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HomeMy WebLinkAboutOrd 1283 and Res 2015-27 - Affordable Housing Impact Feeordinance No. 1283 Resolution No. 2015-27 CITY OF PALM DESERT DEPARTMENT OF COMMUNITY DEVELOPMENT STAFF REPORT REQUEST: ADDITION OF CHAPTER 3.47 "AFFORDABLE HOUSING IMPACT FEE" TO THE PALM DESERT MUNICIPAL CODE TO ESTABLISH AN AFFORDABLE HOUSING FEE FOR NEW RESIDENTIAL DEVELOPMENT WITHIN THE CITY OF PALM DESERT SUBMITTED BY: Lauri Aylaian, Director of Community Development APPLICANT: City of Palm Desert 73-510 Fred Waring Drive Palm Desert, CA 92260 DATE: May 28, 2015 CONTENTS: 1. Ordinance No. 1283 (revised) 2. Resolution No. 2015 - 27 (revised) 3. Revised Computation of Potential Fee Revenue, dated May 28, 2015 4. May 12, 2015, Letter from Gretchen Gutierrez, DVBA CEO 5. April 23, 2015, Letter from Walter P. McNeill, McNeill Law Offices 6. April 23, 2015, Letter from Nathan Miller, BIA Director of Government Affairs 7. Memorandum to Mr. Bill Blankenship from David P. Lanferman, Rutan & Tucker LLP, dated April 22, 2015 8. Letter from Darrin Smith, Economic & Planning Systems, dated May 14, 2015 9. Memorandum from Assistant City Attorney Robert Hargreaves to City Council Members dated May 19, 2015 10. May 18, 2015 email message from Anthony Gonsalves regarding AB 2 (Alejo), AB 1335 (Atkins), and SB 628 (Beall) Recommendation By Minute Motion: 1. Approve and file the Nexus -Based Affordable Housing Fee Analysis for Rental Housing and the Nexus -Based Affordable Housing Fee Analysis for For -Sale Housing, both dated April 2, 2015, and by Economic & Planning Systems, Inc., and together the "Nexus Study." Staff Report Affordable Housing Impact Fee Page 2 of 7 May 28, 2015 Waive further reading and: Ordinance No. 1283 Resolution No. 2015-27 2. Pass Ordinance No. 1283 to second reading approving the addition of Chapter 3.47 "Affordable Housing Impact Fee" to the Palm Desert Municipal Code. 3. Adopt Resolution No. 2015- 27 establishing a fee of $2.00 per square foot of livable space as the Affordable Housing Impact Fee for new residential development in the City of Palm Desert. Executive Summary A proposed affordable housing fee ordinance was considered by the City Council on April 23, 2015, at which time staff was directed to investigate alternative methods of providing affordable housing and to try to find a way of mitigating the impact of market rate housing on the need for affordable housing that would be mutually supported by staff, the Building Industry Authority and the Desert Valleys Builders Association. This report informs the City Council as to the outcome of the efforts to devise an approach that would garner the support of all interested parties. Approval of the staff recommendation presented herein would implement a fee of $2.00 per square foot of living space on new home construction and additions. The fee would remain in place until or unless alternative funding mechanisms are made available, at which time the matter would be revisited. Background On April 23, 2015, the City Council had a study session, then conducted a public hearing on the concept of adopting a fee on new market -rate residential development to help offset the cost to the community of the affordable housing demand created directly by that new market -rate residential development. At the public hearing, several representatives of the single-family residential development community spoke in opposition to the proposed fee, and the City Council continued the matter to allow staff the chance to work further with these interested parties to try to develop a recommendation that would be supported by all who addressed the matter. Since the matter was first heard by the City Council, staff has continued to speak, correspond, and meet with single-family residential developers and representatives from the Building Industry Association (BIA) and the Desert Valleys Builders Association (DVBA). Discussions have been wide-ranging and informative, but ultimately no consensus was reached. Therefore, staff has returned to the City Council with answers to questions posed by councilmembers and with a modified fee ordinance, but without the support of the BIA and the DVBA, who continue to request that no fee, regardless of the amount, be imposed. Letters from these organizations, as well as their \\srv-fil2k3\groups\Planning\Lauri Aylaian\Staff Reports\HHordable Housing Impact Fee 5-28-15.doc Staff Report Affordable Housing Impact Fee Page 3 of 7 May 28, 2015 Ordinance No. 1283 Resolution No. 2015-27 legal advisors, are attached to this staff report. The responses to these letters, provided by the Assistant City Attorney and the consultant who prepared the Nexus Study, are also appended. Answers to the Questions of Councilmembers During the study session and subsequent public hearing, several members of the City Council asked for more information concerning the follwing: how other cities are providing affordable housing now that redevelopment funds are no longer available; how Palm Desert stacks up against other Coachella Valley cities regarding Regional Housing Needs Allocation (RHNA) numbers and the amount of affordable housing units available; and new or proposed legislation that would assist with the production of affordable housing. Affordable Housing Development in Other California Cities: At the April 23, 2015, public hearing on the proposed affordable housing fee, Councilmembers wanted to know of programs or mechanisms through which other California cities are meeting their affordable housing obligations. Staff investigated the matter by consulting with developers of affordable housing and with staff from other cities in the Coachella Valley that have produced affordable housing units since redevelopment agencies were dismantled in 2011. Staff also searched technical literature and journals on development and affordable housing to find what funding mechanisms were employed on featured projects. The findings were consistent everywhere: the only way that affordable housing projects have been built in California since the loss of redevelopment is with tax credit financing. Tax credit financing is awarded on a competitive basis to projects that meet specific requirements for proximity to jobs and transportation, energy conservation and sustainability, density and land use, and that have a significant amount of soft debt in the project. To win tax credits for financing affordable housing in Riverside and San Bernardino Counties, a developer will need to provide 40 to 50 percent of his financing in the form of free land, reduced or waived fees, matching grants, or cash contributions. Since Palm Desert's development fees account for a small portion of total development costs, even a complete waiver of them will not make affordable housing development feasible. Money, such as that collected in the form of the proposed fee, can be used to buy land, pay for offsite infrastructure, or otherwise contribute to project as needed to secure the tax credit financing. Affordable Housing Units and RHNA Numbers in the Coachella Valley: It can be useful to view Palm Desert's affordable housing program in context with neighboring Coachella Valley cities. The following information was compiled to show where Palm Desert falls relative to other Valley cities with regard to the amount of affordable housing provided, and the Regional Housing Needs Allocation requirements imposed of or the near future (2014-2021). The RHNA numbers include only the low-income and very -low income units, since in the Coachella Valley the open market generally fulfills the RHNA need for moderate -income housing. Additionally, the numbers have been \\srv-fil2k3\groups\Planning\Lauri Aylaian\Staff ReportsWHordable Housing Impact Fee 5-28.15.doc Staff Report Affordable Housing Impact Fee Page 4 of 7 May 28, 2015 Ordinance No. 1283 Resolution No. 2015-27 adjusted to per dwelling unit figures, since it would not be meaningful to compare Palm Desert's numbers with those of a city whose population is, for example, 65% larger (Indio) or 90% smaller (Indian Wells). City RHNA Low and Very Low Income Unit Allocation for 2014 - 2021 Coachella 4,458 Desert Hot Springs 1,607 Indio 1,201 Cathedral City 236 Palm Desert 165 La Quinta 152 Palm Springs 106 Indian Wells 67 Rancho Mirage 38 City % subsidized units Coachella 10 Cathedral City 7.4 Indio 5.4 Palm Desert 5 Palm Springs 5 La Quinta 4.9 Indian Wells 4.2 Rancho Mirage 4.1 Desert Hot Springs Not available RHNA Allocation per City 100 Dwelling Units Coachella 45.00 Desert Hot 14.74 Springs Indio 4.15 Indian Wells 1.3 Cathedral City 1.12 La Quinta 0.65 Palm Desert 0.45 Palm Springs 0.3 Rancho Mirage 0.27 City Subsidized Units Palm Desert 1,867 Palm Springs 1,732 Indio 1,576* Cathedral City 1,548 La Quinta 1,145 Coachella 995 Rancho Mirage 591 Indian Wells 218 Desert Hot Springs Not available * Includes homeless shelter beds Recent and Proposed Legislation: Two bills that would provide funding for affordable housing have been introduced into the legislature, AB 2 (Alejo and Garcia) and AB 1335 (Atkins). The former would establish an RDA -like program that would receive tax increment and issue debt for communities with crime rates 5% above and unemployment 3% above statewide averages; Palm Desert would not likely be eligible. The latter is almost identical to two previous bills, SB 391 and SB 1220, both of which \\srv-fil2k3\groups\Planning\Lauri Aylaian\Staff ReportsMordable Housing Impact Fee 5-28-15.doc Staff Report Affordable Housing Impact Fee Page 5 of 7 May 28, 2015 Ordinance No. 1283 Resolution NO. 2015-27 would have imposed a $75 transaction fee on all home sales, with the proceeds going to the State for allocation to affordable housing in various local jurisdictions. Both previous bills failed before making it out of the legislature, and the current bill, which requires a 2/3 majority approval to pass, is not likely to be more successful than its predecessors. On a positive note, enactment of SB 628 last year allows cities to establish enhanced infrastructure financing districts, which can be used to acquire, construct, or rehabilitate affordable housing projects. These financing districts would function much the same as redevelopment project areas dis, selling bonds which would be repaid using tax increment monies. Two shortcomings of relying on an enhanced infrastructure financing district are that a 55% vote of property owners is required to approve a district, so district formation is not assured, and the time required for formation is probably several years —a public financing authority must be established, district needs, boundaries, and goals defined, agreements negotiated with all taxing entities and adopted by each of their governing boards, a financing plan prepared and adopted, and special elections held. For these reasons, staff believes that an enhanced infrastructure financing district holds potential for helping the City address affordable housing needs, but that it cannot be counted on. Instead, staff recommends that an affordable housing fee be established for residential development, and if/when a financing district is established, the fee be reduced or eliminated at that time. Attached to this report is Anthony Gonsalves' summary of each of these three pieces of legislation, and his opinion as to likelihood of passage. Further details and legislative analyses of these bills, as well as the chaptered language of the Enhanced Infrastructure Financing District act, is available upon request. Modified Fee Ordinance Despite the fact no consensus was reached with the representatives of the BIA and the DVBA, staff has revised the ordinance in response to a suggestion made by several developers interested market -rate residential projects in the city. They requested that the fee be based upon net livable square footage of the market -rate homes, rather than on gross square footage. This change essentially means that garage space will not be included in the computation of fees, which is consistent with the manner in which other fees are handled, and that the fee revenue generated during build out of the city will be reduced by $2.7 to $3.6 million. Clearly, the fee per square foot could simply be increased to offset the reduction in average home size by 400 square feet, leading to the same potential fee generation as was originally proposed. However, in consideration of the partnership historically forged between Palm Desert and the developers who build our residential neighborhoods, staff recommends that the fee be adopted at the $2.00 per square foot rate supported in the original recommendation. The ordinance, resolution, and Computation of Potential Fee Revenue have been revised to reflect this change, and are appended to this staff report. \\srv-fil2k3\groups\Planning\Lauri Aylaian\Staff ReportsWffordable Housing Impact Fee 5-28-15 doc Staff Report Affordable Housing Impact Fee Page 6 of 7 May 28, 2015 Ordinance No. 1283 Resolution NO. 2015-27 Additionally, if the City Council adopts the proposed fee, staff recommends that the Council reconsider the issue when and if conditions impacting affordable housing development change. For instance, if an infrastructure financing district is established in Palm Desert, or if new sources of federal or state funding become available for affordable housing, or if a regional approach to funding is adopted, the Council should review the necessity (or lack thereof), appropriateness, and amount of the fee and adjust or eliminate it accordingly. Conclusion and Recommendation Support for the proposed affordable housing fee is not unanimous. Representatives from the BIA and the DVBA have asked that no fee be imposed, and several individual residential developers who have met with City staff have suggested that a lesser fee be imposed. However, staff believes that provision of a modest revenue stream to mitigate, at least in part, the need for affordable housing caused by the development of market rate housing is an important part of the community fabric of Palm Desert. Alternative sources of funding for affordable housing have been investigated, and none have proven to be available in the near term. Adoption of the proposed ordinance does not preclude use of alternative funding mechanisms when and if they become available. If such other opportunities are implemented, the proposed fee can be revised or eliminated, as would be determined to be appropriate at that time. Palm Desert has a history of being a leader in the Coachella Valley, and such leadership does not always enjoy unanimous support at the outset. The fact that other Valley cities have not established an affordable housing fee does not mean that it should not be done. Palm Desert will remain a premier city in which to live, build, and do business, attracting investors, residents, and tourists alike, at least in part due to its commitment to making sound long-range decisions that enhance the quality of life for all who reside here. Staff believes that adoption of the proposed ordinance is one example of the way in which Palm Desert weighs the thoughts and opinions of all concerned, and decides in favor of a well-grounded, reasonable step forward. Environmental Review The establishment of an affordable housing impact fee constitutes the creation of a government funding mechanism that involves no commitment to a specific project, therefore, is a non -project in terms of CEQA. Fiscal Analysis The estimate of potential revenue for an affordable housing impact fee of $2.00 per square foot of livable area (excludes garages) applied to residential development through build -out of the City, assumed to be in 20 years, is $11.3 to $20.7 million, depending on \\srv-fil2k3\groups\Planntng\Lauri Aylaian\Staff Reports\Affordable Housing Impact Fee 5-28-15.doc Staff Report Affordable Housing Impact Fee Page 7 of 7 May 28, 2015 Ordinance No. 1283 Resolution No. 2015-27 the densities of future development and the sizes of dwelling units constructed. (This number has been reduced from the $14.0 to $24.5 million in revenue that was projected based upon gross home size.) As discussed in the April 23, 2015 staff report, the revenue from this fee could be used most effectively to provide affordable housing through a variety of programs, such as those identified in the current Housing Element. These programs include purchasing and renovating existing, blighted housing units; purchasing extensions for affordability covenants that are set to expire in the near future; providing financial assistance to private developers for constructing and operating new multi -family dwelling units; etc. A detailed calculation of this potential revenue is attached to this report. Submitted By: auri Aylaian, Director of Community beveleMent Review Paul S. Gibson, Director of Finance proval: in M. Wohlmuth, City Manager \\srv-fil2k3\groups\Planning\Lauri Aylaian\Staff Reports\Nffordable Housing Impact Fee 5-28-15 doc ORDINANCE NO. 1283 AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF PALM DESERT, CALIFORNIA, ADDING A CHAPTER TO THE CITY OF PALM DESERT MUNICIPAL CODE TO ESTABLISH AN AFFORDABLE HOUSING FEE FOR ALL NEW RESIDENTIAL DEVELOPMENT WITHIN THE CITY OF PALM DESERT THE CITY COUNCIL OF THE CITY OF PALM DESERT, CALIFORNIA, DOES ORDAIN AS FOLLOWS: WHEREAS, the City Council of the City of Palm Desert, California, held a duly noticed public hearing on the 23d day of April 2015, continued to the 28th day of May 2015, to consider an affordable housing impact mitigation fee to be assessed against all new market rate residential development within the City; and WHEREAS, that at said public hearing, upon hearing and considering all testimony and arguments, if any, of all interested persons desiring to be heard, and after considering the staff report and its exhibits, the City Council found the following facts to justify their actions as described below: There exists a shortage of very low, low, and moderate income housing within the city of Palm Desert and surrounding communities. 2. As the city is built out over the next twenty (20) years, the residents who move into the new market rate housing development will require goods and services that are produced, provided, and/or sold by persons who have service industry jobs, which are typically lower -paying jobs that do not compensate their employees highly enough that they can afford to live in market -rate housing in the city of Palm Desert. 