HomeMy WebLinkAboutCity Council - 2021-50 RESOLUTION NO. 2021-50
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF HUNTINGTON BEACH
ADOPTING AN AFFORDABLE HOUSING IN-LIEU FEE PURSUANT TO ORDINANCE
NO. 4235, AND REPEALING RESOLUTION NOS. 2007-71. 2008-43, AND ALL
SUPPLEMENTAL RESOLUTIONS THERETO
WHEREAS, on November 1, 2004, the City Council of Huntington Beach adopted
Ordinance No. 3687 adding Zoning & Subdivision Ordinance Section 23026 relating to
Inclusionary Housing: and
WHEREAS, on September 21. 2021, the City Council of Huntington Beach adopted
Ordinance No. 4235 amending and updating Zoning & Subdivision Ordinance Section 230.26.
WHEREAS, as part of Ordinance No. 4235, the City Council received a report from
Keyser Marston Associates dated May 6, 2020, which includes an analysis pertaining to the
City's methodology for calculating the payment of Inclusionary Housing fees. A copy of this
report is attached hereto as Exhibit A.
WHEREAS. pursuant to Section 230.26(E)(4), notwithstanding applicable requirements
of Specific Plans; developers of residential ownership projects proposing any number of housing
units and residential rental projects proposing one hundred (100) housing units or fewer may
elect to pay a fee in-lieu of providing the required affordable units on site to fulfill the City's
requirement of the Inclusionary Housing Ordinance.
NOW, THEREFORE, the City Council of the City of Huntington Beach does hereby
resolve as follows:
I. The Keyser Marston Associates report attached hereto as Exhibit A is approved
and filed.
2. -The proposed affordable housing in-lieu fee shall be as follows:
21-10164/265557
Resolution No. 2021-50
A. In-Lieu Fee Schedule: Calculated Per Square Foot of Net Saleable Area or Net
Leasable Area (up to 2.000 s.f.)
4 of Units Fee Per Square Fee Per Square
Foot: Foot: Rental
Ownership Apartments
HOUSin g
3 $2.54 $3.58
4 $3.38 $4.77
5 $4.23 $5.97
6 T $5.07 $7.16
7 $5.92 $8.35
8 $6.76 $9.55
9 $7.61 $10.74
10 $8.45 $11 .93
11 $9.30 $13.13
12 $10.14 $14.32
13 $10.99 $I5.51
14 $11.84 $16.71
15 $12.68 $17.90
16 $13.53 $19.09
17 $14.37 $20.29
18 $15.22 $21.48
19 $16.06 $22.67
20 $16.91 $23.87
21 $17.75 $25.06
22 $18.60 $26.25
23 $19.44 $27.45
24 $20.29 $28.64
25 $21.13 $29.83
26 $21.98 $31.03
27 $22.83 $32.22
28 $23.67 $33.41
29 $24.52 $34.61
30+ $2536 $35.80
B. The in-lieu fee calculation for ownership housing units in excess of 2,000 square feet
per unit shall be capped at the total fee for a 2,000 square foot unit.
3. All deposits of' in-lieu fees paid pursuant to Zoning & Subdivision Ordinance
Section 230.26 shall be placed in the City's Affordable Housing Trust Fund. Interest shall
accrue to the (Lind. No other funds shall be commingled with the Trust Fund.
Resolution No. 2021-50
4. The Affordable Housing In-Lieu Fee shall be adjusted annually on July I" of each
year, as outlined in Zoning& Subdivision Ordinance Section 230.26.
5. The City Manager or their designee shall administer the Affordable Housing Trust
Fund and shall provide an annual report to the City Council, which shall include the beginning
balance, ending balance, and a description of the projects funded or to be funded each fiscal year.
6. Resolution Nos. 2007-71 and 2008-43 are hereby repealed.
PASSED AND ADOPTED by the City Council of the City of Huntington Beach at a
regular meeting thereof held on the21st day of September 2021.
Mayor
ATTEST: APPROVED AS TO FORM:
City Clerk vt City Attorney
IEWED AND APPROVED: INITIATED AND APPROVED:
J�
City Manager Director of Community Development
G, Resolution No. 2021-50
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Exhibit "A"
KEYSER MARSTON ASSOCIATES-
ADVISORS IN PUBLIC/PRIVATE REAL ESTATE DEVELOPMENT
MEMORANDUM
AOVIsORs IN:
Real Estate To: Ursula Luna-Reynosa, Community Development Director
Affordable Housing
:conomic Development City of Huntington Beach
BERKIELEIT A Jerry Keyser eyser From: Kathleen Head
.
Timothy C Kelly
Debbie M.Kerr
David Doeaema Date: May 6, 2020
Kevin Feeney
Los ANGEM
Kathleen H Head Subject: Inclusionary Housing :Policy & Implementation Recommendations
James A Rabe
Gregory D.Soo-Hoo
Kevin E.Engstrom
Juke L.Romey Keyser Marston Associates, Inc. (KMA) was engaged by the City of Huntington Beach
Tim R.Brett (City) to assist in updating the requirements imposed by the Inclusionary Housing
SAN OIEGo Ordinance. The update was undertaken for the following reasons:
Paul C.Marra
1. To evaluate the impacts created by real estate economic changes and increases
in the unmet need for affordable housing that have occurred since the
Inclusionary Housing Ordinance requirements were last modified in 2011.
2. To modify the Inclusionary Housing requirements with the intention of achieving
the following goals:
a. To maximize the program's efficiency; and
b. To match the requirements to the types of housing being developed.
KMA prepared the accompanying Financial Analysis: Inclusionary Housing Ordinance
Update (Financial Analysis) to evaluate the economic characteristics of the Inclusionary
Housing program as implemented since 2011. 1 The Financial Analysis serves as the
foundation KMA used for creating a package of Inclusionary Housing policy and
implementation recommendations.
1 Capitalized terms used throughout this memorandum are defined in the Financial Analysis.
500 SOUTH GRAND AVENUE,SUITE 1480: LOS ANGELES.CALIFORNIA 90071 Y PHONE 213 622.8095
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BACKGROUND
Based on the results of the Financial Analysis, KMA reached the following key
conclusions:
1. Current Inclusionary Housing Requirements:
a. The 10% moderate income requirement for ownership housing
development continues to be supportable.
b. The 10% low income requirement for rental apartment projects is
supportable. There is no need to provide an option for moderate income
units to be used as a substitute when the units are provided on site
within a market rate project.
2. The maximum in-lieu fee amounts that can currently be supported on a
financially feasible basis were estimated as follows:
Maximum Financially Feasible In-Lieu Fees
Ownership Rental
Housing Apartments
Inclusionary Housing Requirement 10% Moderate 10% Low
Income Income
In-Lieu Fee Amounts
Per Affordable Unit $504,700 $332,000
Per Total Unit $50,470 $33,200
Per Square Foot of Saleable/Leasable Area $25.36 $35.80
Recommended Policy and Implementation Package
The Inclusionary Housing policy and implementation recommendations package consists
of the following components:
1. The minimum residential project size that triggers an Inclusionary Housing
obligation.
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2. The income and affordability requirements that will be applied to ownership
housing and rental apartment projects.
3. The covenant periods under which the income and affordability standards
should be imposed for ownership housing and rental apartment projects.
4. To mitigate the financial impacts created by the imposition of Inclusionary
Housing requirements options need to be provided that are tailored to the type
of housing being developed. The following options are proposed to be offered
under specified circumstances:
a. On-site production;
b. Off-site production;
C. In-Lieu Fee Payment;
d. Land Dedication; and
e. Acquisition and rehabilitation of existing apartment units.
5. Implementation activities that should be undertaken by the City.
Case Studies
To assist the City in evaluating the proposed policy and implementation
recommendations KMA prepared comparisons of the Inclusionary Housing options that
could potentially be applied to a hypothetical project. Hypothetical projects are
analyzed for an ownership housing project and a rental apartment project.
RECOMMENDED POLICY AND IMPLEMENTATION PACKAGE
Threshold Project Size
The majority of Inclusionary Housing programs in California include a threshold project
size below which projects are not subject to the affordable housing production
requirements. Common thresholds fall between three and 10 units. KMA recommends
that the threshold project size be maintained at the three unit standard imposed by the
City's existing Inclusionary Housing Ordinance,
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It is important to understand that Inclusionary Housing requirements create a significant
impact on smaller projects, because the financial impact created by the affordable
housing requirement is spread over a small number of market rate units. The other
issues to consider are:
1. Given the magnitude of the Affordability Gaps associated with ownership
housing projects, small infill projects are disproportionately impacted by an
affordable housing production requirement.'
2. Small rental apartment projects are often self-managed by owners that do not
have experience owning and operating affordable housing units.
3. Monitoring and administering Inclusionary Units in small projects that are
scattered throughout Huntington Beach will be a tabor intensive obligation for
City staff.
It is KMA's recommendation that projects with fewer than 100 units should be allowed
to pay a fee in lieu of developing the required number of Inclusionary Housing units. At
a 10% Inclusionary Housing requirement, a 100 unit project would generate a 10-unit
Inclusionary Housing obligation. This is a sufficient number of affordable housing units
to support the efficient management and administration of the units.
KMA recommends that a graduated in-lieu fee schedule continue to be offered in the
updated Inclusionary Housing Ordinance. The recommended in-lieu fee payment
structure is discussed further in the Inclusionary Housing production option section of
this memorandum.
Income and Affordability Standards
An Inclusionary Housing program's income and affordability standards should be set at
levels that do not constrain residential development. Based on the results of the
Financial Analysis, KMA determined that the following Inclusionary Housing
requirements can be supported.
'The Affordability Gap is defined as the difference between the achievable market rate sales prices or
rents and the Affordable Sales Prices or Affordable Rents for the Inclusionary Housing units.
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Ownership Housing Projects
Inclusionary Housing Requirement
KMA recommends that the City continue to designate moderate income units as the
affordable housing type for ownership housing projects. Based on the Financial
Analysis, KMA recommends that the affordable housing requirement remain at 10% of
the units in an ownership housing project.
Affordable Sales Price Calculation Methodology
KMA strongly recommends that the City make modifications to the methodology used
to estimate the Affordable Sales Prices. The specific issues relate to the methodology
used to set the benchmark mortgage interest rate and the allowable range of home
buyer down payments.
Benchmark Mortgage Interest Rate
In practice, the City has been using the lowest interest rate published during the
preceding three month period. As an example, the rate being applied by the City in April
2020 is 2.46%. This rate is significantly lower than the rates for which typical moderate
income home buyers will be able to qualify. Common reasons for this are:
1. Credit history and scores that do not fall within the exceptional level required to
obtain the lowest interest rate available in the marketplace;
2. Back-end ratios that are often higher than the typical ratios applied in
conventional lenders' underwriting standards for the lowest interest rate
mortgages;
3. The lowest published interest rate is often a teaser rate that will ultimately
adjust to a higher rate that will be unaffordable to the moderate income home
buyer; and
4. There is a limited pool of mortgage lenders that are willing to provide loans on
homes that are subject to long-term irrevocable resale restrictions. These
lenders do not generally offer the lowest interest rates available in the
marketplace.
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The use of the lowest published interest rate is not required by the Inclusionary Housing
Ordinance or by the Affordable Ownership Housing Regulations. The application of this
metric generates extremely high Affordable Sales Prices, which can actually only be
achieved by home buyers with the ability to make an extraordinarily large down
payment.
KMA recommends that the City modify the policy being used to set the mortgage
interest rate that is applied in the Affordable Sales Price calculations. KMA typically uses
the Bankrate sitewide average annual percentage rate (APR) for 30-year fixed interest
rate mortgages. In addition, KMA recommends that the benchmark interest rate be set
on the on the first day of each calendar quarter.
Range of Allowable Home Buyer Down Payments
The Affordable Ownership Housing Regulations set the maximum home buyer down
payment at 50% of the Affordable Sales Price. The high end of this range was
established when it became apparent that typical moderate income home buyers could
not qualify for the mortgage loans required to support the Affordable Sales Prices being
set by the City.
The Inclusionary Housing program is intended to target home buyers that could
otherwise not afford to purchase a home in Huntington Beach. Moderate income home
buyers who have sufficient resources to fund a 50% down payment likely have other
available opportunities to purchase a home.
KMA recommends that the down payment requirements be modified as follows:
1. The minimum home buyer down payment amount should be set at 5% of the
Affordable Sales Price.
a. This down payment amount must be provided from the home buyer's
own funds.
b. These funds cannot be provided using gifts or loans obtained by the
home buyer.
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2. The maximum down payment amount should be set at 20% of the Affordable
Sales Price. Gift funds may be used for the down payment amount that falls
between 5% and 20% of the Affordable Sales Price.
Rental Apartment Projects
The existing Inclusionary Housing Ordinance applies a 10% low income affordable
housing requirement to rental apartment projects. However, the Inclusionary Housing
Ordinance gives the City discretion to permit a developer to substitute moderate
income units for the low income requirements.
Based on the City's RHNA targets, and the results of the Financial Analysis, KMA
recommends that the updated Inclusionary Housing Ordinance should maintain the 10%
low income housing requirement. The moderate income option should be eliminated.
A significant number of large scale apartment projects that have been developed in
Huntington Beach have made use of the Government Code Sections 65915 —65918
(Section 65915) density bonus. It should be assumed that developers will continue to
use this approach as a means of mitigating the financial impacts created by an
Inclusionary Housing requirement.
Covenant Periods
Ownership Housing Projects
KMA recommends that the covenant period for affordable ownership housing units
continue to be set at one cumulative 45-year period. Within that one 45-year period
the home must be sold and resold to moderate income households at the then current
Affordable Sales Price,
Rental Apartment Projects
KMA recommends that the covenants for the Inclusionary Housing rental apartment
units should remain in place for as long as the property is developed with a residential
use, but for not less than 55 years. Following the 55-year term, the covenant should
only be removed if at some point the property is rezoned and subsequently put to a
non-residential use.
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Options for Fulfilling Inclusionary Housing Obligations
On-Site Production of Inclusionary Housing Units
Ownership Housing Projects
By right, developers of ownership housing projects can fulfill the project's Inclusionary
Housing obligations on site within the market rate project. Developers that wish to
fulfill the Inclusionary Housing obligations on site should be provided with option to
select one of the following fulfillment structures:
Development of Affordable Ownership Housing Units
The following standards mirror the Inclusionary Housing requirements currently being
imposed by the City. These development parameters fall within the typical range for
Inclusionary Housing programs throughout California, and KMA recommends that they
be included in the updated Inclusionary Housing Ordinance.
1. The Inclusionary Housing obligation is set at 10%of the total number of units to
be constructed on the site.
2. The following income and affordability standards are applied:
a. The affordability requirement is set at the moderate income level.
b. The Affordable Sales Prices must be calculated using the H&SC Section
50052.5 standards.
3. The affordable housing units must be built concurrently with the market rate
project. The affordable units can be constructed in phases if the market rate
project is being developed in phases.
4. The affordable housing units must comply with the following development scope
requirements:
a. The bedroom mix for the affordable units must be proportional to the
bedroom mix of the market rate units. However, the affordable units
may be smaller in square footage than the market rate units.
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b. The exterior improvements for the affordable units must be comparable
to the exterior improvements for the market rate units.
C. The interior improvements for the affordable units must meet the
following standards:
i. The interior finished must be comparable to the base level
interior finishes provided in the market rate units; and
ii. The appliance packages must be the same as the packages
provided in the base level market rate units.
Development of Affordable Rental Apartments within an Ownership Housing Project
If the developer of an ownership housing project is willing to fulfill the project's
Inclusionary Housing requirement with rental apartment units, KMA recommends that
the following requirements be applied in the updated Inclusionary Housing Ordinance:
1. The developer should be allowed to create a separate affordable housing parcel
within their development site to fulfill the project's Inclusionary Housing
obligations.
2. The developer of the market rate project can enter into an agreement with an
affordable housing developer to construct, own and operate the affordable
housing units:
a. The affordable housing developer must have relevant recent experience,
and must be approved by the City.
b. The affordable housing developer may not request any financial
assistance from the City.
3. The Inclusionary Housing obligation should be set at 10% of the total number of
units to be constructed on the site.
4. The Inclusionary Housing obligation should be required to be fulfilled with rental
apartment units that embody the following characteristics:
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a. The threshold affordability standard is set at the low income level, but
the developer should be provided with the discretion to fulfill the 10%
requirement with very low income units.
b. The rents must calculated using the H&SC Section 50053 standards.
5. The bedroom mix should not be required to match the unit mix provided in the
market rate ownership housing project. However, at least 40%of the
Inclusionary Housing units should be required to include at least two bedrooms.
Rental Apartment Projects
KMA recommends that the updated Inclusionary Housing Ordinance apply the following
standards to the on-site fulfillment of the Inclusionary Housing requirements imposed
on rental apartment projects:
1. The Inclusionary Housing obligation should be set at 10% of the total number of
units to be constructed on the site. 1
2. The following income and affordability standards should be applied:
a. The threshold affordability standard is set at the low income level, but
the developer should be provided with the discretion to fulfill the
requirement with very low income units.
b. The Affordable Rents must be calculated using the H&SC Section 50053
standards.
