Honorable Mayor and Members of the Hermosa Beach City Council
Regular Meeting of December 12, 2023
Title
INTRODUCTION OF AN ORDINANCE AMENDING TITLE 17 OF THE HERMOSA BEACH MUNICIPAL CODE ZONING TEXT AMENDMENT (ZTA 23-02-B) ADDING THE LAND VALUE RECAPTURE PROGRAM AND AMENDING CRITERIA FOR AFFORDABLE HOUSING AND CONSIDERATION OF A RESOLUTION AMENDING THE CITY MASTER FEE SCHEDULE TO ESTABLISH THE LAND VALUE RECAPTURE FEES
(Community Development Director Carrie Tai)
Body
Recommended Action:
Recommendation
Staff recommends City Council:
1. Introduce by title only and waive first reading of an Ordinance of the City of Hermosa Beach, California, approving Zoning Text Amendment (ZTA 23-02-B), to amend the Title 17 of the Hermosa Beach Municipal Code (Zoning Ordinance) to add the Land Value Recapture Program for Affordable Housing, amend certain criteria for affordable housing, and determine the actions are consistent with the PLAN Hermosa Final Environmental Impact Report pursuant to the California Environmental Quality Act (CEQA) (Attachment 1);
2. Adopt a resolution amending the City Master Fee Schedule to establish fees for the Land Value Recapture program for affordable housing and determine the action to be exempt pursuant to the California Environmental Quality Act (Attachment 2); and
3. Direct the City Clerk publish the summary ordinance.
Body
Executive Summary:
At its October 10, 2023 and October 24, 2023 meetings, City Council conducted extensive discussions on the proposed Land Value Recapture (LVR) Program associated with the adopted 2021-2029 Housing Element and requested additional analysis and information pertaining to the program. The following provides the requested program information, proposes to incorporate the LVR Program into the Zoning Ordinance, and establishes associated fees.
Background:
During the development of the Housing Element programs from 2021 through 2023, staff conducted numerous meetings with the community, City Council, and Planning Commission to discuss ways to develop and implement the Housing Element. At a joint meeting held on February 3, 2021, the City Council and Planning Commission received a presentation from then-consultant John Douglas on general Housing Element principles, as well as strategies to facilitate the development of affordable housing.
One such strategy, the Land Value Recapture (LVR) Program, was included in the Housing Element. Land Value Recapture is generally described as “capturing” a portion of the increased land value as a result of zoning changes. Initial discussions of the LVR Program were in reference to land that is “upzoned” or “intensified,” but there were no definitive zoning changes at that point. In the case of the Housing Element, the LVR Program would pertain to non-residentially zoned properties permitted to develop residential uses as part of the Housing Element implementation. The adopted 2021-2029 Housing Element committed the City to performing a feasibility study on the LVR Program.
At its August 8, 2023 meeting, the City Council adopted the revised 2021-2029 Housing Element, which was forwarded to the California Housing and Community Development Department (HCD) for certification. The 2021-2029 Housing Element Sites Inventory included the list of sites within the City that are anticipated to accommodate the City’s Regional Housing Needs Assessment (RHNA) allocation. The majority of these sites are non-residentially zoned properties. Because the City is past the State deadline for certification of its Housing Element, State Law now requires the City to complete zone changes prior to certification of the Housing Element.
The City’s RHNA allocation is as follows, with corresponding percentages:
|
6th Cycle RHNA by Income Category-Hermosa Beach |
|
Income Level |
Very Low |
Low |
Moderate |
Above Moderate |
Total |
|
Units |
232 |
127 |
106 |
93 |
558 |
|
Percentage |
41.6% |
22.8% |
19% |
16.6% |
100% |
To effectively incentivize affordable housing units in any proposed residential development, the LVR Program must accompany the Housing Element-related zoning changes that enable residential development on non-residentially zoned properties. Staff secured the assistance of Kosmont Companies to evaluate a potential fee for the LVR program based on current land values for residential development, construction costs, and similar fees in other jurisdictions. Included in this evaluation was a feasibility analysis to ensure that the presence of an LVR Program would not disincentivize the development of residential development and instead promote development of affordable housing.