3. The city of Palm Desert stands to benefit when there is a balance between jobs offered in the city and the housing provided therein: traffic is lessened when fewer workers need to commute in from other cities; parents work near to where their children attend school and can more easily engage in school -related activities; families can participate in more activities in their communities by virtue of spending less time commuting to and from work; and residents and visitors alike are serviced by people who are proud of Palm Desert, which is their home. 4. The City of Palm Desert understands the importance of continual planning for affordable housing and intends to encourage, in accordance with the approved Housing Element, the integration of affordable housing throughout the community by requiring that market -rate residential development be complemented with affordable dwelling units either within or adjacent to the market -rate units; the City is also prepared to accept payment of a reasonable impact fee in lieu of requiring that all market -rate developers simultaneously construct affordable dwelling units, when such requirement is not consistent with the goals and policies of the General Plan or is otherwise not feasible. ORDINANCE NO. 1283 5. The former City of Palm Desert Redevelopment Agency, which was the primary source of funding for Palm Desert's affordable housing program, was abolished by the State of California in 2011, leaving only nominal funding available through which the City can assist the private sector in the provision of subsidized affordable housing. 6. With sufficient funding, the City of Palm Desert can assist in providing affordable housing by: acquiring blighted housing stock, renovating it, and establishing affordability covenants on it; providing below -market rate interest loans to developers of affordable housing; providing land at reduced or no cost to not -for - profit affordable housing developers; purchasing extensions of affordability covenants on existing affordable units when those covenants are scheduled to expire; purchasing affordability on suitable existing market -rate dwelling units; and other means that will stabilize or increase the inventory of affordable housing stock in the city of Palm Desert. WHEREAS, the City Council considered the "Nexus -Based Affordable Housing Fee Analysis for Rental Housing" and the "Nexus -Based Affordable Housing Fee Analysis for For -Sale Housing," both dated April 2, 2015, and prepared by Economic & Planning Systems, Inc. of Oakland, California, and attached to the 23 April 2015 staff report as Exhibits "A" and "B," respectively, and referred to collectively as the "Nexus Study," which Nexus Study establishes the nexus between construction of new market rate housing and the need for affordable housing in the community, and which Nexus Study also demonstrates that affordable housing impact fees of $9.24 to $12.38 per square foot for for - sale housing units and $13.50 to over $20.00 per square foot for rental housing units would be needed to fully mitigate the impacts on the need for affordable housing of new market rate units with sales prices between $200,000 and $1.2 million; and WHEREAS, the nexus exists for all new residential construction, including any residential remodel or addition that increases the number of bedrooms, thereby increasing the capacity for residents, whether the new home or addition be a custom home or a tract of homes, and whether the home(s) be single family or multi -family; and WHEREAS, the City Council also considered the Memorandum regarding Implementation Considerations for Palm Desert Affordable Housing Impact Fees dated March 18, 2015, prepared by Economic & Planning Systems, Inc. of Oakland, California, and appended to the 23 April 2015 staff report as Exhibit "C," which recommends that affordable housing impact fees lower than the maximum permissible fees be adopted; and WHEREAS, the City Council desires to adopt and implement affordable housing impact fees for both residential rental development and residential ownership development, including for residential remodel or addition projects that increase the number of bedrooms in a residence, to mitigate the impact of this market rate development on the need for affordable housing, while ensuring that those market rate developments remain economically feasible; and WHEREAS, the proposed affordable housing impact fee is reasonably related to the impact resulting from the type of development upon which the fee will be imposed and the fees generated and will not exceed the reasonable cost estimate of the housing program. 2 ORDINANCE NO. 1283 The fee rate is projected to generate approximately $11.3 to $20.7 million of the total $112.6 million required to facilitate implementation of the goals and programs described in the currently adopted Housing Element of the City of Palm Desert Comprehensive General Plan, which is only 10.0 to 18.4% of the total program mitigation costs. NOW, THEREFORE, BE IT ORDAINED by the City Council of the City of Palm Desert, California, does hereby determine that it is in the public interest that market rate residential development in the City be supplemented by affordable residential development to provide housing opportunities for the workers needed to fill jobs created to service the residents in the new market rate development. BE IT FURTHER ORDAINED AS FOLLOWS: Section 1: Accounting and disbursement of fees: The affordable housing impact fees collected shall be deposited into the City's affordable housing fund to be used only for the provision of affordable housing in accordance with policies and programs identified in the approved Housing Element of the City of Palm Desert General Plan, and Section 2: Chapter 3.47 is hereby added to the City of Palm Desert Municipal Code to read as shown in attached Exhibit "A." PASSED, APPROVED, AND ADOPTED by the City Council of the City of Palm Desert, California, at its regular meeting held on the 28th day of May 2015, by the following vote, to wit: AYES: NOES: ABSENT: ABSTAIN: ATTEST: RACHELLE D. KLASSEN, CITY CLERK CITY OF PALM DESERT, CALIFORNIA a:100 : IIN-11aC07ITS$V81A DAVID J. ERWIN, CITY ATTORNEY Susan Marie Weber, Mayor 3 ORDINANCE NO. 1283 EXHIBIT "A" CHAPTER 3.47 AFFORDABLE HOUSING IMPACT FEE ON NEW MARKET RATE RESIDENTIAL DEVELOPMENT 3.47.10.1 Purpose, Use, and Findings. A. There exists shortageof very low, low, and moderate income housing within the City of Palm Desert and surrounding communities. B. As the City of Palm Desert is built out over the next twenty years, the residents who move into the new market rate housing development will require goods and services that are produced, provided, and/or sold by persons who have service industry jobs, which are typically lower -paying jobs that do not compensate their employees highly enough that they can afford to live in market -rate housing in the city of Palm Desert. C. The City of Palm Desert stands to benefit when there is a balance between jobs offered in the city and the housing provided therein: traffic is lessened when fewer workers need to commute in from other cities; parents work near to where their children attend school and can more easily engage in school -related activities; families can participate in more activities in their communities by virtue of spending less time commuting to and from work; and residents and visitors alike are serviced by people who are proud of Palm Desert, which is their home. D. The City of Palm Desert understands the importance of continual planning for affordable housing and intends to encourage, in accordance with the approved Housing Element, the integration of affordable housing throughout the community by requiring that market -rate residential development be complemented with affordable dwelling units either within or adjacent to the market -rate units; the City is also prepared to accept payment of a reasonable impact fee in lieu of requiring that all market -rate developers simultaneously construct affordable dwelling units, when such requirement is not consistent with the goals and policies of the General Plan or is otherwise not feasible. E. The former City of Palm Desert Redevelopment Agency, which was the primary source of funding for Palm Desert's affordable housing program, was abolished by the State of California in 2011, leaving only nominal funding available through which the City can assist the private sector in the provision of subsidized affordable housing. F. With sufficient funding, the City of Palm Desert can acquire interest in real properties that provide affordable housing by: acquiring blighted housing stock, renovating it, and establishing affordability covenants on it; acquiring affordability covenants by providing below -market rate interest loans to developers of affordable housing and/or providing land at reduced or no cost to not -for -profit affordable housing developers; purchasing extensions of affordability covenants on existing affordable units when those covenants are scheduled to expire; purchasing affordability covenants on existing, suitable market -rate dwelling units; and other means that will stabilize or increase the inventory of affordable housing stock in the city of Palm Desert. 51 ORDINANCE NO. 1283 G. The City Council considered a nexus -based affordable housing fee analysis for rental housing and a nexus -based affordable housing fee analysis for for -sale housing, collectively referred to as the "Nexus Study," which Nexus Study establishes the nexus between construction of new market rate housing and the need for affordable housing in the community, and which Nexus Study also demonstrated that affordable housing impact fees of $9.24 to $12.38 per square foot for for -sale housing units and $13.50 to over $20.00 per square foot for rental housing units would be needed to fully mitigate the impacts on the need for affordable housing of new market rate units with sales prices between $200,000 and $1.2 million. H. The nexus exists for all new residential construction, including any residential remodel or addition that increases the number of bedrooms, thereby increasing the capacity for residents, whether the new home or addition is a custom home or a tract of homes, and whether the home(s) be single family or multi -family. I. The City Council also studied implementation considerations, including the financial impact of such fees on potential development in the City, and concluded that it was appropriate to adopt affordable housing impact fees lower than the maximum permissible fees. J. The City Council desires to adopt and implement affordable housing impact fees for both residential rental development and residential ownership development, including for residential remodel or addition projects that increase the number of bedrooms in a residence, to mitigate the impact of this market rate development on the need for affordable housing, while ensuring that those market rate developments remain economically feasible. K. The City Council of the City of Palm Desert does hereby determine that it is in the public interest that market rate residential development in the city be supplemented by affordable residential development to provide housing opportunities for the workers needed to fill jobs created to service the residents in the new market -rate development. 3.47.020 Accounting and Disbursement of Fees. The affordable housing impact fees paid pursuant to this chapter shall be deposited into the City's affordable housing fund to be used only for the provision of affordable housing in accordance with policies and programs identified in the Housing Element of the City of Palm Desert General Plan which is approved and adopted at the time of payment of fees. 3.47.030 Calculation and Payment of Fee. A. The affordable housing impact fee paid pursuant to this chapter shall be applied to new market rate residential development. For the purposes of this chapter, "new market - rate residential development" is defined as the construction of any new dwelling unit, including for -sale or rental homes, apartments, time-share units, and condominiums, or the remodel of or addition to any such dwelling unit, which remodel or addition creates one or more new bedrooms. B. Calculation of fee shall be based upon the square footage of the livable building area (including bedrooms, bathrooms, dining and living rooms, hallways, recreation rooms, dens, libraries, casitas, and other conditioned space, but excluding garages, carports, storage sheds, and the like) of the dwelling unit or, in the case of a remodel or addition 5 ORDINANCE NO. 1283 described in 3.47.030 A, upon the square feet of the living area of the new bedroom(s). C. The fee enacted by this chapter shall be paid to the City of Palm Desert prior to issuance of the building permit for the dwelling unit. 3.47.040 Exemptions. The affordable housing impact fee shall not apply to mobile homes, to new dwelling units on which affordability covenants are recorded if those covenants are for a period of thirty (30) years or longer, or to any new single family home that is less than 1,250 square feet in size and situated on an infill lot. RESOLUTION NO. 2015 - 27 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PALM DESERT, CALIFORNIA, ESTABLISHING FEES PURSUANT TO CHAPTER 3.47 OF THE MUNICIPAL CODE OF THE CITY OF PALM DESERT WHEREAS, it is determined that there is a need for affordable housing in Palm Desert, and the State of California has mandated that local governments provide for affordable housing through their zoning and development ordinances, Palm Desert has chosen to use its police power land use planning authority to provide for affordable housing; and WHEREAS, applicable goals, policies and actions of the adopted 2004 City of Palm Desert Comprehensive General Plan, including the Housing Element (as updated and adopted in 2013), demonstrate the need for affordable hosusing in Palm Desert; and WHEREAS, on May 28, 2015 the City Council approved an ordinance creating Chapter 3.47 "Affordable Housing Impact Fee" of the Palm Desert Municipal Code that, among other things, includes establishment of an Affordable Housing Impact Fee to be adopted by the City Council and applicable only to development of new market -rate residnetial for -sale and rental dwelling units, including additions and remodels to existing units when those additions/remodels increase the number of bedrooms in existing dwelling units, that shall be based upon the cost of mitigating the impact of market -rate units on the need for affordable housing in the city, and WHEREAS, the City Council has considered and adopted an ordinance to add Chapter 3.47 to the Municipal Code to also implement goals, policies, and actions of the 2013 Housing Element update; and WHEREAS, on April 23 and May 28, 2015, the City Council considered the "Nexus - Based Affordable Housing Fee Analysis for Rental Housing" and the "Nexus -Based Affordable Housing Fee Analysis for For -Sale Housing," both dated April 2, 2015, and prepared by Economic & Planning Systems, Inc. of Oakland, California and referred to collectively as the "Nexus Study," which Nexus Study demonstrates that affordable housing impact fees of $9.24 to more than $20.00 per square foot of new market rate development would be needed to fully mitigate the impacts of such development on the need for affordable housing; and WHEREAS, to ensure the economic feasibility of residential development, including new market -rate units and the addition of new bedrooms to existing residential development, the memorandum entitled Implementation Considerations for Palm Desert Affordable Housing Impact Fees dated March 18, 2015, prepared by Economic & Planning Systems, Inc., recommends that affordable housing impact fees lower than the maximum permissible fees be adopted; and WHEREAS, the City Council desires to adopt and implement affordable housing impact fees for market -rate residential development while ensuring that that development remain economically feasible; and RESOLUTION NO. 2015- 27 WHEREAS, affordable housing impact fees collected shall be deposited into the Affordable Housing Fund to be used only for acquiring interest in real properties that provide affordable housing, consistent with the goals and programs identified in the currently adopted Housing Element of the Palm Desert Comprehensive General Plan so as to provide housing options to persons and families of very low, low, and moderate income; and WHEREAS, at least 10 days prior to the date this resolution is to be considered, data was made available to the public indicating the amount of cost, or estimated cost, required to provide the service for which the fee or service charge is levied and the revenue sources anticipated to provide the service, including general fund revenues in accordance with Government Code Section 66019; and WHEREAS, at least fourteen days prior to the date this resolution is to be considered, notice was mailed to those persons who had requested same in accordance with Government Code Section 66019; and WHEREAS, notice of the hearing on the proposed fees was published twice in the manner set forth in Section 6062a as required by Government Code Section 66018; and WHEREAS, a public hearing was conducted and the public notice and availability of estimated costs were available to the public at least ten days prior to the meeting, all in accordance with Government Code Sections 66018 and 66019. NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Palm Desert, California, does hereby approve establishment of an affordable housing impact fee of two dollars ($2.00) per square foot of livable building area (as defined in Section 3.47.030.13 of the Palm Desert Municipal Code) for new residential market -rate for -sale and rental dwelling units, including new bedrooms added to existing market -rate dwelling units. PASSED, APPROVED, and ADOPTED by the City Council of the City of Palm Desert, California, at its regular meeting held on the day of , 2015, by the following vote: AYES: NOES: ABSENT: ABSTAIN: Susan Marie Weber, Mayor ATTEST: RACHELLE D. KLASSEN, CITY CLERK CITY OF PALM DESERT, CALIFORNIA COMPUTATION OF POTENTIAL FEE REVENUE City of Palm Desert — Affordable Housing Impact Fee Revised 28 May 