3. The affordable housing units should be required to be constructed concurrently
with the market rate project, and they must be dispersed throughout the
project.
4. The affordable housing units should be required to comply with the following
development scope requirements:
'If a developer chooses to use a Section 65915 density bonus the Inclusionary Housing obligation must be
set at the lesser of 10%of the total number of units to be constructed on the site or 10%of the total
number of units allowed by the site's base zoning standards.
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a. The bedroom mix for the affordable units must be proportional to the
bedroom mix of the market rate units. However, the affordable units
may be smaller in square footage than the market rate units.
b. The interior improvements of the Inclusionary Housing units must
comport with defined quality standards such as those applied by the Tax
Credit program The market rate units in the project can include
enhanced interior improvements.
Off-Site Production of Inclusionary Housing Units
KMA recommends that the updated Inclusionary Housing Ordinance allow a developer
to fulfill the Inclusionary Housing obligations in an off-site location under the following
conditions:
1. The development parcel should be required to be located within one mile of the
market rate project that is subject to the Inclusionary Housing obligations.
2. The development must not create an over concentration of deed restricted
affordable housing units in any specific neighborhood."
3. Irrespective of the market rate project's tenure,the Inclusionary Housing
obligation should be required to be fulfilled with rental apartment units.
4. The Inclusionary Housing obligation should be set at 15% of the total units
included in the market rate project that generated the Inclusionary Housing
requirements
5. The following income and affordability standards should be applied:
a. The affordability standard should be set at the low income level, but
developers should be provided with the discretion to fulfill the obligation
with very low income units.
'Over concentration is defined as more than 50 covenanted very low or low income units within%mile,
or more than 200 such units within 36 mile of the of the proposed affordable housing site.
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b. The Affordable Rents must be calculated using the H&SC Section 50053
standards.
6. Design, building quality and maintenance standards should be based on a
defined standard such as the requirements imposed by the Tax Credit program.
7. The bedroom mix should not be required to match the unit mix provided in the
market rate single family home project. However, at least 40% of the units
should be required to include at least two bedrooms.
8. Under the following circumstances the developer of the market rate project can
enter into an agreement with an affordable housing developer to construct, own
and operate the affordable housing project:
a. The affordable housing developer must have recent relevant experience,
and be approved by the City.
b. The affordable housing developer may not request any financial
assistance from the City.
C. The developer may apply to use the Section 65915 density bonus and the
statutorily established number of incentives or concessions.
9. The affordable housing project should be required to be constructed prior to or
concurrent with the market rate project that triggered the Inclusionary Housing
obligation. If the market rate project is proposed to be developed in phases, the
affordable housing project should be required to be developed along with the
first phase of the market rate project.
In-Lieu Fee Payment Option
As currently implemented, the City allows developers of projects that include 30 or
fewer units to pay a fee in lieu of producing affordable housing units. The in-lieu fee can
also be paid to fulfill a fractional unit affordable housing obligation.
KMA recommends that the updated Inclusionary Housing Ordinance should encourage
the use of an in-lieu fee payment options for premium priced ownership housing and
rental apartment projects. The key advantages of this strategy are:
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1. The City can target the use of the in-lieu fee revenue to projects undertaken by
developers that have specific expertise in the development and operation of
affordable housing projects.
2. The in-lieu fee revenues can be used as a leveraging source for dedicated
affordable housing projects that have access to outside public funding sources.
This leveraging creates a more cost-efficient way to achieve deeper affordability
than can be supported by an Inclusionary Housing requirement alone.
In-Lieu Fee Payment Thresholds
KMA recommends that the in-lieu fee payment option be updated to allow developers
to pay the fee by right in the following circumstances:
1. Single family home developments of any size should be provided with the option
to pay an in-lieu fee.
2. Condominium/townhome ownership housing projects and rental apartment
projects with fewer than 100 units should be allowed to pay an in-lieu fee.
3. An In-lieu fee payment option for a fractional affordable housing obligation
should continue to be offered by the City.
4. For projects that do not meet the defined standards, the City Council should be
provided with the discretion to allow an in-lieu fee to be paid if hardship
circumstances are demonstrated.
In-Lieu Fee Schedules
The existing Inclusionary Housing Ordinance provides a graduated in-lieu fee schedule
to reflect the fact that Inclusionary Housing requirements have a disproportionate
impact on smaller projects. KMA recommends that a graduated in-lieu fee schedule
continue to be offered in the updated Inclusionary Housing Ordinance.
It is KMA's opinion that an in-lieu fee measured against the square footages of the units
corresponds more closely to the Affordability Gap associated with the market rate units
being developed. As such, it is KMA's recommendation that the in-lieu fee schedules in
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the updated Inclusionary Housing Ordinance be based on the net saleable area for
ownership housing projects and the net leasable area for rental apartment projects.
KMA created recommended in-lieu fee schedules that discount the in-lieu fee on a pro
rata basis for projects with between three and 30 units. For projects with more than 30
units the in-lieu fee is a fixed dollar amount per square foot of saleable or leasable area.
Based on the results of the Financial Analysis, KMA recommends that the following in-
lieu payment schedules be applied in the first year following the adoption of an updated
Inclusionary Housing Ordinance:
Recommended In-Lieu Fee Schedules
Per Square Foot of Net Saleable Area or Net Leasable Area
#of Ownership Rental #of Ownership Rental
Units Housing Apartments Units Housing Apartments
3 $2.54 $3.58 17 $14.37 $20.29
4 $3.38 $4.77 18 $15.22 $21.48
5 $4.23 $5.97 19 $16.06 $22.67
6 $5.07 $7.16 20 $16.91 $23.87
7 $5.92 $8.35 21 $17.75 $25.06
8 $6.76 $9.55 22 $18.60 $26.25
9 $7.61 $10.74 23 $19.44 $27.45
10 $8.45 $11.93 24 $20.29 $28.64
11 $9.30 $13.13 25 $21.13 $29.83
12 $10.14 $14.32 26 $21.98 $31.03
13 $10.99 $15.51 27 $22.83 $32.22
14 $11.84 $16.71 28 $23.67 $33.41
15 $12.68 $17.90 29 $24.52 $34.61
16 $13.53 $19.09 30+ $25.36 $35.80
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In-Lieu Payment Timing
Developers should be required to pay the in-lieu fee when building permits are obtained
for the project. However, for phased projects the developer should be allowed to pay a
pro rata share of the in-lieu fee concurrently with the issuance of building permits for
each development phase.
Land Dedications
The City Council should have the discretion, but not the requirement, to approve a
developer's proposal to dedicate property in lieu of producing Inclusionary Housing
units. KMA recommends that the following threshold requirements should be imposed
for any property put forth for City Council consideration:
1. The developer must be willing to convey the property to the City at no cost.
2. The developer must provide evidence of the following when the land dedication
proposal is submitted:
a. The developer must have site control with lien-free title. Any
encumbrances or easements that adversely impact the property's title
must be disclosed and factored into the estimated value of the interests
proposed to be conveyed to the City.
b. The property cannot contain any hazardous materials at the time the
land dedication proposal is submitted:
i. The developer must disclose whether any hazardous materials
were previously contained on the site; and
ii. If hazardous materials were previously remediated, the developer
must provide evidence that the cleanup was performed in
accordance with applicable law.
C. The property cannot have been improved with any residential use for at
least five years prior to the submission of a land dedication proposal.
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d. Payment in full of all property taxes and special taxes must have been
made when the proposal is submitted, and again prior to conveyance of
the property to the City.
3. The property must embody the following characteristics:
a. The property must be located within one-mile of the project that is
subject to the Inclusionary Housing obligation.
b. The construction of affordable housing units on the property must not
create an over concentration of low income housing in any specific
neighborhood.
C. The number of units that must be able to be developed on a land
dedication site should be set at 20% of the total units being constructed
within the market rate project:
i. The site's existing General Plan and zoning standards must allow
for a residential use at a density sufficient to allow for the
requisite number of affordable units to be developed.
ii. The site must be suitable in terms of size, configuration, and
physical characteristics to allow for the requisite number of
affordable units to be developed on a cost efficient basis.
d. The property must be fully served by the necessary infrastructure prior to
conveyance to the City.
4. It is the City's goal to convey dedicated properties to developers with experience
developing affordable rental apartment projects targeted to very low income
households. To assist the City in evaluating land dedication proposals, the
developer should be required to submit the following documents:
a. A conceptual site plan and narrative description of a project that could be
developed on the property.
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b. A pro forma analysis that quantifies any financial gap associated with the
identified development scope, and describes how this financial gap will
be filled.
C. If a Section 65915 density bonus will be required, the terms of the
necessary density bonus must be identified.
Prior to submitting a proposal to the City Council for consideration, the City staff should
independently evaluate the information submitted by the developer. Based on that
review the City should determine whether the proposal meets the threshold standards
proposed to be included in the updated Inclusionary Housing Ordinance.
Acquisition and Rehabilitation Projects
The Inclusionary Housing Ordinance is one tool the City is using to assist in meeting its
RHNA targets. The only way that the acquisition and rehabilitation of existing units can
be used to obtain RHNA credit is if the following conditions are met:
1. The project(s) must be identified in the City's Housing Element; and
2. The units must be in need of substantial rehabilitation as defined by H&SC
Section 33413 (2) (A) (iv).
For projects that meet both of these requirements, the City Council should have the
discretion, but not the requirement, to approve a developers acquisition and
rehabilitation proposal. KMA recommends that this option only be approved if the
proposed acquisition and rehabilitation project provides more affordable units at
deeper affordability than would be achieved under any of the other Inclusionary
Housing options discussed in this memorandum.
The additional threshold requirements that should be imposed on acquisition and
rehabilitation projects are:
1. The project must meet one of the following criteria:
a. The project includes affordable units that are at risk of being converted
to market rate units within a five year period; or
b. The project is a motel that can be adaptively reused as residential units.
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2. The Inclusionary Housing requirement is equal to at least 20%of the units in the
project that trigged the Inclusionary Housing obligation:
a. The rents charged for the Inclusionary Housing units must be set at the
lesser of the H&SC 50053 rents or an at least 10% discount from the
achievable market rents for the units.
b. If there are more units in the acquisition and rehabilitation project than
are required to fulfill the Inclusionary Housing requirement, those units
may be rented at unrestricted market rate rents.
3. Any very low or low income households currently residing in the project must be
provided with the following benefits:
a. They must be allowed to stay in place following the acquisition and
rehabilitation.
b. The rents charged to these tenants must comport with the requirements
imposed by H&SC Section 50053 for the tenant's income level.
C. Any temporary relocation costs incurred during the rehabilitation period
must be paid for by the developer.
d. These tenants can only be evicted on a just cause basis.
Implementation Recommendations
As part of the implementation process for the updated Inclusionary Housing Ordinance,
the City should take the following actions:
Section 65915 Density Bonus
The City's Section 65915 density bonus ordinance does not currently include all of the
amendments the State Legislature has made between 2006 and 2019. Given that the
Section 65915 density bonus is intended to reduce the financial impact created by the
imposition of Inclusionary Housing requirements, KMA recommends that the City
update Zoning Code Title 23, Chapter 230, Article I, Section 230.14 to reflect the current
requirements.
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Affordable Housing Regulations
The following Inclusionary Housing Ordinance regulations documents should be
updated:
1. Affordable Ownership Housing Regulations: Developer Requirements;
2. Affordable Ownership Housing Regulations: Owner Requirements; and
3. Affordable Rental Housing Regulations.
Inclusionary Housing Program Updates
The Inclusionary Housing program should be updated at regular intervals:
1. The entire program should be re-evaluated at least every five years.
2. To allow in-lieu fees to keep pace with changes in the market place during the
intervening periods, the in-lieu fees should continue to be adjusted each year
based on the percentage change in new home prices in Orange County as
published annually by the Real Estate Research Council (RERC).
Implementation Activities
A staffing plan should be created for managing the development process and the
ongoing monitoring of the Inclusionary Housing units once they are built.
CASE STUDIES
Background
The following section of this memorandum describes case studies for a hypothetical
ownership housing project and a hypothetical rental apartment project. Both projects
include 250 units, but they are assumed to be developed at different densities and with
different unit mixes.
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The case studies identify each of the options available for fulfilling the Inclusionary
Housing requirements. It is important to note that these case studies are based on the
policy recommendations provided in this memorandum. If the City ultimately chooses
to apply different requirements these case studies will need to be modified accordingly.
Fulfillment Options that Vary Between Ownership Housing and Rental Apartments
The following Inclusionary Housing fulfillment options vary between ownership housing
and rental apartment projects:
1. Production of the Inclusionary Housing units on site within the market rate
project; and
2. A fee payment in lieu of producing affordable housing units.
The ownership housing and rental apartment project case studies are organized as
follows:
1. The development scope assumptions are described.
2. The requirements associated with providing the Inclusionary Housing within the
market rate projects are detailed.
3. An in-lieu fee payment estimate is provided for the hypothetical development.
Standardized Fulfillment Options
The other three fulfillment options for Inclusionary Housing requirements carry the
same responsibilities irrespective of the market rate project's tenure. The options are:
1. Production of the Inclusionary Housing Units in an off-site location;
2. Dedication of land to the City in lieu of producing affordable housing units; and
3. Acquisition and rehabilitation of existing units.
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The descriptions of the three other fulfillment options include the following
information:
1. The development scope assumptions that guide the Inclusionary Housing
requirements;
2. The affordability requirements associated with each option; and
3. The unit mix standards applied to each option are presented.
Ownership Housing Project: On-Site Production and In-Lieu Fee Options
Development Scope Assumptions — Ownership Housing Project
The development scope used the ownership housing hypothetical are:
1. The 250 unit project is developed on a 12.5-site. This represents a density of 20
units per acre.
2. The Inclusionary Housing obligation is equal to 25 units, which represents 10% of
the units in the market rate project.
3. The project is developed in five phases.
4. The unit mix is detailed in the following table:
Unit Mix
Number of Number of Square Feet
Bedrooms Units Per Unit
3 50 1,900
3 75 2,300
4 SO 2,600
4 75 3,000
Total 250 622,500
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On-Site Production Options—Ownership Housing Project
As discussed previously in this memorandum, KMA recommends that developers be
provided two alternative methods for fulfilling the Inclusionary Housing requirements
on site within a market rate project. Bath of these options can be selected by
developers by right.
The two alternatives can be described as follows:
On-Site Production of Affordable Ownership Units
In this alternative, the Inclusionary Housing obligation is fulfilled with ownership
housing units that are interspersed throughout the market rate project.
1. The Inclusionary Housing requirement is set at 10% of the total number of units
to be constructed on the site. This equates to 25 units out of the 250 proposed
units.
2. The income restriction is set at the moderate income level.
3. The bedroom mix required to be applied to the Inclusionary Housing units is
based on pro rata shares of the three- and four-bedroom units in the market rate
project, allocated to the smaller of the unit types in each bedroom category. For
the hypothetical project, the Inclusionary Housing units are distributed as
follows:
a. 13 three-bedroom units with saleable area of 1,900 square feet; and
b. 12 four-bedroom units with saleable area of 2,600 square feet.
4. The project is assumed to be developed in five phases. Assuming the 250 units
are divided equally across the five phases, five affordable units must be
constructed in each phase.
On-Site Production of Affordable Rental Apartment Units
In this alternative the developer creates a separate parcel to accommodate the required
Inclusionary Housing units. To exercise this option, the developer must agree to fulfill
the Inclusionary Housing requirement with affordable rental apartment units.
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1. The Inclusionary Housing requirement is set at 10% of the total number of units
to be constructed on the site. This equates to 25 units out of the 250 proposed
units.
2. The income restriction is set at the low income level.
3. The affordable units developed on the separate parcel are not required to match
the unit mix provided in the market rate project. Instead, the following
requirements are applied in this hypothetical case study:
a. A maximum of 15 units (60%) can be studio or one-bedroom units; and
b. At least 10 units (40%) must include two or more bedrooms.
4. All 25 affordable rental apartment units must be constructed prior to or
concurrent with the construction of the first phase of the market rate ownership
housing project.
In-Lieu Fee Payment Option
For the hypothetical 250 unit ownership housing project, a developer can use the in-lieu
fee option under the following conditions:
1. A project that consists of single family homes can select the in-lieu fee option by
right.
2. A condominium or townhome project would be required to obtain City Council
approval in order to be allowed to use the in-lieu fee option.'
Based on the in-lieu fee schedule being recommended by KMA, the hypothetical
ownership housing project would generate the following in-lieu fee payment obligation:
1. The total saleable area of the 250 unit market rate project is 622,500 square
feet.
2. The in-lieu fee for projects that include 30 or more units is $25.36 per square
foot of saleable area.
s A condominium or townhome project with up to 100 units can select the in-lieu fee option by right.
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3. The resulting total in-lieu fee is $15.8 million, which equates to approximately
$63,151 per unit in the market rate project.
Rental Apartment Project: On-Site Production and In-Lieu Fee Options
The development scope used the rental apartment project hypothetical are:
1. The 250 unit project is developed on a five acre-site. This represents a density of
50 units per acre.
2. The Inclusionary Housing obligation is equal to 25 units, which represents 10%of
the units in the market rate project.