The Planning Commission discussed the Housing Element-related zoning changes at its June 20, July 18, and August 15, 2023 meetings, providing input on the LVR Program each time. At its September 19, 2023 meeting, the Planning Commission forwarded a recommendation to City Council for approval of the program, details of which discussed in the section below.
At its October 10, 2023 meeting, City Council received a presentation on and discussed the proposed LVR program, including the analysis prepared by Kosmont Companies. The City Council requested staff evaluate a higher fee than initially recommended, as well as a two-tier fee structure applied to different-sized properties.
At its October 24, 2023 meeting, City Council conducted a public hearing on the recommended Housing Element-related zoning changes. After extensive discussion, City Council adopted the Housing Element-related changes, but deferred adding section 17.39.050 pertaining to Land Value Recapture. City Council requested staff return with additional analysis including: 1) increasing the percentage of affordable units needed to qualify for exemptions from the fee; and 2) information pertaining to commercial property values versus residential property values.
|
Past Board, Commission, and Council Actions |
|
Meeting Date |
Description |
|
February 3, 2021 |
The City Council and Planning Commission held a joint study session to provide an overview of the Housing Element update process, explanation of the State requirements for Hermosa Beach’s RHNA, to solicit comments regarding housing needs, and to receive feedback. |
|
December 21, 2021 |
City Council conducted a public hearing, adopted the 2021-2029 Housing Element, and authorized submission to HCD. |
|
June 20, 2023 |
Planning Commission conducted a public hearing and recommended the City Council adopt the Housing Element and also discussed zoning text amendments. |
|
July 18, 2023 |
Planning Commission conducted a study session to discuss the proposed Zoning Text Amendment for Housing Element implementation. |
|
August 8, 2023 |
City Council conducted a public hearing and adopted the revised 2021-2029 Housing Element. |
|
August 15, 2023 |
Planning Commission conducted a study session to discuss the proposed Zoning Text Amendment for the Housing Element implementation. |
|
September 19, 2023 |
Planning Commission conducted a public hearing and recommended the City Council adopt the Housing Element General Plan Map Changes, Zoning Map Changes, and Zoning Text Amendment, including the LVR Program. |
|
October 10, 2023 |
City Council conducted a discussion on the proposed Land Value Recapture Program and provided feedback to staff. |
|
October 24, 2023 |
City Council approved Zone Change 23-01 and Zone Text Amendment 23-02, moving Planning Commission recommendation and deferred Section 17.39.050 from the Draft Ordinance relating to Land Value Recapture. |
Discussion:
The Housing Element included the LVR program to capture a portion of land value gained from adding residential development capacity to properties zoned for non-residential development. The LVR Program applies to residential or mixed-use developments proposed on non-residentially zoned properties identified in the Housing Element and on the Zoning Map as HE Overlay that do not propose a certain percentage of housing affordable to very low-, low-, or moderate-income units. In other words, the LVR Program would include an exemption option on projects proposing a certain amount of affordable housing. The primary intent of the LVR program is to incentivize the development of affordable housing to meet the City’s RHNA allocation. The second intent is to generate a local funding source to assist in any new affordable units, or to benefit a regional Housing Trust.
In response to City Council requests from October 10, 2023 and October 24, 2023, Kosmont Companies performed an updated and expanded Land Value Recapture Analysis in December 2023, herein referred to as the “LVR Analysis” (Attachment 4).
Proposed Fee
As with the prior analysis, the revised LVR Analysis approaches the LVR Program fees as the equivalent value of a developer’s cost of including affordable housing in its development. The LVR Analysis considered the value of land with residential development potential, the likelihood for State density provisions to be used, housing costs, construction costs, operational costs, and various types of affordable housing funding. Specifically, the LVR Analysis compared the rent collected from affordable housing units to market rate units and determined an impact per square foot from including affordable housing in a housing development.
The equivalent value in the initial analysis from October 2023 identified a range of $66 to $94 per square foot as an equivalent value that could be justified and recommended a $60 per square foot LVR fee. However, basing the LVR fee on the equivalent value would lead to a developer choosing to construct affordable units on-site or to pay the fee. Rather, City Council requested a $10 increase to the per-square-foot fee to increase motivation for including affordable housing in the project. City Council requested analysis of a two-tier fee structure, of $76 (Tier 1) and $104 (Tier 2) per square foot, to be applied to properties of 1-2 units of minimum density and 3 or more units of minimum density, respectively.