2015 The computation of potential fee revenues begins with identifying the amount of vacant land in Palm Desert on which market rate housing can be developed. For this, an inventory of vacant residential land has been prepared using the current approved Housing Element inventory as a basis, and supplementing it with other vacant parcels which are being considered for residential development. This inventory is presented below. Assessor's Parcel No. General Plan/Zone Size (Acres) Potential Units @ Max. Density 694-130-017 D R-M, R-HO/PCD 10.21 176 694-130-021 G R-M, R-HO/PR-20 24.16 200 694-130-018 D R-M, R-HO/PR-20 3.48 72 694-190-008 (H) MU/PR-20 15 of 29.36 160 694-200-014 (J) R-M, R-HO, MU/PR-20 11.46 194 694-130-012 1 R-M, R-HO/PR-5 33.71 235 694-130-003 F R-M, R-HO/PR-20 18.92 302 685-010-005 (A) C-R/PR-20 30 432 694-310-001 & 005 B) C-R/PR-22 10 200 694-120-012 1 I-BP/PR-20 10 200 627-273-018 R-M/R-3 0.3 7 627-273-005 R-M/R-3 0.3 7 625-171-001 R-M/R-3 0.3 7 627-121-044 R-H/R-3 0.25 6 627-121-045 R-H/R-3 0.25 6 627-301-022 R-H/R-3 0.31 7 627-153-007 R-H/R-3 0.22 5 627-101-033, -038, -039, -002, - 017 R-M/R-3 1.64 22 627-041-010 through 013, -29, 031 — 033 R-M/OP* and R-2 1'.20 19 627-051-002 R-M/R-2 0.16 2 627-031-030 RM/R-2 0.17 2 Revised Affordable Housing Impact Fee Revenue Calculation Page 1 627-052-006 R-M/R-2 0.17 2 627-052-031 R-M/R-2 0.16 2 627-052-033 R-M/R-2 0.16 2 627-084-001 R-M/R-2 0.22 2 627-084-003 R-M/R-2 0.19 2 627-182-004 R-M/R-1 0.20 1 627-182-005 R-H/R-1 0.20 1 627-182-006 R-H/R-1 0.17 1 627-351-042 R-M/R-2 0.20 2 627-351-019 R-M/R-1 0.17 1 625-224-001 R-M/R-1 0.19 1 625-126-009 R-H/R-3 0.14 2 625-061-018 R-M/R-1 0.15 1 625-021-008 R-M/R-1 0.19 1 625-031-011 R-M/R-1 2.20 1 625-032-011 R-M/R-1 0.21 1 624-241-008 R-M/R-1 0.12 1 Total Units (Table III-38 of HousingElement)177.1 2,285 Potential Santa Rosa Golf Course Project 79.5 306 Millennium — SFHs and apartments 63 660 132 Acre Site (Shepherd Lane 132 660 170-Acre Site — Specific plan under development — assume 75% residential 127 1,270 Less affordable apartments on City land -20 -400 TOTAL POTENTIAL AT MAX. DENSITY 558.6 4,781 TOTAL POTENTIAL UNITS AT LIKELY DENSITY (6-8 Dwelling Units / acre 3,351 to 4,469 Revised Affordable Housing Impact Fee Revenue Calculation Page 2 REVISED COMPUTATION OF POTENTIAL FEE REVENUE (continued) City of Palm Desert — Affordable Housing Impact Fee The total fee potential for all new residential development equals the sum of the fees for each Dwelling Unit (DU), plus the sum of fees for additions to existing homes. A range of fees will be calculated, since there are a range of manners in which the undeveloped residential property in Palm Desert may be developed. The total fees collected will depend upon the density of future residential development, and the size of the dwelling units (both homes and apartments). Although the development pattern in Palm Desert has historically been suburban, low density, single -story, single-family golf resort style homes, the changing demographics and lifestyles indicate that future development might be unlike development to date. Therefore, there is necessarily a degree of uncertainty in these calculations. Formulas: Total Fee Revenue = Fees from new dwelling units + Fees from additions to existing dwelling units Fee for Each Dwelling Unit = (Square Feet of Dwelling Unit) X (Fee per Square Foot) Fee for Average DU = (Square Feet of Average DU) X (Fee per Square Foot) Total fees for all new DU's = (Fee per SF) X (average SF of new DU's) X (total # of new DU's) FIRST: Calculate the total fees for all new dwelling units using expected densities of development and estimated sizes of homes and apartments: From the inventory table on the previous page, the total number of new dwelling units may be as low as 3,351 but may be as high as 4,781. Assuming that, in response to changing demographics and lifestyles, future development of the inventoried lands will feature homes smaller than those historically constructed in Palm Desert, the average size of new market -rate DU's is likely to be between 1,600 and 2,100 square feet (SF) of livable space (excludes garages). On the low end of the range, at an average size of 1,600 SF, the potential fee revenue for 3,351 dwelling units would be: Sum of fees for all new DU's = ($2.00 per GSF) X (average of 1,600 SF) X (3,351 DU's) _ $10.7 Million Revised Affordable Housing Impact Fee Revenue Calculation Page 3 while on the high end of the density range, but still with an average size of 1,600 SF, the fee revenue for 4,781 dwelling units would be: Sum of fees for all new DU's = ($2.00 per GSF) X (average of 1,600 SF) X (4,781 DU's) _ $15.3 Million Now for the high end of the range, at an average size of 2,100 SF, the potential fee revenue for 3,351 dwelling units would be: Sum of fees for all new DU's = ($2.00 per SF) X (average of 2,100 SF) X (3,351 DU's) _ $14.1 Million and the fee revenue for 4,781 dwelling units would be: Sum of fees for all new DU's = ($2.00 per SF) X (average of 2,100 SF) X (4,781 DU's) _ $20.1 Million NFXT- Calculate the total fees for additions and remodels to existing homes. Note that the number of residential remodels and additions that increase the number of bedrooms is not directly tracked. However, an approximation can be made by starting with the number of residential remodel/addition projects with construction values of $15,000 or more in one year. (A bedroom addition likely will cost more than $15,000.) In the calendar year 2014, the City of Palm Desert issued 178 building permits for residential remodels and additions with a value of $15,000 or more. Assuming that 2/3 of these projects are for interior remodels of bathrooms, kitchens, and other living space, without involving an increase in the number of bedrooms, there are 1/3 of 178 or 60 existing homes that increase the number of bedrooms, presumably by one bedroom each, over the course of one year. The affordable housing impact fee for these projects over the course of 20 years would be: (60 bedrooms) X (avg. 250 SF per bedroom) X ($2.00 per SF) X (20 years) _ $600,000 The total fee potential for all new residential development equals the sum of the fees for each DU, plus the sum of fees for additions to existing homes. From the information above, the project range of the total fee revenues is: Low end: $ (10.7 to 15.3)M + $600,000 = $ 11.3 to $15.9 million High end: $ (14.1 to 20.1)M + $600,000 = $ 14.7 to $20.7 million Revised Affordable Housing Impact Fee Revenue Calculation Page 4 2015 BOARD OF DIRECTORS PRESIDENT Joseph Hayes First Bank If VICE PRESIDENT Bruce Maize Fidelity Title 2nd VICE PRESIDENT Fred Bell Nobelf Energy Solutions SECRETARYITREASURER Eileen Eske Pacific Premier Bank VICE PRESIDENT OFASSOCIATES Allan Levin Allan Levin & Associates PAST PRESIDENT Mark Benedetti BMC Select Build CHIEF EXECUTIVE OFFICER Gretchen Gutierrez DIRECTORS Brian Benedetti Brian Benedetti Construction Andy Brakebill Paul Associates Printing Tom DuBose Development Design & Engineering Margaret Drun Margaret Drury Construction Nklario Gonzales GHA Companies Mark Gran Strictly Business Consulting Todd Hooks Agua Caliente Band of Cahuilla Indians Dave Lippert Lippert Construction. Inc Heather Loutsenhizer Petta Building Group Paul Mahonev PMA Advertising Deborah McGarrev The Gas Company Dan Olivier Nethery Mueller Olivier Alan Pace Petra Geotechnical John Powell. Jr. Coachella Valley Water District Marvin Roos MSA Consulting Inc Gre- Smith Smith-Kandal Insurance/Real Estate Phil Smith Sunrise Company Rvan Smith Shea Homes Patrick Swarthout Imperial Irrigation District City of Palm Desert Community Development May 12, 2015 MAY 18 2015 City of Palm Desert John Wohlmuth, City Manager 73-610 Fred Waring Drive Palm Desert, CA 92260-2578 Dear Mr. Wohlmuth, The Desert Valleys Builders Association appreciates the time and opportunities provided to the construction industry regarding the City's need and desire to provide affordable housing accessibility within the City of Palm Desert. In a perfect world or even a stable economy, housing would be provided at a full range of prices. For where there is a market, there will be someone to fill that niche. Our experience in the home building industry has provided many examples of when a market is inundated with a particular product to near saturation, another will change their product line to meet the needs of other sectors of the market. Of course shifts in such paradigms take time, especially with the convincing of banks, financiers, and stock holders. But, it does happen. The Desert Valleys Builders Association recommends the City Council NOT adopt the proposed affordable housing fee based on the followin:: reasons. In the Coachella Valley, each City will have a general sales price point based on cost of land and fees. Builders have also sized their product to the demand and found that certain price points require appropriately sized living spaces including the size of the lot. Jeff wattenbarger 75100 Mediterranean • Palm Desert a CA 92211 Wattenbarger Construction (760) 776-7001 Office • (760) 776-7002 fax www.thedvba.org 301*-, BOARD OF DIRECTORS PRESIDENT Joseph Hayes First Bank 13' VICE PRESIDENT Bruce Maize Fidelitv Title "'d VICE PRESIDENT Fred Bell Nobel] Energy Solutions SECRETARYITREASURER Eileen Eske Pacific Premier Bank VICE PRESIDENT OFASSOCIATES Allan Levin Allan Levin & Associates PAST PRESIDENT Mark Benedetti BMC Select Build CHIEF EXECUTIVE OFFICER Gretchen Gutierrez DIRECTORS Brian Benedetti Brian Benedetti Construction Andy Brakebill Paul Associates Printin; Tom DuBose Development Design & Engineeiing Margaret Drury Margaret Drury Construction Mario Gonzales GHA Companies Mark Gran Strictly Business Consulting Todd Hooks Agua Caliente Band ofCahuilla Indians Dave Lippert Lippert Construction. Inc Heather Loutsenhizer Penta Building Group Paul Mahoney PMA Advertising Deborah McGarrey The Gas Company Dan Olivier Nethery Mueller Olivier Alan Pace Petra Geotechnical John Po«ell, Jr. Coachella Valley Water District Marvin Roos IvISA Consulting Inc Greg Smith Smith-Kandal Insurance,Reai Estate Phil Smith Sunrise Company Rvan Smith Shea Homes Patrick Swarthout Imperial Irrigation District Compared to 2005 land prices, building in the City of Palm Desert is quite affordable. But, today's buyers are a bit more wary and frugal. The builders in Palm Desert are looking at products with 3.5-4 units per acre resulting in significant land cost per unit. Referencing a recent study produced by Clear Source Financial Consulting (and provided by the DVBA to City staff), land cost per door in Palm Desert is approximately $78,500 per unit, when the same sized property in Indio is $21,400 per unit. No matter which city in the Coachella Valley, the cost of materials and labor are going to be similar. Expected and purchased amenities vary greatly from unit to unit, and community to community. Builders will price accordingly, with the narrowest of profit margins since the 1980's. The idea of a new fee at $2/sq.ft. raises significant concerns for the homebuilding and selling industry. Looking at the same Comparative Fee Study prepared by Clear Source Financial Consulting, we see that in the process of total fees from planning thru processing to impact, the City of Palm Desert falls currently in the middle of Coachella Valley cities in terms of cost of doing business. However, adding a $2 per square foot of construction (including garage space) puts the City in the category of third most expensive City for fees right behind Coachella (#1) at $47,273 at 3.5 units/acre, or $44,704 at 6.0 units/acre; Indio (#2) at $45,298 with 3.5 units/acre, or $41,811 at 6.0 units per acre; Palm Desert fees with a $2/sq. affordable housing fee including garage would cost $44,838 with 3.5 units/acre, or $42,486 at 6.0 units/acre. As we mentioned at the prior City Council meeting, there is a direct correlation between the cost of housing and the number of potential buyers. For every $1,000 increase in price, 10,000 or more potential buyers are lost from the opportunity for home ownership. Additionally, a cost increase of $1,000 in materials or fees do not equate to the cost displayed on the final sell sheet. Depending upon the terms of the loans, the staff time to process, then the amount of time before its paid, etc. all add up for the `Cost of Carry,' which must be passed onto the prospective buyer. Jeff Wattenbarger 75100 Mediterranean • Palm Desert • CA 92211 Wattenbarger Construction (760) 776-7001 office • (760) 776-7002 fax www.thedvba.org 2015 BOARD OF DIRECTORS PRESIDENT Joseph Hayes First Bank If VICE PRESIDENT Bruce Maize Fidelity Title 2nd VICE PRESIDENT Fred Bell Nobell Energy Solutions SECRETARYITREASURER Eileen Eske Pacific Premier Bank VICE PRESIDENT OFASSOCIATES Allan Levin Allan Levin & Associates PAST PRESIDENT Mark Benedetti BNIC Select Build CHIEF EXECUTIVE OFFICER Gretchen Gutierrez DIRECTORS Brian Benedetti Brian Benedetti Construction Andy Brakebill Paul Associates Printing Tom DuBose Development Design Br. Engineering Margaret Drury Margaret Drury Construction Mario Gonzales GHA Companies Mark Gran Strictly Business Consulting Todd Hooks Agua Caliente Band of Cahuilla Indians Dave Lippert Lippert Construction. Inc Heather Loutsenhizer Penta Building Group Paul Mahonev PMA Advertising Deborah McGarrey The Gas Company Dan Olivier Nethen Mueller Olivier Alan Pace Petra Geotechnical John Pox%ell. Jr. Coachella Valley Water District Marvin Roos MSA Consulting Inc Greg, Smith Smith-Kandal Insurance/Real Estate Phil Smith Sunrise Company Ryan Smith Shea Homes Patrick Swarthout Imperial Irrigation District 4 As requested by Councilmember Sabby Jonathan, the DVBA has looked into alternatives for funding "affordable housing" units within the city limits of Palm Desert. We referenced two (2) legislative bills currently moving though the State Capitol offices and committees we believe could assist the City, should they pass and get signed into law. The first is AB 2 (Alejo and Eduardo Garcia) the Community Revitalization Authority. Should this become law it will act similarly to the old RDA. There are some exceptions, and some basic requirements. This is an incremental taxation / bonding program. The designated Community Revitalization and Investment Area must meet the following requirements: (1) An annual median household income that is less than 80 percent of the statewide annual median income. (2) Three of the following four conditions: (A) Non -seasonal unemployment that is at least 3 percent higher than statewide median unemployment (B) Crime rates that are 5 percent higher than the statewide median crime rate (C) Deteriorated or inadequate infrastructure such as streets, sidewalks, water supply, sewer treatment or processing, and parks. (D) Deteriorated commercial or residential structures. The second legislative bill is AB1335 (Atkins) Establishes the Building Homes and Jobs Act of 2015 to provide funding for affordable housing. Establishes the Building Homes and Jobs Trust Fund (the Trust Fund) within the State Treasury. Imposes a $75 fee on every real estate instrument, paper, or notice that is required or permitted by law per each single transaction per parcel of real property, excluding real estate instruments, papers, or notices recorded in connection with a transfer subject to a documentary transfer tax. Jeff Wattenbarger 75100 Mediterranean • Palm Desert • CA 92211 Wattenbarger Construction (760) 776-7001 office • (760) 776-7002 fax www.thedvba.org 2015 BOARD OF DIRECTORS PRESIDENT Joseph Hayes First Bank is, VICE PRESIDEN7 Bruce Maize Fidelity Title 2„ d VICE PRESIDENT Fred Bell Nobell Energy Solutions SECRETAR YITREASURER Eileen Eske Pacific Premier Bank VICE PRESIDENT OFASSOCIATES Allan Levin Allan Levin & Associates PAST PRESIDENT Mark Benedetti BMC Select Build CHIEF EXECUTIVE OFFICER Gretchen Gutierrez DIRECTORS Brian Benedetti Brian Benedetti Construction Andy Brakebill Paul Associates Printing Tom DuBose Development Design & Engineering 1%dargaret Drury Margaret Drury Construction Mario Gonzales GHA Companies Mark Gran Strictly Business Consulting Todd Hooks Agua Caliente Band of Cahuilla Indians Dave Lippert Lippert Construction. Inc Heather Loutsenhizer Penta Building Group Paul Mahoney PMA Advertising Deborah McGarrey The Gas Company Dan Olivier Nethery Mueller Olivier Alan Pace Petra Geotechnical John Powell. Jr. Coachella Valley Water District Marvin Roos MSA Consulting Inc Greg Smith Smith-Kandal Insurance,Real Estate Phil Smith Sunrise Company Rvan Smith Shea Homes Patrick Swarthout a Requires 20% of the money deposited into the Trust Fund to be used for affordable homeownership activities. Allows the remaining 80% of money in the Trust Fund, upon appropriation by the Legislature to be expended for the following purposes: a) Development, acquisition, rehabilitation, and preservation of housing affordable to extremely low-, very low, low and moderate -income households including necessary operating subsidies; b) Affordable rental and ownership housing that meets the needs of a growing workforce up to 120% of area median income (AMI); c) Matching portions of funds placed into local or regional housing trust funds; d) Matching portions of funds in the Low- and Moderate -Income Housing Asset Funds of former redevelopment agencies retained by successor agencies; e) Emergency shelters, transitional housing, and rapid re -housing services; f) Efforts to acquire and rehabilitate foreclosed, vacant, or blighted homes; and g) Homeownership opportunities, including but not limited to down payment assistance. Etc. These two bills are in process. The likelihood of them becoming law, is beyond our knowledge. If adopted, AB 2 may be difficult for the City of Palm Desert to qualify, due to the requirements. AB 1335 is similar to many defeated bills of the past, wherein the California Association of Realtors was successful in beating them down. Currently, the only opposition to AB 1335 is coming from the various counties assessor's offices, which we believe is because of the processing requirements they would incur with adoption of this legislation. Imperial Irrigation D�stnct 75100 Mediterranean • Palm Desert • CA 92211 Jeff Wattenbarger Wattenbarger Construction (760) 776-7001 office • (760) 776-7002 fax www.thedvba.org 2015 BOARD OF DIRECTORS PRESIDENT Joseph Hayes First Bank I s' VICE