3. The unit mix is presented in the following table:
Unit Mix
Number of Number of Square Feet
Bedrooms Units Per Unit
Studio 35 600
1 120 800
2 75 1,000
3 20 1,200
Total 250 216,000
On-Site Production of Affordable Rental Apartment Units
A developer may select the on-site production option by right. The requirements
associated with this alternative are:
I. At a 10% Inclusionary Housing requirement, 25 affordable units must be
provided.
2. The income restriction is set at the low income level.
3. To match the distribution of the bedroom types included in the market rate
project, the affordable units must be provided in the following mix:
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Number of Number of
Bedrooms Units
Studio 4
1 12
2 8
3 1
Total 25
4. The affordable units must be dispersed throughout the market rate project and
developed concurrently with the market rate project.
In-lieu Fee Payment Option
Under the recommended structure, a 250 unit rental apartment project would not be
allowed to pay a fee to fulfill the Inclusionary Housing obligation. However, if the
developer can prove a financial hardship, the City Council has the discretion to approve
the payment of an in lieu fee.
Based on the in-lieu fee schedule being recommended by KMA, the hypothetical rental
affordable housing project would generate the following in-lieu fee payment obligation:
1. The total leasable area of the 250 unit market rate project is 216,000 square
feet.
2. The in-lieu fee for projects that include 30 or more units is $35.80 per square
foot of leasable area.
3. The resulting total in-lieu fee is $7.7 million, which equates to approximately
$30,900 per unit in the market rate project.
Other Inclusionary Housing Obligation Fulfillment Options
Each of the three remaining Inclusionary Housing obligation fulfillment options includes
the following common assumptions:
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1. The market rate project that triggered the Inclusionary Housing requirement
includes 250 units; and
2. The Inclusionary Housing obligation must be fulfilled with rental apartment
units.
Off-Site Production Option
The City has approval rights over the following:
1. The development site proposed to be used; and
2. The affordable housing developer proposed to undertake the development of
the Inclusionary Housing units.
The off-site production option includes the following additional requirements:
1. The Inclusionary Housing requirement is set at 15%of the units included in the
market rate project.
2. At 250 units the market rate project generates a requirement for 38 affordable
units.
3. The affordability standard is set at the low income level.
4. The affordable units are not required to adhere to the bedroom mix included in
the market rate project. The standards that are imposed on the off-site
development option are:
a. No more than 60% of the units (23) can be studio or one-bedroom units;
and
b. At least 40%of the units (15) must include two or more bedrooms.
5. The Inclusionary Housing obligation must be fulfilled prior to or concurrent with
the first phase of the market rate development.
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Land Dedication Option
City Council approval is required for the use of the land dedication option. Proposals
must meet all the following requirements in order to be presented to the City Council
for consideration.
1. The Inclusionary Housing obligation is set at 20% of the units being constructed
in the market rate project.
2. A 50 unit affordable housing unit requirement is imposed on the hypothetical
250 unit market rate project.
3. At an assumed allowable density of 50 units per acre, the dedicated site must
include at least 43,560 square feet of land area.
4. The affordability standard is set at the very low income level.
5. The unit mix requirements are:
a. No more than 50%of the units can be studio or one-bedroom units; and
b. No fewer than 50% of the units must include two or more bedrooms.
6. The developer must submit a conceptual plan and a pro forma analysis to
demonstrate that a 50 unit project targeted to very low income households will
be feasible with no financial contribution from the City.
Acquisition and Rehabilitation Option
The acquisition and rehabilitation option can only be exercised under very limited
circumstances, and then only with City Council approval. Only projects that fulfill the
following requirements will be presented to the City Council for consideration:
1. The Inclusionary Housing requirement is set at 20%of the units being
constructed in the market rate project.
2. To fulfill the affordable housing requirement a developer would need to acquire
and rehabilitate existing projects that include a total of at least 50 units.
3. The affordability standard is set at the very low income level.
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4. The rehabilitation scope must comport with the following requirements:
a. The improvements must have a value equal to at least 25% of the after
rehabilitation value of the units, which includes the value of the land.6
b. It is required that at least 50%of the acquired and rehabilitated units
include at least two bedrooms. This may require reconfiguration and
conversion of some units in the projects that are acquired.
SUMMARY
The preceding memorandum presented KMA's policy and implementation
recommendations related to updating the City's Inclusionary Housing Ordinance. The
recommended affordable housing requirements are based on the results of the
accompanying Financial Analysis and on an evaluation of the array of fulfillment options
that can be made available to the developers of market rate residential projects.
It is the City's goal to update the Inclusionary Housing Ordinance in ways that balance
the interests of property owners and developers against the public benefits associated
with increasing the inventory of affordable housing units in the community. To that
end, KMA identified financially feasible Inclusionary Housing production requirements
and provided a mix of alternative methods for fulfilling the requirements.
s H&SC Section 33413(2)(a)(iv).
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KEYSER MARSTON ASSOCIATES
FINANCIAL ANALYSIS: INCLUSIONARY
HOUSING ORDINANCE UPDATE
Prepared for:
City of Huntington Beach
Prepared by:
Keyser Marston Associates, Inc.
May 6, 2020
TABLE OF CONTENTS
I. OVERVIEW .....................................................................................................................1
A. Key Court Cases.................................................................................................................... 3
B. Legislation: AB 1505............................................................................................................ 5
C. Inclusionary Housing Program Characteristics.................................................................... 7
D. State Density Bonus and Inclusionary Housing Requirements............................................ 9
II. SUPPORTABLE INCLUSIONARY HOUSING REQUIREMENTS............................................. 10
III. METHODOLOGY ........................................................................................................... 11
A. Inclusionary Housing Requirements that are Currently Being Imposed........................... 11
B. Regional Housing Needs Assessment (RHNA) ................................................................... 14
C. Financial Analysis Organization ......................................................................................... 16
IV. OWNERSHIP HOUSING ANALYSIS.................................................................................. 16
A. Supporting Documents: Ownership Housing Analysis...................................................... 17
B. Condominium Prototype ................................................................................................... 18
C. Projected Market Rate Sales Prices................................................................................... 19
D. Affordable Sales Price Calculations.................................................................................... 19
E. Pro Forma Analyses............................................................................................................ 23
F. In-Lieu Fee Analysis: Ownership Housing.......................................................................... 26
V. RENTAL APARTMENT ANALYSIS.................................................................................... 27
A. Supporting Documents: Rental Apartment Analysis........................................................ 28
B. Rental Apartment Prototypes............................................................................................ 28
C. Projected Market Rents..................................................................................................... 30
D. Affordable Rent Calculations............................................................................................. 30
E. Pro Forma Analyses............................................................................................................ 32
F. In-Lieu Fee Analysis: Rental Apartments........................................................................... 34
VI. SUMMARY ................................................................................................................... 36
A. Existing Inclusionary Housing Requirements..................................................................... 36
B. Residential Development Prototypes................................................................................ 37
C. Conclusions........................................................................................................................ 38
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ATTACHMENTS
ATTACHMENT 1 — INCLUSIONARY HOUSING PROGRAM SURVEY
ATTACHMENT 2 — OWNERSHIP HOUSING ANALYSES
Appendix A: Condominium Analyses
Exhibit I: Pro Forma Analysis: Existing 10% Production Alternative
Exhibit II: Pro Forma Analysis: Existing In-Lieu Fee Payment Alternative
Appendix B: Affordability Analyses
Exhibit I Affordable Sales Price Calculations
Exhibit II In-Lieu Fee Analysis
Appendix C: Home Sales Survey
ATTACHMENT 3 — RENTAL APARTMENT ANALYSES
Appendix A: Pro Forma Analyses— 10% Inclusionary Units
Exhibit I: Moderate Income Alternative— Density @ 50 Units Per Acre
Exhibit Il: Low Income Alternative — Density @ SO Units Per Acre
Exhibit III: Very Low Income Alternative — 35% Density Bonus: 67.5 Units Per Acre
Appendix B: Affordability Analyses
Exhibit I: Affordable Rent Calculations
Exhibit Il: In-Lieu Fee Analysis
Appendix C: Rent Survey
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I. OVERVIEW
The City of Huntington Beach (City) has imposed Inclusionary Housing requirements on
residential development since the early 1990's. During the intervening period the City Council
has taken the following actions related to the Inclusionary Housing policy:
1. In October 2005 the City Council adopted an Inclusionary Housing Ordinance to codify
the affordable housing policy. t The key requirements imposed by the Inclusionary
Housing Ordinance can be summarized as follows:
a. Projects with three or more units are subject to a 10% Inclusionary Housing
requirement:
i. Projects with between three and 10 units were allowed to pay a fee in
lieu of producing affordable units.
ii. Under specified circumstances the affordable housing requirements
could be fulfilled in off-site locations with new development or the
acquisition and rehabilitation of existing units.
b. The following income standards were applied:
i. For ownership housing projects the requirement was set at very low, low
or median income at the City's discretion; and
ii. For rental apartment projects the requirement was set at very low or low
income at the City's discretion
C. The covenant period was set at 60 years for both ownership housing and rental
apartment projects.
The Inclusionary Housing Ordinance is codified in Zoning Code Title 23,Chapter 230,Article 1,Section 230.26.
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2. In July 2009 the City Council approved the following changes to the Inclusionary Housing
Ordinance:2
a. The in-lieu fee payment option was expanded to include projects with up to 30
units
b. The household income limits were modified as follows:
I. For ownership housing projects the requirement was set at the moderate
income level; and
ii. For rental apartment projects the requirement was set at the low income
level. However, with City approval affordable units built within the
market rate projects can fulfill the obligation with moderate income
units.
C. The affordable units must have a bedroom mix that is proportionate to the
market rate unit mix. However, the smallest units of each bedroom type can be
used.
d. In August 2011 the City published the following regulations that detail the
Inclusionary Housing Ordinance requirements:
I. Affordable Ownership Housing Regulations: Developer Requirements;
ii. Affordable Ownership Housing Regulations: Owner Requirements; and
III. Affordable Rental Apartment Regulations.
The Inclusionary Housing Ordinance has not been amended to reflect the approved changes. However, in
practice,the City has been implementing the changes.
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The City engaged Keyser Marston Associates, Inc. (KMA) to assist in updating the requirements
imposed by the Inclusionary Housing Ordinance. This update is being undertaken because
conditions have changed since the Inclusionary Housing Ordinance requirements were last
modified in 2011. The following Financial Analysis: Inclusionary Housing Ordinance Update
(Financial Analysis) evaluates the following topics:
1. The appropriateness of the 10% affordable housing requirement;
2. The fee amounts that can be supported for projects that are permitted to pay a fee in
lieu of producing affordable housing; and
3. Alternative means of fulfilling the affordable housing requirements imposed by the
Inclusionary Housing Ordinance.
This Overview section describes the basic parameters that guide Inclusionary Housing programs
throughout California.
A. Key Court Cases
It is important to review the key legal cases and State legislation that guide the implementation
of Inclusionary Housing programs. A chronological summary of the relevant issues follows.
Palmer Case
In 2009, the California Court of Appeal ruled in Palmer/Sixth Street Properties L.P. v. City of Los
Angeles, 175 Cal. App. 4" 1396 (Palmer), that the local affordable housing requirements being
imposed by the City of Los Angeles violated the Costa-Hawkins Rental Housing Act (Costa-
Hawkins). Specifically, Costa-Hawkins allows landlords to set the initial monthly rent for a new
unit, and then to increase the monthly rent to the market level each time a unit is vacated. The
Court found that the imposition of long-term income and affordability restrictions on rental
residential units is a violation of this provision.
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It is commonly believed that the Palmer ruling prohibited jurisdictions from requiring
developers to construct affordable rental apartment units as a part of their Inclusionary
Housing program. In an effort to comply with Palmer,jurisdictions generally took one of the
following actions:
1. The jurisdiction eliminated the requirement that market rate rental apartment projects
provide affordable rental apartment units; or
2. The jurisdiction replaced affordable housing production models with a linkage or impact
fee methodology; or
3. The jurisdiction imposed affordable housing requirements as part of negotiated
Development Agreements for rental apartment projects.
San lose Case
In 2015, the California Supreme Court ruled in California Building Industry Association v. City of
San Jose, 61 Cal 411435 (San Jose) that Inclusionary Housing programs should be viewed as use
restrictions that are a valid exercise of a jurisdiction's zoning powers. Specifically, the Court
found that Inclusionary Housing requirements are a planning tool rather than an exaction. This
is interpreted to mean that an in-lieu fee payment option that is included in an Inclusionary
Housing program, that includes an affordable housing production requirement, is not subject to
the AB 1600 nexus requirements imposed by the "Mitigation Fee Act".1
Price controls imposed by Inclusionary Housing programs must meet the following criteria:
1. The requirements cannot be "Confiscatory"; and
2. The requirements cannot deprive a property owner of a fair and reasonable return on
their investment.
3 The Mitigation Fee Act is codified in California Government Code§66000 et seq.
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The San lose ruling that Inclusionary Housing programs are not an exaction applies to both
ownership housing and rental apartment development. However, the San Jose case did not
overturn the limitations Palmer imposed on Inclusionary Housing programs for rental
apartment projects.
The San Jose case is also relevant to rental apartment projects, because former Governor
Brown publicly stated that he would not sign a "Palmer Fix" bill unless and until the California
Supreme Court ruled in favor of the City of San Jose. As such, the San Jose ruling opened the
door for the subsequent passage and adoption of Assembly Bill (AB) 1505 in September 2017.
B. Legislation: AB 1505
AB 1505, which is otherwise known as the "Palmer Fix", was signed into law on September 29,
2017. AB 1505 amends Section 65850 of the California Government Code and adds Section
65850.01. This legislation provides jurisdictions with the ability to adopt programs that impose
affordable housing requirements on rental apartment projects.
Role of the California Department of Housing and Community Development (HCD)
Section 65850.01 does not place a cap on the percentage of units that can be subject to income
and affordability restrictions. However, Section 65850.01 (a) gives HCD the authority to review
the restrictions imposed by an Inclusionary Housing program on rental apartment
developments if it requires that more than 15%of the units to be restricted to households
earning less than 80%of the area median income (AMI), and if one of the following conditions
applies:
1. The jurisdiction has failed to meet at least 75%of its Regional Housing Needs
Assessment (RHNA) allocation for above moderate income units. This test is measured
on a pro-rated basis over the planning period, which is set at a minimum of five years; or
2. HCD finds that the jurisdiction has not submitted their housing element report for at
least two consecutive years.
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As of December 31, 2019, the City has exceeded the RHNA goal for above moderate income
housing. The City received Housing Element approval from HCD in March 2020, but prior to
that HCD had deemed the City out of compliance since 2015. Since the City has not submitted
their housing element report for at least two consecutive years HCD has the right to require an
economic feasibility study if more than 15% of rental apartment units in a project are required
to be restricted at less than 80% of AMI.
It is likely that this Financial Analysis meets the economic feasibility study standards defined in
Section 65850.01 (b). However, if the City chooses to impose a greater than 15% affordability
requirement and/or deeper affordability standards on rental apartment projects, HCD can
intervene in the Inclusionary Housing Ordinance update process. This could extend and
complicate the approval process for updates to the Inclusionary Housing Ordinance being
considered by the City.
Additional AB 1505 Requirements
Section 65850 (g) requires jurisdictions to provide alternative means of fulfilling the affordable
housing requirements imposed on rental apartment projects by an Inclusionary Housing
program. Options that can be provided to developers include, but are not limited to:
1. Off-site construction of affordable units;
2. Payment of a fee in-lieu of producing affordable housing units;
3. land dedication; and
4. The acquisition and rehabilitation of existing units.
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C. Inclusionary Housing Program Characteristics
Over 170 jurisdictions in California currently include an Inclusionary Housing program as a
component in their overall affordable housing strategy. While the unifying foundation of these
programs is the objective to attract affordable housing development, the characteristics of
these programs vary widely from jurisdiction-to-jurisdiction.
To assist the City in evaluating options for updating the Inclusionary Housing Ordinance it is
useful to identify the elements that are typically included in Inclusionary Housing programs
being implemented in California jurisdictions. To that end, KMA compiled information on 64
Inclusionary Housing programs being implemented throughout California. The survey
information is presented in Attachment 1 and is summarized in the following sections of this
Financial Analysis.
1. In California, the majority of Inclusionary Housing programs include a threshold project
size below which projects are not subject to the affordable housing requirements.
Common thresholds fall between three and 10 units. The average threshold project size
found in the program survey is eight units.
2. The income and affordability standards imposed by Inclusionary Housing programs vary
widely throughout California. The majority of programs have established standards in
the range of 10%to 20%of the units in projects that will be subject to the requirements.
However, the following policy variations are commonly found:
a. The threshold standards are varied as a reflection of the depth of the
affordability being provided.
b. Inclusionary Housing requirements have a disproportionate impact on smaller
projects, because there are fewer market rate units available to spread the
impact created by the income and affordability standards. A sliding scale
requirement is sometimes used to mitigate these impacts.
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C. The length of the covenant period imposed on Inclusionary Housing units varies
from jurisdiction-to-jurisdiction. The California Health and Safety Code (H&SC)
Section 33413 standards of 45 years for ownership housing units and 55 years
for rental apartment units is commonly used. However, both shorter and longer
covenant periods are imposed throughout Inclusionary Housing programs in
California.
