Colleagues’ Memo seeks renewed focus on affordable housing strategies

September 21, 2019 – Palo Alto Matters

The city’s ambitious Housing Work Plan was approved to great fanfare in 2018. It outlined a balanced array of strategies designed to address housing production, affordability, and preservation. But key opportunities for the city to expand BMR supply and preserve existing, naturally more affordable units remain untapped. 

First year policy changes pursuant to the HWP created new potential for significant growth in market rate, multifamily housing units and enabled approval of the Wilton Court project, a 59-unit, 100 percent affordable housing development in the Ventura neighborhood. However, Palo Alto still needs well over 1,000 new affordable units by 2023 to meet state mandated housing targets and inaction on housing preservation left the city with little recourse when faced with the conversion of the 75-unit President Hotel Apartments to hotel use. Since January 2019, the public has seen little action to move the remainder of the work plan forward. 

On September 23, City Council will consider a Colleagues’ Memo by Councilmembers DuBois and Kou asking council to prioritize outstanding HWP affordable housing items as well as additional strategies to “produce affordability within the extremely low (0-30 percent Area Median Income), very low (31-50 percent AMI), and low (51-80 percent AMI) income limits.” 

The Colleagues’ Memo calls for urgent action to:

  • Implement the “Palmer Fix,” a recent state law restoring the authority of local governments to require new multi-family rental housing to include a minimum percentage of Below Market Rate units (current city law only requires for-sale projects to include BMR housing). (HWP item 3.1)
  • Increase development impact fees to $64 per square foot for commercial projects. Santa Clara County recently adopted the same fee for commercial development at Stanford, based on a nexus study showing that the public cost to meet housing demand created by commercial growth in the area far exceeds that amount. 

In addition to seeking action “as soon as possible” on those items, the memo asks council to:

  • Explore a “no net loss” policy when housing is redeveloped. (HWP item 3.3) The memo suggests considering an in-lieu fee or off-site replacement requirement if existing units are removed. 
  • Explore protections for existing, naturally more affordable housing types such as cottage clusters and duplexes in low-density zones (HWP item 2.9) in order to preserve both “missing middle housing” and transitions between low and higher density zones. 
  • Ensure that when mixed-use projects (mix of commercial, residential and/or retail use) are awarded density bonuses (typically extra floor area) the bonus is applied to the housing portion of the project to the extent legally permissible.
  • Explore citywide regulations to prevent conversion of existing housing to commercial/hotel use.

Staff indicates that a study of the Palmer Fix and possible adjustment of the city’s current inclusionary rate is currently underway and will be presented to the Planning and Transportation Commission in October, with possible council action on a new ordinance early next year. For all the other items, however, staff expects significant additional work would be required.

Market-rate housing production on pace, but affordable units lag far behind regional requirements

Since adoption of Palo Alto’s 2018 Comprehensive Plan Update, we often hear about the city’s goal of producing an average of 300 new housing units a year for the period 2015-2030. To meet the Regional Housing Needs Allocation, or RHNA requirements, set by the Association of Bay Area Governments, we need a total of 1,988 new units during the period 2015-2023. With only five years left in the plan horizon, that translates to an average of 308 new units per year from here on out. But those overall targets don’t tell the whole story. Built into the 1,988 total are specific targets for multiple levels of affordability.

What we don’t hear much about is that a full 70 percent of that mandated 1,988 total must be new Below Market Rate units. 

According to the 2018 Housing Work Plan, the city anticipates exceeding the RHNA mandated target for the above moderate income category (serving households earning more than 120 percent of Area Median Income). The city’s 2018 progress report to the state bears that out, showing that more than half of the required above moderate income units were permitted in the first four years of the nine year RHNA planning horizon. If the recent annual average of 76 market rate units per year continues through 2023, Palo Alto will exceed its required market rate target by 97 units. 

The first year of the city’s ambitious two-year Housing Work Plan saw intensive policy action to spur new housing by loosening zoning standards to allow significantly greater density and floor area, make housing projects more profitable through parking and design flexibility, and streamline approvals by reining in the public review process. But those development incentives are likely to overwhelmingly benefit market rate rather than affordable projects.