PRESIDENT Bruce Maize Fidelity Title 2nd VICE PRESIDENT Fred Bell Nobell Energy Solutions SECRET.4R VITREASURER Eileen Eske Pacific Premier Bank VICE PRESIDENT OFASSOCL4TES Allan Levin Allan Levin & Associates PAST PRESIDENT Mark Benedetti BMC Select Build CHIEF EXECUTIVE OFFICER Gretchen Gutierrez DIRECTORS Brian Benedetti Brian Benedetti Construction Andy Brakebill Paul Associates Printing Tom DuBose Development Design &. Engineering Marearet Drury Margaret Drury Construction Mario Gonzales GHA Companies Mark Gran Strictly Business Consulting Todd Hooks Agua Caliente Band of Cahuilla Indians Dave Lippert Lippert Construction. Inc Heather Loutsenhizer Penta Building Group Paul Mahoney PMA Advertising Deborah McGarrev The Gas Company Dan Olivier Nethery Mueller Olivier Alan Pace Petra Geoteehnical John Powell. Jr. Coachella Valley Water District Marvin Roos MSA Consulting Inc Greg Smith Smith-Kandal Insurance/Real Estate Phil Smith Sunrise Company Rvan Smith Shea Homes Patrick Swarthout Imperial Irrigation District Fortunately, a bill that was passed last year, under our radar, is SB 628 Enhanced Infrastructure Financing Districts (EIFDs). This new law, effective in 2015, "authorize(s) the legislative body of a city or a county, defined to include a city and county, to establish an enhanced infrastructure financing district, adopt an infrastructure financing plan, and issue bonds, for only which the district is liable, upon approval by 55% of the voters; to finance public capital facilities or other specific of communitywide significance, including, but not limited to, Brownfield restoration and other environmental mitigation; ... the acquisition, construction, or rehabilitation of housing for persons of low and moderate income for rent or purchase;..." DVBA believes this is the best opportunity for the City of Palm Desert, since the demise of the RDA. This bill allows the City to be creative in determining the district and financing plan borders. In the most restrictive plans it could be limited to areas of the City considered un-developed or under -developed. Voting parties would only be those property owners in the district. There should be no cost to builders/developers for the formation of the district and plan. There is no cost to the homebuyer. And, no additional taxes will be paid by the homebuyers. As a property tax -increment financing tool, the district has the potential to raise significantly more revenue than the proposed mitigation fee to new construction. To assure our interpretations we have confirmed our understanding of the benefits of Enhanced Infrastructure Financing Districts by meeting with representatives of Kosmont Companies. They have a public financing background and have been assisting cities in Post -RDA issues. DVBA suggests that staff research this as the most viable alternative. In continuing to look for alternative solutions, we have also reached out to other building industry associations in our neighboring states to learn how their communities are dealing with providing affordable housing opportunities. Oregon established legislation in the early 1990s prohibiting local agencies from developing inclusionary zoning ordinances or in -lieu fees to support affordable housing efforts. Nevada does not have any inclusionary zoning, and there aren't any cities of record attempting to adopt such an ordinance. Jeff Wattenbarger 75100 Mediterranean • Palm Desert • CA 92211 Wattenbarger Construction (760) 776-7001 office • (760) 776-7002 fax www.thedvba.org 2015 BOARD OF DIRECTORS PRESIDENT Joseph Hayes First Bank I" VICE PRESIDENT Bruce Maize Fidelity Title end viCE PRESIDENT Fred Bell Nobell Energy Solutions SECRETAR YITREASURER Eileen Eske Pacific Premier Bank VICE PRESIDENT OF ASSOCIATES Allan Levin Allan Levin & Associates PAST PRESIDENT Mark Benedetti BMC Select Build CHIEF EXECUTIVE OFFICER Gretchen Gutierrez DIRECTORS Brian Benedetti Brian Benedetti Construction Andy Brakebill Paul Associates Printing Tom DuBose Development Design & Engineering Margaret Drury ✓ Margaret Drury Construction Mario Gonzales GHA Companies Mark Gran Strictly Business Consulting Todd Hooks Agua Caliente Band ofCahuilla Indians Dave Lippert Lippert Construction, Inc Heather Loutsenhizer Penta Building Group Paul Mahonev PMA Advertisins Deborah McGarrey The Gas Company Dan Olivier Nethery Mueller Olivier Alan Pace Petra Geotechnical John Powell. Jr. Coachella Valley ater District Marvin Roos MSA Consulting Inc Greg Smith Smith-Kandal Insurance,Real Estate Phil Smith Sunrise Company Rvan Smith Shea Homes Patrick Swarthout Imperial Irrigation District Jeff Wattenbarger Wattenbar2er Construction Most recently, April 1, 2015 to be exact, a law went into effect in Arizona prohibiting any local agency from affecting the sale price of a home, in their efforts to provide affordable housing. These states are partnering with non- profit builders, using state housing tax credits (when available) and other cost saving incentives to provide affordable housing opportunities. Finally, beyond the economics of pricing out the middle class by increasing the cost of market rate housing to supplement housing for those at a lower economic level, we believe there are some constitutional issues that have yet to be answered. We have consulted with the Law Offices of Walter P. McNeill for a review of the proposed ordinance. The opinion letter provided separately speaks to advances in the interpretation of Koontz and the effects of Proposition 26 on regulatory law. Both of which DVBA believes establishes that the advancement of an affordable housingfee on new market rate construction to be a violation of law. Therefore, based on the above referenced issues, The Desert Valleys Builders Association recommends the City Council NOT adopt the proposed affordable housing fee, and further investigate the possibilities provided in SB 628 Enhanced Infrastructure Financing Districts. Once again, the DVBA appreciates the opportunity to provide input to this issue. Cc: Lauri Aylaian, Director of Community Development Mayor Susan Marie Webber Mayor Pro Tern Robert A. Spiegel Council Member Jan Harnik Council Member Sabby Jonathan Council Member Van Tanner 75100 Mediterranean • Palm Desert • CA 92211 (760) 776-7001 office • (760) 776-7002 fax www.thedvba.org JA no 0 rx- 114 Tin - I GOVERNMENT FEE LIT 1� A 7 1 N April 23, 2015 Gretchen Gutierrez, CEO Desert Valley Builders Association 75100 Mediterranean Palm Desert, CA 92211 by E-mail and U.S. Mail re: Legal Analysis of City of Palm Desert proposed Affordable Housing Fees Dear Ms. Gutierrez, At your request I have analyzed the City of Palm Desert's proposed "affordable housing fees" to provide an opinion as to their vulnerability to legal challenge should one occur. In summary, it is my opinion that the proposed fees are legally invalid on a variety of grounds. Most prominent of those grounds are that: (1) the fees (insofar as they are treated as "mitigation impact fees" —a questionable assumption as described below) clearly violate the strict scrutiny nexus requirements now applicable to all impact fees for development permits for land per the U.S. Supreme court decision in Koontz v. St. Johns Water Mgmt. Dist. (2013) ---U.S.—, 133 S.Ct. 2586, 186 L.Ed. 2d 697; (2) the fees, insofar as a California Court may treat them as being in substance a "regulatory fee," violate the provisions of Proposition 26 (Cal. Const. XIIIC §1(e)(3)) which require that a charge for a permit shall not exceed the reasonable regulatory costs for issuing the permit and enforcing the permit (i.e. the building permit as opposed to a regulatory program for affordable housing); (3) the fees, under any circumstances and assuming for sake of argument that they are otherwise legitimate, are far in excess of mitigating the purported costs for affordable housing allegedly created by the construction of market rate housing, by a factor of 2X up to about 10X; (4) the fees are inconsistent with the City General Plan Housing Element, and are therefore arbitrary, capricious, and invalid on those grounds. Other factors are present which make the fees either invalid or problematic at best; I will mention some but not all of those below. This is not meant to be an exhaustive treatment of the subject but it should be sufficient to raise the key issues and make it apparent that these fees cannot be adopted without violating current law. I would be glad to answer any questions you may have. Thank you for this interesting assignment. 1. PROCEDURE: It should be noted at the outset that the proposed procedure for adoption and implementation of the proposed affordable housing fees violate the basic tenets of both resolution/ordinance adoption and (considered as "impact fees") the provisions of Gov. Code §66017(a) of the Mitigation Fee Act. 280 Hemsted Drive. Suite E. Redding. California 96002 i WMcNeill@McNLaw corn TEL 5_30.222.8992 1 FAX 530.222.8892 It is clear that the City intends to adopt the more or less standard vehicle for authorizing and implementing fees: an authorizing ordinance as to the purposes of the fee, combined with an implementing resolution that contains the specifics for the fee, in particular the amount of the fee; and in the future, when or if the fee needs to be modified, only the resolution is modified while the ordinance remains unchanged. That general structure is acceptable, but it is fundamental that you cannot adopt an implementing resolution until you first have a valid authorizing ordinance legally adopted. In this case the resolution cannot, as planned, be adopted concurrently with the "first reading" of the ordinance, because the ordinance is not even capable of being legally voted upon until its second introduction to the City Council. Here, the City intends to vote on the resolution immediately at the "first reading" of the ordinance. A resolution adopted in that fashion is invalid. Treating the "affordable housing fee" as an attempted "mitigation fee" under the Mitigation Fee Act [MFA] (Gov. Code §66000 ei seq.) brings into play Gov. Code §66017(a), which provides that when there is adoption of a new fee, the fee "shall be effective no sooner than 60 days following the final action on the adoption of the fee or charge or increase in the fee or charge." In this case neither the ordinance nor the implementing resolution comply with §66017(a) by providing for that 60 delay in the implementation of the fee. That delay is critical for a variety of reasons, the most obvious being that builders who have invested heavily in developments right up to the precipice of issuance of building permits deserve the opportunity to obtain permits without paying a new fee that they had previously not incorporated into their careful financial analysis of building costs — a development budget that typically ultimately yields a relatively slim profit margin which could disappear entirely if consumed by a new fee that had not been planned for when the development process began. A fee adopted without this delay mechanism is invalid. 2. VIOLATION OF Koontz v. St. Johns Water Mgmt. Dist. (2013) ---U.S.—, 133 S.Ct. 2586,186 L.Ed. 2d 697 ["Koontz"]. The 2013 ruling of the U.S. Supreme Court in Koontz v. St. Johns River Water Management District [hereinafter "Koontz"] establishes newly defined constitutional requirements for monetary exactions as a condition of land development, which must be satisfied for collections of the Palm Desert affordable housing fee not to be deemed unlawful "takings" in violation of the 5V- Amendment of the U.S. Constitution. The City and its consultant have relied on the pre -Koontz case law (eg. Commercial Builders of Northern California v. City of Sacramento, 941 F.2d 872 (9th Cir.(Cal.),1991) to support an affordable housing fee which uses a collective analysis (not geared to individual fee payers) and only a general associational relationship between the fee and affordable housing as the legally required "nexus," as well as the proposition that legislatively created non -proportional fees can be charged as long as the amounts of revenue collected in the aggregate are less than the total mitigation cost as derived from general programmatic calculations of the total cost of mitigation. Palm Desert's 2 proposed affordable housing fee clearly and obviously follows the "old" template of the law. Without going into unnecessary detail here (you already know generally how the proposed fee is supposed to work) this affordable housing fee is based on the loose premise that the construction of market rate housing - basically housing for "moderate income" families and higher incomes - creates a corresponding need for services supplied only by workers from lower income levels ("very low income" to "median income") that need housing that corresponds to their incomes but is not currently sufficiently available in Palm Desert. To meet this alleged "need" the affordable housing fee is to be collected and deposited in the City's "affordable housing fund" and shall be spent only to promote the "policies and programs" identified in the Housing Element of the City's General Plan as supporting affordable housing. Had the law for mitigation fees remained static in recent years there is at least a possibility that this concept of impact fees charged for the right to obtain a building permit might meet constitutional muster. That is not the case today. Some history of the case law is helpful in understanding the changing landscape of the law as it relates to fee exactions placed on permits to develop property. In Koontz, supra, the property owner requested drainage and wetlands mitigation permits from the St. Johns River Water Management District to allow him to develop 3.7 acres on his 14.9-acre property. The District demanded as part of the process of imposing standard conditions on issuance of the permits that he either restrict his development by an additional 2 acres or pia the District for unrelated offsite mitigation work that would enhance about 50 acres of land owned by the District. Koontz found the District's demands excessive and on his refusal to agree to these demands his permits were denied by the District. Florida law allows a claim for damages for unconstitutional demands by public agencies, so Koontz sued. The issue presented to the Court was whether the District's demanded exactions - particularly the monetary demand - should be examined under the "heightened scrutiny" review of Nolan / Dolan. The majority of the Court decided that "heightened scrutiny" is applicable. The minority of the Court felt that Nolan / Dolan scrutiny was not warranted for a "monetary exaction," nor in cases where the exaction was not clearly an ad hoc individualized determination that maximizes the risk of extortionate use of the police power right to demand concessions. The majority opinion, however, found that, in the context of conditions placed on the development of land, "monetary exactions" are just as deserving of constitutional protection as demands for an interest in real property, and there is no reason that equivalent protection should not be given to legislative "impact fees" and other standard conditions placed on land development that have become commonplace methods of funding public improvements. The Court noted that, contrary to the warnings of the minority opinion that "heightened scrutiny" would have calamitous consequences for municipal finances and the ability of cities to fund infrastructure with legislatively created fees on permits for land development, many states around the country have been applying Nolan/Dolan "heightened scrutiny" to such impact fees and legislative exactions on land for years, without any evidence of it causing financial ruin in those states. 