Inclusionary Housing programs focus on the production of affordable housing units by imposing
specific affordable housing requirements on new development. To comply with the findings in
the Son Jose case, and the requirements imposed by Sections 65850 and 65850.01, Inclusionary
Housing programs must offer developers a range of options for fulfilling the affordable housing
requirements. The most common options offered to developers are:
1. Construction of a defined percentage of income restricted units within new market rate
residential projects;
2. Construction of a defined percentage of income restricted units in a project located in
an off-site location;
3. Payment of a fee in lieu of producing affordable housing units in which the revenues will
subsequently be used by the jurisdiction to assist in the development of affordable
housing units within the community;
4. The dedication of land to the jurisdiction that is appropriate for the development of
affordable housing; and
5. The acquisition and rehabilitation of existing units.
The requirements imposed by the City's existing Inclusionary Housing Ordinance can be
considered typical within the context of the surveyed programs. As such, the focus of this KMA
evaluation is on updating the Inclusionary Housing Ordinance to reflect current market and
financial conditions.
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D. State Density Bonus and Inclusionary Housing Requirements
A tool that is commonly used to reduce the financial impact associated with the imposition of
Inclusionary Housing requirements is the density bonus provided by California Government
Code Sections 65915-65918 (Section 65915). Section 65915 requires jurisdictions to provide
density bonuses based on a sliding scale ranging from 5%to 35%depending on the magnitude
of the income restrictions being imposed.
In July 2013 the First District Court of Appeal held that jurisdictions must agree to count the
affordable units used to fulfill the Section 65915 density bonus requirements towards the
Inclusionary Housing requirements that will be imposed on a project.' Based on that ruling, a
developer must be allowed to use the same affordable units to fulfill both the Inclusionary
Housing requirements and the Section 65915 requirements. However, in order to exercise this
option, the developer must apply the more stringent of the two programs' requirements.
The Section 65915 density bonus can act to materially reduce the financial impacts created by
Inclusionary Housing requirements. For that reason, the City should recognize that when
Inclusionary Housing requirements are imposed it is highly likely that many developers will
make use of Section 65915 density bonuses. It is also important to understand that the City is
required to grant a developer's request for the statutorily established density bonus along with
the requisite number of concessions and incentives, as well as any necessary development
standards reductions or waivers.'
Section 65915 requires the City to adopt an ordinance that specifies how it will comply with the
State mandated density bonus requirements. The City adopted a density bonus ordinance in
2005 and it has amended the ordinance four times.6 However, the City's density bonus
4 Latinos Unidos del Valle de Napa y Solana v. County of Napo, 217 Cal.App.4" 1160(Napo).
S Section 65915 (d)(1)identifies three conditions under which requested incentives or concessions can be denied.
However,this does not relieve the City of the obligation to grant the number of incentives or concessions that the
project is entitled to under Section 65915(d) (2).
e The density bonus ordinance is codified in Zoning Code Title 23,Chapter 230,Article I,Section 230.14.
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ordinance has not been updated to reflect several modifications that have been made by the
State Legislature to Section 65915 over time. Until such time as the modifications are amended
into the City's density bonus ordinance, State law will automatically prevail over any
inconsistencies between State law and the City's ordinance.
II. SUPPORTABLE INCLUSIONARY HOUSING REQUIREMENTS
As discussed previously, the court in the San Jose case found that the imposition of Inclusionary
Housing requirements is a valid exercise of the City's zoning powers rather than an exaction.
Sections 65850 and 6S850.01 amended the California Government Code to expressly allow
Inclusionary Housing requirements to be imposed on rental apartment projects.
It is important for the City to consider the following caveats when updating the Inclusionary
Housing Ordinance
1. Inclusionary Housing requirements cannot be confiscatory or deprive an owner of a fair
and reasonable return. However, recognizing that the courts have not defined these
terms, the City has some discretion in establishing evaluation parameters.
2. California Government Code Section 65583 (a) (Section 6SS83 (a)) requires the City to
analyze potential and actual constraints being placed on the development of housing.
Within that context, it is important to recognize that the requirements imposed by the
Inclusionary Housing Ordinance can only be expected to fulfill a small portion of the
unmet need for affordable housing in Huntington Beach.
As mentioned previously, the City has been imposing Inclusionary Housing requirements on
residential development since the early 1990's. As such, residential developers and owners of
residentially zoned land are fully aware of the financial impacts created by the affordable
housing requirements. Given that building permits were obtained for 2,915 housing units
between 2013 and 2018 it can safely be concluded that to date the Inclusionary Housing
Ordinance has not acted as a constraint to development.
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The key factors that should be considered in updating the Inclusionary Housing Ordinance are:
1. The requirements should balance the interests of property owners and developers
against the public benefit created by the production of income restricted units; and
2. The Inclusionary Housing requirements cannot be confiscatory or deprive an owner of a
fair and reasonable return on their investment.
III. METHODOLOGY
The purpose of this analysis is to assist the City in updating the Inclusionary Housing Ordinance.
The evaluation is comprised of the following steps:
A. Inclusionary Housing Requirements that are Currently Being Imposed
Basic Requirements
1. The Inclusionary Housing requirements apply to residential projects that include three
or more units.
2. The affordable housing units must be built concurrently with the market rate project.
The units can be constructed in phases if the market rate project is being developed in
phases.
3. The affordable housing units must comply with the following development scope
requirements:
a. The bedroom mix for the affordable units must be proportional to the bedroom
mix of the market rate units. However, the affordable units may be smaller in
square footage than the market rate units.
b. The exterior improvements for the affordable units must be comparable to the
exterior improvements for the market rate units.
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C. The interior improvements for the affordable units must be comparable to the
base level interior finishes provided in the market rate units.
Income and Affordability Covenants
The Inclusionary Housing requirement is set at 10% of the units in ownership housing and rental
apartment development projects. The specific income and affordability standards that are
currently being applied are as follows:
Ownership Housing Projects:
1. The affordable units must be sold to moderate income households.
2. The H&SC Section 50052.5 calculation methodology is used to set the "Affordable Sales
Prices".
3. The covenant period is set at one cumulative total of 45 years. Within that one 45-year
period the home must be sold and resold at an Affordable Sales Price to moderate
income households.
Rental Apartment Projects:
1. Under the current policy, the affordable units are to be rented to low income
households. However, moderate income units may be allowed to be used to fulfill the
requirement if the units are provided on site within the market rate project.
2. The H&SC Section 50053 calculation methodology is used to establish the "Affordable
Rents' each year.
3. The covenant period is set at 55 years.
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Alternative Inclusionary Housing Requirement Fulfillment Options
Developers currently have the option to fulfill the Inclusionary Housing requirements in the
following ways:
In-Lieu Fees
An in-lieu fee can be paid to fulfill a fractional affordable unit obligation. An in-lieu fee can also
be paid by projects with between three and 30 units. Restrictions applied to the in-lieu fee are:
1. The City Council establishes the in-lieu fee schedule each year.
2. The in-lieu fee must be paid when the building permits for the project are issued.
3. The in-lieu fee revenue is deposited into the "Inclusionary Housing Trust Fund". The City
must allocate at least 20% of these funds to assist very low income households, and at
least 50% of the total funds must be used to assist very low and low income households.
Off-Site Affordable Housing Production
The Inclusionary Housing requirements can currently be fulfilled in off-site locations under the
following criteria:
1. Newly constructed units must fulfill the same development scope requirements that are
applied to affordable units constructed within the market rate project.
2. The affordable units can be provided in existing projects that meet the following criteria:
a. The units must not be subject to existing income and affordability covenants
unless the units are at risk of being converted to unrestricted market rents.
b. The units must require substantial rehabilitation, which is defined as one-third of
the value of the existing improvements, excluding land.
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3. Mobile homes can be used to fulfill the affordable housing requirement.
B. Regional Housing Needs Assessment (RHNA)
To assist in creating updates to the existing Inclusionary Housing Ordinance it is useful to
identify the composition of the City's unmet need for housing. One measurement is the RHNA,
which is used as a tool in the Housing Element process. The most recent RHNA covers the
period between 2013 and 2021. At the end of 2019 the City's progress towards fulfilling the
defined RHNA targets is presented in the following table:
City of Huntington Beach RHNA Information 2013—2021
Progress as of December 31, 2019
Unfilled RHNA Targets
Building
RHNA Permits Entitled
Income Category Targets Issued Units Total %
Very Low 313 50 0 263 84%
Low 220 47 1 172 78%
Moderate 248 274 9 (35) 0%
Above Moderate 572 2,574 266 (2,649) 0%
Totals 7 1,353 2,945 276 435 82%
As can be seen in the preceding table, the above moderate income target has been exceeded
by a significant margin, and 35 more units were produced than the current moderate income
target. 8 This indicates that the Inclusionary Housing Ordinance should focus on the attraction
of very low and low income units. However, this goal needs to be balanced against the
'The Total Unfilled RHNA Target and the Percentage of Remaining RHNA Target calculations exclude the excess
number of moderate and above-moderate income units that have been permitted.
'The Southern California Association of Governments(SCAG)staff recommended RHNA allocation for 2021-2029
totals 13,337 units. No credit will be provided for units produced in excess of the 2013 - 2021 targets.
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requirement that the Inclusionary Housing Ordinance cannot be structured in a way that places
an onerous financial burden on the developers of market rate housing.
Recognizing that the vast majority of housing that has been constructed in Huntington Beach
over the past five years has been premium priced ownership housing units and rental
apartments, it may be advantageous to update the Inclusionary Housing Ordinance
requirements to encourage off-site production and in-lieu fee payment options. The key
advantages of this strategy are:
1. The affordable housing units can be developed by developers that have specific
expertise in the development and operation of affordable housing projects.
2. Dedicated affordable housing projects have access to public funding sources that
provide a more cost-efficient way to achieve deeper affordability than can be supported
by an Inclusionary Housing requirement. A representative sample of programs that are
targeted to dedicated affordable housing projects are:
a. Low and Moderate Income Housing Asset Funds (LMIHAF)that are under the
control of the City, which acts as the Housing Successor to the former
Huntington Beach Redevelopment Agency;
b. HOME Program funds that are awarded to the City by the United States
Department of Housing and Urban Development (HUD);
C. The federal and state Low-Income Housing Tax Credits (Tax Credits) offered
under Internal Revenue Code Section 42;
d. State funding sources such as the Affordable Housing and Sustainable
Communities (AHSC) Program; and
e. The funds allocated to the City by HCD under the Permanent Local Housing
Allocation (PLHA) for Senate Bill 2 (Chapter 364, Statutes of 2017).
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C. Financial Analysis Organization
The financial analyses are organized as follows:
Step Analysis
1 Creation of residential prototypes that are representative of new market rate
development in Huntington Beach.
2 A survey of representative projects to estimate the achievable market rate sales
prices and rents for the prototype units.
3 Estimation of the Affordable Sales Prices and Affordable Rents.
4 An evaluation of the existing 10% Inclusionary Housing requirement:
a. For ownership housing projects KMA prepared a pro forma analysis for a
prototype condominium project that includes a 10% moderate income
requirement and a pro forma analysis for the same project assuming that the
2019 in-lieu fee amount is paid.
b. For rental projects KMA prepared pro forma analyses for a prototype rental
apartment project under three alternative income and affordability standards.
5 Projection of the in-lieu fees per square foot of net saleable or leasable area that can
be supported.
Iv. OWNERSHIP HOUSING ANALYSIS
The Inclusionary Housing Ordinance requires 10%of the units in ownership housing projects to
be allocated to moderate income households. Imposing a moderate income requirement on
ownership housing units reflects the fact that these households are likely to have more
discretionary income to devote to the ongoing costs associated with home ownership than that
of lower income households.
Recent new ownership housing development in Huntington Beach has been focused largely on
detached single family home projects, with scattered development of condominiums and
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townhomes.1 However, for the following reasons the prototype ownership housing project
created by KMA for the pro forma analysis is a condominium project:
1. For single family homes, the weighted average gap between the market rate price and
the Affordable Sales Price for a moderate income household is approximately $1.74
million.:'
2. It is clear that exercising an option to pay an in-lieu fee or to provide off-site affordable
housing units could be structured to produce more affordable units at a deeper
affordability level than fulfilling the Inclusionary Housing requirement within a market
rate single family home project.
3. Higher density condominium projects are currently being proposed for development in
Huntington Beach. The gap between the market rate prices and the Affordable Sales
Prices for this product type is significantly smaller than the gap exhibited by single family
homes. Therefore, the potential for fulfilling Inclusionary Housing obligations on site
merits evaluation.
A. Supporting Documents: Ownership Housing Analysis
The documents that support the ownership housing analysis are presented in Attachment 2.
The following condominium pro forma analyses are used to evaluate the existing moderate
income affordable housing production requirements and to estimate the supportable in-lieu
fees per square foot of net saleable building area. The analyses are organized as follows:
To compile sufficient data the home sales survey for condominiums and townhomes had to be extended to
projects built as early as 1990. comparatively, it was possible to limit the survey of single family home sales to
projects constructed after 2010.
10 See Attachment 2 —Appendix B—Exhibit Il.
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Financial Analysis—Ownership Housing
Appendix A Condominium Analyses
Appendix B Affordability Analyses
Appendix C Home Sales Survey
B. Condominium Prototype
KMA created a prototype based on a review of condominium projects proposed for
development and existing condominium projects in Huntington Beach. The key characteristics
of the condominium prototype used in the pro forma analyses are:
Condominium Prototype
Site Area (Square Feet) 43,560
Total Number of Units 40
Density (Units Per Acre) 40
Unit Mix
Two-Bedroom Units 20
Three-Bedroom Units 10
Four-Bedroom Units 10
Average Unit Sizes (Square Feet)
Two-Bedroom Units 1,530
Three-Bedroom Units 1,900
Four-Bedroom Units 3,000
Parking
Total Number of Spaces 110
Parking Spaces Per Unit 11 2.75
Parking Type Subterranean
Based on the citywide parking standards of 2.0 spaces for two-bedroom units; 2.5 spaces for three-and four-
bedroom units;and .5 guest spaces per unit.
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C. Projected Market Rate Sales Prices
It is important to note that the prototype analysis is intended to reflect average or typical
ownership housing projects rather than any specific project. It should be expected that specific
projects will vary to some degree from the prototype.
To assist in projecting the achievable market rate sales prices, KMA compiled sales data for
condominiums sold in Huntington Beach between March 2019 and March 2020 (Attachment 2
—Appendix Q. This information is used to establish the average sales price per square foot of
saleable area for two-, three- and four-bedroom condominium units.
Based on the results of the surveys, KMA estimated the market rate sales prices as follows:
Projected Market Rate Sales Prices —Ownership Housing
% of Total Units Average Price
Two-Bedroom Units 50% $842,500
Three-Bedroom Units 25% $1,001,700
Four-Bedroom Units 25% $1,348,100
Average Price / SF of Net Saleable Area 100% $500
D. Affordable Sales Price Calculations
The Affordable Sales Prices calculations are presented in Attachment 2 —Appendix B— Exhibit I.
The calculations are based on the following assumptions:
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1. The household income information used in the calculations is based on 2020 income
statistics for Orange County as a whole. The household incomes for moderate income
households are produced and distributed annually by HCD.12
2. The Affordable Sales Price estimates are based on the calculation methodology imposed
by H&SC Section 50052.5. The calculations include the elements described in the
following sections of this report.
Household Size
The household incomes applied in the Affordable Sales Price calculations are set at the number
of bedrooms in the home plus one. For example, the imputed household size for a three-
bedroom home is four persons. H&SC Section 50052.5 refers to this as "the household size
appropriate for the unit." However, this is not meant to be an occupancy cap; it is simply a
benchmark used to create a consistent methodology for calculating the Affordable Sales Price.
Household Income
For moderate income households, H&SC Section 50052.5 uses 110% of AMI for a household
size equal to the number of bedrooms in the home plus one. This measurement is only used for
setting the Affordable Sales Prices. Households with incomes of up to 120% AMI would qualify
to reside in moderate income units.
Income Allocated to Housing-Related Expenses
H&SC Section 50052.5 allocates 35% of the benchmark household income to the payment of
housing-related expenses.
12 As of April 23, 2020 HCD had not yet published 2020 income information. For the purposes of this Financial
Analysis KMA estimated the moderate income amounts based on an extrapolation from the Orange County
median income published by HUD on April 1,2020. It is possible that the information published by HCD for 2020
may vary somewhat from these estimates.
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Housing-Related Expenses
Based on research undertaken by KMA, the variable housing related expense assumptions used
in this analysis are presented in the following table:
Variable Housing Related Expenses — Ownership Housing
Monthly HOA,
Monthly Utilities Insurance &
Allowances 13 Maintenance
Two-Bedroom Units $171 $500
Three-Bedroom Units $226 $550
Four-Bedroom Units $281 $575
The property tax expense estimate is based on 1.08% of the home's estimated Affordable Sales
Price, This Affordable Sales Price is applied as the assessed value due to the fact that an
irrevocable long-term resale restriction covenant is imposed on the home.
