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New Inclusionary Housing Ordinance begins to take shape

by Steven Felschundneff | steven@claremont-courier.com

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On Tuesday the Claremont Planning Commission made quick work of a task they had previously put off, sending a revised Inclusionary Housing Ordinance to the Claremont City Council.
Two weeks ago the commission elected to continue its discussion of the update after several commissioners expressed reservations over making a very important, and long lasting, decision with only four days to study the proposal.
The urgency came after the city council tied implementation of the Village South Specific Plan to the update of the Inclusionary Housing Ordinance. The council will now consider the new rule at its first meeting in September and, if passed, will have a second reading by September 28. In accordance with state law, the ordinance will go into effect 30 days later, and the council selected October 29 at the advice of the city attorney. The Village South Specific Plan will be implemented in tandem.
The resolution will update the current ordinance which has proven ineffective. Since the law was passed in 2006, nine developments have included 67 moderate income homes but zero low income units.
The recommended update as discussed by the commission will require at least 10 percent of all rental units in a new development be low income housing not to exceed 15 percent of total units. For sale units had a similar calculation, however, only five percent must be low.
When Vice Chair Parker Emerson read the resolution into the record he said five percent for low income rental instead of the ten percent, which was the motion that the commission voted on and approved. Community Development Director Brad Johnson confirmed that Mr. Emerson appeared to misspeak but that staff would communicate to the council that the commission’s intent was to set the minimum at 10 percent. Nonetheless, the city council will have the flexibility to adopt its own benchmark for low income units when it meets in September.
The U.S. Department of Housing and Urban Development determines what qualifies as low income for any given region, while the California Department of Housing and Community Development (HCD) calculates moderate income. This distinction is critical because each department has a completely different methodology for determining affordability.
Under HUD, $94,600, or 118 percent of the average median income (AMI), is considered low income for a family of four, while moderate income determined by HCD is $96,000 a difference of just $1,450. The two paths diverge when calculating what constitutes an affordable home. HUD sets the sales price at 70 percent of AMI with 30 percent of income allotted to housing. HCD allows 110 percent of AMI with 35 percent of income going to the housing expense. As a result, under HUD low income rules, a typical three-bedroom townhome would be affordable at a sales price of $71,300 but that same unit would be $333,500 for moderate income buyers. The market rate price would be $630,000, which creates an affordability gap of $558,700 for low income but only $296,500 for moderate.
The planning department gave the commission four choices for updating the ordinance. Choices “A” and “C” would create one group which recognizes that HUD low and HCD moderate income are effectively the same and would explicitly allow low income households to purchase units at the moderate income price. Under this option the units would be counted as moderate income for purposes of the Regional Housing Needs Assessment which leaves the city wanting to plan for low income housing under the mandated housing element.
The Commissioners preferred option “D” which creates a hybrid model with the low income standard on for sale units calculated up to a maximum of 80 percent of AMI, now referred to as the “Claremont low.” Under this calculation, low income would be $64,000 and moderate would remain at 96,000. The hybrid model would allow the city to claim some units as low income under RHNA.
Low income for rental units would be calculated at 30 percent, which is the threshold on being considered “rent burdened,” of 60 percent of Los Angeles County AMI.
The commissioners wanted to make tweaks, including adding language about what would happen to people in affordable units who get a better job or see their income increase in other ways which result in the household exceeding the low income threshold in the ordinance.
Kathe Head, the city’s chief consultant on the ordinance, said with for sale units once a person buys a home it is theirs, with the caveat of the equity share agreement with the city, which is designed to discourage reselling of affordable housing.
In the case of rental units she recommended the rent remain at 30 percent as occupant earnings increase, rather than requiring a family to move if their income increased too much. Additionally, if the rent paid for an “affordable” unit was to reach market rate, then another unit in the building should be reclassified so that the total percentage of low income units remains the same.
Because the city council requested that the ordinance be updated, it’s highly likely they will approve it, and so by the beginning of November the Village South Specific Plan will also become the law of the land.
Representatives from the builder Arteco Partners and Village Partners, who hope to begin the application process for the first construction under VSSP, contend the revised IHO may derail their project, South Village, by adding costs that could make it economically unviable. During public comment two weeks ago, the builder said the company had not yet determined how to offset the hit to their bottom line, citing the increased cost of building materials that had already put financial pressure on the project.
A letter dated August 10 sent to the planning commission and Mr. Johnson, Jerry Tessier, president of Arteco Partners and Don Henry, principal of Village Partners, cautioned that “the city itself has not endeavored to conduct any research up to this point to analyze the impact on housing production by a revised IHO ordinance.”
Mr. Tessier and Mr. Henry hired David Taussig Associates to perform “a thorough analysis of the potential impact of the proposed amendment to the Inclusionary Housing Ordinance,” specifically the financial impact on the proposed rental units in the company’s South Village project.
While a full report will not be ready for a few weeks, Will Saba of DTA wrote in a memorandum also dated August 10 that requiring a percentage of units be classified at low income, 60 percent of AMI versus moderate at 120 percent of AMI, would result in an annual loss of $875,000. This calculation is based on a proposed 507 rental apartments in the project, 76 of which would be affordable. He estimated the reduction in revenue would result in a 50 percent drop in the affordable component’s valuation and make it difficult to finance.
“As valuations prepared by investors and lenders for apartment projects are based on capitalization (cap) rates, within current cap rates falling in the range of about 5% of Net Operating Incomes, an $875,000 drop in annual rental revenues (assuming a 5% vacancy rate and 10% in operating expenses) would reduce the valuation of the affordable component of the Project from $29.8 million to $14.9 million,” Mr. Saba wrote.
It was not clear how Mr. Saba reached these numbers since the commission had not met yet and had not decided what percentage of low income units would be in the new ordinance. The COURIER called Mr. Saba for clarification, but had not heard back by press time.

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