A design for affordable housing

Here in Alameda, there are two ways to talk about the issue of affordable housing.

One is to denounce Measure A, demand “more housing now!”, and denigrate anyone who disagrees as an “obstructionist.”

No matter that Measure A’s ban on multi-family housing was essentially eviscerated in 2012; that 4,286 new housing units have been built, or are proposed to be built, between 2015 and 2023, or that the Planning Board and Council have approved every residential development project put before them in the last five years.  Just stick to the slogans and your Twitter followers will shower you with “likes.”

The Merry-Go-Round won’t name names, but the people in this group know who they are, what blogs they post comments on, and which bars they advertise in appearances before Council.

Fortunately, there is another way.  It consists of analyzing what our local government can, and cannot, do to increase the supply of housing for low- and middle-income families – and at what cost.

And here we will name names.

One is Councilman Frank Matarrese, who submitted a Council referral back in June 2016 – which it took his colleagues six months to take up – to consider revising the City’s inclusionary housing ordinance to increase the required percentage of “affordable” units and to require that every new development also provide “workforce” housing.

Another is Assistant Community Development Director and City Planner Andrew Thomas, who presented staff’s analysis of, and recommendations about, potential changes in the inclusionary housing ordinance to the Planning Board last Monday.  (Mr. Thomas’s boss, Community Development Director Debbie Potter, undoubtedly contributed as well.)

And for a third (with apologies if it causes her any trouble with her political allies), we’ll call out Laura Thomas of Renewed Hope, the only citizen who bothered to speak during the public comment period at the Planning Board meeting, and who offered specific suggestions for finding money to enable the City to build affordable housing itself.

These are serious people, with serious ideas, and the rest of us would do well to pay attention to them.  Today, we’ll comment on a few of the matters raised Monday.

At present, the inclusionary housing ordinance requires that 4 percent of the units in every new development project be “deed-restricted” for “very-low-income” households (i.e., those with annual income of $28,050 to $46,750 for a four-person household); 4 percent for “low-income” households ($46,750 to $74,800); and 7 percent for “moderate-income” households ($74,800 to $112,200).  If the goal is to increase the number of units available to people in these categories, why not just bump up the required percentages?

The staff report prepared by Mr. Thomas gave several answers, but the one that resonated most strongly with us can be stated in two words:  density bonus.

Adopted in 2009 to implement state law, the City’s density-bonus ordinance gives a developer the right to build additional market-rate units if the project includes a specified percentage of very-low-, low-, or moderate-income units.  The density bonus ranges from a minimum 20 percent to a maximum 35 percent of the “otherwise maximum allowable residential density.”

As it happens, the requirement for the very-low-income category in the inclusionary housing ordinance is uncomfortably close to the threshold for the same category in the density-bonus law:  4 percent versus 5 percent.  By increasing the percentage of very-low-income units in a project by a mere 1 percent, a developer will qualify for a 20 percent “density bonus.”  This means that, for a 90-unit project, one more low-income unit will yield 18 more market-rate units.

As the staff report notes, this trick hasn’t escaped the attention of developers.

Tim Lewis Communities, the Roseville-based developer of two projects along Alameda’s northern waterfront (and a $5,000 contributor to the misnamed “Alamedans United” PAC that backed Council members Marilyn Ezzy Ashcraft and Malia Vella in the last election), has used it for both projects:  by boosting the very-low-income percentage from the required 4 percent to 5 percent, it gained an additional 69 market-rate units for the Del Monte warehouse (subsequently reduced to 35 when Council reduced the overall project size), and an additional 98 market-rate units for Encinal Terminals.  (Both projects include the bare minimum percentages of low- and moderate-income housing required by the inclusionary housing ordinance.)

The upshot is that, if Council increased the required percentages of very-low-, low-, and moderate-income units, some projects might qualify automatically for the minimum 20% density bonus – and others might get closer to the threshold.  As a result, even more high-end housing could, and undoubtedly would, get built in the City.