Supportable Mortgage Amount
The mortgage amounts used in the Affordable Sales Price calculations are estimated using the
income available after the other housing-related expenses are paid. The Affordable Ownership
Housing Regulations state the following:
The Maximum Mortgage Amount is equal to the present value of the Income
Available for Mortgage Payments over a 30-year term. The discount rate used
to determine the present value is set at the Mortgage Interest Rate. The
Mortgage Interest Rate will be posted on the City's website, and will be updated
monthly.
"The utilities allowances are based on the assumption that the home owners utilities costs are comprised of gas
heating,cooking and water heating; basic electric;water; and trash and sewer services. The allowances are based
on the Orange County Housing Authority schedule effective October 1, 2019.
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In practice, the City has been using the lowest interest rate published during the preceding
three month period. As an example, the rate being applied by the City in April 2020 is 2.46%.
This rate is significantly lower than the rates for which typical moderate income home buyers
will be able to qualify. Common reasons for this are:
1. Credit history and scores that do not fall within the exceptional level required to obtain
the lowest interest rate available in the marketplace;
2. Back-end ratios that are often higher than the typical ratios applied in conventional
lenders' underwriting standards for the lowest interest rate mortgages;
3. The lowest published interest rate is often a teaser rate that will ultimately adjust to a
higher rate that will be unaffordable to the moderate income home buyer; and
4. There is a limited pool of mortgage lenders that are willing to provide loans on homes
that are subject to long-term irrevocable resale restrictions. These lenders do not
generally offer the lowest interest rates available in the marketplace.
The use of the lowest published interest rate is not required by the Inclusionary Housing
Ordinance or by the Affordable Ownership Housing Regulations. The application of this metric
generates extremely high Affordable Sales Prices, which can actually only be achieved by home
buyers with the ability to make an extraordinarily large down payment.
KMA strongly recommends that the City modify the policy being used to set the mortgage
interest rate being applied in the Affordable Sales Price calculations. The mortgage terms used
in this pro forma analysis are based on a 50 basis points premium applied to the April 20, 2020
Bankrate site average APR for 30-year fixed interest rate mortgages. This results in a 4.24%
interest rate.
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Benchmark Down Payment
KMA set the down payment at 10% of the Affordable Sales Price. This represents a benchmark
percentage based on the standards set forth in the Affordable Ownership Housing Regulations.
The benchmark down payment is only used for the purpose Of setting the Affordable Sales
Price. The actual down payment amount can vary from a minimum of 5% to a maximum of 50%
of the Affordable Sales Price. However, it is important to understand that the down payment
amount does not impact the Affordable Sales Price. Rather, the actual down payment
contributed by a home buyer is subtracted from the defined Affordable Sales Price to establish
the allowable first trust deed mortgage amount.
Affordable Sales Prices
The Affordable Sales Price estimates for moderate income units are:
Affordable Sales Price Estimates—Ownership Housing
Two-Bedroom Units $432,800
Three-Bedroom Units $475,200
Four-Bedroom Units $S09,700
E. Pro Forma Analyses
KMA prepared two pro forma analysis, which can be described as follows:
1. A pro forma analysis was prepared for a project that includes 40 condominium units.
Four of the units are set aside for moderate income households and 36 units are
unrestricted market rate units (Existing 10% Production Alternative).
2. A pro forma analysis was prepared for a 40 unit condominium project in which a fee is
paid in lieu of producing any affordable units. The analysis is based on the 2019 in-lieu
fee schedule, which is currently being applied (Existing In-Lieu Fee Payment Alternative).
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The pro forma analyses are organized as follows:
Ownership Housing Pro Forma Analyses
Table 1: Estimated Development Costs
Table 2: Projected Net Sales Revenue
Table 3: Projected Developer Profit
Existing 10% Production Alternative — Ownership Housing
The pro forma analysis for the Existing 10% Production Alternative is presented in Attachment 2
—Appendix A— Exhibit I. In this alternative 90% of the units are sold at unrestricted market rate
prices and 10% of the units are sold to moderate income households at Affordable Sales Prices.
Existing In-Lieu Fee Payment Alternative — Ownership Housing
The pro forma analysis for the Existing In-Lieu Fee Payment Alternative is presented in
Attachment 2 —Appendix A — Exhibit II. In this alternative 100% of the units are sold at
unrestricted market rate prices, and the in-lieu fee is paid when building permits are issued. A
comparison of the pro forma analyses follows:
Pro Forma Comparison—Ownership Housing
Existing In-
Existing 10% Lieu Fee
Production Payment
Alternative Alternative Difference
Development Costs
Property Acquisition Costs $7,623,000 $7,623,000 Direct CostsCosts 18,392,000 18,392,000 --0--
Indirect Costs 3,940,000 6,406,000 (2,466,000)
Financing Costs 1,733,000 1,938,000 ($205,000)
Total Development Costs $31,688,000 $34,359,000 ($2,671,000)
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Pro Forma Comparison —Ownership Housing
Existing In-
Existing 10% Lieu Fee
Production Payment
Alternative Alternative Difference
Net Revenue $35,658,000 $37,678,000 ($2,020,000)
Developer Profit $3,970,000 $3,319,000 $651,000
As a %of Development Cost 12.5% 9.7%
As can be seen in the preceding table, under current conditions, the Existing 10% Production
Alternative generates a higher developer return than the Existing In-Lieu Fee Payment
Alternative. This is attributable to the following factors:
1. The total development costs for the Existing In-Lieu Fee Payment Alternative are $2.67
million higher than the total development costs for the Existing 10% Production
Alternative. The differences are largely explained by the following factors:
a. The scheduled in-lieu fee payment totals $2,349,000. Under the existing
Inclusionary Housing Ordinance terms, this payment must be made when
building permits are issued.
b. The additional carrying casts associated with the in-lieu fee payment are
estimated at $205,000.
2. The net revenue generated by the Existing In-Lieu Fee Payment Alternative is $2.02
million higher than the net revenue for the Existing 10% Production Alternative.
3. The resulting net profit is $651,000 higher for the Existing 10% Production Alternative
than for the Existing In-Lieu Fee Payment Alternative.
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Based on the findings of the comparative pro forma analyses it would seem likely that
developers would choose to fulfill the Inclusionary Housing requirement on site within the
market rate project. However, historically, ownership housing developers have typically
requested the right to pay the in-lieu fee. It is likely that this option is selected for the following
reasons:
1. The in-lieu fee amount is fixed when building permits are obtained for the project.
Developers place a value on certainty.
2. The upside potential for market rate prices can be achieved for 100% of the units in the
project.
3. It can be difficult to attract home buyers who meet both the income qualification
standards and lenders' underwriting criteria and are willing to purchase a home that is
subject to long-term resale restrictions.
F. In-Lieu Fee Analysis: Ownership Housing
In general terms, the financial impact associated with fulfilling Inclusionary Housing
requirements within market rate projects is equal to the difference between the achievable
market rate sales prices or rents and the Affordable Sales Prices or Affordable Rents for the
Inclusionary Housing units. This is known as the "Affordability Gap." The Affordability Gap
represents the maximum in-lieu fee that should be charged as part of an Inclusionary Housing
program.
KMA prepared Affordability Gap analyses for a condominium/town home project and a single
family home project (Attachment 2 —Appendix B — Exhibit II). These analyses apply the
weighted average Affordability Gaps to the bedroom mixes identified in the home sales survey.
As discussed previously, the home sales survey demonstrated significantly higher prices for the
single family homes than for condom iniums/townhomes. This is partially attributable to the
fact that the single family homes are larger than the condominiums/townhomes, and also that
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a premium is typically paid for detached homes. In the survey, the weighted average sales price
per square foot of net saleable area was 38% higher for the single family homes than for the
condom iniums/townhomes.
As shown in Attachment 2—Appendix B— Exhibit II, the weighted average Affordability Gaps,
and the resulting in-lieu fees, are as follows:
In-Lieu Fees Based on Affordability Gaps—Ownership Housing
Condominiums & Single Family
In-Lieu Fee Townhomes Homes
Per Moderate Income Unit $504,700 $1,635,900
Per Total Unit in the Project $50,470 $163,590
Per SF of Net Saleable Area $25.36 $55.34
As can be seen in the preceding table, the in-lieu fee based on the Affordability Gap is
estimated at $50,470 per total unit in the condominium and townhome project.
Comparatively, the 2019 in-lieu fee under the existing Inclusionary Housing Ordinance is set at
$58,736 per total unit in the project. Thus, the currently supportable in-lieu fee for
condominium and townhome projects is estimated to be approximately 14% lower than the in-
lieu fee applied by the existing 2019 schedule.
It is important to note that the in lieu fee based on the Affordability Gap for single family homes
is estimated at $163,590 per total unit in the project. A fee of this magnitude is significantly
higher than the in-lieu fee charged in any Southern California city.
V. RENTAL APARTMENT ANALYSIS
The existing Inclusionary Housing Ordinance effectively allows developers to fulfill the
affordable housing requirements by allocating 10%of the units in a market rate project to
moderate income households. Therefore, KMA applied this requirement as the base case in the
analysis. KMA also prepared pro forma analysis for the following alternatives:
Financial Analysis: Inclusionary Housing Ordinance Update Page 27
Keyser Marston Associates,Inc. 1908014M8 May 6,2020
1. A 10% low income requirement for a project at the density allowed by zoning; and
2. A Section 65915 density bonus alternative that allocates 11% of the units allowed by the
site's zoning to very low income households.
The rental apartment pro forma analyses are used to estimate the financial impacts created by
the modifications to the affordability standards that are being tested. The analysis is also used
to estimate the supportable in-lieu fees.
A. Supporting Documents: Rental Apartment Analysis
The documents that support the rental apartment analysis are presented in Attachment 3. The
pro forma analyses for rental apartment projects are organized as follows:
Financial Analysis—Rental Apartments
Appendix A Pro Forma Analyses
Appendix B Affordability Analyses
Appendix C Rent Survey
A variety of tools are available to reduce the financial impact associated with the imposition of
income and affordability restrictions on rental apartment projects. For example, the Section
6591S density bonus program is commonly used by the developers in jurisdictions that impose
Inclusionary Housing requirements. As discussed previously, under the findings of the Napa
case, a developer must be allowed to fulfill Inclusionary Housing and Section 65915 density
bonus requirements with the same affordable units as long as the affordable units meet the
more restrictive of the standards imposed by the two programs.
B. Rental Apartment Prototypes
The rental apartment prototypes used in this analysis were created based on the results of the
KMA market surveys, and a review of projects that have recently been constructed in
Financial Analysis: Inclusionary Housing Ordinance Update Page 28
Keyser Marston Associates,Inc. 1908014 HB May 6, 2020
Huntington Beach. The KMA market surveys were also used to estimate the achievable market
rate rents for the prototype units. The prototypes used in this analysis reflect the
characteristics of recently constructed projects. These prototypes are described in the
following table:
Rental Apartment Project Prototypes
Moderate & Low Very Low Income
Income Density Bonus
Alternatives Alternative
Site Area (Acres) 8.0 8.0
Total Number of Units 400 540
Density (Units Per Acre) SO 67.5
Unit Mix
Studio Units 60 81
One-Bedroom Units 200 270
Two-Bedroom Units 120 162
Three-Bedroom Units 20 27
Average Unit Sizes (Sq Ft)
Studio Units 620 620
One-Bedroom Units 820 820
Two-Bedroom Units 1,160 1,160
Three-Bedroom Units 1,550 1,550
Parking
Total Number of Spaces 14 750 729
Parking Spaces Per Unit 1.88 1.35
Parking Type Wrap Wrap
"The citywide and Section 65915 parking standards require 1.0 space for studio and one-bedroom units; and; 2.0
spaces for two-bedroom units. For three-bedroom units the citywide requirement is 2.5 spaces and the Section
65915 standard is 2.0 spaces. The Moderate and Low Income Alternatives include .5 guest spaces per unit. No
guest spaces can be required under the Section 65915 standards.
Financial Analysis: Inclusionary Housing Ordinance Update Page 29
Keyser Marston Associates,Inc. 1908014MB May 6,2020
C. Projected Market Rents
In February 2020, KMA surveyed rental apartment projects in Huntington Beach that received
four or more stars in the Costar quality ranking system (Attachment 3 — Appendix Q. The
purpose of this survey was to derive estimates of the currently achievable market rents for the
types of projects likely to be constructed in Huntington Beach. However, the characteristics of
actual projects will vary to some degree from the prototypes.
The market rate monthly rent estimates that are used in this pro forma analysis are:
Projected Monthly Market Rate Rents— Rental Apartments
Average Monthly Rent Per Unit
Studio Units $2,652
One-Bedroom Units $3,189
Two-Bedroom Units $4,856
Three-Bedroom Units $5,501
Average Monthly Rent Per SF of Net Leasable Area $4.01
D. Affordable Rent Calculations
The Inclusionary Housing Ordinance calls for Affordable Rents to be calculated using the
methodology imposed by H&SC Section 50053. The calculations are presented in Attachment 3
—Appendix B — Exhibit I, and the assumptions and results can be summarized as follows:
Financial Analysis: Inclusionary Housing Ordinance Update Page 30
Keyser Marston Associates,Inc. 1908014.118 May 6. 2020
1. The household income information used in the calculations is based on 2020 income
statistics for Orange County as a whole. The household incomes are published annually
by HUD and are distributed by HCD. :s
2. The household size appropriate for the unit is based on the H&SC Section 50052.5
standard of the number of bedrooms in the home plus one. As was the case in the
Affordable Sales Price calculations, this is a benchmark, not an occupancy cap.
3. The household incomes used in the Affordable Rent calculations are set as follows:16
a. Moderate income at 110% of AMI;
b. Low income at 60% of AMI; and
C. Very low income at 50% of AMI.
4. Thirty percent (30%) of defined household income is allocated to housing- expenses.
5. KMA's calculations are based on the assumption that the tenants will be required to pay
for gas heating, cooking and water heating, and basic electric services. The October 1,
2019 Orange County Housing Authority utilities allowances were applied to this analysis.
The resulting Affordable Rents are presented in the following table:
"As of April 22, 2020 HCD had not yet published 2020 income information. For the purposes of this Financial
Analysis KMA estimated the very low, low and moderate income amounts based on extrapolations from the
Orange County median income published by HUD on April 1, 2020. It is possible that the information published by
HCD may vary somewhat from these estimates.
:6 The percentages of the AMI used in the Affordable Rent calculations are benchmarks established by H&SC
50053. The incomes limit used to qualify households to occupy moderate income units is based on 120%of AMI as
defined in H&SC 50093. The low income limit is defined in H&SC 50079.5 and the very low income limit is defined
in H&SC 50105. These limits are meant to reflect 80%and 50%of AMI, respectively. However, HUD ad)usts the
income levels for Orange County to account for conditions that warrant special consideration. As a result,the
current income qualification limits exceed 80%and 50%of AMI.
Financial Analysis* Inclusionary Housing Ordinance Update Page 31
Keyser Marston Associates,Inc. 1908014 H8 May 6.2020
Affordable Rent Calculations—Rental Apartments
Moderate Very Low
Income Low Income Income
Studio Units
Maximum Monthly Housing Cost $1,983 $1,082 $901
(Less) Monthly Utility Allowance (51) (51) (51)
Affordable Rent $1,932 $1,031 $850
One-Bedroom Units
Maximum Monthly Housing Cost $2,266 $1,236 $1,030
(Less) Monthly Utility Allowance (61) (61) (61)
Affordable Rent $2,205 $1,175 $969
Two-Bedroom Units
Maximum Monthly Housing Cost $2,549 $1,391 $1,159
(Less) Monthly Utility Allowance (80) (80) (80)
Affordable Rent $2,469 $1,311 $1,079
Three-Bedroom Units
Maximum Monthly Housing Cost $2,833 $1,545 $1,288
(Less) Monthly Utility Allowance (103) (103) (103)
Affordable Rent $2,730 $1,442 $1,185
E. Pro Forma Analyses
Moderate Income Alternative—Rental Apartments
The Moderate Income Alternative is based on the existing Inclusionary Housing Ordinance mix
of 90% unrestricted market rate units and 10% moderate income units. This provides a
baseline against which to measure the impacts associated with imposing stricter affordability
requirements than are imposed by the existing Inclusionary Housing Ordinance.
Financial Analysis: Inclusionary Housing Ordinance Update Page 32
Keyser Marston Associates, Inc. 1908014.148 May 6,2020
The pro forma analysis is presented in Attachment 3 —Appendix A — Exhibit I, and it is organized
as follows:
Moderate Income Alternative
Rental Apartments
Table 1: Estimated Development Costs
Table 2: Estimated Stabilized Net Operating Income
Table 3: Estimated Developer Return
The estimated stabilized developer returns on total investment derived from the Moderate
Income Alternative analysis is 6.1%.
Supportable Inclusionary Housing Production Requirements
The pro forma analyses for the Low Income Alternative and the Very Low Income Density Bonus
Alternative are presented in Attachment 3 —Appendix A— Exhibits II and III, respectively. The
analyses are organized as follows:
Low Income Alternative and
Very Low Income Density Bonus Alternative
Rental Apartments
Table 1: Estimated Development Costs
Table 2: Estimated Stabilized Net Operating Income
Table 3: Inclusionary Housing Impact
The pro forma analyses for the Low Income Alternative and the Very Low Income Density Bonus
Alternative are presented in Attachment 3 —Appendix A— Exhibit II and Exhibit III, respectively.
