Bonuses without benefits

Council got an earful Tuesday night about the alleged flaws in Alameda’s density bonus ordinance.

Here’s one thing those on the dais didn’t hear:  The main problem with the density bonus ordinance is that . . . it doesn’t produce the results it’s supposed to.

Surprising as that conclusion may seem, it follows from the evidence of how the ordinance has worked in practice.

Let’s take a look.

The declared purpose of the state density bonus law, and of local ordinances like Alameda’s adopted to implement it, is to increase the supply of “affordable” housing.  (And by “affordable” housing, we mean what the State of California means:  housing affordable by very-low, low- and moderate-income households).  It seeks to achieve this goal by rewarding a developer with “bonus” market-rate units – in excess of the total it would otherwise be permitted to build under the applicable zoning laws – if it agrees to include specified percentages of “affordable” housing in its project.

But suppose the local jurisdiction already has an ordinance (as Alameda does) requiring a developer to incorporate “affordable” housing.  In such a case, what additional “affordable” housing results when the developer takes advantage of the density bonus ordinance?

To get the answer for Alameda, the Merry-Go-Round looked at the three residential developments for which density bonus applications have been approved by the Planning Board and/or Council.

We first calculated the number of “affordable” housing units in each category the developer would have been required to build under the City’s inclusionary housing ordinance, which mandates that 4% of the total units be reserved for very-low-income households, 4% for low-income households, and 7% for moderate-income households.  Then we compared these totals with the number of “affordable” units in each category the developer proposed in its successful application for a density bonus.

Here are the results:

DBO Inclusionary

Based on these figures, the projects approved under the density bonus ordinance will deliver a total of 15 more units of very-low-income housing than the inclusionary housing ordinance otherwise would require – but will provide six fewer low-income units and two fewer moderate-income units, for a net gain of only seven “affordable” units.  (Last summer, the Planning Board approved a revised development plan for Alameda Landing that changed the mix of very-low- and low-income units from 14 and nine to 25 and six.  If this change is taken into account, the net gain increases to 15 “affordable” units).

Why would a developer choose to qualify for a density bonus by exceeding the inclusionary housing ordinance’s requirements for very-low-income housing rather than low- or moderate-income housing?  The most likely explanation is that it’s easier to get “bonus” units that way:  going from 4% to 5% in the very-low-income category earns a density bonus, but it takes a jump from 4% to 10% in low-income units, and from 7% to 10% in moderate-income units, to meet the density-bonus threshold.

Now look at the last column in the table.  It shows that, in exchange for including a net seven (or 15) units of affordable housing, the developers get the right to build (and sell or rent) another 162 market-rate units.  This represents about 27% more market-rate units than the developers would have been able to build without the density bonus.  And the more market-rate units, presumably, the higher the profits.

Is this “price” worth it?  One could argue that authorizing an additional boatload of housing we don’t need – as far as we know, no one (except maybe Diane Lichtenstein of the “Alameda Home Team”)  is complaining about a shortage of million-dollar homes in Alameda – is not the way to obtain another thimbleful of the housing that we do need.  On the other hand, one could argue that, absent the density bonus ordinance, a developer would not take on a new residential project at all – in which case no “affordable” housing would get built.   From this perspective, the appropriate comparison is between the number of affordable units included in the projects qualifying for a density bonus and . . . zero.

And, no, we haven’t forgotten Alameda Point.  There, the analysis is different but the conclusion is the same.  The settlement of the Renewed Hope lawsuit, written into law by ARRA, already requires that 6% of the housing units built at the Point be reserved for very-low-income households, 10% for low-income households, and 9% for moderate-income households.  In its application submitted under the density bonus ordinance, Alameda Point Partners, the developer chosen for Site A, agreed to match these numbers exactly.  Its proposed 800-unit project contains 200 “affordable” units.

Had the requirements specifically established for Alameda Point not applied, the density bonus ordinance would have allowed a smaller project with fewer total units and fewer “affordable” units.  According to a site plan submitted by Alameda Point Partners, the site would accommodate 265 single-family homes.  But the maximum density bonus for a project of this size would have been only 93 market-rate units.  And to get that maximum, the developer would have needed to include only 30 very-low-income units, or 53 low-income units, or 106 moderate-income units.  It is thus the Renewed Hope settlement, not the density bonus ordinance, that is responsible for the 200 “affordable” units at Site A.

Now let’s take another approach to the issue.