3 The "heightened scrutiny" now required by the Koontz decision demands that by way of an individualized determination for each fee payer (rather than a collective analysis) the exaction placed on land development must have an "essential nexus" to the impacts/harm to be alleviated by governmental expenditure of the exaction funds, and that the amount of the exaction have "rough proportionality" to the impact/harm it is intended to mitigate. In California and in the 9- Circuit this is a dramatic change in the law. (See Commercial Builders of Northern California v. City of Sacramento (1991) 941 F.2d 872 ["Commercial Builders"]; McClung v. City of Sumner 548 F.3d 1218 (2008) ["McClung"].) In Commercial Builders the City of Sacramento had passed a Linkage Fee ordinance that conditioned nonresidential building permits on payment of a fee to offset the burdens associated with the alleged influx of low-income workers to work on such developments and the demand for low-income housing. The plaintiffs claimed that the ordinance worked an unconstitutional taking because there was an insufficient showing that non-residential development contributes to the need for low-income housing and that the amount of the fees was not in proportion to any alleged burden on housing. But the 9- Circuit held that a legislative monetary exaction should not be invalidated unless there was "no rational relationship" or "no evidence of a nexus" between the development and the problem that the exaction seeks to address. The Court found that even though building market rate housing has an attenuated indirect economic relationship to affordable housing needs that was largely associational rather than clearly causative, this was sufficient to meet this extraordinarily lenient nexus standard. The Court also accepted the "proportionality" of the fee as it was much less than the total amount of a potential fee that the study claimed to be authorized. Generally the Court regarded the fee as a legislative act that required great deference from the court, and — ignoring the crucial fact that legislation is just as effective as an ad hoc exaction to extort money for exercising the right to develop property — gave the fee the same deference it would give in refusing to interfere in ordinary legislation. Long after Commercial Builders, in the McClung (2008) case the 9th Circuit reviewed a development condition of general application passed by the City of Sumner that required the builder to install and overbuild a 24-inch storm drain pipe, even though the property development did not need a pipe of that size or expense. The Court made the explicit determination that Nolan/Dolan "heightened scrutiny" does not apply to monetary exactions (because "money is fungible") as contrasted with dedications of land, nor does it apply to legislative exactions of general application as opposed to ad hoc or adjudicative individualized exactions. The McClung court cited with approval the decision in Commercial Builders among the cases it believed to be correctly decided on these principles (McClung, at 548 F.3d 1228). Koontz explicitly abrogates McClung (p.22 of Koontz decision) and by implication also abrogates Commercial Builders. The anticipated affordable housing fee in Palm Desert accordingly must be reviewed under "heightened 9 scrutiny' to determine if fee payers are accorded an individualized determination to assure that there is an "essential nexus" and individualized "rough proportionality" to the effects of the proposed land use. The more demanding "essential nexus" from Koontz and NolanlDolan requires more than a general associational relationship between the development activity (commercial building) and the impact/harm to be alleviated (unaffordable housing) which otherwise might clear the low bar of "no evidence" or "no rational relationship" set in Commercial Builders. Moreover, the amount of fee cannot be arbitrarily set for administrative convenience; nor can the proportionality of fee collections in either the individual case or in the aggregate be ignored, much less glossed over on the assumption that total fee revenues are less than what might be demanded. The Palm Desert proposed affordable housing fee uses a collective analysis that fails to protect individual fee payers by an individualized determination that there is an "essential nexus" between the fee exacted and causation of a specified need for affordable housing, and it further fails to show how defined corresponding affordable housing would mitigate the impact of the particular development paying the fee. Proportionality of the fee to the alleged impact is lacking both as to the individual fee payer, and as to all fee payers who are called on to pay more in revenues than any potential total cost for affordable housing. The affordable housing fee fails on all counts. The terminology and requirements set out in Koontz are not unique, but rather come from the context of pre-existing case law where it has been determined that "heightened scrutiny" is called for because "[1]and use applicants are especially vulnerable to ... coercion ... [and] extortionate demands." Koontz,133 S.Ct. 2586, 2594-2596. Some further background on these requirements in Koontz illuminates the failure of the Palm Desert proposed affordable housing fees to meet current legal standards in respect to: (1) causation as a requirement of the "essential nexus"; (2) direct and proportional mitigation rather than programmatic funding; and (3) the prohibition on fees that exceed costs, whether individual or collectively. (1) Causation as a requirement of the "essential nexus." The "essential nexus" prong of Koontz /NolanlDolan demands a "substantial connection" between the public burden created by the construction and the necessity for the exaction (Surfside Colony, Ltd. V. California Coastal Comm. (1991) 226 Cal.App.3d 1260,1267). The strength of that connection must "substantially advance" the state interest served by imposing the exaction (Nollan, supra, 483 U.S. 825, 834-835). While the case law does not necessarily require that the construction be the sole cause or an absolutely direct cause of the public burden, it is clear that the nexus analysis must show a cause -and -effect relationship between the two. In this regard the dissent by Justice Beezer in Commercial Builders, a dissent now vindicated by Koontz, was on target in stating (Commercial Builders, supra, 941 F.2d at 877): Sacramento has commissioned a study that demonstrates at best a tenuous and theoretical connection between commercial development and housing needs. But the Takings Clause requires a 5 cause -and -effect relationship between the two. Pennell v. San Jose, 485 U.S. 1, 20,108 S.Ct. 849, 862, 99 L.Ed.2d 1 (1988) (Scalia, dissenting). In my view, Sacramento has not shown such a relationship. Even the study relied on by the city to support the ordinance states that its "nexus analysis does not make the case that building construction is responsible for growth." The issue arose again in Surfside, supra, where the California Coastal Commission demanded a lateral access beach easement as a condition of the permit allowing construction of a revetment to protect against erosion on the beach front of the Surfside Colony housing development. The "nexus" for the Commission's exaction of an easement was the assertion that the revetment would exacerbate erosion in front of the revetment (which was built on an emergency basis and therefore completed before the Commission's administrative proceedings were completed). The Commission had several scientific studies concerning the effects of revetments; some of the studies indicated that revetments accelerate erosion of the beach in front of them, leaving the beach steeper, more narrow and "perched"; while another study indicated that beach erosion was more complex and variable, depending on localized factors like wave conditions, sand supply, bedrock, etc., so that a "rational" determination of the effect of a revetment can only be made by a site - specific analysis. The Colony submitted an expert report to the Commission that asserted that this particular revetment did not exacerbate erosion and in fact stabilized the beach. In addition, the Commission was given pictures of the revetment (which was built in November/December 1982) showing the revetment in January 1983 with an eroded beach in front of it, and in July 1993 with the sand having come back and covered over the revetment so that it was not then visible. (In essence, the revetment here was actually restoring an already damaged beachfront rather than exacerbating erosion). Nonetheless, the Commission, which takes the general policy position that revetments exacerbate erosion and discourages them, voted to maintain the easement exaction. Colony sued, and the trial court upheld the exaction. The Court of Appeal in Surfside Colony reversed the trial court decision, focusing its decision on the strength of the essential nexus required by Nolan. It found "there must be a solid connection between the public burden created by coastal construction and the necessity for a public easement" (Surfside Colony, 226 Cal.App.3d at 1263, emphasis added). Stating further (id. at 1267, fn.10, emphasis in original): The strength of the connection required by Nollan is not spelled out in so many words, but appears to be at least a substantial one. At 483 U.S. at pp. 834-835,107 S.Ct. at pp. 3146-3147 the court indicates the need for a "substantial" connection between the public burden imposed by the proposed construction and the condition imposed by the government: "Our cases have not A revetment is a sloping structure or fortification placed on the shoreline to disrupt the force of waves and protect the beach land from erosion or loss. elaborated on the standards for determining what constitutes a 'legitimate state interest' or what type of connection between the regulation and the state interest satisfies the requirement that the former 'substantially advance' the latter. The Court then distinguished Whaler's Village Club v. California Coastal Comm. (1985)173 Cal.App.3d 240, which had upheld the Commission's policy of exacting public access easements for the construction of revetments, but was decided before Nollan. Whaler's Village had employed a "rational basis" test and had determined that it was enough that the project incurred "incidental" effects on the public's right to shoreline access. The Whaler's Village court stated (at 173 Ca.App.3d 260-261) "the validity of the condition is not destroyed because the development has no direct nexus to the condition, the benefit to the public is greater than to the developer, as future needs are taken into consideration. It was enough that the project 'contributes in an incidental manner to the need for a particular extraction." The Surfside Colony court found that the foregoing holding of Whaler's Village no longer controls in light of the nexus requirements of Nolan for a "close connection" or "substantial relationship" between the burden and the condition. Then, after rejecting the Commission's legal arguments that an indirect or incidental relationship is sufficient, it found that in the absence of evidence that revetments necessarily cause accelerated beach erosion, there could be no finding of the legally required nexus in the case before it. Accordingly, the Commission's exaction of an easement was an unconstitutional taking. The proposed affordable housing fee in Palm Desert suffers from this infirmity. There is no evidence that construction of market rate housing causes a greater need for affordable housing. The data used in the study is purely associational, based on the unproven/unwarranted assumption that there is an idealized mix of income strata, and that the increase of one stratum necessarily requires corresponding increases of the other strata to bring to bring back the idealized balance. The reality is that there is no such idealized mix of income strata. There are largely wealthy communities that don't require the idealized level of hypothetical support services from low-income workers and are quite stable in that form. By the same token, it isn't hard to imagine that low-income populations can grow and predominate in a community without high -income residents flooding back in to restore balance. The notion that construction of market rate housing requires servicing by low-income workers is pure fiction, if not almost demeaning to low-income workers. High income housing residents can get along just fine without gardeners, nannies, wet -nurses, maids, and pool boys. Other potential low-income services are not by definition essential to the functioning of higher income residents (witness the gradual disappearance of cashiers in stores) and are a product of opportunistic pre-existing availability rather than generated need and attraction. There is no appellate case in the state of California that has upheld the concept underpinning the fee study in this case, that higher income residents of market rate housing somehow generate low income populations. No wonder. Consider for a moment the legitimate proposition that the income strata in any community are to some degree interdependent in both directions. That is, increases in low-income populations also have a need for services from higher income residents, and room also has to be made for the moderate- to high - income residents. Low-income residents need health care services from doctors and skilled nurses; if they get divorced, suffer an injury caused by others, or are arrested, they need an attorney; they need the police to protect them; they need fireman to put out their fires; they need good school teachers for their children. Ironically, fees that falsely inflate the cost of housing can push some moderate - income earners into median and lower categories for housing — a dilemma that's real for too many schoolteachers. The notion that constructing houses creates a need for more houses in a particular income stratum is a ruse for extortionate governmental exactions, not a cause -and -effect phenomenon based on fact. (2) Direct and proportional mitigation rather than programmatic funding. The "individualized determination" of Koontz requires that the impacts of land development be mitigated in a direct and proportional way, rather than simply collecting funds to go to "programs" that do not directly ameliorate the impacts of the individual project, much less do so in way that is clearly proportional to the impacts of the individual project. In the Koontz case itself, the Court invalidated the government's proposed mitigation of Koontz's development, where the government had suggested it was adequate to spend money for mitigation work on 50 acres of government land distant from the Koontz property. Here, the proposed Palm Desert affordable housing fee utterly fails the requirements of Koontz. To begin with, there is no mechanism in the affordable housing fee for actual individualized determinations whatsoever. It's little more than a broad - based exaction of $2 / sq.ft. for new market rate construction. One fee fits all. To make it worse, the fee revenues have no avenue of direct or individualized mitigation for the impacts of the individual fee payers. Instead, the fee revenues are all thrown into a single "housing fund" and then spent on the "policies" and "programs" of the Housing Element of the General Plan, which permits expenditures anywhere in the City for the most vaguely defined purposes, having as a the common thread only the goal of improving availability of affordable housing for the entire City, even if the specifics are yet to be determined. This handing of the funds guarantees that Koontz cannot be satisfied. And then the concept of "proportionality", even of total expenditures to total impacts (which isn't sufficient anyway but might be better than nothing), is thoroughly undercut by the following factors that distort "proportionality" beyond recognition: • Contributions from the ancient but still present commercial linkage fee (City of Palm Desert Resolution 90-130) are ignored, with no justification. • There are two irrational exemptions for mobile homes and "granny flats" (secondary dwellings of 1250 sq.ft. or less). All else being equal, exempting and then subsidizing mobile homes and "granny flats" distorts the fee, causes over -collection, and raises equal protection issues. • "Leveraging" of fee funds with funds obtained from other outside sources (like state and federal grants, etc.) has to taken into account but is totally ignored. The City of San Diego, for example, "leverages" $8 for every dollar it obtains locally. Palm Desert may not be that successful, but even partial success dramatically changes and reduces the fee calculations. Market adjustment by private development and travel. It's a fact of capitalism that increased demand (if there is any) will result in market adjustment. If builders are not saddled by excessive fees and regulatory constraints, they will build low-income housing given the chance to make a profit, and it is well known that private builders can deliver low-income housing at significantly lower construction costs than government -built housing. Also, even if the City claims it would prefer that low-income workers live locally in Palm Desert, any increase in demand will likely be met by workers travelling from areas where they already live and/or which are more hospitable to low-income housing. The City cannot choose whether workers travel or not, nor designate where workers must live. The market - driven effect of travel will happen whether the City prefers it or not. The error here is the City's failure to properly account for inevitable market effects. Measurement of "low income" households, as opposed to "low income" jobs, is unreliably inaccurate. Data on jobs is easy to measure, but cross- referenced data to determine whether individuals hold more than one job (normally "part-time" jobs) is not readily available. Census data is helpful but not frequent and specific enough for useful measurement. Recent trends, pushed in part by the ACA, have dramatically increased part-time jobs in the employment pool. Statistics on "low-income" workers tend to be grossly overstated in that there is no reliable accounting for 2-job workers and workers with part-time jobs in households ancillary to a spouse or partner also holding full or part-time employment. The errors are exacerbated by a tendency for "off the books" cash employment among some low-income service workers that may supplement reported employment, and other forms of income generation that avoid reporting. The errors in accounting fall toward significantly over -counting "low-income" households based only on reported low-income jobs. In effect, the goal of even gauging "proportionality" of impacts on "low-income" households is wishful thinking at best, and any fee structure that purportedly relies on such unreliable data is inherently arbitrary and capricious. • The fee study blithely ignores the enormous vacancy rate of existing housing in Palm Desert, much of which could be converted to low-income housing without the inordinate expense of newly constructed low-income facilities. According to current Ca. Dept. of Finance population and housing estimates, the City of Palm Desert has a 37.6517o housing vacancy rate, which adjusted for seasonality is 9.5%, making this City the third highest vacancy rate city (behind Indio and Rancho Mirage) among 28 cities in the County of Riverside. It is beyond irresponsible for the City to seek funding through a new fee for construction of low-income housing, when there is a gigantic unoccupied stock of existing housing obtainable at a fraction of the cost of new construction. A final irony is that many households that are currently "low-income" are comprised of construction workers that were laid off in the recession and have not yet returned to productive full employment. That is to say, their regular employment is either direct participation in or as part of the vast support services network for construction of market rate housing. Obtaining employment means they would be lifted out of the "low-income" categories and at least into the moderate -income level or better. They want jobs — not government subsidies that perpetuate their current circumstances. The substantial (and ineffective) levy of "affordable housing fees" on market rate construction of housing has only one real effect, the suppression of construction industry construction of market rate housing and the enormous pool of labor it supports when otherwise functioning in a healthy economy. Creation of this new "affordable housing fee" will have a greater effect of perpetuating and creating low-income households, rather than ameliorating the problem it purports to solve. In sum, it is impossible for the proposed fee to function legally as a proportional mitigation for impacts of development of market rate housing, particularly given the constraints of the Koontz decision. (3) The prohibition on fees that exceed costs, whether individually or collectively. It is axiomatic that fees that collect more than costs are unlawful. Koontz v. St. Johns Water Mgmt. Dist. (2013) --- U.S.