The results of the analyses are summarized in the following table:
financial Analysis: Inclusionary Housing Ordinance Update Page 33
Keyser Marston Associates,Inc. 1908014 HI3 May 6.2020
Inclusionary Housing Impacts Analyses
Rental Apartments
Enhanced / Return on Total
(Reduced) Value Investment
Moderate Income Alternative N/A 6.1%
Low Income Alternative ($6,300,000) 5.9%
Very Low Income Density Bonus Alternative $4,505,000 6.2%
The results of the Inclusionary Housing impacts analyses for rental apartments indicate the
following:
1. The imposition of a 10% low income Inclusionary Housing requirement is estimated to
reduce the prototype rental apartment project's value by $6.3 million. This represents
an approximately 14% reduction in the property acquisition costs that can be supported,
which is well within the range of impacts typically created by Inclusionary Housing
requirements.
2. The Very Low Income Density Bonus Alternative is actually stronger from a financial
perspective than the Moderate Income Alternative. If a developer can efficiently make
use of the 35% density bonus provided by Section 65915, this alternative clearly
presents the most efficient method for fulfilling the City's Inclusionary Housing
requirements.
F. In-Lieu Fee Analysis: Rental Apartments
KMA estimated the supportable in-lieu fee amounts for rental apartment projects based on the
Affordability Gaps associated with the on-site development of Inclusionary Housing units within
market rate rental apartment projects. In-lieu fee analyses were only prepared for the
Moderate and Low Income Alternatives. Projects that make use of the Section 65915 density
bonus must produce the requisite number of affordable housing units.
Financial Analysis: Inclusionary Housing Ordinance Update Page 34
Keyser Marston Associates, Inc. 1908014 HB May 6,2010
The Affordability Gaps for rental apartments are estimated in Attachment 3 - Appendix B —
Exhibit II using the following methodology:
1. The analysis is based on the assumption that 10% of the total units in a market rate
rental apartment project would be subject to Inclusionary Housing requirements.
2. The differences between the estimated achievable market rate monthly rents and the
defined Affordable Rents are calculated for studio, one-bedroom, two-bedroom and
three-bedroom units.
3. KMA assumed that the property taxes for projects that include designated affordable
housing units would be based on a lower assessed value due to the reduction in net
operating income that would be generated by the project. KMA deducted this lower
property tax expense from the estimated rent difference.
4. The estimated annual Affordability Gap is equal to the net rent difference minus the
property tax savings.
5. The total Affordability Gaps are estimated by capitalizing the annual Affordability Gaps
at the threshold returns derived from a pro forma analysis of a market rate
development. The results of these calculations are defined as the Net Affordability
Gaps.
6. The Net Affordability Gaps are translated into the supportable in-lieu fees per affordable
unit and per square foot of net leasable area.
The results of the in-lieu fee analysis are summarized in the following table:
Financial Analysis: Inclusionary Housing Ordinance Update Page 35
Keyser Marston Associates,Inc. 1908010.HB May 6. 2020
In-Lieu Fees Based on Affordability Gaps—Rental Apartments
Moderate Income Low Income
In-Lieu Fee Alternative Alternative
Per Affordable Unit $192,000 $332,000
Per Total Unit in the Project $19,200 $33,200
Per SF of Net Leasable Area $20.70 $35.80
VI. SUMMARY
The following section summarizes the results of this Financial Analysis. The findings provide the
basis for KMA's recommendations for updating the Inclusionary Housing Ordinance. A detailed
set of policy recommendations are presented in a separate memorandum.
A. Existing Inclusionary Housing Requirements
The Inclusionary Housing requirements that were evaluated in this Financial Analysis can be
summarized as follows:
1. The requirements are imposed on all new residential development with three or more
units.
2. A 10% affordable housing requirement is imposed on residential development that is
subject to the Inclusionary Housing requirements. The existing income restrictions are:
a. Ownership housing developments are subject to a moderate income unit
requirement, and
b. The base requirement for rental apartment projects is for low income units.
However, at the City's discretion affordable units that are built on site within a
market rate projects can fulfill the requirement with moderate income units.
Financial Analysis: Inclusionary Housing Ordinance Update Page 36
Keyser Marston Associates,Inc. 1908014 HB May 6, 2020
B. Residential Development Prototypes
The development scopes for the residential development prototypes that were evaluated in
this Financial Analysis are presented in the following table:
Residential Development Prototypes: Development Scopes
Ownership
Housing Rental Apartments
Very Low
Moderate & Income Density
Condominium Low Income Bonus
Alternative Alternatives Alternative
Site Area (Acres) 1.0 8.0 8.0
Total Number of Units 40 400 540
Density (Units Per Acre) 40 50 67.5
Unit Mix
Studio Units 60 81
One-Bedroom Units 200 270
Two-Bedroom Units 20 120 162
Three-Bedroom Units 20 20 27
Four-Bedroom Units 10
Average Unit Sizes (Sa Ftl
Studio Units 620 620
One-Bedroom Units 1,530 820 820
Two-Bedroom Units 1,900 1,160 1,160
Three-Bedroom Units 3,000 1,550 1,550
Parking
Total Number of Spaces 110 750 729
Parking Spaces Per Unit 2.75 1.88 1.35
Parking Type Subterranean Wrap Wrap
Financial Analysis: Inclusionary Housing Ordinance Update Page 37
Keyser Marston Associates,Inc. 1908014.HB May 6,2020
The ownership housing sales price and rental apartment rent estimates applied in this analysis
are provided in the following table:
Residential Development Prototypes: Sales Prices and Rents
Ownership Rental
Housing Apartments
Unit Mix
Studio Units $2,652
One-Bedroom Units $3,189
Two-Bedroom Units $837,000 $4,856
Three-Bedroom Units $991,300 $5.501
Four-Bedroom Units $1,321,000
Sales Price/Rent Per Square Foot $501 $4.01
C. Conclusions
Based on the results of the preceding Financial Analysis, KMA reached the following
conclusions:
1. Inclusionary Housing Requirements:
a. The 10% moderate income requirement for ownership housing development
continues to be supportable-
b. The 10% low income requirement for rental apartment projects is supportable.
There is no need to provide an option for moderate income units to be used as a
substitute when the units are provided on site within a market rate project.
2. The maximum in-lieu fee amounts are currently estimated as follows:
Financial Analysis: Inclusionary Housing Ordinance Update Page 38
Keyser Marston Associates,Inc. 1908014 HB May 6,2020
Supportable In-Lieu Fees
Ownership Rental
Housing Apartments 17
In-Lieu Fee Amounts
Per Affordable Unit $504,700 $332,000
Per Total Unit $50,470 $33,200
Per Square Foot of Saleable/Leasable Area $25.36 $35.80
"Based on a 10%low income unit Inclusionary Housing Requirement.
Financial Analysis: Inclusionary Housing Ordinance Update Page 39
Keyser Marston Associates,Inc. 1908014.HB May 6,2020
ATTACHMENT 1
INCLUSIONARY HOUSING PROGRAM SURVEY
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH, CALIFORNIA
Prepared by Keyser Marston Associates,Inc
file name:Inclusionary Survey 5 6 20 Page 1 of 5
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ATTACHMENT 2
OWNERSHIP HOUSING DEVELOPMENT
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH, CALIFORNIA
Prepared by Keyser Marston Associates,Inc.
File Name Hg Own Inclusionary 5 6 20,Condo Titles page 1 of 17
APPENDIX A
CONDOMINIUM PROTOTYPE
OWNERSHIP HOUSING DEVELOPMENT
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH, CALIFORNIA
Prepared by Keyser Manton Associates,Inc.
File Name.Ng Own Inclusionary 5 6 20;Cando Titles Page 2 of 17
APPENDIX A - EXHIBIT I
CONDOMINIUM PROTOTYPE
OWNERSHIP HOUSING DEVELOPMENT
PRO FORMA ANALYSES
EXISTING 10% PRODUCTION ALTERNATIVE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH, CALIFORNIA
Prepared by Keyser Marston Associates,Inc.
FJe Name:NB Own Inclusionary 5 6 20;p1 Mod Base page 3 of 17
APPENDIX A-EXHIBIT I-TABLE 1
ESTIMATED DEVELOPMENT COSTS
CONDOMINIUM PROTOTYPE:OWNERSHIP HOUSING DEVELOPMENT
PRO FORMA ANALYSES
EXISTING 10% PRODUCTION ALTERNATIVE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
I. Property Acquisition Costs 43,560 Sf of Land $175 /Sf of Land $7,623,000
II. Direct Costs +
On-Site Improvements/Landscaping 43,560 Sf of Land $20 /Sf of Land 5871,000
1st Level Subterranean Parking Spaces ' 110 Spaces $25,000 /Space 2,750,000
Budding Costs ' 93,647 Sf of GBA $125 /Sf of GBA 11,706,000
Contractor/DC Contingency Allow 20% Other Direct Costs 3,065,000
Total Direct Costs $18,392,000
III. Indirect Costs
Architecture, Engineering&Consulting 6.0% Direct Costs $1,104,000
Public Permits&Fees ' 40 Units $20,000 /Unit 800,000
Taxes, Insurance,Legal&Accounting 3 0% Direct Costs 552,000
Marketing 40 Units $2,500 /Unit 100,000
Developer Fee " 40 Units $29,900 /Unit 1,196,000
Soft Cost Contingency Allowance 5.0% Other Indirect Costs 188,000
Total Indirect Costs $3,940,000
IV. Financing Costs
Interest During Construction $1,294,000
Loan Origination Fees 60.0% Loan to Cost 2.5 Points 449,000
Total Financing Costs $1,733,000
V. Total Construction Cost 40 Units $602,000 /Unit $24,065,000
Total Development Cost 40 Units $792,000 /Unit $31,688,000
Estimated based on a survey of the sales of residentially zoned land in Huntington Beach between June 2016 and August 2019.
Based on the estimated costs for similar uses
' Based on 2.0 spaces for Two-Bedroom Units;2.5 spaces for Three-Bedroom Units;2.5 spaces for Four-Bedroom Units;and 0.50 spaces per unit for
guest parking
4 Includes contractors'fees,general requirements, builder's risk insurance and a direct cost contingency allowance.
Based on estimates prepared for other protects within Huntington Beach.
Based on the Developer Fee per unit that would be anticipated for a project in which 100%of the units are sold at unrestricted market rate prices.
' Assumes a 6.0%interest cost for debt;an 18 month construction period;a 5 month absorption period; 30%of the units are presold and close
during first month after completion; and 2.5 points for loan origination fees.
Prepared by Keyser Marston Associates,Inc
File Name:HB Own Inclusionary 5 6 20,Pf Mod Base Page 4 of 17
APPENDIX A-EXHIBIT I-TABLE 2
PROJECTED NET SALES REVENUE
CONDOMINIUM PROTOTYPE: OWNERSHIP HOUSING DEVELOPMENT
PRO FORMA ANALYSES
EXISTING 10% PRODUCTION ALTERNATIVE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
I. Gross Sales Revenue
Market Rate Units '
Two-Bedroom Units 18 Units @ $837,000 /Unit $15,066,000
Three Bedroom Units 9 Units @ 5991,300 /Unit 8,922,000
Four-Bedroom Units 9 Units @ $1,321,700 /Unit $11,895,000
Moderate Income Units 2
Two-Bedroom Units 2 Units @ $432,800 /Unit 866,000
Three-Bedroom Units 1 Unit @ 5475,200 /Unit 475,000
Four-Bedroom Units I Unit @ $509,700 /Unit 510,000
Total Gross Sales Revenue $37,734,000
II. Cost of Sales
Commissions 3.0% Gross Sales Revenue $1,132,000
Closing Costs 2.0% Gross Sales Revenue 755,000
Home Buyer Warranties 0.5% Gross Sales Revenue 189,000
Total Cost of Sales (52,076,000)
III. Net Revenue $35,6581000
' Based on a sales survey undertaken by KMA in February 2020(See APPENDIX C). For the two-and three-bedroom units a 15%premium is added
for new construction. The four-bedroom units in the survey were constructed recently,so no premium was applied.The weighted average sales
price equates to 5501 per square foot of saleable area.
2 See APPENDIX B-EXHIBIT I. Equal to the lesser of the calculated affordable sales price or a 30%discount from the projected market price.
Prepared by Keyser Marston Associates.Inc.
File Name:HB Own Inclusionary 5 6 20,Pf Mod Base Page 5 of 17
APPENDIX A-EXHIBIT I-TABLE 3
PROJECTED DEVELOPER PROFIT
CONDOMINIUM PROTOTYPE: OWNERSHIP HOUSING DEVELOPMENT
PRO FORMA ANALYSES
EXISTING 10%PRODUCTION ALTERNATIVE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
1. Net Revenue $35,658,000
II. Total Development Cost See APPENDIX A-EXHIBIT I -TABLE 1 $31,688,000
III. Developer Profit 12.5% Total Development Cost $3.970,000
Prepared by:Keyser Marston Associates,Inc.
F,le Name:HB Own Incluslonary 5 6 20,Pf Mod Base Page 6 of 17
APPENDIX A - EXHIBIT II
CONDOMINIUM PROTOTYPE
OWNERSHIP HOUSING DEVELOPMENT
PRO FORMA ANALYSES
EXISTING IN-LIEU FEE PAYMENT ALTERNATIVE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH, CALIFORNIA
Prepared by:Keyser Marston Associates,Inc.
He Name:Me Own Inclusionary 5 6 20;Pf ILF Page 7 of 17
APPENDIX A EXHIBIT II-TABLE 1
ESTIMATED DEVELOPMENT COSTS
CONDOMINIUM PROTOTYPE:OWNERSHIP HOUSING DEVELOPMENT
PRO FORMA ANALYSES
EXISTING IN LIEU FEE PAYMENT ALTERNATIVE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
I. Property Acquisition Costs 43,560 Sf of Land $175 /Sf of Land $7,623,000
If. Direct Costs
On Site Improvements/Landscaping 43,560 Sf of Land $20 /Sf of Land $871,000
1st Level Subterranean Parking Spaces ' 110 Spaces $25,000 /Space 2,750,000
Building Costs 93,647 Sf of GBA $125 /Sf of GBA 11,706,000
Contractor/DC Contingency Allow ' 20% Other Direct Costs 3,065,000
Total Direct Costs $18,392,000
III. Indirect Costs
Architecture,Engineering&Consulting 6.0% Direct Costs $1,104,000
Public Permits&Fees 40 Units $20,000 /Unit 800,000
In-Lieu Fee 40 Units $58,736 /Unit 2,349,000
Taxes,Insurance, Legal&Accounting 3.0% Direct Costs 552,000
Marketing 40 Units $2,500 /Unit 100,000
Developer Fee 3.0% Gross Sales Revenue 1,196,000
Soft Cost Contingency Allowance 5.0% Other Indirect Costs 305,000
Total Indirect Costs $6,406,000
IV. Financing Costs
Interest During Construction 7 $1,452,000
Loan Origination Fees 60.0% Loan to Cost 2.5 Points 486,000
Total Financing Costs $1.938,000
V. Total Construction Cost 40 Units $668,000 /Unit $26,736,000
Total Development Cost 40 Units $859,000 /Unit 534,359,000
' Estimated based on a survey of the sales of residentially zoned land in Huntington Beach between June 2016 and August 2019.
• Based on the estimated costs for similar uses.
' Based on 2.0 spaces for Two-Bedroom Units;2.5 spaces for Three Bedroom Units;2.5 spaces for Four-Bedroom Units;and 0.50 spaces per unit for
guest parking.
' Based on the profit as a percentage of Total Development Cost estimated to be generated by the
Based on estimates prepared for other projects within Huntington Beach.
Based on the 2019 In-Lieu Fee for a 40 unit project.
7 Assumes a 6.0%interest cost for debt;an 18 month construction period;a 5 month absorption period;30%of the units are presold and close
during first month after completion;and 2.5 points for loan origination fees.
Prepared by.Keyser Marston Associates,Inc.
File Name:HB Own Inclusionary 5 6 20;Pf ILF Page 8 of 17
APPENDIX A EXHIBIT II -TABLE 2
PROJECTED NET SALES REVENUE
CONDOMINIUM PROTOTYPE:OWNERSHIP HOUSING DEVELOPMENT
PRO FORMA ANALYSES
EXISTING IN-LIEU FEE PAYMENT ALTERNATIVE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
I. Gross Saks Revenue
Two-Bedroom Units 20 Units @ $837,000 /Unit $16,740,000
Three-Bedroom Units 10 Units @ $991,300 /Unit 59,913,000
Four-Bedroom Units 10 Units @ $1,321,700 /Unit 513,217,000
Total Gross Sales Revenue $39,870,000
If. Cost of Sales
Commissions 3.0% Gross Sales Revenue $1,196,000
Closing Costs 2.0% Gross Sales Revenue 797,000
Home Buyer Warranties 0.5% Gross Sales Revenue 199,000
Total Cost of Sales ($2,192,000)
III. Net Revenue 537,678,000
Based on a sales survey undertaken by KMA in February 2020(See APPENDIX C)- For the two-and three-bedroom units a 15%premium is added
for new construction. The four-bedroom units in the survey were constructed recently,so no premium was applied.The weighted average sales
price equates to$501 Per square foot of saleable area
Prepared by Keyser Marston Associates,Inc.
