiums and mixed used housing development and that the current percentages can be increased without harming project economic viability and rebuts the findings of the Cascadia Partners report that otherwise states only the lower 12% levels of affordability are possible.

We additionally note that it will be very difficult for the City of Davis to meet its Regional Housing Needs Allocation (RHNA) imposed by the California Department of Housing and Community Development (HCD) for low income housing targets through use of only a 15% affordable housing requirement. The RHNA is a process mandated by California state law that requires that cities and unincorporated areas of counties to plan for new housing to accommodate projected growth. RHNA operates on an eight-year cycle.

The current cycle’s RHNA allocation for the City of Davis includes 580 Very Low Income (VLI) units and 350 Low Income (LI) units

The City’s interim affordable housing baseline is 15% of new housing, with 5% LI, 5% VLI, and 5% Extremely Low Income units. L

RHNA does not have a category for Extremely Low Income households. So for this analysis, it is assumed that Extremely Low units are combined with Very Low Income units totaling 10%.

Thus, 5,800 LI units would be required to meet the RHNA Low Income targets if a combined 10% of the affordable units were Extremely Low Income and Low Income (580 / 10%). An additional 7,000 units would need to be constructed to achieve the 350 Low Income units (350 / 5%). Thus the current interim 15% affordable housing requirement would require a total of 7,000 units to be built for the City to meet their RHNA allocated total low income housing units.

If alternatively a 25% affordable housing requirement were imposed on developers comprising 15% Very Low Income units and 10% Low Income units, only 3,866 new units would be required to be built. (580 VLI/15% = 3,866 Units vs 350 LI/10% = 3,500 Units). Thus it is far more likely that the City’s RHNA allocation would be met with a 25% requirement for affordable housing.

In summary, we believe there is substantial benefit to the Davis community to increase the percentages of required low-income housing to the maximum possible without incurring excessive economic disadvantage to developers. With that in mind and given the disparity in the maximum low-income requirements estimated by Cascadia Partners that can be borne by developers (at 12%) and the state imposed minimum low income requirements for the Builders Remedy (at 20%), we strongly urge the Council to reexamine the economics of low income housing for Davis developers in an expedited manner . At minimum, this should include an independent 3^rd party review of the assumptions, calculations, and conclusions of the Cascadia Partners study to determine if the minimum percentage of minimum required low income housing can be further increased to 25%.

4. Increase the minimum parcel size for land donated to alternatively meet affordable housing requirements to 4 acres

A local expert in the field of low income and affordable housing (David Thompson – private communication) has stated that land donation requirements of lesser sizes are not feasible to finance given the realities of financing requirements and available tax credits.

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Thank you for your consideration of these recommended changes.

Respectfully submitted,

The Sierra Club Yolano Group Management Committee