—,133 S.Ct. 2586,186 L.Ed. 2d 697 ["Koontz"]; see also Shappell Industries, Inc. v. Governing Board (1991)1 CA 4- 218; Sinclair Paint Co. v. State Board of Equalization (1997)15 C 4- 866; and Warmington Old Town Associates v. Tustin Unified School District (2002)101 CA 4- 840). The fee study is in direct conflict with the Housing Element of the General Plan in that it totally ignores the Regional Housing Needs Allocations ["RHNA"] developed according to State law and incorporated in the Housing Element. The RHNA numbers show a need for "affordable housing" on the order of approximately 203 units., In stark contrast, however, the fee study calculates generated low- income housing, depending on the size of market -rate constructed rental or SFD housing, in a range from 444 units (if 10017o of market rate construction is only The RHNA number for "moderate income" includes both "median income" and "moderate income" (at 120% AMI), requiring an adjustment in that number to pull out only "median income" housing for that category. This highlights yet another fatal defect in the fee study — its use of income categories that don't correspond to the City's Housing Element. 10 the smallest size of rental housing, a virtual impossibility) to 2,031 units if all market -rate housing consists of palatial single family dwellings. Of course, reality will dictate a mix of market -rate housing that falls between these two numbers, but even the lowest number is twice the RHNA number for "affordable housing" and on the high end the number is roughly 10 times the RHNA requirements. The proposed "affordable housing fee" is calibrated to meet unreal sky-high demand levels that are flatly inconsistent with the RHNA relied upon by the City's own Housing Element and unavoidably generate massive surplus revenues. As a purported "mitigation fee" the City of Palm Desert proposed "affordable housing fee" cannot possibly withstand legal scrutiny, especially given the legal constraints now applicable throughout the country (based on the U.S Constitution Fifth Amendment prohibition against uncompensated "takings") based on the Koontz decision. 3. PROPOSITION 26: The proposed fees, insofar as a California Court may treat them as being in substance a "regulatory fee," violate the provisions of Proposition 26 (Cal. Const. XIIIC §1(e)(3)) which require that a charge for a permit shall not exceed the reasonable regulatory costs for issuing the permit and enforcing the permit (i.e. the building permit as opposed to a regulatory program for affordable housing). Courts have a salutary habit of looking at enactments such as new fees in accordance with what the purported fees actually are based on their substance, rather than accepting at face value the label that a government agency may place on the exaction (Weisblat v. City of San Diego (2009)176 Cal.App.4- 1022, 1038): "Although the classification of a revenue -producing device can be determinative of the lawfulness of the device, courts look to the actual attributes of the device as enacted in order to arrive at the proper classification; the label attached to the device by the local government is not determinative." (Kern County Farm Bureau v. County of Kern (1993)19 Cal. AppAth 1416, 1422, 23 Ca1.Rptr.2d 910, italics added.) In the present matter the City of Palm Desert chooses to label its proposed "affordable housing fee" a "mitigation fee." There is, however, a strong possibility that a reviewing court would determine that this fee is actually an attempted "regulatory fee" that is barred by the provisions of Proposition 26 (Cal. Const. XIUC §1(e)(3)) which require that a charge for a permit shall not exceed the reasonable regulatory costs for issuing the permit and enforcing the permit (i.e. the building permit as opposed to a regulatory program for affordable housing). The reason this fee is at risk of legal characterization as a "regulatory fee" is quite simple: all revenues from the fee are collected into the City's "affordable housing fund," and from there the fees are spent to effectuate the "policies" and "programs" of the Housing Element of the General Plan that are well-intentioned as to their purposes but vague (at best) for specific expenditures and unlimited as to the City's evolving regulatory program to 11 generally address affordable housing needs in the City. The attributes of this fee appear to be regulatory in nature, as opposed to standard mitigation fees that are directly addressed to funding identified prospective public facilities. In November of 2010, Proposition 26 amended the California Constitution (Art. XIII C §1) and completely changed the legal paradigm for judging the validity of fees and charges imposed by local agencies in California. It was the outgrowth of frustration with the unchecked proliferation of fees and charges that are really "hidden taxes," especially fees to simply raise revenues for regulatory programs. The onslaught of new fees had been made possible by the California Supreme Court's decision in Sinclair Paint, and appellate decisions in its wake, that: gave every new fee a presumption of validity; that put the burden on fee payers to prove there was no evidence to support a fee; that allowed fees for regulatory programs based on a general associational relationship between the class of fee payers and the societal problem to be solved by the use of the fee revenues; and that allowed fees that were not apportioned to fee payers in relation to the payers' burdens on or benefits from the governmental activity. Prop 26 turned the tables on that. Now any fee or charge created by a local agency is defined to be a tax unless the local agency can prove that it is not a tax by showing that it fits within one of seven specific exceptions that allow certain defined types of fees/charges. The burden of proof is on the local agency to show by a preponderance of the evidence that the fee is not a tax and that it is reasonably allocated to fee payers. Deliberately absent from the list of exceptions for permissible fees are regulatory fees of the type allowed by the Sinclair Paint decision. Very simply, Prop 26 puts an end to new or increased regulatory fees; they must now be approved by the voters as taxes. There is one exception in Prop 26 for "a charge imposed as a condition of property development," but that exception does not allow the imposition of fees merely as a requirement of issuing a building permit. As explained in CBIA v. SJVAPCD (2010)178 Cal.App.4-120,130-131, a regulatory fee may be made a requirement of issuing a building permit without losing its character as a "regulatory fee" and subjecting itself to the requirements of the Mitigation Fee Act. The key distinction is not the mandatory nature of paying the fee when the permit is taken, but rather whether the fee truly arises under the local agency's police power authority to condition development permits so that the specific consequences of the permit are mitigated. In the SJVAPCD case the court held that an "indirect source fee" to fund the regulatory program of the SJVAPCD In Sinclair Paint a paint manufacturer challenged a new fee charged for every bucket of paint to help the State pay for a lead screening program for children potentially exposed to lead from lead based paint — though lead had been banned from the manufacture of paint for well over 15 years; the paint company challenging the fee didn't even exist when lead was a common ingredient in paint. The Supreme Court generally classified fees/charges as falling into categories of (1) special assessments, (2) development fees, or (3) regulatory fees. It upheld the fee imposed on the paint industry as a bona fide regulatory fee, stating that it is constitutionally permissible under the police power to impose industry -wide fees to address the past, present or future impacts of the industry's operations, and that such fees are a valid method to shift the "societal costs" from the government to the industry, regardless that the industry and its fee payers had not been responsible for these impacts for many years. 12 addressing air pollution caused by development was in fact a "regulatory fee" not subject to the Mitigation Fee Act. In the present case, we similarly have a fee directed to the City's regulatory program for addressing affordable housing needs. There appears to be little substantive legal distinction, and the chances are significant that a court would view the "affordable housing fee" as truly a "regulatory fee." As noted above, Prop 26 ends regulatory fees by making them taxes that require a vote of the people to legitimize them as "taxes." Here the City of Palm Desert has no intention of putting the "affordable housing fee" up to a vote. If passed merely by the City Council it will be unlawful. 4. The "Fees" are far in excess of the City's costs and the alleged "impacts" of market rate housing development. This legal deficiency was discussed above under the topic of "proportionality" as well. To reiterate: the proposed fee ranges from 2X to 10X of the City's costs and / or the alleged impacts of market rate housing development. The fee is legally unsustainable. 5. The fees are inconsistent with the City General Plan Housing Element, and therefore arbitrary, capricious, and invalid on those grounds. As also noted previously, the proposed "affordable housing fee" is completely incongruent with the Housing Element of the General Plan. To begin with, the categorizations of affordable housing needs don't even match up to the categories used in the Housing Element. On top of that, the nexus study completely ignores the RHNA allocations driven by State law, and the quantification of affordable housing units actually needed in the City of Palm Desert. Instead, the nexus study takes off into the nether realm of 2X to 10X the RHNA housing needs and overcharges market rate housing without factual substantiation and in complete conflict with the Housing Element requirements. Under these circumstances any attempted adoption of this "affordable housing fee" would be patently arbitrary, capricious and unlawful. The review and analysis above addresses the most salient legal deficiencies in the Palm Desert proposed "affordable housing fee". If you have any questions I would be glad address them. Very truly yours, MCNEILL LAW OFFICES ��� dj✓lip;✓ WALTER P. MCNEILL 13 April 23, 2015 C01177h' Chaplc'1' 13oildim_ I1111d>I1A \I�OkIa(114I IS"wthrrn ( dil�,Illu 1891 11"Strect Rkerside. California 92501 (951)781-7310 Fax 9951) 781-0509 Re: City of Palm Desert — City Council Agenda — April 23, 2015 Objections to Proposed "Affordable Housing Impact Fees" and Request for Continuance of Council Consideration To the Honorable Mayor and Members of the City Council: This letter is respectfully submitted on behalf of the Riverside County Chapter of the Building Industry of Southern California and its members, in response to the proposal that the City adopt a new and unsanctioned "impact fee" to be used to subsidize "affordable housing" in the City of Palm Desert. This letter summarizes some of our concerns and potential legal complications to the proposed new "affordable housing impact fee." The Council is respectfully urged to reject the proposal, at least in its present form, and to instead direct City Staff to work with the BIA and other critical stakeholders to develop a more lawful, effective and market driven approach to improving the affordability of housing in Palm Desert. Below you find a brief summary of our general objections to the proposed fee as well as a list of our legal concerns on the matter. Additionally, Attachment A elaborates on each specific legal issue. Introduction and Request for Deferral of Council Consideration: It should be noted at the outset that we greatly appreciate the opportunity to comment. We do regret that we have been forced to communicate our concerns in this rushed manner, and so close to the scheduled Council meeting. However, BIA and other members of the public were not given adequate prior notice of this proposed action, nor any meaningful opportunity to review the associated nexus studies that assumes supports the proposed resolutions. The BIA did not receive notification until April 13, 2015 and then had to request for an electronic copy of the study which was not initially provided. There were no advance informal meetings between staff and the affected stakeholders, nor any study sessions or opportunities to question the consultant about the novel methodology and assumptions used in creating the nexus studies, nor to discuss the negative impacts of this fee on all housing construction activity in Palm Desert. We strongly recommend that this matter be deferred and continued, to allow for further public review and input, should the Council choose or choose not to consider it at a later date. The BIA does not question the importance of attempting to improve the affordability of housing in Palm Desert and other Riverside County communities. That is a worthy and legitimate public An Affiliate of the National Association of Home Builders and the California Building Industry Association objective. The BIA and its members are among the most supportive advocates for constructive, reasonable, and lawful measures that will actually improve the supply and affordability of housing, including policies promoting the increased production of homes affordable to residents in all income ranges. Local governments concerned about the affordability of housing should therefore be encouraging new housing production and adopting policies to incentivize new housing development as opposed to creating new burdens on housing development that many have determined to be counter- productive as such is the case with inclusionary zoning type impact fees. Housing "impact fees" and their relational inequities are regressive. They disproportionately burden entry-level renters and homebuyers. They are generally ineffective and in many cases counter- productive to their objective. Planning professionals and housing advocates increasingly recognize them as constraints on the production of housing and the supply of affordable housing in particular. This letter summarizes legal objections to the proposed imposition of affordable housing impact fees and deficiencies of the purported nexus study. However, the City is urged to also take note of the policy criticisms and economic objections to such the proposed impact fees and exactions (E.g., Cal. Gov. Code § 65589.5(a)(2): "The excessive cost of the state's housing supply is partially caused by activities and policies of many local governments that limit the approval of housing, increase the cost of land for housing, and require that high fees and exactions be paid by the producers of housing.") • Objections to Unlawful Fees on New "For Sale" Homes • No Statutory Authority for "Impact Fees" to Fund "Affordable Housing" • The Proposed "Impact Fees" Are NOT Justified by the "Nexus Studies" • The Purported "Nexus Studies" Are Flawed and Fail to Meet Evidentiary Requirements to Demonstrate a Reasonable Relationship Between New Housing Development and Increased Public Needs for Privately -Subsidized Affordable Housing • Failure to Comply With the Mitigation Fee Act • The Proposed New "Impact Fees" Would Violate California Constitutional Prohibitions Against "Special Taxes" Without Voter Approval • General Plan "Consistency" Issues • State Housing Law Issues • Denial of Equal Protection of the Laws and Substantive Due Process • Unlawful Fees on New "For Rent" Homes • Unlawful Circumvention of State Rental Housing Law We again appreciate the opportunity to comment and respectfully reserve the right for additional review of the study and supplemental documentation to determine additional legal conflicts and issues as our time frame to do so in this circumstance has been unfortunately limited. If you have any questions regarding this request of notification please do not hesitate to contact me at (951) 505-2594 or nmiller@riversidebia.org. Sincerely, (50 Nathan A. Miller Director of Government Affairs An Affiliate of the National ASsoclatlon of llonle Builders and the California Building Indust v Association i3UTAN RUTAN & TUCKER. LLP MEMORANDUM TO: Mr. Bill Blankenship, CEO, Building Industry Ass'n — Riverside County FROM: David P. Lanferman DATE: April 22, 2015 FILE NO.: 031455-0002 RE: Legal Objections -- Palm Desert's Proposed New Affordable Housing Fees This Memo summarizes some of the more obvious legal questions and deficiencies raised by the proposal for the City of Palm Desert to consider and adopt new "affordable housing impact fees" to be imposed on new residential development. This is based on our preliminary, and time -constrained, review of the purported "nexus studies" and cover memo. Additional issues, inconsistencies, and flaws may be revealed upon more detailed review. Legal Objections to the Proposed New Affordable Housing Impact Fees: There are numerous legal grounds for questioning or objecting to the proposed "affordable housing impact fees" (on both "for sale" and "for rent" homes), which include, but are not limited to, the following: 1. No Statutory Authority for "Impact Fees" to Fund "Affordable Housing." The documentation offered in support of the new "impact fees" acknowledges that the proposed use of such fees would be to generate revenues from the private development sector which would then be used by the City to subsidize the production of new affordable units. However, California cities may not impose fees on development projects for the purpose of reimbursing or subsidizing costs incurred by other private parties. (Price Development Co. v. Redevelopment Agency of the City of Chino Hills (9th Cir. 1988) 852 F.2d 1123.) Moreover, under California's Mitigation Fee Act, development impact fees may only be imposed to finance the construction of "public facilities," as defined in Goverrunent Code section 66000. A City may not lawfully impose "impact fees" except for the purpose of providing up blic facilities or improvements, the need for which is caused by new development. The proposed new housing fees