There are, of course, those who would regard this as a salutary outcome.  But not everyone would agree with Inner Ringleader and Planning Board holdover John Knox White, who offered what, at least to us, was a novel argument for more upscale housing:

Every time housing comes up, somebody mentions that, well, we’re building housing that’s expensive, and therefore it’s not really making affordable housing, and somebody else has to point out that, if people could buy million-dollar houses or million-and-a-half dollar houses, they might not be buying the 1,300 square-foot houses and renovating them into million-dollar houses.  [They might] not [be] jacking up the price for $700,000 houses to over a million dollars, thereby making those houses unaffordable.

(So that’s why the people down the street put on a new roof:  they couldn’t find a new million-and-a-half dollar house to buy!  Who’da thunk it?)

In any event, there still remains some room to maneuver between the inclusionary housing requirements and the density-bonus thresholds:  the range between 4 and 10 percent for low-income housing and between 7 and 10 percent for moderate-income housing.  At Monday’s meeting, Planning Board member Lorre Zuppan suggested raising the required percentages in one or both of these categories.  Mr. Knox White dismissed this idea as “dickering around the edges,” but we think that Ms. Zuppan – as usual – made a valid point.  “What’s the real goal here?” she asked.  “There may be some benefit to tweaking those percentages in order to get more for the community and relieve more of the crisis for the community.”

Ms. Zuppan’s comment caused us to wonder whether the current percentages in the inclusionary housing ordinance should be adjusted to make sure the requirements fit the needs.  The rent study done for the City in October 2015 showed that 5,125 renter households fell into the very-low-income category; 2,195 into the low-income category, and 7,955 into the moderate-income category.  But it was the very-low income households who suffered a disproportionate share of what the study called a “severe housing cost burden”:  of 3,094 renter households spending more than 50 percent of their income on housing, 2,975 were very-low-income households.  Maybe raising the 4 percent requirement for this category would be worth the cost of automatically triggering a density bonus.

This needs-based analysis also would justify distinguishing between rental and owner-occupied housing in setting inclusionary housing requirements for new residential developments.  If the “housing crisis” consists primarily of a dearth of apartments for very-low-, low-, and moderate-income households, why not require developers of rental projects to build more of them – and let developers of townhomes and condos off easier?  The short answer is that a California Court of Appeal case decided in 2009 struck down inclusionary housing requirements for newly constructed rental units as a violation of the Costa-Hawkins Act.

The other principal argument identified in the staff report for not increasing the inclusionary housing percentages is the one usually invoked by developers:  since a project containing low- and moderate-income units already generates less revenue for the developer than a purely market-rate project would, increasing the required percentages would “squeeze” the developer to the point where she’d either raise the sales or rental price of the remaining units – or decide not to build the project at all.  At Monday’s meeting, we heard versions of this argument from Planning Board members on both sides of the political spectrum.  And even Ms. Thomas agreed that, given the recent travails at Site A (which is subject to a  25 percent affordable requirement, thanks to Renewed Hope), “we really need to see whether that experiment pans out before we push a higher percentage.”

Well, we hate to be contrarian (no, not really) about an issue on which David Burton, Ron Curtis, and Laura Thomas all appear to agree, but we are congenitally reluctant to accept at face value any pleas by a real-estate developer (even one we trust, like Joe Ernst) about the dire consequences of requiring more low- or moderate-income housing in a project.   Why not mandate the higher requirements – but give the developer an out if she can show that they indeed would render the project economically infeasible?  Of course, a Planning Board responsible for approving this kind of exception would benefit from members with financial expertise, but recent experience shows that the Triumvirate in control of Council won’t appoint such people if they’re Trish Spencer nominees.

Concerns about “feasibility” also dominated the discussion about the second item in Mr. Matarrese’s referral:  adding a requirement that a project include a specified percentage of “workforce” housing.  (Mr. Knox White bristled at the use of that term – “The City is defining it differently than the rest of the country,” he pronounced – so, if it’ll make him happy, we’ll refer to “middle-income” housing.  As used by staff, this term encompasses units targeted at households earning from 120 to 180 percent of area median income – $116,900 to $175,320 using 2017 numbers).