The LVR Analysis evaluated this structure and determined that larger properties capable of constructing five or more units are eligible for density bonus, which increases development potential, the tiering of the two proposed LVR fees should correspond to this differentiation. Therefore, staff proposes applying the Tier 1 fee to properties with a minimum density of 1 to 4 units, and the Tier 2 fee to those with a minimum density of 5 or more units.
In addition to evaluating equivalent value, the LVR Analysis evaluated the Market Feasibility to assess tolerance for the LVR fee. The Market Feasibility evaluates the cost of development/construction against the market cost of residential development. Currently, with development costs in the range of $400 to $600 per square foot, and a market price of $800 to $1,000 for residential development, the residual land value has a range of approximately $400 per square foot, with a worst case scenario of $200 to $400 per square foot range. The City’s proposed land value recapture fee would be $76 (Tier 1)/$104 (Tier 2) per square foot on market-rate only residential or mixed-use developments.
The LVR Analysis acknowledges the infancy of the program and uncertain market conditions. Considering changing economic conditions and the inception of a new program, the LVR Analysis recommends regular monitoring and updates. If approved, the required fee(s) would be set by resolution of the City Council, included as Attachment 2.
Affordability Percentage
Initial Affordability Tier Recommendation
Staff initially proposed thresholds for exemption as follows: 10 percent very-low income; 15 percent low income; or 20 percent moderate income units in a proposed residential or mixed-use development. The thresholds of very-low, low, and moderate units for inclusion in a residential project to qualify for exemption from the Land Value Recapture Program fee were established based on an evaluation of local market conditions in conjunction with City and State zoning and entitlement provisions. Factors evaluated include supportable lease and ownership values under the three affordability thresholds, local market rents, local dwelling unit bedroom counts and unit sizes, local property values, and State Density Bonus Law. Ultimately, the percentages were established at ratios that seek to balance the incentives to deliver one affordability threshold versus another and support the development of affordable housing units as part of a given project. The Planning Commission concurred and recommended this affordability tier.
Revised Affordability Tier Proposal
At its October 24, 2023 meeting, City Council considered the affordability tiers and requested staff evaluate increasing the tiers by 5 to 10 percent each to further the City’s goal to incentivize affordable housing. The LVR Analysis re-evaluated the percentages, along with the request from City Council’s October 10, 2023 meeting to increase the proposed LVR Program fees. In evaluating the affordability tiers, the LVR Analysis also considered the newly adopted AB 1287, passed in October 2023, which further increased the density bonus allowances for projects reaching the current maximum levels of density bonus allowances. AB 1287 increases the desirability of combining different levels of affordable housing to benefit from added density, and increases waivers and concessions which allow by-right deviation from local development standards.
Based on the LVR Analysis, the following affordability tiering for exemption could be justified as follows:
|
|
Minimum Density |
|
|
Four or fewer units |
Five or more units |
|
Very-Low |
1 affordable unit (any level) |
15% |
|
Low |
|
15% |
|
Moderate |
|
25% |
Moderate-Income Rental Housing/Density Bonus
State Density Bonus Law allows projects with residential units to qualify for density bonus when it proposes a certain amount of affordable housing. For the moderate-income category, only for-sale units are currently eligible for density bonus. Given that over 50 percent of the Hermosa Beach population are renters (>50 percent) and over 30 percent of households fall into the moderate-income level, allowing moderate-income rental units to qualify for the density bonus program further incentivizes housing to match community characteristics. Staff recommends minor changes to Section 17.42.100(B)(3) of the HBMC for this purpose.
Proposed Zoning Text Amendment Language
LVR Program-Section 17.39.050 (NEW)
The LVR Program would be implemented in the City’s Zoning Ordinance, within a newly created chapter that pertains to sites designated on the Housing Element Sites Inventory and also on the Zoning Map with the “HE Overlay.” The following excerpt from the proposed Zoning Text Amendment details the applicability of the LVR Program to eligible properties.