Rle Name HB Own Incluslonary 5 6 20,Pf ILF Page 9 of 17
APPENDIX A-EXHIBIT II-TABLE 3
PROJECTED DEVELOPER PROFIT
CONDOMINIUM PROTOTYPE:OWNERSHIP HOUSING DEVELOPMENT
PRO FORMA ANALYSES
EXISTING IN-LIEU FEE PAYMENT ALTERNATIVE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
I. Net Revenue See APPENDIX A-EXHIBIT II-TABLE 2 $37,678,000
It. Total Development Cost See APPENDIX A-EXHIBIT II-TABLE 1 $34.359,000
III. I Developer Profit 9.7% Total Development Cost $3,319,000
Prepared by Keyser Marston Associates,Inc.
Fle Name:FIB Own Inclusionary 5 6 20;Pf ILF Page 10 of 17
APPENDIX B
OWNERSHIP HOUSING DEVELOPMENT
AFFORDABILITY ANALYSES
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH, CALIFORNIA
Prepared by.Keyser Marston Associates,Inc
File Name MB Own Inclusionary 5 6 20,App 8 Tales page 11 of 17
APPENDIX B-EXHIBIT I
AFFORDABLE SALES PRICE CALCULATIONS
MODERATE INCOME HOUSEHOLDS
2020 INCOME STANDARDS
OWNERSHIP HOUSING DEVELOPMENT
FINANCIAL ANALYSIS:INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
Two-Bedroom Three Bedroom Four-Bedroom
Units Units Units
1. Income Information
Area Median Income ' $92,700 $103,000 5111,250
Household Income @ 110%Median 3 $101,970 $113,300 $122,390
Income Allotted to Housing @ 35%of Income $35,690 $39,660 $42,830
It. Expenses
Annual Utilities Allowance 3 $2,052 $2,712 $3,372
HOA,Maintenance&Insurance 6,000 6,600 6,900
Property Taxes @ 1.08%of Affordable Sales Price ` 4,670 5,130 5,510
Total Expenses $12,722 $14,442 $15,782
III. Income Available for Mortgage $22,968 $25,218 $27,048
IV. Affordable Sales Price
Supportable MIR @ 4 24%Interest $389,500 $427,700 $458,700
Home Buyer Down Payment @ 10%Aff Sales Price 4 43,300 47,500 51,000
Affordable Sales Price $432,800 $475,200 $509,7D0
Based on the 2020 Orange County median incomes published by the California Housing&Community Development
Department(HCD). The benchmark household sine is set at the number of bedrooms in the unit plus one.
2 Based on the California Health&Safety Code Section 50052.5 calculation methodology.
' Based on the Orange County Housing Authority utility allowances effective as of 10/1/19. Assumes:Gas Cooking,Gas
Heating,and Gas Water Heater; Basic Electric;Water,Trash/Sewer.
4 Based on the August 15, 2011 Inclusionary,Housing Regulations.
' Based on a 50 basis points premium applied to the April 20,2020 Bankrate site average for 30-year fixed interest rate
mortgages
Prepared by: Keyser Marston Associates
File name: HB Own Inclusmnary 5 6 20;ASP
APPENDIX B- EXHIBIT II
IN-LIEU FEE ANALYSIS
AFFORDABILITY GAP APPROACH-MODERATE INCOME
OWNERSHIP HOUSING DEVELOPMENT
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
Condominium&
Townhome Units Single Family Homes
I- Sales Price Difference
A. Two-Bedroom Units
Market Rate Units $837,000
Affordable Sales Price - 432,800
Difference 5404,200
B. Three-Bedroom Units
Market Rate Units 5991,300 $2,371,400
Affordable Sales Price ' 475,200 475,200
Difference $516,100 51,896,200
C. Four-Bedroom Units
Market Rate Units $1,321,700 $1,949,100
Affordable Sales Price ' 509,700 509,700
Difference $812,000 $1,439,400
II. Distribution of Affordable Units
Two-Bedroom Units 2
Three-Bedroom Units 1 48%
Four Bedroom Units 1 52%
III- Net Affordability Gap Per Moderate Income Unit
Affordability Gap Per Moderate Income Unit $534,100 $1,658,700
(Less) Reduced Cost of Sales Per Affordable Unit (29,400) (22,800)
Net Affordability Gap Per Moderate Income Unit $504,700 $1,635,900
W. In-Ueu Fee
Per Total Unit $50,470 $163,590
Per Square Foot of Net Saleable Area $25,36 555.34
See APPENDIX B-EXHIBIT I.
The Cost of Sales consist of:Commissions @ 3.0%;Closing Costs @ 2.0%;and Home Buyer Warranties @ 0.50%.
Prepared by Keyser Marston Associates,Inc.
File Name.HS Own Inclusionary 5 6 20;ILF Page 13 of 17
APPENDIX C
OWNERSHIP HOUSING DEVELOPMENT
HOME SALES SURVEY
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH, CALIFORNIA
Prepared by:Keyser Marston Associates,Inc
He Name Ng Own Inclus,onary 5 6 20.App C Ttles Page 14 of 17
APPENDIX C
HOME SALES SURVEY
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
Sales Price
Address Zip Code Unit Size(SF) Total Per SF Year Built
1. Condominium&Townhome Units
Two-Bedroom Units
21383 Kennedy Ln 92646 1,472 $379,949 $258 2012
17552 Van Buren Ln 92647 1,271 $538,500 $424 1995
20171 Sealpoint Ln#206 92646 1,421 $570,000 $401 1999
20191 Sealpoint Ln 4202 92646 1,332 $575.000 $432 1999
20171 Sealpoint Ln R305 92646 1,246 5580,000 5465 1999
415 Townspuare Ln#302 92648 1,038 $580,000 $559 1990
20171 Sealpoint Ln#107 92646 1,174 $594,000 $506 1998
8312 Atlanta Avenue A102 92646 1,316 5600,000 $456 1991
8306 Atlanta Ave 9102 92646 1,242 $610,000 $491 1991
415 Townsquare Ln N103 92648 1,038 $635,000 $612 1990
1516 Pacific Coast 9101 92648 1,300 $685,000 $527 1992
18858 Milos Cir 92648 1,794 $695,000 $387 1993
4392 Lahaina Dr N30 92649 1,400 5711,000 $508 2019
376 5th St 92648 1,810 $875,000 $483 1999
21386 Armilla Cir 92648 1,843 5940,000 $510 2005
7976 Aldea Cir 92648 1,843 $950,000 $515 2005
21339 Cieza Cir 92648 1,843 $950,000 $515 2005
21387 Armilla Cir 92648 1,843 $960,000 $521 2004
19335 8rooktrail Ln 92648 2,245 $950,000 $423 1991
21387 Armilla Cir 92648 1,843 $960,000 $521 2004
7967 Osuna Cir 92648 1,877 $975,000 $519 2005
Minimum 1,038 $379,949 $258 1990
Maximum 2,245 $975,000 $612 2019
Average 1,533 $729,200 5476 1999
Three-Bedroom Units
7545 Shady Glen Cu 92648 1,407 5464,648 $330 1998
18775 Chapel Ln 92646 1,773 $678,000 5382 1991
16432 Poipu Ln 92649 1,512 5707,000 5468 2014
7675 Timber Cir p2 92648 1,846 5745,000 $404 2003
8158 Constantine Or 92646 2,132 $745,000 $349 1997
6227 Pacific Pointe Or#30 92648 1,993 5850,000 $426 2002
8243 Noelle Or 92646 2,035 $980,000 $482 2013
21445 Hayley Ln 92646 1,926 $1,010,000 $524 2013
19331 Brooktrail Ln 92648 2,027 $1,025,000 $506 1991
19262 Surfwave Or 92648 2,430 $1,085,000 $447 1997
16377 26th St 0102 90742 1,837 $1,200,000 $653 2026
Minimum 1,407 $464,648 S330 1991
Maximum 2,430 $1,200,000 $653 2016
Average 1,902 $862,700 5454 2003
Source:Redfin.The survey includes executed sales that occurred between March 2019 and March 2020
Prepared by Keyser Marston Associates,Inc
File name:HB Own Inclusionary 5 6 20,Sales Survey Page 15 of 17
APPENDIX C
HOME SALES SURVEY
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
Sales Price
Address Zip Code Unit Size(SF) Total Per SF Year Built
Four-Bedroom Units
21396 Abigail Ln 92646 2,431 $1,094,000 $450 2013
8255 Kendall Dr 92646 2,431 $1,099,000 5452 2013
8373 Sage Or 92646 2,431 $1,108,000 $456 2010
8389 Noelle Or 92646 2,606 $1,150,000 $441 2013
8237 Kendall Df 92646 2,778 $1,170,000 $421 2013
8200 Noelle Or 92646 3,604 $1,375,000 $382 2013
8318 Noelle Or 92646 3,604 $1,375,000 5382 2012
8220 Noelle Or 926,46 3,604 $1,415,000 5393 2013
21254 Baeza Cir 92648 3,055 $1,534,500 $502 2004
21307 Andalucia Ln 92648 3,459 $1,897,000 $548 2004
Minimum 2,431 $1,094,000 $382 2004
Maximum 3,604 51,897,000 $548 2013
Average 3,000 $1,321,800 $441 2011
II, Slnele Family Homes
Three-Bedroom Units
4861 Coveview Dr 92649 2,000 $1,212,500 S606 2011
627 Frankfort Ave 92648 3,407 $1,565,000 $459 2012
1009 California St 92648 3,333 $1,650,000 $495 2019
610 17th St 92648 2,952 $1,740,000 $589 2014
624 14th St 92648 2,875 $1,900,000 $661 2018
622 14th St 92648 2,875 $1,950,000 $678 2018
615 13th St 92648 2,900 52,075,000 $716 2019
512 8th St 92648 2,875 $2,090,000 $727 2019
613 13th St 92648 2,900 $2,095,000 $722 2019
1004 Huntington St 92648 3,285 $2,100,000 $639 2018
623 13th St 92648 2,900 $2,149,900 5741 2020
314 3rd St 92648 2,875 $2,150,000 $748 2018
514 11th St 92648 2,853 $2,150,000 $754 2016
414 9th St 92648 2,900 $2,225,000 $767 2019
412 9th St 92648 2,875 $2,225,000 $774 2019
312 3rd St 92648 2,850 $2,250,000 S789 2019
310 3rd St 92648 2,850 $2,270,000 $796 2019
809 Huntington St 92648 3,350 $2,295,000 $685 2018
314 3rd St 92648 2,850 $2,425,000 $851 2019
124 7th 92648 2,875 $2,725,000 $948 2020
Minimum 2,000 $1,212,500 $459 2011
Maximum 3,407 $2,725,000 $948 2020
Average 2,929 $2,062,100 $704 2018
Source:Redfin.The survey includes executed sales that occurred between March 2019 and March 2020.
Prepared by:Keyser Marston Associates,Inc
File name:HB Own Inclusionary S 6 20,Sales Survey Page 16 of 17
APPENDIX C
HOME SALES SURVEY
FINANCIAL ANALYSIS:INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
Sales Price
Address Zip Code Unit Size)$f) Total Per SF Year Built
Four BedroomUnits
17315 Wareham Ln 92649 1,995 $1,170,000 $586 2010
17301 Wareham Ln 92649 2,200 $1,175,000 $534 2010
10242 Thompson Or 92646 2,926 51,212,000 $414 2015
17321 Wareham Ln 92649 2,089 $1,249,900 $598 2010
10241 Patch Dr 92646 2,693 $1,290,000 5479 2015
10192 Thompson Or 92646 2,926 $1,335,000 $456 2015
19741 Wardlow Ln 92646 3,435 $1,450,000 $422 2015
505 16th St 92648 2,875 $1,500,000 $522 2010
9211 Sheridan Dr 92646 3,253 $1,514,900 $466 2015
17322 Osterville Ln 92649 2,758 $1,530,000 $555 2013
627 Frankfort Ave 926,48 3,407 $1,565,000 $459 2012
624 13th St 926,48 2,910 $1,645,000 $565 2015
1009 California St 92648 3,333 $1,650,000 5495 2019
609 17th St 92W 2,870 $1,700,000 $592 2019
611 17th St 92648 2,870 $1,750,000 5610 2019
17472 Oakbluffs Ln 92649 3,569 $1,888,000 $529 2015
4862 Orleans Or 92649 3,555 $1,998,000 $562 2016
510 8th St 92648 2,875 $1,999,999 $696 2018
4891 Orleans Dr 92649 3,628 $2,050,000 $565 2015
1019 California St 92648 3,374 $2,160,000 $640 2018
1737 Park St 926,48 3,176 $2,554,000 $804 2018
121 7th St 92648 2,877 $2,900,000 $1,008 2015
Minimum 1,995 $1,170,000 $414 2010
Maximum 3,628 $2,900,000 51,008 2019
Average 2,982 $1,694,900 $568 2015
Due to lack of sales,the condominium/townhomes sales survey is limited to homes built after 1990.
z The of single family home sales survey is limited to homes built after 2010.
Source:Redfin.The survey includes executed sales that occurred between March 2019 and March 2020
Prepared by:Keyser Marston Assocates,Inc
File name:HB Own Inclusmnary 5 6 20,Sales Survey Page 17 of 17
ATTACHMENT 3
RENTAL APARTMENT DEVELOPMENT
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH, CALIFORNIA
Prepared by:Keyser Marston Associates,Inc.
File name:FIB Rent inclusionary 5 6 20;ATT 3 TIRE Page I of 20
APPENDIX A
RENTAL APARTMENT DEVELOPMENT
PRO FORMA ANALYSES
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH, CALIFORNIA
Prepared by Keyser Marston Associates,Inc
file name HS Rent In[lusionary 5 6 20;Apo A Titles age 2 of 20
APPENDIX A - EXHIBIT I
RENTAL APARTMENT DEVELOPMENT
PRO FORMA ANALYSES
10% INCLUSIONARY UNITS - MODERATE INCOME ALTERNATIVE
DENSITY @ 50 UNITS PER ACRE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH, CALIFORNIA
Prepared by Keyser Marston associates,Inc
Fie name HB Rent Inclusronary 5 6 20:PF Mod Page 3 of 20
APPENDIX A-EXHIBIT I -TABLE 1
ESTIMATED DEVELOPMENT COSTS
RENTAL APARTMENT DEVELOPMENT
10%INCLUSIONARY UNITS-MODERATE INCOME ALTERNATIVE
DENSITY @ 50 UNITS PER ACRE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
I. Property Acquisition Costs 1 348,480 Sf of Land $150 /Sf of Land 552,272,000
IL Direct Costs 2
On-Site Improvements/Landscaping 348,480 Sf of Land S20 /Sf of Land $6,970,000
Above-Ground Parking Spaces ' 750 Spaces $25,000 /Space 18,750,000
Building Costs 464,250 Sf of GBA $125 /Sf of GBA 58,031,000
Contractor/DC Contingency Allow 20% Other Direct Costs 16,750,000
Total Direct Costs 464,250 Sf of GBA $216 /Sf of GBA $100,501,000
III. Indirect Costs
Architecture, Engineering&Consulting 8% Direct Costs $8,040,000
Public Permits&Fees ' 400 Units $20,000 /Unit 8,002,000
Taxes, Insurance, Legal&Accounting 3% Direct Costs 3,015,000
Marketing 400 Units $5,000 /Unit 2,001,000
Developer Fee 5% Direct Costs 5,025,000
Soft Cost Contingency Allowance 5% Other Indirect Costs 1,304,000
Total Indirect Costs $27,387,000
IV. Financing Costs
Interest During Construction
Land 6 $52,272,000 Cost 3.6% Avg Rate $2,823,000
Construction 6 $137,441,000 Cost 3.6% Avg Rate 4,453,000
Loan Origination Fees 60% Loan to Cost 2.0 Points 2,277,000
Total Financing Costs $9,553,000
V. Total Construction Cost 400 Units $344,000 /Unit $137,441,000
Total Development Cost 400 Units $474,000 /Unit $189,713,000
Estimated based on a survey of the sales between 2016 and 2018 of residentially zoned land.
Based on the estimated costs for similar uses.
' Based on 1.0 spaces for Studio Units; 1.0 spaces for One-Bedroom Units;2.0 spaces for Two-Bedroom Units;2.5 spaces for Three-Bedroom Units;
and 0 50 spaces per unit for guest parking.
' Based on estimates prepared for other projects within Huntington Beach.
Based on an 18 month construction period and a 100%average outstanding loan balance.
Based on an 18 month construction period and a 60%average outstanding loan balance.
Prepared by Keyser Marston Associates,Inc.