The staff report argued that, since the middle-income units would be sold or rented at market rates, they didn’t “need to be financially subsidized by the other market-rate units in the project that are already subsidizing the 15% of deed-restricted units,” and therefore “are not increasing the costs of the other 85% of the units.”  But at Monday’s meeting Ms. Zuppan pointed out that, if the middle-income units were sold or rented at lower prices than the rest of the units, as they surely would be, the project would generate less revenue for the developer than it otherwise would, and the “squeeze” objection therefore would apply to any newly imposed middle-income requirement, too.

In theory, of course, she’s right.  But look at what’s been happening with recent projects after Mr. Matarrese (and Ms. Spencer) began agitating for more new housing for middle-income households:  the recently approved master plan for the Encinal Terminals development states that 153 of the 510 market-rate units will constitute “workforce” housing.  (The original master plan submitted in May 2016 contained no similar set aside.)  Likewise, according to Alameda Point Chief Operating Officer Jennifer Ott, Alameda Point Partners has informed the City that 120 of the 600 market-rate units at Site A will qualify as middle-income housing.  (Mr. Thomas also told us that the Del Monte warehouse project will “have a ton” of small units, and the Shipways project “has a bunch.”)

Since the inclusionary housing ordinance itself didn’t mandate these actions, the developers may simply have been trying to make their projects more palatable to the politicians whose campaigns they hadn’t supported.  But a desire to curry political favor only goes so far:  presumably, Tim Lewis and Bruce Dorfman have determined that their projects still will “pencil out” even if they include this much middle-income housing.  If so, the economic case against writing a middle-income requirement into the inclusionary housing ordinance becomes that much weaker.

Of course, there are details still be worked out, not the least of which is how to define the requirement (which is different than what to call it).  The planners like to use the term “affordable-by-design,” which casts the requirement in terms of square footage.  For example, the Encinal Terminals master plan describes two categories of “workforce” housing:  one with units of 900 square feet or less, the other with units between 900 and 1,200 square feet.  By making an assumption about price per square foot, it’s possible to calculate a sales price and then determine whether that price is affordable by middle-income households.   (The staff report takes this approach and concludes that “households within the workforce income range would be able to afford a home in the $500,000 to $750,000 price range.”)  But a law based upon a square-footage test makes us a little nervous:  why is 900 square feet the magic number?  Won’t the assumption about price per square foot (and therefore the conclusion about affordability) change as the market changes?

In addition, as Mr. Thomas acknowledged, staff chose 10 percent for the middle-income requirement because that was the percentage used in the “specific plan” for the Main Street Neighborhood at Alameda Point.  But that choice in turn was based on the conclusion by the City’s consultant that a development that included 10 percent “workforce” housing still would generate enough revenue to cover the $53 million cost of replacing the infrastructure in the area.  If a project wasn’t required to bear such draconian expenses, it should be able to accommodate a percentage of middle-income housing greater than 10 percent.  How much more?  Mr. Thomas told the Planning Board that the same consultant who did the Main Street Neighborhood study probably could come up with a figure applicable City-wide.

Ultimately, the Planning Board voted to recommend that Council retain the current inclusionary housing percentages, and it declined to recommend that Council adopt a middle-income housing requirement.  We think it also recommended further study on the latter issue, but the video got a little confusing toward the end.

In addition to the items in Mr. Matarrese’s referral, the Board addressed another affordable-housing issue Monday:  funding.  And this is where Renewed Hope’s Ms. Thomas comes in.

Ms. Thomas is no slouch at pro-housing rhetoric, but it was her pragmatic side that was on display this time.  Her focus was on how the City could find money to build low- and middle-income housing itself.  One idea was to put all of the so-called “boomerang funds” Alameda expects to receive from the former redevelopment agency into a “housing trust fund.”  Another was to earmark any money the City got as its share of profits from Site A for affordable housing.  A third was to issue bonds secured by a new parcel tax.