Like the density bonus law, the state housing element law is intended to encourage development of “affordable” housing.  Each city must adopt a “housing element” demonstrating that it has “made available” sufficient sites to meet the city’s share of the “regional housing needs assessment,” which divides housing by income category.

This enterprise involves a bit of fiction.  The city itself determines which sites belong in which income category.  As long as a parcel is theoretically “available” for that type of housing, it doesn’t matter whether a project containing all, or even some, of the units in the assigned income category actually is going to get built there.

In Alameda, the best example of this phenomenon was the parcel known to park supporters as “Crab Cove” and to developers as “Neptune Pointe” – the 3.5 acres located at the foot of McKay Avenue next to Crown Beach.  For purposes of the 2007-14 Housing Element, the City classified this parcel as a site available for development of “very low/low” income housing and counted its “realistic capacity” of 48 units toward the VL/L quota.  We suppose that, theoretically, the site may have been “available” for a 48-unit low-income project, but at the time the classification was made, and the Housing Element adopted, staff and the politicians well knew of developer Tim Lewis’s desire to build market-rate homes there.

This disconnect with reality continues in the Housing Element for 2015-2023, which the former Council adopted last summer.  The City’s RHNA for that period requires that Alameda “make available” sites allowing development of a total of 1,723 housing units, of which 222 are to be affordable by “extremely low”-income households, 222 by “very low”- income households, and 248 by “low”-income households.  The Housing Element proposed by staff, and approved by the former Council, meets these requirements by classifying three sites as “available” for housing in the VL/L categories and counting their entire “realistic capacity” toward the low-income quota:  Shipways (146 units), North Housing (806 units), and Encinal Terminals (234 units).

There are no pending development proposals for any of these three sites, but we doubt that even City Planner Andrew Thomas expects that a total of 1,186 units of low-income housing are going to be built on them.  Indeed, if he thinks that the outfit – Tim Lewis, as it happens — holding development rights for Encinal Terminals is going to construct a 234-unit low-income project on that land, well, he must have been riding his bike through the Posey Tube and inhaling the noxious fumes.  But as long as Encinal Terminals (and the two other sites) are, theoretically, “available” for low-income housing, Mr. Thomas did nothing wrong in counting those sites toward that goal.

At the Merry-Go-Round, we prefer reality.  So we decided to look at the residential projects announced to date – not just those approved – to see how many units of low- and moderate-income housing developers actually are proposing to build in the next eight years.  We divided the projects into three groups:  projects for which a density bonus has been approved; projects for which the developer has filed, or has stated it intends to file, a density bonus application, and projects for which the developer is eschewing any reliance on the ordinance.

Here’s what we found:

RHNA DBO.rev3(Note:  The Alameda Landing and Del Monte numbers reflect amended development plans approved by the Planning Board and Council, respectively).

Now compare the numbers in the table with the RHNA requirements:  a total of 219 very-low- and low-income units proposed versus 692 very-low- and low-income units needed.  So even though five of the eight projects are qualified under the density bonus ordinance, the new residential developments will provide only about one-third of the very-low- and low-income housing the City needs to satisfy its RHNA quota.  At the same time, they will generate only half as many moderate-income units – but about twice as many “above-moderate” units – as the RHNA says the City needs.

Is it conceivable that the three sites classified as “available” for very-low- and low-income housing in the Housing Element will make up the shortfall?  Well, maybe.  But to do so they would have to provide more “affordable” housing than the inclusionary housing ordinance requires.  Indeed, even if they offered to include the percentages in any income category needed to qualify for a density bonus, the total would still fall short of the RHNA quotas.

Two conclusions about the density bonus ordinance may be drawn from this analysis:

  • The density bonus ordinance has not induced developers who have announced projects to date to include enough low-income housing to meet the City’s RHNA quotas.
  • It is problematic whether the incentives offered by the density bonus ordinance will entice other developers to propose projects with enough low-income units to fill the gap.

Viewed as a means to increase the supply of “affordable” housing in Alameda, the density bonus ordinance thus fails to achieve its stated goals.  It doesn’t produce significantly more low- and moderate-income housing than the inclusionary housing ordinance already requires.  And it doesn’t generate sufficient low- or moderate-income housing to enable the City to satisfy its RHNA requirements.  But it does result in a lot of market-rate housing – according to the RHNA, far more than the City needs.

So let’s get rid of the density bonus ordinance – or at least stop issuing density bonuses – right?

Not so fast.  We can’t get rid of the density bonus ordinance.  State law requires cities to adopt ordinances implementing the density bonus statute.  Nor can we stop issuing density bonuses.  Again, state law mandates that, if a developer proposes a project that contains the specified percentages of low-income housing, the city shall give her bonus units, incentives, and waivers.