17.39.50 Land Value Recapture for Affordable Housing
A. Sites designated as (--HE) that have underlying non-residential zones are subject to the City’s Land Value Recapture Program for Affordable Housing, as follows:
1. Proposed projects that are entirely non-residential are exempt.
2. Projects on sites with a Sites Inventory capacity are subject to the Land Value Recapture Program fee, as follows:
a. For sites on the Sites Inventory with a capacity of 5 or more units:
1. Projects proposing a minimum of 15% very-low income units, 15% low-income units, or 25% moderate income units, or combination thereof, (calculated from base density) shall be exempt from the fee;
2. Projects proposing a portion of the above affordability requirements shall be subject to the corresponding proportional amount of the fee.
3. Projects not proposing affordable units shall be subject to the Tier 2 fee.
b. For sites on the Sites Inventory with a capacity of 1 to 4 dwelling units:
1. Projects constructing to minimum density and proposing at least 1 affordable unit (very low, low, or moderate) are exempt from the fee.
2. Projects not proposing affordable units shall be subject to the Tier 1 fee.
B. The fee amounts for the Land Value Recapture Program for Affordable Housing shall be set by City Council resolution.
Staff also noticed minor refinements were needed to existing language relating to the quality of affordable units as compared to market rate units. Staff proposes to incorporate minor changes to sections 17.42.100(A)(3) of the Municipal Code requiring that affordable units be dispersed throughout a development and have equivalent size and bedroom counts to comparable market rate units. The changes would also allow projects with moderate-income rental units to utilize the State Density Bonus law in a manner similar to for-sale projects.
Affordable Housing Quality-Section 17.42.100(A)(3) (AMEND)
3. Compatibility. All affordable housing units shall be dispersed within market-rate projects whenever feasible. Affordable housing units within market-rate projects shall be comparable with the size and bedroom count, design, and use of market-rate units in appearance, use of materials, and finished quality. The design and appearance of the affordable housing units shall be compatible with the design of the total housing development project and consistent with the surrounding neighborhood. Forms, materials and proportions that are compatible with the character of the surroundings shall be used.
B. Moderate Income-Density Bonus-Section 17.42.100(B)(2) (AMEND)
2. Applicability. The provisions of subsection (B)(1) of this section shall be applicable to residential projects of five (5) or more units, and senior citizen housing developments of at least thirty-five (35) units. Additionally, projects proposing a percentage of moderate-income rental units equivalent to the percentage of for-sale moderate income units may utilize the corresponding density bonus allowance specified in Government Code Section 65915.
Comparable Data from Other Jurisdictions
The LVR Program is not formally considered an inclusionary housing ordinance since it does not mandate affordable housing. Over 30 percent of cities in the State of California have programs to facilitate the creation of affordable housing. Most are inclusionary housing ordinances, which mandate the inclusion of a certain percentage of affordable housing on residential developments. The following table lists select cities in Los Angeles and Orange Counties that have programs to require or incentivize affordable housing. One notable difference is that Hermosa Beach seeks to exceed the equivalency factor to motivate actual production of affordable housing.
|
Affordable Housing Programs |
|
Jurisdiction |
Inclusionary |
Affordability Threshold |
Fee |
Fee Unit |
|
Rancho Palos Verdes |
Yes |
5-10% |
$308,716 |
Unit |
|
Santa Monica |
Yes |
5-30% |
$41.39-$48.35 |
Sq. Ft. |
|
Long Beach |
Yes |
11% |
$37.90-$38.50 |
Sq. Ft. |
|
Newport Beach |
Yes |
7% |
$33.80-$36.60 |
Sq. Ft. |
|
Laguna Beach |
Yes |
25% |
$247,317-$348,197 |
Unit |
|
Huntington Beach |
Yes |
10% |
$3-$36 |
Sq. Ft. |
Use of Land Value Recapture Funds
The use of funds generated through the LVR Program would be used to fund creation of affordable housing in the City. This could be in the form of development subsidies for construction of new affordable housing or funding towards conversion of existing units to affordable housing. All funds would be for the purpose of funding or subsidizing affordable housing and public services supporting added population from additional housing.