Some of these ideas are problematic.  For one thing, we’re not so sure that Site A will produce enough profit for the developer to share any with the City.  Nor are we confident that City of Alameda residents would be as amenable as County of Alameda residents to a tax increase intended to raise funds for affordable housing.  (The County’s Measure A1, which authorized issuance of $580 million in bonds for that purpose, passed with 73.3 percent of the vote last November.)  But the presence of these problems doesn’t make Ms. Thomas’s ideas any less worthy of consideration by Council.  Even Mr. Knox White supported them, albeit in a backhanded way:  “If the goal is to fund affordable housing and not build more market rate, we’re going to have to start paying for it – or we’re going to have to acknowledge that we need to build market rate to subsidize affordable housing and to bring cost of middle-income housing down.”

Ms. Thomas also dismissed – primarily for historical reasons – another idea for financing construction of affordable-housing projects by the City:  in lieu fees (i.e., a charge that a developer must pay “in lieu of” including low- and moderate-income housing in the project itself).  According to the staff report, many Bay Area cities charge such fees, especially for rental projects where inclusionary housing requirements are precluded. Setting the right amount for in-lieu fees surely would pose a challenge, and there is no guarantee that the revenue generated by such fees would enable the City to build more, or better, affordable housing than a private developer would build in order to comply with the inclusionary housing requirements.  But once again we’re with Ms. Zuppan:  at the least, in-lieu fees are an “interesting option.”

With no objection, the Planning Board voted to recommend that Council look at the funding ideas suggested by Ms. Thomas.

So now the ball is back in Mr. Matarrese’s court.  Ordinarily, we would hesitate to tell elected officials what to do.  But, to us, the affordable-housing issue cries out for the sort of approach former City Manager John Russo took to the pension/OPEB problem:  appoint a task force, with all viewpoints represented but all ideologues excluded; identify the specific options available to the City, with the necessary research done by staff; and then take a ranked-choice vote and present the results to Council.  We can’t be sure that Ms. Spencer or even Mr. Matarrese himself would endorse this approach.  But if they did, it would take only Ms. Ashcraft to make it happen, and we can leave the sloganeering to those who do it best.


Matarrese referral: 2016-06-21 Matarrese referral

July 24, 2017 staff report: 2017-07-24 staff report to PB re ordinance

Housing element March 13, 2017 staff report: 2017-03-13 staff report to PB re H.E. 2016 annual report

Encinal Terminals master plan: 2017-07-17 Ex. 1 to staff report to PB- Encinal Master Plan

Rent study: 2015-11-04 Ex. 1 to staff report – rent study

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
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14 Responses to A design for affordable housing

  1. dave says:

    Market rate housing is, by definition, affordable.

    What’s really at issue here is subsidized housing. Using market rate to subsidize below market rate units is simply a redistribution scheme: adding a price premium to some units to pay for other units makes the market rate units not market rate anymore. They become unaffordable to many who could have afforded them at a true market rate. All such a plan succeeds in doing is to make the affordability issue worse for many middle class families and ultimately reduce the supply of market rate housing. That compoinds the problem it is trying to solve.

    • RJS says:

      “Market rate housing is, by definition, affordable.”
      So – these ‘affordable housing’ schemes are exercises in the redistribution of wealth? You bet they are – but you never hear them referred to as such.
      It is certainly refreshing to see such clarity in the issue here. The question, of course, is one of power. Which is more powerful – fundamental economics, or political will?

      I vote for the one that does not require my vote.

