75B - PH - ZONING ORDN AMENDMENT

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Zoning Ordinance Amendment No. 2011-01 September 26, 2011 Page 7 Even though collecting an in-lieu fee should be a rare occurrence, the proposed ordinance establishes a methodology for calculating the fee that is based on bridging the gap between what it would cost to provide the unit at a market rate versus an affordable rate. The calculation uses market rents or for-sale prices in place at the time of application to establish the cost of the unit. It then uses current affordability indexes established by the State and County to determine what a prospective owner or tenant could pay. The difference between the rent/sale price and the amount the owner/tenant could pay constitutes the affordability gap. There are generally two ways of calculating an affordable housing in-lieu fee - a fixed fee or a market-based fee. A fixed fee is established based on a variety of criteria, which could include unit size, number of bedrooms and/or geographic location within a city. The fee is then set and remains fixed until such time as the City Council takes action to adjust it. It could also be adjusted based on common factors, such as the Consumer Price Index. The advantage of this approach is that the fee is slightly easier to calculate. The disadvantage of this approach is that the fee does not respond to current market conditions and, as such, may not accurately reflect the actual cost gap of providing the affordable unit. If a fixed fee were established today, the current housing market conditions, where market prices are very close to affordable prices in some income categories, would result in a fee that is very low to reflect the relatively small affordability gap. Given that new housing production of the type that would trigger this ordinance is unlikely to occur in the near term, any fixed fee established today would be out of date before an application is received. This could have the effect of creating additional financial responsibility for the city to provide the unit in the future. In addition, differences in housing prices within a jurisdiction could further skew the fee. In a large built-out city such as Santa Ana, where there is a wide range of housing prices, a fixed fee could be disproportionately charged unless it was adjusted for the geographic location of the project. This adjustment would still not account for shifts in market conditions over time. A market-based fee responds to market conditions at the time of application. While the fee itself is not fixed, the methodology used to calculate the fee does not change and it is not overly difficult to calculate. For those jurisdictions in California that have adopted ordinances requiring new housing developments to provide affordable units, the fixed fee approach is the most common. However, two-thirds of cities in California do not have formally adopted ordinances requiring affordable housing. The most common practice in these jurisdictions is to negotiate fees at the time of application without any formal methodology, or to not require any affordable units. Negotiating fees without a fixed methodology creates uncertainty for the developer and does not allow the city to apply the in-lieu fee equally on all development projects. The advantage of using a market based methodology is that it uses current for-sale and lease rates, as well as the current affordable income indexes in place at the time of application. This ensures that any fee charged at that time of application would not penalize or, conversely, create a windfall, for those developers seeking to pay the fee in lieu of unit production. It would also ensure that affordability rates were also accurately reflected. 75B-9