Instead, if we truly want to increase the supply of “affordable” housing, the focus needs to turn to what revisions to local housing ordinances can be made, or what other actions can be taken, to achieve the goal that the density bonus ordinance purports, but presently fails, to accomplish.  (Of course, this presumes that “affordable” housing, rather than just more residential development of any type, is the objective.  Some may disagree.  For example, “I think we should have more Gold Coast housing,” Ms. Lichtenstein told Council.  “That is an asset to the City as well.”).

Maybe the percentage of “affordable” housing required by the inclusionary housing ordinance for all new residential projects ought to be increased.  Former Vice Mayor Doug deHaan reminded Council Tuesday that, in the redevelopment era, every redevelopment project, not just Alameda Point, had to include 25%, not just 15%, “affordable” units.  Or maybe the threshold required to obtain a density bonus ought to be raised.  While state law forbids a city from reducing the percentage of “affordable” housing needed to qualify for a density bonus, it doesn’t bar a city from increasing it.

And, maybe, at the same time, the percentages in the various income categories in the density bonus ordinance ought to be adjusted.  As presently written, the ordinance encourages developers to include “very-low”-income units in their projects, since that’s the easiest way to qualify for a density bonus.  But an argument can be made that what Alameda really needs is more “moderate”-income housing.  If so, the ordinance should be re-written to turn the incentives in that direction.

And here’s an even more radical proposition:  Maybe we should lessen, if not abandon, our reliance on private, for-profit developers to build the “affordable” housing the City needs.  Instead, we should look to non-profits, or – forgive us, Professor Friedman – government to assume that role.

In last week’s Alameda Sun, Mark Greenside, who is not known as a flaming liberal, made a similar point:

Clearly, there are ways other than developer-driven density bonuses and building waivers to fund and build affordable housing — especially 91 units a year.  There’s federal housing money, foundation money, church money, fraternal money. There are private-public partnerships and non-government organizations.  There are always creative ways to get money and creative ways to build, but in Alameda we’re getting same old, same old sold to us [as] something new called “smart growth.”

We don’t know if Mr. Greenside is correct about the availability of alternative sources of funding for “affordable” housing.  The inclusionary housing ordinance itself recites Council’s “finding” that “Federal and state funds for the construction of new affordable housing are insufficient to fully address the problem of affordable housing within the City.”  Likewise, Councilwoman Marilyn Ezzy Ashcraft, a former Planning Board chair and long-time “affordable” housing advocate, told her colleagues Tuesday that putting together developments devoted solely to “affordable” housing is a “tricky proposition.”  But we hesitate to brand Mr. Greenside as starry-eyed.  Why not, to use his word, get “creative”?

We think this is a topic for serious debate.  Let the usual suspects march to the podium with exultations about how excited they are that the former Council began approving density-bonus projects – or with lamentations about how appalled they are that the politicians are letting the developers pick the City’s pockets.  Perhaps the rest of us can spend our time talking about practical solutions.

Sources:

Density bonus ordinance: 30_17_DENSITY_BONUS_ORDINANCE

Inclusionary housing ordinance: 30_16_INCLUSIONARY_HOUSING_REQUIREMENTS_FOR_RESIDENTIAL_PROJECTS

2007-14 Housing Element: 2007-14 Housing Element (as adopted)

2015-23 Housing Element: 2014-07-15 Ex. 1 to staff report- 2015-2023 Housing Element

Alameda Landing: 2012-12-10 staff report to PB re Alameda Landing applicationPB-12-20 PLN12-0265 Alameda Landing Residential PD Resolution – Final PB approved2014-07-28 staff report re affordable housing

Boatworks: 2011-07-11 staff report to PB re Boatworks

Del Monte: 12-16-14 Ordinance – Del Monte Master Plan-redline

Alameda Point, Site A: 2015-02-23 Ex.3 to staff report to PB re Site A – Letter from APP Providing Evidence for Waiver of AMC 30-53

Hangstrom: 2015-03-09 staff report to PB re 2100 Clement

Marina Shores: 2014-05-27 staff report to PB re Marina Cove II

Mapes Ranch: 2012-10-02 staff report re Mapes Ranch

1835 Oak St.: 2014-10-13 staff report re 1835 Oak St.

 

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
This entry was posted in Alameda Point, City Council, Development, Housing and tagged , , , , , , , , , , . Bookmark the permalink.

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