Meanwhile, we are and have historically been WAY behind in meeting required targets for Below Market Rate housing. According to the Housing Work Plan, during the period from 1998 through 2017, only 24 percent of approved new units qualified as affordable. To meet RHNA targets for units accessible to people earning up to 80 percent of the Area Median Income, the city will need an additional 1,022 subsidized units between now and 2023. Add in the moderate income category (81-120 percent of AMI) and the total affordable units still needed jumps to 1,258 — 82 percent of the city’s entire remaining RHNA obligation. 

New Affordable Housing district unlikely to build sufficient supply

The principle affordability effort of the Housing Work Plan to date was the creation of an Affordable Housing overlay making special development incentives available to housing projects with 100 percent of units serving people earning up to 120 percent of AMI. Designed to accommodate a specific project, the overlay paved the way for the January 2019 approval of a 59-unit, 100 percent affordable project near Wilton Avenue in the Ventura neighborhood.

As important as that project is, it represents a mere drop in the bucket toward our 1,258 unit affordable housing deficit. Furthermore, given Palo Alto’s land costs, such projects are few and far between. If the city hopes to make more progress toward affordable housing targets, it will need several more of these AND an expanded toolkit.

State and local development incentives create urgent opportunity

What is the Palmer Fix?

For many years Palo Alto required inclusion of BMR units in both for-sale and rental housing projects, but in 2009 a California Court of Appeals in the “Palmer” case struck down a Los Angeles inclusionary rule, thereafter forbidding local governments from imposing inclusionary requirements on rental housing. The inability to condition development entitlements on inclusion of a limited number of BMR units has contributed to a decline in BMR production in communities across the state. 

Following a failed legislative attempt in 2013 to reverse the Palmer rule, a 2015 State Supreme Court decision regarding a San Jose inclusionary law paved the way for the 2017 enactment of AB 1505, a State law explicitly authorizing local inclusionary rules for rental housing projects. That law became known as the “Palmer Fix” and since 2017 affordable housing advocates across the state have encouraged local governments to implement it.

Time is of the essence to implement the Palmer Fix

This year’s passage of substantial new state and local development incentives designed to spur market rate, multifamily housing production could lead to thousands of new market rate housing units in Palo Alto in the coming years. But because the city’s current inclusionary requirements only apply to certain for-sale units, that market rate growth won’t produce as many Below Market Rate units as it could. 

The Housing Work Plan called for an economic study in mid-2018 of the impacts of a Palmer Fix at various inclusionary rates, and for council action at the end of last year. Yet the study, which also explores possible adjustments to the city’s existing inclusionary rate of 15 percent, has yet to see the light of day and staff doesn’t expect an ordinance to go to council until early next year.  Every market rate rental project approved while city action on the Palmer Fix is delayed could represent a lost opportunity to expand BMR housing in the city.

Will recent action by Santa Clara County spur Palo Alto to raise commercial development impact fees?

Palo Alto, like most cities, imposes affordable housing impact fees on commercial development to offset some of the public cost of meeting the BMR demand created by a new commercial project. In 2017, Palo Alto’s commercial impact fees became a source of significant controversy. Supported by a nexus study showing that impact fees could be justified at up to $264 per square foot, the previous council had voted to raise the fees imposed on office and research and development projects from $20.37 to $60 per square foot. By the time the ordinance came up for a second reading, however, a new council majority had taken over. Under the new leadership, council reversed course, lowering the affordable housing fees to $35/sf.

In order to inform its decision on Stanford’s General Use Permit Application, Santa Clara County commissioned a nexus study in 2018 to understand the public cost of meeting affordable housing demand created by Stanford growth. The nexus study revealed that the public cost far exceeded the $36.22 per square foot impact fee the county then charged the university. County staff recommended raising the fee to $143.10/sf, but the Board of Supervisors opted for a more moderate increase to $68.50/sf. In addition the County Planning Commission conditioned its recommendation for approval of the Stanford GUP on a requirement that Stanford itself build at least 2,172 new housing units (not counting student beds) on campus.

Although the council’s political dynamics have not changed significantly since 2017, recent research and action taken by Santa Clara County may make the council more inclined to consider a higher fee.

Council discussion of the Colleagues’ Memo is scheduled to begin at 9:30 pm on Monday, September 23. 

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