Furthermore, the City could also contribute to the South Bay Regional Housing Trust, which is in the process of being established by the South Bay Cities Council of Governments (SBCCOG). SBCCOG is pursuing grant funds to secure resources to form the Housing Trust, expected in late 2023. City Managers from cities within the South Bay, including Hermosa Beach, have worked for over a year on developing the framework and bylaws for a Housing Trust. The Housing Trust would be created to fund housing to assist the homeless populations and persons and families of extremely low, very low, and low income within the South Bay.
HCD Oversight
Assembly Bill (AB) 1505, passed in 2018, authorizes cities to adopt inclusionary housing ordinances that require affordable housing. AB 1505 also includes provisions for HCD review of an inclusionary housing ordinance if it requires more than 15 percent of the total number of units to be in the low-income category. The proposed LVR Program would not trigger this requirement.
General Plan Consistency
PLAN Hermosa, the City’s General Plan, was adopted by the City Council in August 2017. Upon adoption, the 2021-2029 Housing Element became a component of PLAN Hermosa. The General Plan Amendment, Zone Change, and Zoning Text Amendment implement the following policies of the Housing Element.
Program 7. Land Value Recapture
Program Description: When land is rezoned to allow higher intensity uses, the value of that property typically increases. Land value recapture refers to a policy requiring that a portion of the increased value be dedicated to a public benefit, such as affordable housing. In connection with the rezoning process required under Program 9, the City will conduct a feasibility study to determine whether a land value recapture program should be established for the properties to be rezoned, and if so, what specific requirements are appropriate.
Environmental Review
Pursuant to the California Environmental Quality Act (CEQA), the City evaluated the, Zoning Changes, and Zoning Text Amendments against the PLAN Hermosa Final Environmental Impact Report (EIR) (State Clearinghouse Number 2015081009), certified on August 22, 2017, and determined that an Addendum to the PLAN Hermosa Final EIR is the appropriate document for disclosing changes to the PLAN Hermosa EIR in accordance with Section 15162 through of the CEQA State Guidelines, in that there are no significant effects not previously discussed in the PLAN Hermosa Final EIR.
The establishment of the Land Value Recapture fee is statutorily exempt pursuant to the California Environment Quality Act (CEQA) pursuant to CEQA Guidelines section 15378 (b)(4), which provides that CEQA does not apply to the creation of governmental funding mechanisms that do not involve a commitment to a particular project which may result in a significant impact to the environment. The fee does not identify or permit any specific future project or projects.
Public Notification
For the December 12, 2023, City Council public hearing, a legal ad was published on November 30, 2023 in the Beach Reporter, a newspaper of general circulation. As of the writing of the report, staff has received no public comments.
Fiscal Impact:
There is no fiscal impact associated with the recommended action. Staff does not anticipate an increase in staff time associated with the administration of the LVR Program, therefore the current precise development plan application fee would be sufficient to recover the cost of staff time.
Any LVR fees to be collected would be reserved for use in support of future affordable housing projects, and would not be available for use as General Fund revenue. Because the LVR fee accompanies new land use regulations, the exact amount of LVR fees to be collected is currently unknown and unable to be projected at this time.
Attachments:
1. Draft Ordinance-Zoning Text Amendment
2. Draft Resolution-LVR Fees
3. Redlined Zoning Text Amendment
4. Revised LVR Analysis-December 2023
5. Link to the February 3, 2021 Joint City Council/Planning Commission Staff Report
6. Link to the December 21, 2021 City Council Staff Report
7. Link to the June 20, 2023 Planning Commission Staff Report
8. Link to the July 11, 2023 City Council Staff Report
9. Link to the July 18, 2023 Planning Commission Staff Report
10. Link to the August 8, 2023 City Council Staff Report
11. Link to the August 15, 2023 Planning Commission Staff Report
12. Link to the September 19, 2023 Planning Commission Staff Report
13. Link to the October 10, 2023 City Council Staff Report
14. Link to the October 24, 2023 City Council Staff Report
Respectfully Submitted by: Carrie Tai, AICP, Community Development Director
Noted for Fiscal Impact: Viki Copeland, Finance Director
Legal Review: Patrick Donegan, City Attorney
Approved: Suja Lowenthal, City Manager