do not meet these statutory or constitutional criteria. Neither the Staff Report nor the consultant's materials provide any legal authority for these fees. 2. The Proposed "Impact Fees" Are NOT Justified by the "Nexus Studies." Even if there were authority to consider adopting fees for privately owned or occupied housing, the City would need to provide evidence of a "nexus" between impacts on public 2644/031455-0002 Five Palo Alto Square, 3000 El Camino Real, Suite 200, Palo Alto, CA 94306 8349849.1 a04/23/15 650.320.1500 1 Fax 650.320.9905 Orange County I Palo Alto I www.rutan.com RUTAN RUTAN a TUCKER, LLP Building Industry Ass'n — Riverside County April 22, 2015 Page 2 affordable housing needs and the amount and use of the proposed "impact fees." In this context, the California Supreme Court has explained: "As matter of statutory and constitutional law, such legislatively -established fees must be shown to be reasonably related in both use and amount to deleterious public impacts of new development." (San Remo Hotel v. City & County of San Francisco (2002) 27 Cal .4th 643.) In addition, the U. S. Supreme Court re -confirmed in 2013 that as a matter of federal constitutional law, "monetary exactions [fees] are subject to [heightened] scrutiny under" the Court's earlier holdings requiring that such demands be shown to be reasonably related. and "roughly proportional," to impacts or needs created by those on whom the fees are imposed. (Koontz v. St. John's River Water Management District (2013) 133 S.Ct. 2586 ["the government may choose whether and how a permit applicant is required to mitigate the impacts of a proposed development, but it may not leverage its legitimate interest in mitigation to pursue governmental ends that lack an essential nexus and rough proportionality to those impacts."].) The proposal for establishing these housing impact fees acknowledges these constitutional requirements, and seeks to pass off two so-called "nexus studies" as satisfying these evidentiary requirements (one for "for -sale" homes, and one for "for -rent" homes). The consultant's reports, however, fail to adequately demonstrate the required "nexus" between new homes and the proposed new housing impact fees. They do not follow any judicially -approved or legislatively -sanctioned methodology for demonstrating a reasonable relationship between the development of new market -rate housing and any increased needs for privately -subsidized "affordable housing" in the City of Palm Desert. (Cf., Building Industry Assn. v. Ciry of Patterson (2009) 171 Cal.AppAth 886, the Court of Appeal invalidated the City's "affordable housing in lieu fees" because the study prepared by the City's consultant did not show a causal relationship between new housing and increased needs for affordable housing.) To the contrary, it has long been recognized that there is in fact no such nexus between increasing the supply of housing in a community and increased needs for subsidized housing. See, e.g., Altshuler & Gomez -Ibanez, REGULATION FOR REVENUE: THE POLITICAL ECONOMY OF LAND USE EXACTIONS (1993, The Brookings Institution & The Lincoln Institute of Land Policy) p. 5: " FT]he development of market rate housing ... clearly does not create a need for more subsidized housing.") 2644/031455-0002 8349849.1 a0423/15 RUTAN RUTAN 6 TUCKER. LLP Building Industry Ass'n — Riverside County April 22, 2015 Page 3 3. The Purported "Nexus Studies" Are Flawed and Fail to Meet Evidentiary Requirements to Demonstrate a Reasonable Relationship Between New Housing Development and Increased Public Needs for Privately -Subsidized Affordable Housing. The purported "nexus studies" offered here are premised on very speculative and unfounded assumptions. They are largely based on generic statistical data rather evidence of actual local conditions, and key assumptions in the report are not based on relevant data from Palm Desert or even from Riverside County. For example, they admit that "Riverside County data was not available for every Economic Census industry" which was to be used in speculating as to the typical household expenditures based on the job -type of speculative new households. (See, EPS, "Study for For -Sale Housing," p. 13.) The studies are, at least in part, inconsistent with actual facts and data, and inconsistent with projections in the City's own Housing Element and General Plan. For example, even though the American Community Survey reports that "average household size in Palm Desert is 2.05 people" (ibid., p. 7), the City's consultants nevertheless disregarded the actual facts and instead based their analysis on the contrary "assumption" that the average household size for future workers is 3 persons per household. (EPS, p. 7.) In addition, while the studies acknowledge that many Palm Desert residents are (and will continue to be) retired persons, they nevertheless rely on assumptions about different household spending and lifestyles that do not reflect the actual population of Palm Desert. While the new "nexus studies" purport to provide some evidentiary justification for the new fees, they failed to use a legally -sound methodology, and erroneously relied upon a series of unfounded and unsupportable assumptions. In essence, the studies base their conclusions on the highly speculative assumed disposable incomes of the households projected to move to Palm Desert, not on the "impacts" of the construction of new housing. Moreover, since the proposed fees are based largely on the assumption of increased disposable income being added to the community, they are really much more like taxes on new residents than true "impact fees." The unfounded assumptions and speculative methodology used by the City's consultants was the subject of scathing academic critique in a study published by the Goldman School of Public Policy at the University of California, Berkeley, The Use of Residential Nexus Analysis in Support of Inclusionary Housing Ordinances: A Critical Evaluation, (November 2011): "In general, the methodology is untested and has not been vetted by peer review.... Moreover, several issues common among residential nexus analyses call into question the accuracy of the methodology as a whole." As noted above, no statute or court decision authorizes or approves the speculative "analysis" used in these nexus studies. The Council should carefully consider whether Palm Desert truly wants to be the "guinea pig" or test case for such unauthorized housing impact fees. There are a number of flaws in the basic methodology created by EPS, including at least three (3) fundamental infirmities summarized here. First, the consultants admit that their 2644/031455-0002 8349849.1 a04123/15 RUTAN RUTAN 6 TUCKER. LLP Building Industry Ass'n — Riverside County April 22, 2015 Page 4 analysis "assumes that all households renting new market -rate units in Palm Desert are `net new' households to the City." (EPS, p. 11.) From that unfounded assumption, the study further assumes or speculates that every sale (or rental) of a new home results in the sudden, immediate appearance additional household income in Palm Desert, inferred simply from the costs of buying or renting the home in question. Neither of these assumptions are reasonable or supported by relevant local and substantial evidence. In a great many cases when a new home is bought or rented, the accompanying occupancy (and the assumed household income) — and the consumption that the consultant assumes to be associated with it — are not new or "additional" to the general locale or even to the City itself, but rather may be relocating locally The assumptions in the consultant's studies depend on ignoring all the effects of (1) local and regional organic population gromth and its consequences for both household formation and eventual income formation, (2) the fact that nearly one-half of home sales are typically to so- called "move -tip" buyers whose "enabling incomes" indicate already higher levels of consumption and demand, (3) nationally, nearly one-fourth of home sales are to non -occupant investors whose incomes — and assumed consumption — may never appreciably touch the City (while their tenants' consumption would likely be far different from what the consultants speculate), and (4) the disbanding of assumed "households" due to extraneous events (such as job changes, scholastic graduations, changes in health or mobility), into separate homes with no concomitant change in individuals' incomes and consumption. A second fatal flaw in the consultants' methodology is the assumption that all direct spending by new -home buyers or new -home renters will result exclusively in new jobs for lower - income workers who have neither (i) pre-existing jobs for which there is slack demand, nor (ii) proximately -located housing. This is another unfounded assumption. The studies ignores the fact that many of the service workers who it presumes (1) would be "attracted" to the City because of the new market -rate home occupants' (imputed) consumer spending, and (2) would be paid low wages by local employers, already live in the vicinity; already have households; and already occupy housing in or around the City that is affordable to them. A third flaw in methodology lies in its apparent assumption that any household that buys or rents a new home in the City of Palm Desert will focus all of its direct spending exclusively within the City's boundary lines. However, since the City is surrounded by other similar communities where new households may also find services and retail opportunities, such an assumption does not seem accurate. Much of the direct consumer spending by occupants of newly -built housing homes will likely fall outside the City's limits. As a consequence, the nexus studies have overstated the assumed generation of lower -income jobs within the City by a sizable factor. The resulting "impact fees" conjured up by this speculative methodology are therefore substantially over -stated, and unsupported by credible evidence. 2644/031455-0002 8349849.1 a0423/15 RUTAN RUTAN i TUCKER, LLP Building Industry Ass'n — Riverside County April 22, 2015 Page 5 4. Failure to Comply With the Mitigation Fee Act, The proposed "impact fees" would be deemed to violate the Mitigation Fee Act (Gov't Code §§ 66000 et seq.) which codifies the specific findings and supporting evidence that must be provided in order to lawfully enact any fees imposed as conditions of development approvals. The City's documentation does not identify any particular new public facilities to be financed with the fees. And, as noted above, it also fails to provide substantial evidence in the record (as opposed to assumptions and speculation) to demonstrate any reasonable relationships or nexus between the type of development and the use of the fee or the need for the unidentified public facilities attributed to residential development. Section 66005(a) further states that any fee or exaction imposed as a condition of development approval "shall not exceed the estimated reasonable costs of providing the service or facility for which the fee or exaction is imposed." California case law and the Mitigation Fee Act both prohibit the use of fees to attempt to alleviate or correct any perceived existing deficiencies in the community's existing facilities or level of service, so the new fees could not lawfully be used to help the City correct any existing shortages of affordable housing. (Gov't Code § 66001(g).) Here, the City has acknowledged that the lack of affordable housing is an existin community -wide problem, whether or not any new housing is developed in the City. 5. The Proposed New "Impact Fees" Would Violate California Constitutional Prohibitions Against "Special Taxes" Without Voter Approval. The City's affordable housing requirements may be deemed to be unlawful special taxes. The California Attorney General has published an Opinion explaining that such a "fee" on market rate housing development to provide a subsidy for affordable housing programs would be an unlawful "special tax" — invalid under the Cal. Const. (art, XI11) unless first approved by 2/3 of the voters. (62 Ops. Ca1.Atty. Gen. 673.) Under the California Constitution, purported "fees" which exceed the reasonable costs of providing facilities or services shown to be necessary as a result of development activities may be deemed to be "special taxes" — which are unconstitutional and invalid in the absence of the necessary voter approval. (E.g., Jacks v. City of Santa Barbara (2015) _- Cal.AppAth ; Weisblat v, City of San Diego (2009) 176 Cal.AppAth 1022 [rental housing administrative "fee" held to be an illegal general tax, because not based on evidence of the City's reasonable costs of providing services].).) 6. General Plan "Consistency" Issues. The proposed "housing impact fees" may be deemed to be inconsistent with several policies included in the City's General Plan and its current Housing Element, which encourage the development of more housing, and reducing constraints on such development. 2644/031455-0002 8349849.1 a04/23/15 RUTAN RUTAN i TUCKER. LLP Building Industry Ass'n — Riverside County April 22, 2015 Page 6 7. State Housing Law Issues. City policies imposing unjustified or excessive exactions or fees on new development as conditions of developing new housing in general are viewed as constraints on the supply of housing generally by the California Department of Housing and Community Development, and are deemed to operate as deterrents to affordable housing, which is contrary to State Housing Law. Adoption of such new constraints may require the City to amend its Housing Element. Denial of Equal Protection of the Laws and Substantive Due Process. The City's impact fees, as applied to new residential development such as this project, would arbitrarily require one class of residents (developers and purchasers of new market -rate for -sale housing, and new rental housing, and their tenants) to contribute more to affordable housing programs (which ostensibly benefit the community as a whole) than other residents. In the absence of evidence demonstrating any rational basis for shifting such a public burden to the private builders and residents of new homes on this selective basis, requiring these fees appears to be arbitrary, in violation of constitutional rights to due process and to equal protection of the laws 9. Unlawful Fees on "For Rent" Homes -- Circumvention of State Rental Housing Law. The proposed new housing "impact fees" on rental developments would be invalid for the reasons summarized above, but also would also likely be deemed invalid for an additional reason — inconsistency with controlling State Rental Housing Law. The proposed new fees on "for rent" housing appear to have been suggested as an attempt to circumvent State law. California's Costa -Hawkins Rental Housing Act [Cal. Civ. Code §§ 1954.50 of seq.] prohibits cities from regulating the rents charged on most new rental housing units. Palmer 1,. City of Los Angeles (2009) 175 Cal.App.4th 1396, held that an ordinance that required developers of new rental housing to set aside a percentage of the new units to be occupied at restricted, below market, rents for lower income residents violated the Costa - Hawkins Act, The Court also held that the ordinance's provision for payment of "in lieu fees" as an alternative means of satisfying the requirements were inextricably intertwined with the underlying set -aside requirements and thus were equally invalid. The Supreme Court declined to review or change that decision, and the Governor vetoed proposed legislation in 2013 that purported to overturn that decision. Accordingly, fees imposed as conditions of approving new for -rent development projects — regardless how "relabeled" as impact fees rather than "in lieu fees" remain unauthorized, contrary to State law, and are unlawful. 