  2. Steve Gerstle says:

    For profit developers are building housing to maximize profit. That is what they do and how they function. It seems like the size of homes and condos continues to grow. Many of the older homes and apartments in Alameda are quite small and modest. Not everyone wants or needs a large home, but that is what private developers build. I don’t blame them for seeking to maximize profits. It seems that a better approach would be to use government and non-profit funds to build alternate housing that would serve the needs of the rest of us. Perhaps smaller units designed with cost efficiencies that do not need the bling of granite countertops? It would be great to see limited equity coops and small apartments developed outside the realm of for-profit developers. To help people save, perhaps a small percentage of the monthly rent could go into a savings account so that renters end up with more than just a pile of rent receipts? My great-grandfather worked for the Workmen’s Circle, a radical group with a political agenda that also built communal organizations such as co-ops, healthcare facilities and cemeteries. Much of it is now gone as the children and grandchildren entered the middle class, but the idea of self help organizations go back to the founding of our country. I’m not saying that developers should not contribute, but I don’t know how much we can rely on them.

  3. The Planning Board just completed a perfunctory, and wholly inadequate, review of the City’s inclusionary housing requirement. The review failed to address an essential question – does the inclusionary requirement promote housing affordablity or just an inadequate increase the number of affordable units? The demand and supply for housing in the inner Bay Area are now so far out of balance that building market rate housing alone, or even with the inclusion of a small percentage of units set aside as affordable units, could worsen the affordability crisis.

    The Urban Displacement Project led by UC Berkeley’s Miriam Zuk and Karen Chapple is building a strong case that either inclusionary requirements must be raised significantly or separate funding must be found to build affordable housing. See for example their 2016 paper on the relationships between housing production, filtering (hand-me-down) housing, and displacement (http://www.urbandisplacement.org/sites/default/files/images/udp_research_brief_052316.pdf).

    Many studies sponsored by cities claim that raising the inclusionary requirements further will reduce, or even eliminate, the production of market rate housing. And with available financing for affordable housing so limited, the evidence is accumulating that a moratorium on the construction of market rate housing in hot urban markets would be the best course of action, not to solve the affordable housing crises, but to keep it from getting worse.

    A thought experiment illustrates the conundrum for those promoting affordable housing. Building 1 affordable unit and 99 market rate units will house one low income family. The retail jobs, clerical jobs, landscaping jobs, and restaurant jobs created to serve those living in the new market rate units will attract far more than one low wage worker and their families. Thus, the overall project with one affordable unit and 99 market rate units, despite increasing the total number of affordable units, actually worsens the affordability crisis by attracting more than one new low wage worker to the area.

    Any study justifying inclusionary housing percentages to require of new housing developments that is more than a two or three years old likely underestimates the inclusionary requirement needed to promote housing affordability. Thus many recently approved, and certainly future inclusionary developments in the inner Bay Area could be intensifying the shortage of affordable housing rather than relieving it. Lower State inclusionary housing requirements in the suburban and rural areas are more likely to suffice to relieve the housing crisis than those in high demand markets like Alameda.

    It is time for a serious review of Alameda’s inclusionary requirements. Encourage the Council to conduct a full (rather than the cursory review just completed by the Planning Board) review of Alameda’s requirements when they take up this issue, perhaps in September.

  4. The city has a limited capacity to make a dent in the deficit of housing affordable to families and individuals making less than $100,000 a year. The scale of the need is statewide. But there is no concurrent state commitment of funding to actually address the need. Instead, our state devotes unlimited funds to building one new Bay Bridge span; a high speed rail system from here to LA when the real need is regional transit; and a water tunnel system for unsustainable agribusiness and urban growth. There’s plenty of money (or the ability to obtain it), just none for affordable housing.

  5. Laura Thomas says:

    Thank you Bob for attempting to elucidate a difficult issue. I also appreciate the fact you attended our October forum on how affordable housing is built; if more folks had come, we all might have a better understanding of the difficulties.

    Market rate housing is hardly affordable to the majority of Bay Area residents due to limited supply. Period.