2644/031455-0002 8349849.1 a04/23/ 15 May 14, 2015 Lauri Aylaian Director of Community Development City of Palm Desert 73-510 Fred Waring Drive Palm Desert, CA 92260 Subject: Review of Comments regarding the Affordable Housing Nexus Studies for Palm Desert; EPS #141134 Dear Lauri: Thank you for forwarding the materials submitted by the Desert Valleys Builders Association (DVBA) regarding the affordable housing nexus studies and fees under consideration by the City of Palm Desert. As the authors of the nexus studies and feasibility assessment for Palm Desert, as well as similar studies for other California communities, we at Economic & Planning Systems (EPS) are pleased to have the opportunity to engage with the development community on this important topic. The DVBA's letter makes several good points regarding the potential merits of pending and recent legislation in addressing affordable housing goals in Palm Desert and throughout the State. EPS consistently recommends that jurisdictions consider a wide variety of funding approaches to affordable housing, so that the costs of meeting this important community need can be shared broadly, rather than solely by increasing costs for homebuilders (and potentially reducing values for landowners). EPS has been working on Infrastructure Financing Districts ("Enhanced" and otherwise) and agrees that this tool is worth exploring as one of the City's options for raising revenue for affordable housing. It is also fair to say that inclusionary zoning in California has been challenged in several lawsuits in recent years, and may or may not survive as it has traditionally been practiced for several decades in this State. However, the studies we have done for Palm Desert represent the current industry standard alternative to inclusionary zoning (which historically was based simply on local policy preferences), as our studies are focused on establishing a nexus relationship between new market -rate housing and increased demand for EtOnOmrCRF'annrny-Systems,Inc. below -market -rate ("affordable") units. The first such fees that we are aware One xarser P,aza, s`,ne 1410 of were calculated in Santa Monica and have been in place for many years, Oak,'and, CA 94612 and many cities have been pursuing nexus -based fee programs in the wake of 510841 9190 te; the Palmer and Patterson cases. While we are not aware of any legal cases 510 740 2080 tax focused on the validity of these nexus arguments thus far, it is worth noting Oak;and that several California jurisdictions (Sunnyvale, Mountain View, Santa Rosa, sacramento and Sonoma County) have adopted fees based on our methodology, and other 7env pr De ryeles jurisdictions have adopted similar fees based on comparable studies by some www.epsys.eom P: 1141000s1141134ParmDe5etr1Report1EP5CommentLtr051415.db x Lauri Aylaian May 14, 2015 Page 2 of our competitors. That said, we at EPS are not legal advisers and certainly would suggest that the City's own legal counsel review our studies and applicable statutes and case law to gain comfort in the validity of the approach. Elsewhere in the DVBA letter, we are not certain of the validity of the uncited claim that each $1,000 of additional home price eliminates 10,000 or more potential buyers from the opportunity for home ownership. This seems like a number based on a much broader population than Palm Desert or the Coachella Valley (perhaps the entire nation?), particularly given that an additional $1,000 of home price equates to only about $5/month on mortgage payment. While financing requirements have tightened following the recession, it seems unlikely that a bank would qualify a given mortgagee (let alone 10,000 mortgagees) for a $250,000 home but not a $251,000 home. Perhaps their citation is an interpolation of studies on the impacts of an extra $50,000 or $100,000 of home price? Regarding the legal opinion letter from McNeill Law Offices, many of the points raised in that letter are legal questions, such as the standard of review and whether the fee is a "mitigation" or "regulatory fee," and again EPS suggests that the City's legal counsel review those questions and concerns. However, there are several technical issues that we would like to speak to. Pursuant to their concern regarding the date of implementation noted on page 2, please note that some communities do elect to apply any newly adopted fees only to projects not yet in review or entitled by the City, or otherwise delay implementation of the fee, to address the concern that such fees will affect the economics of ongoing projects in negative ways. Also, on page 7, the letter asserts that the underpinning of the nexus analysis is the notion that there is an "idealized mix of income strata" that the fee aims to promote and balance. Whereas certain existing State and regional policy goals such as the Regional Housing Needs Allocation (RHNA) may aim to promote such a balance, the nexus analysis aims to objectively illustrate how the typical spending of households at different income levels translates into demand for goods and services and workers to provide them (including legal, healthcare, and public services as recommended in the McNeill letter, not just "wet -nurses" and "pool boys" as dismissively stated in the letter). On page 10 and twice again on page 13, the letter states that the fee from the study "exceeds costs" because it calculates maximum fees based on impacts rather than using the RHNA goals for affordable housing in Palm Desert. Here, I will point out that: 1) I am not certain how the author is reaching his conclusion that our study suggests demand for 444-2,031 affordable units, as he does not "show his work" in calculating these figures; 2) the RHNA numbers reflect policy goals for housing production in a specific period of time, whereas the nexus study calculates the relationship between market -rate home production and affordable housing demand based on market -rate unit pricing but not for any specific time period, and thus are not directly comparable; 3) the maximum nexus -based fees are calculated based on the worker demand associated with new market -rate households at various income levels, and would be proportionately the same whether assuming the City adds 100 market -rate units or 1,000 at a given price point; and 4) we understand that the Patterson case with which the attorneys should be familiar specifically found that City at fault for relying on RHNA as a proxy for affordable housing demand (and thus costs) rather than calculating the impacts from development more specifically (as we have done in our study). Finally, the letter asserts that the fee study is inconsistent with certain aspects of the City's Housing Element, and thus is "arbitrary, capricious, and invalid." As alleged evidence, the letter states that the EPS study calculates housing demand for income categories including "very low", "low", "median", and "moderate" income, while the Housing Element discussion of income levels subsumes P �141000sV4ll34P4lmDesertkReportkFPSCommentLtrOS1415.docx Lauri Aylaian May 14, 2015 Page 3 "median income" within the category of "moderate income" households. While again this may be a matter of legal technicality that deserves review by the City's legal counsel, it strikes me as a great overstatement to claim this as a "fatal defect in the fee study." I hope you find this response helpful, and thank you again for the opportunity to respond to comments regarding our work. Sincerely, ECONOMIC & PLANNING SYSTEMS, INC. Darin Smith Managing Principal P U41000s\141134Pa1mDesertlReportlfPSCommentCtrOS1415.0o x 1101k BEST BEST & KMEGFA ATTORNEYS AT LAW Memorandum To: Palm Desert City Council Members File No.: 72500.00001 From: Robert W. Hargreaves, Assistant City Attorney Date: May 19, 2015 Re: Affordable Housing Mitigation Fees The Desert Valley Builders Association (DVBA) and Riverside Chapter of the Building Industry Association (BIA) have submitted letters from their attorneys that raise a number of legal issues regarding the proposed affordable housing mitigation fee program. Those arguments are addressed briefly below. In summary, numerous other California jurisdictions have relied on nexus studies similar to the ones prepared for the City's to impose affordable housing mitigation fees. To our knowledge, those fees have not been successfully challenged. The City is not breaking new ground with these fees. In our opinion the affordable housing mitigation fees can be successfully defended against these challenges. Below are responses to the numbered issues raised by the two letters. I. DVBA ( Letter dated April 23, 2015 from Mr. McNeill, Esq. to Gretchen Gutierrez) 1. Procedural issues. The City agrees that the new fee cannot be imposed for 60 days after the final action to impose the fee. 2. Nolan/Dolan. DVBA argues strenuously and at great length that the fee must meet the nexus and rough -proportionality tests of the Nolan/Dolan line of Supreme Court cases. We concur. The mitigation fee statute under which the City is proceeding, Gov't Code section 66001, requires as much. As explained at length in the staff report, the City has met those tests with industry - standard nexus studies: Nexus -Based Affordable Housing Fee Analysis for Rental Housing and Nexus -Based Affordable Housing Fee for For -Sale Housing. Both studies clearly establish the nexus between the construction of new market -rate housing and the need for affordable housing. Both studies, using detailed factual analysis, have quantified the fees needed to fully mitigate those impacts (59.24-$20.21 per square foot). The fee proposed by staff (S2 per square foot) is substantially less. Consequently, the nexus and rough -proportionality tests are fully satisfied. Numerous other California jurisdictions have used similar studies to justify implementation of affordable housing impact fees at much higher levels. 3. Regulatory fees. DVBA argues that the fees do not meet the standards for "regulatory fees". The City has not claimed otherwise and, to the contrary, has proceeded under the rubric of "mitigation fees". 72500.00001 `•.9790040.2 1101k BEST BEST & KRIEGER ATTORNEYS AT LAW 4. Fees are excessive. DVBA argues that the fees are "far in excess" of the impacts. DVBA does not provide any factual analysis to substantiate that allegation. In contrast, the City's nexus studies provide detailed factual analysis to quantify the impacts. 5. Fees are Inconsistent with the Housing Element. Staff has provided a detailed memorandum "Estimate of Costs for the City of Palm Desert Affordable Housing Program As Approved in Housing Element Adopted For 2014-2021" that demonstrates how the affordable housing mitigation fees are designed to meet the objectives of the Housing Element. IT. BIA (Memorandum dated April 22, 2015 from Mr. Lanferman, Esq. to Mr. Blankenship) 1. No statutory authority. BIA argues that mitigation fees can only be charged to construct public facilities. In this case, the fees will be used to acquire for the City interests in real property that provide affordable housing. 2-3. The nexus studies do not support the fees. BIA argues that the fees are not justified by the nexus studies. As noted above, the City respectfully disagrees. .The studies are factually detailed and demonstrate nexus and proportionality. Similar studies have been used to justify fees in other jurisdictions, and have not been successfully challenged. 4. Failure to comply with Mitigation Fee Act. Those arguments are addressed above. 5. The fees would be special taxes. Impact fees are not taxes. 6. Fees are inconsistent with General Plan and Housing Element. This issue is addressed above. 7. State Housing Law Issues: State housing law fully supports efforts to promote affordable housing. 8. Denial of equal protection: The nexus studies provide the rational basis for the imposition of fees on new housing development 9 Unlawful fees on rental housing. The fee program is not intended to, and does not in fact, regulate rents of market rate housing. -2- 72500M001\9790040.2 Aylaian, Lauri From: Aryan, Steve Sent: Tuesday, May 19, 2015 12:49 PM To: Aylaian, Lauri Subject: FW: Governor's May Revise 2015-16 Attachments: AB 2.pdf; AB 2 Analysis.htm; AB 1335.pdf, AB 1335 Analysis.htm; SB 628 chaptered.htm; SB 628 Analysis.htm From: Joe A. Gonsalves & Son [mailto:Gonsalves@gonsalvi.com] Sent: Monday, May 18, 2015 12:04 PM To: Aryan, Steve Subject: RE: Governor's May Revise 2015-16 Steve and Lauri, I have provided you with some background on each bill individually. In addition, I have attached for your review a copy of each bill along with their analysis. AB 2 (Alejo): This bill would allow local government entities, excluding schools, to form an Authority to collect tax increment and issue debt. The Authority could use its powers to invest in disadvantaged communities with a high crime rate, high unemployment, and deteriorated and inadequate infrastructure, commercial, and residential buildings. Three of these four conditions would constitute blight. The area where the Authority could invest would also be required to have an annual median household income that is less than 80% of the statewide annual median income. Like redevelopment agencies, this bill would allow Authorities to freeze the property taxes at the time the plan for revitalizing the area is approved. The Authority will collect all the tax increment or the increase in property taxes that is generated after that point and use it on specified activities. Unlike redevelopment agencies, this bill would require the taxing entities in the area including the county, city, special districts, or a military base to agree to divert tax increment to the Authority. No portion of the local schools' share of tax increment may go to the Authority. AB 2 changes the affordable housing requirements of RDAs in three ways. It increases the amount an Authority must set aside for affordable housing from 20% to 25%. Second, the bill requires a community revitalization and investment plan to ensure that housing affordable to and occupied by extremely low-, very low-, and low-income households within an area does not decrease during the life of the area plan. Third, the bill requires the authority to provide replacement housing in two rather than four years. The Authority would be allowed to transfer the funds collected for affordable housing to a housing authority within the project area or to the successor agency to a former redevelopment agency. This bill is very similar to AB 2280 (Alejo) of 2014 which was vetoed by the Governor because it allowed local governments to establish a Community Revitalization and Investment Authority to use tax increment revenues to invest in disadvantaged communities a vests this new program in redevelopment law. In an attempt to address some of the Governor's concerns, this bill takes portions of the Community Redevelopment Law (CRL) and incorporates it into this bill rather than cross referencing the CRL. This bill will very likely be passed by the Legislature and sent to the Governor. The question is whether the Governor will sign it or not? We have had many conversations with the Governor's office and the Department of Finance about this issue and they have repeatedly told us that any changes to current law will be done through the budget process and not part of legislation. AB 1335 (Atkins) AB 1335, The Building Homes and Jobs Act, will generate hundreds of millions of dollars annually for affordable housing through a $75 fee on real estate recorded documents, excluding those documents associated with home sales. Funds generated will leverage an additional $2 to $3 billion in federal, local, and bank investment. Last session, SB 391 (DeSaulnier) would have imposed a $75 fee on every real estate instrument, paper, or notice that is required or permitted by law, excluding real estate instruments, papers, or notices recorded in connection with a transfer subject to a documentary transfer tax. The bill was held in Assembly Appropriations Committee. The differences between this bill and SB 391 are as follows: 1. Sets a cap of $225 on fees charged on a per parcel per transaction basis, 2. Creates a 20% set aside of funding for homeownership programs, 3. Requires the creation of an advisory board made up of experts and stakeholders to help develop the investment strategy, 4. Directs the county recorders to stop collecting the fee if HCD determines that the funds are not being used to support the purposes authorized by the Building Homes and Jobs Act, 5. Declares the intent of the Legislature to create a Secretary of Housing to oversee all of the housing activities related to the state and to have a clearer and more unified approach to housing in the state. AB 1335 is currently in the Assembly Appropriations Committee. The bill requires the approval of 2/3 of the membership of the Senate and the Assembly to be enacted. Prior to 2010, specified fees could be enacted by majority vote, but this authority was significantly limited by Proposition 26 (2010). This will create some difficult hurdles for this Legislation to overcome. SB 628 (Beall) Senate Bill 628 was signed into law by the Governor last year. This bill allows city or county officials to create an Enhanced Infrastructure Financing District (EIFD), which is governed by a public finance authority, to finance public capital facilities or other specified projects of communitywide significance that provide significant benefits to the district or the surrounding community. SB 628 also allows EIFDs to finance housing for low- and moderate income households and requires EIFDs to replace low- and moderate- income housing that is removed or destroyed. The amount of tax increment revenues available to EIFDs is generated only by those local governments that choose to participate, and doesn't include any revenues drawn from the State General Fund. The bill requires any IFD that constructs dwelling units to set aside not less than 20% of those units to increase and improve the community's supply of low- and moderate -income housing available at an affordable housing cost to persons and families of low- and moderate -income. This bill provides a means to finance the reuse and revitalization of former military bases, fund the creation of transit priority projects and the implementation of sustainable communities plans, construct and rehabilitate affordable housing units, and construct facilities to house providers of consumer goods and services in the communities served by these efforts. Should you have any questions or concerns, please feel free to contact our office, Thank you, Anthony Anthony D. Gonsalves Joe A. Gonsalves & Son 916-441-0597 office 916-441-5061 fax From: saryan@cityofpalmdesert.org[mailto:saryan@cityofpalmdesert.org] Sent: Thursday, May 14, 2015 2:50 PM To: Joe A. Gonsalves & Son Cc: layla ian (@cityofpa I mdesert.org Subject: FW: Governor's May Revise 2015-16 Can you please respond to the question below? Thanks for your help! Stephen Stephen Y. Aryan Risk Manager Office Direct: (760) 776-6326 E-mail: saryan(d_)cityofpalmdesert.org 73-510 Fred Waring Drive Palm Desert, CA 92260 www.cityofpalmdesert.org From: Aylaian, Lauri Sent: Thursday, May 14, 2015 12:17 PM To: Aryan, Steve Subject: RE: Governor's May Revise 2015-16 Steve, Can you ask Anthony for his opinion regarding the likelihood of passage of AB 2, AB 1335, and SB 628? 1 would like his professional opinion in writing (email is OK) so that I can share it with the City Council as part of a response to proposals by the DVBA to avoid implementation of an affordable housing fee in Palm Desert. (The DVBA has suggested that Palm Desert needn't impose any such fee, no matter how small, because these other mechanisms for providing affordable housing are in the works at the State level, and will obviate the need for local funding.) I'd like to get this by next Tuesday, please. Thanks, Lauri A. Lauri Aylaian Director of Community Development City of Palm Desert 73-510 Fred Waring Drive Palm Desert, CA 92260 760.346.0611 phone 760776.6417 fax rom: Aryan, Steve S t: Thursday, May 14, 2015 11:19 AM Subj : FW: Governor's May Revise 2015-16 From: Joe A. Gbqsalves & Son fmailto:Gonsalves@clonsalvi.com] Sent: Thursday, M 14, 2015 11:03 AM Subject: Governor's PtQy Revise 2015-16 FROM: ANTHONY, JASON &,P'AUL GONSA-LVES SUBJECT: GOVERNOR'S Y REVISE — 2015-2016 DATE: THURSD , MAY 14TH, 2015 OVERVIEW: This mZwith emor released the 2015-16 May Revision to the state budget that reflects a 7 billion increase in Generaes compared to the January Budget. This year's budget is 1 /3 larger than the bu is during the econowhich shows the economic rebound that the state is on. However, if the Legislature d Governor are not pruew revenues, it is likely the state will face budget deficits in the out years. The follows will providmmary of the use for these new revenues: 4