    It’s true that making the developers pay for affordable units is a wealth redistribution scheme. The wealth developers or their investors derive is wealth the community has created from social and cultural infrastructure and why shouldn’t the community get a return on its investment? In Alameda, many people love to rail against “greedy developers” but the city has managed to make developers really pay up for the privilege of developing here, not just with affordable housing, but parks, ferry terminals, contributions to public transit and so forth. So much so, that Site A is not likely to turn a profit and that’s why I made my comment. Because if it’s so that developers are profiting so much in our fair town then it will be proven when all those profits from the Site A acutally roll into the city’s coffers. And they could go toward an affordable housing fund as Council member Matarrese recently suggested.

    Steve Gerstle’s ideas are good ones and I support them. If the city wanted to charge in-lieu fees instead of demanding the units from developers, it could go into a big fund for only affordable development. The trick is finding the land. The city could offer a developer a loan and land to build as long as it was all for moderate income or lower. Apparently in Vienna, they do something like this and about 45 percent of all housing in that beautiful city is partly or fully done on city land and in some sort of partnership with builders and is for low to moderate income folks.

    And like I said at the council meeting, I want to see Site A succeed before we start making more inclusionary demands. The city of Santa Monica recently passed a requirement for 30 percent but acknowledged it might be too high and is willing to go back on it (because they seriously want to address the crisis). If we could figure out — a task force might be a great idea — what the sweet spot is, the most affordable housing a given developer can create without throwing in the towel and leaving us with nothing — I would be all for it.

  6. dave says:

    If this is true:

    Market rate housing is hardly affordable to the majority of Bay Area residents due to limited supply.

    Then how are the vast majority of Bay Area residents living in market rate housing?

    Market prices are the result of supply and demand meeting. It is true that supply is constrained here and that has the effect of pushing prices higher, but demand is what people are willing and able to pay. The fact that buyers and renters are willing and able to pay means exactly that: they are willing and able to pay. Ipso facto, market rate housing is affordable.

    • Anonymous says:

      No, your claim is incorrect (“The fact that buyers and renters are willing and able to pay means exactly that: they are willing and able to pay. Ipso facto, market rate housing is affordable”). There is a standard by which “affordable” is understood in law and practice. Clearly what we’re talking about here far exceeds that standard. So just because someone agrees to pay 40% of their income on rent doesn’t mean housing is “affordable” to that someone and, to the contrary, in so far as the payment to income ratio exceeds the 30% standard, this hypothetical is “unaffordable.” Other than getting this one wrong, keep up the good work!

  7. Laura Thomas says:

    Think about it for a moment Dave. Sure they do. But they represent many people who bought houses when they cost $20,000 and then over the years, an always smaller proportion manage to buy homes and then insist on keeping things zoned or restricted nicely to suit themselves while others just left the Bay Area. Marin county used to be inhabited by a crowd of fairly run of the mill folks instead of the professional elite that lives there now. When I graduated from high school, housing prices began to rise sharply and lots of people left. It’s changed the character of the Bay Area and not for the better. The region has become less friendly, very competitive and more conceited than dynamic, despite the image promulgated in the media.

    Trying to argue that the so-called market solves all problems and creates some sort of meritocratic equity is quickly losing its logic and doesn’t satisfy the younger generation and it probably shouldn’t.

    • dave says:

      Some do indeed own homes for peanuts, but lots more have come recently and paid up. They chose to do so. You may think prices are too high but millions of others don’t. They voted with their feet by moving to an expensive area and with their wallets by paying market price.

      And to think, just a few short years ago we were having the opposite conversation: we were frightened by RE prices falling. Rents declined in Alameda for about a decade. Tides turn, supply & demand shift. It’s called reality.

  8. Steve Gerstle says:

    A free market also means one free of government regulations like zoning, density limits and building codes. Do away with all of those and we will have lower cost housing, though some may not like the result.

  9. dave says:

    Zoning does a lot to improve and maintain quality of life and while arguments can be made to reform it, be careful about the baby/bathwater problem. Have you ever been to Houston? It’s famous for its lack of zoning. It’s also cheaper than the Bay Area, for good reasons. It’s nowhere near as nice a place to live.

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