File name.HS Rent Inclusionary 5 6 20;PF Mod Page 4 of 20
APPENDIX A-EXHIBIT I-TABLE 2
ESTIMATED STABILIZED NET OPERATING INCOME
RENTAL APARTMENT DEVELOPMENT
10%INCLU51ONARY UNITS MODERATE INCOME ALTERNATIVE
DENSITY @ SO UNITS PER ACRE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
I, Gross Income
A. Market Rate Units
Studio Units 54 Units @ $2,652 /Unit/Month $1,719,000
One-Bedroom Units 180 Units @ $3,189 /Unit/Month 6,888,000
Two-Bedroom Units 108 Units @ $4,856 /Unit/Month 6,293,000
Three-Bedroom Units 18 Units @ $5,501 /Unit/Month 1,188,000
B. Inclusionary Units: 10%of Units
Studio Units 6 Units @ $1,932 /Unit/Month 139,000
One-Bedroom Units 20 Units @ $2,205 /Unit/Month 529,000
Two-Bedroom Units 12 Units @ $2,469 /Unit/Month 356,000
Three Bedroom Units 2 Units @ $2,730 /Unit/Month 66,000
C. Laundry& Miscellaneous Income 400 Units @ $25 /Una/Month 120,000
Total Gross Income $17,298,000
vacancy&Collection Allowance 5% Gross Income 1865,000)
It. Effective Gross Income $16,433,000
Ill. Operatine Expenses
General Operating Expenses 400 Units @ $4,500 /Unit $1,800,500
Property Taxes 400 Units @ $7,400 /Unit 2,949,000
Replacement Reserve Deposits 400 Units @ $150 /Unit 60,000
Total Operating Expenses (54,809,500)
IV. IStabilized Net Operating Income $11,623,500
Based on the rent survey undertaken in February 2020 and presented in APPENDIX C. The weighted average monthly rent equates to$4.01 per
square foot of leasable area.
The Inclusionary,rent calculations are based on household income at 110%of AMI,with 30%of income allotted to housing related expenses See
APPENDIX D-EXHIBIT I.
Prepared by:Keyser Marston Associates,Inc.
File name.HB Rent Inclusionary 5 6 20,PF Mod Page 5 of 20
APPENDIX A-EXHIBIT I TABLE 3
ESTIMATED DEVELOPER RETURN
RENTAL APARTMENT DEVELOPMENT
10%INCLUSIONARY UNITS MODERATE INCOME ALTERNATIVE
DENSITY @ 50 UNITS PER ACRE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
I. Stabilized Net Operating Income See APPENDIX A-EXHIBIT I-TABLE 2 $11,623,500
II. Total Development Cost See APPENDIX A-EXHIBIT I-TABLE 1 S389,713,000
III. IReturn on Total Investment 6.1%
Prepared by:Keyser Marston Associates,Inc.
File name:HB Rent Inclusionary 5 6 20.PF Mod Page 6 of 20
APPENDIX A - EXHIBIT II
RENTAL APARTMENT DEVELOPMENT
PRO FORMA ANALYSES
10% INCLUSIONARY UNITS - LOW INCOME ALTERNATIVE
DENSITY @ 50 UNITS PER ACRE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH, CALIFORNIA
Prepared by Keyser Marston Associates,Inc.
File name.Hg gent Inclusionary 5 6 20;PF Low Page 7 of 20
APPENDIX A- EXHIBIT II TABLE 1
ESTIMATED DEVELOPMENT COSTS
RENTAL APARTMENT DEVELOPMENT
10% INCLUSIONARY UNITS- LOW INCOME ALTERNATIVE
DENSITY @ 50 UNITS PER ACRE
FINANCIAL ANALYSIS:INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
I. Property Acquisition Costs 348,480 Sf of Land $150 /Sf of Land $52,272,000
If Direct Costs '
On-Site Improvements/Landscaping 348,480 Sf of Land $20 /Sf of Land $6,970,000
Above-Ground Parking Spaces ' 750 Spaces $25,000 /Space 18,750,000
Building Costs 464,250 Sf of GBA $125 /Sf of GBA 58,031,000
Contractor/DC Contingency Allow 20% Other Direct Costs 16,750,000
Total Direct Costs 464,250 Sf of GBA $216 /Sf of GBA 5100,501,000
III. Indirect Costs
Architecture,Engineering&Consulting 8% Direct Casts 58,040,000
Public Permits&Fees ' 400 Units $20,000 /Unit 8,002,000
Taxes, Insurance, Legal&Accounting 3% Direct Costs 3,015,000
Marketing 400 Units 55,000 /Unit 2,001,000
Developer Fee 5% Direct Costs 5,025,000
Soft Cost Contingency Allowance 5% Other Indirect Costs 1,304,000
Total Indirect Costs $27,387,000
W. Financine Costs
Interest During Construction
Land 5 $52,272,000 Cost 3.6% Avg Rate $2,823,000
Construction 6 $137,441,000 Cost 3.6% Avg Rate 4,453,000
Loan Origination Fees 60% Loan to Cost 2.0 Points 2,277,000
Total Financing Costs $9,553,000
V. Total Construction Cost 400 Units $344,000 /Unit 5137,441,000
Total Development Cost 400 Units $474,000 /Unit $189,713,000
' Estimated based on a survey of the sales between 2016 and 2018 of residentially zoned land.
' Based on the estimated costs for similar uses.
Based on 1.0 spaces for Studio Units; 1.0 spaces for One-Bedroom Units;2.0 spaces for Two-Bedroom Units;2.5 spaces for Three-Bedroom Units;
and 0.50 spaces per unit for guest parking.
4 Based on estimates prepared for other projects within Huntington Beach.
` Based on an IS month construction period and a 100%average outstanding loan balance.
Based on an 18 month construction period and a 60%average outstanding loan balance.
Prepared by:Keyser Marston Associates,Inc.
File name:HB Rent Inclusionary 5 6 20;PF Low Page 8 of 20
APPENDIX A- EXHIBIT II -TABLE 2
ESTIMATED STABILIZED NET OPERATING INCOME
RENTAL APARTMENT DEVELOPMENT
10%INCLUSIONARY UNITS LOW INCOME ALTERNATIVE
DENSITY @ 50 UNITS PER ACRE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
I. Gross Income
A. Market Rate Units
Studio Units 54 Units @ $2,652 /Unit/Month $1,719,000
One-Bedroom Units 180 Units @ $3,189 /Unit/Month 6,888,000
Two-Bedroom Units 108 Units @ $4,856 /Unit/Month 6,293,000
Three-Bedroom Units 18 Units @ $5,501 /Unit/Month 1,188,000
B. Inclusionary Units: 10%of Units z
Studio Units 6 Units @ $1,031 /Unit/Month 74,000
One-Bedroom Units 20 Units @ $1,175 /Unit/Month 282,000
Two-Bedroom Units 12 Units @ $1,311 /Unit/Month 189,000
Three Bedroom Units 2 Units @ $1,442 /Unit/Month 35,000
C. Laundry&Miscellaneous Income 400 Units @ $25 /Unit/Month 120,000
Total Gross Income 516,788,000
Vacancy&Collection Allowance 5% Gross Income (839,000)
if. Effective Gross Income $15,9149,000
Ill. Oueratina Expenses
General Operating Expenses 400 Units @ $4,500 /Unit $1,800,500
Property Taxes 400 Units @ $7,100 /Unit 2,851,000
Replacement Reserve Deposits 400 Units @ $150 /Unit 60,000
Total Operating Expenses (54,711,500)
IV. IStabilized Net Operating Income $11,237,500
Based on the rent survey undertaken in February 2020 and presented in APPENDIX C. The weighted average monthly rent equates to 54.01 per
square foot of leasable area.
r The Inclusionary rent calculations are based on household income at 60%of AMI,with 30%of income allotted to housing related expenses. See
APPENDIX D-EXHIBIT I.
Prepared by Keyser Marston Associates,Inc.
File name'.HB Rent Inclusionary 5 6 20,PF Low Page 9 of 20
APPENDIX A- EXHIBIT II-TABLE 3
INCLUSIONARY HOUSING IMPACTS
RENTAL APARTMENT DEVELOPMENT
10%INCLUSIONARY UNITS-LOW INCOME ALTERNATIVE
DENSITY @ SO UNITS PER ACRE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
1. Supportable Investment
Stabilized Net Operating Income See APPENDIX A-EXHIBIT II-TABLE 2 $11,237,500
Threshold Return on Total Investment 6.1%
Total Supportable Investment $183,413,000
Il. Total Development Cost See APPENDIX A- EXHIBIT II-TABLE 1 $189,713,000
III. Reduced Value ($6,300,000)
Return on Total Investment 5.9%
I Based on the Developer Return estimated to be generated by the DENSITY @ 50 UNITS PER ACRE. MODERATE INCOME ALTERNATIVE.
Prepared by.Keyser Marston Associates,Inc.
File name:HB Rent Inclusionary 5 6 20;PF Low Page 10 of 20
APPENDIX A - EXHIBIT III
RENTAL APARTMENT DEVELOPMENT
PRO FORMA ANALYSES
10% INCLUSIONARY UNITS - VERY LOW INCOME ALTERNATIVE
35% DENSITY BONUS: 67.5 UNITS PER ACRE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH, CALIFORNIA
Prepared by.Keyser Marston Associates,Inc.
File name.HB gent Inclus,onary 5 6 20;PF A 00 Page 11 of 20
APPENDIX A EXHIBIT III -TABLE 1
ESTIMATED DEVELOPMENT COSTS
RENTAL APARTMENT DEVELOPMENT
30%INCLUSIONARY UNITS-VERY LOW INCOME ALTERNATIVE
35%DENSITY BONUS:67.5 UNITS PER ACRE
FINANCIAL ANALY515: INCLU51ONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
I. Property Acquisition Costs 348,480 Sf of Land $150 /Sf of Land $52,272,000
It. Direct Costs
On-Site Improvements/Landscaping 348,490 Sf of Land $20 /Sf of Land $6,970,000
Above-Ground Parking Spaces ' 729 Spaces 525,000 /Space 18,225,000
Building Costs 626,738 Sf of GBA $150 /Sf of GBA 94,011,000
Contractor/DC Contingency Allow 20% Other Direct Costs 23,941,000
Total Direct Costs 626,738 Sf of GBA $228 /5f of GBA $143,047,000
III. Indirect Costs
Architecture,Engineering&Consulting 8% Direct Costs $11,444,000
Public Permits&Fees ' 540 Units $20,000 /Unit 10,800,000
Taxes,Insurance, Legal&Accounting 3% Direct Costs 4,291,000
Marketing 540 Units $5,000 /Unit 2,700,000
Developer Fee 5% Direct Costs 7,152,000
Soft Cost Contingency Allowance 5% Other Indirect Costs 1,819,000
Total Indirect Costs $38,206,000
IV. Financing Costs
Interest During Construction
Land s 552.272,000 Cost 3.6% Avg Rate $2,823,000
Construction 6 $193,285,000 Cost 3.6% Avg Rate 6,262,000
Loan Origination Fees 60% Loan to Cost 2 0 Points 2.947,000
Total Financing Costs $12,032,000
V. Total Construction Cost 540 Units $358,000 /Unit $193,285,000
Total Development Cost 540 Units 5455,000 /Unit $245,557,000
I Estimated based on a survey of the sales between 2016 and 2018 of residentially zoned land.
z Based on the estimated costs for similar uses.
I Based on 1.0 space for Studio Units; 1.0 space for One-Bedroom Units;2.0 spaces for Two-Bedroom Units;and 2.5 space for Three-Bedroom Units
No guest spaces are provided.
' Based on estimates prepared for other projects within Huntington Beach.
' Based on an 18 month construction period and a 1D0%average outstanding loan balance.
` Based on an 18 month construction period and a 60%average outstanding loan balance.
Prepared by:Keyser Marston Associates,Inc.
file name HS Rent Inclusionary 5 6 20,PF VL De Page 12 of 20
APPENDIX A- EXHIBIT III-TABLE 2
ESTIMATED STABILIZED NET OPERATING INCOME
RENTAL APARTMENT DEVELOPMENT
10%INCLUSIONARY UNITS-VERY LOW INCOME ALTERNATIVE
35%DENSITY BONUS: 67.5 UNITS PER ACRE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
I. Gross Income
A. Market Rate Units
Studio Units 74 Units @ $2,652 /Unit/Month $2,355,000
One-Bedroom Units 248 Units @ $3,189 /Unit/Month 9,490,000
Two-Bedroom Units 149 Units @ $4,856 /Unit/Month 8,682,000
Three-Bedroom Units 25 Units @ $5,501 /Unit/Month 1,650,000
B. Density Bonus:11%Base Zoning Units
Studio Units 7 Units @ $850 /Unit/Month 71,000
One-Bedroom Units 22 Units @ $969 /Unit/Month 256,000
Two-Bedroom Units 13 Units @ $1,079 /Unit/Month 168,000
Three-Bedroom Units 2 Units @ $1,185 /Unit/Month 28,000
C. Laundry&Miscellaneous Income 540 Units @ $25 /Unit/Month 162,000
Total Gross Income $22,862,000
Vacancy&Collection Allowance S% Gross Income (1,143,000)
II. Effective Gross Income $21,719,000
Ill. Operating Expenses
General Operating Expenses 540 Units @ $4,500 /Unit $2,430,000
Property Taxes 540 Units @ $7,200 /Unit 3,887,000
Replacement Reserve Deposits 540 Units @ $150 /Unit 81,000
Total Operating Expenses ($6,398,000)
IV. Stabilized Net Operating Income $15,321,000
Based on the rent survey undertaken in February 2020 and presented in APPENDIX C. The weighted average monthly rent equates to 54.01 per
square foot of leasable area.
z The Inclusionary rent calculations are based on household income at 50%of AMI,with 30%of income allotted to housing related expenses. See
APPENDIX D-EXHIBIT I.
Prepared by:Keyser Marston Associates,Inc.
File name:HB Rent Inclusionary 5 6 20;PF VL DB Page 13 of 20
APPENDIX A EXHIBIT III -TABLE 3
INCLUSIONARY HOUSING IMPACTS
RENTAL APARTMENT DEVELOPMENT
10%INCLUSIONARY UNITS-VERY LOW INCOME ALTERNATIVE
35%DENSITY BONUS:67,5 UNITS PER ACRE
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
I. Supportable Investment
Stabilized Net Operating Income See APPENDIX A-EXHIBIT III-TABLE 2 $15,321,000
Threshold Return on Total Investment 6.1%
Total Supportable Investment $250,062,000
If. Total Development Cost See APPENDIX A-EXHIBIT III-TABLE 1 $245,557,000
III. Enhanced Value $4,5051000
Return on Total Investment 6.2%
Based on the Developer Return estimated to be generated by the DENSITY @ 50 UNITS PER ACRE MODERATE INCOME ALTERNATIVE.
Prepared by.Keyser Marston Associates.Inc.
File name:HS Rent Inclusionary S 6 20,PF VL DB Page 14 of 20
APPENDIX B
RENTAL APARTMENT DEVELOPMENT
AFFORDABILITY ANALYSES
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH, CALIFORNIA
Prepared by.Keyser Marston Associates,Inc
File name:HB gent Inclusionary 5 6 20;App B Titles Page 15 of 20
APPENDIX D EXHIBIT I
AFFORDABLE RENT CALCULATIONS
2020 INCOME STANDARDS
RENTAL APARTMENT DEVELOPMENT
FINANCIAL ANALYSIS. INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
One Bedroom Two-Bedroom Three-
Studio Units Units Units Bedroom Units
I. General Assumptions
Area Median Income(AMI) 1 $72,100 582,400 $92,700 $103,000
Monthly Utilities Allowance 2 $51 $61 $80 $103
I. Affordable Rem Calculations '
A. Moderate Income-Rent Based on 120%AMI
Benchmark Annual Household Income $79,310 $90,640 $101,970 $113,300
Percentage of Income Allotted to Housing Expenses 30% 30% 30% 30%
Monthly Income Available for Housing Expenses $1,983 $2,266 $2,549 $2,833
(Less)Monthly Utilities Allowance (51) (61) (80) (103)
Maximum Allowable Rent 51,932 $2,205 $2,469 52,730
B. Low Income-Rent Based on 60%AMI
Benchmark Annual Household Income $43,260 $49,"0 $55,620 $61,800
Percentage of Income Allotted to Housing Expenses 30% 30% 30% 30%
Monthly Income Available for Housing Expenses $1,082 $1,236 $1,391 $1,545
(Less)Monthly Utilities Allowance (51) (61) (80) (103)
Maximum Allowable Rent $1,031 $1,175 $1,311 $1,442
C. Very Low Income-Rent Based on 50%AMI
Benchmark Annual Household Income $36,050 $41.200 $46,350 $51,500
Percentage of Income Allotted to Housing Expenses 30% 30% 30% 30%
Monthly Income Available for Housing Expenses $901 $1,030 $1,159 $1,298
(Less)Monthly Utilities Allowance (51) (61) (80) (103)
Maximum Allowable Rent $850 $969 $1,079 $1,185
Based on the 2020 Orange County household incomes published by the California Housing&Community Development Department
(HCD). The benchmark household sue is set at the number of bedrooms in the unit plus one.
Based on the Orange County Housing Authority utility allowance schedule effective as of 10/1/19. Assumes:Gas Cooking,Gas Heating,
and Gas Water Heater,and Basic Electric.
' Based on the California Health&Safety Code Section 50053 calculation methodology.
Prepared by. Keyser Marston Associates
File name. HB Rent Inclusionary S 6 20,Aff Rent Page 16 of 20
APPENDIX D-EXHIBIT II
IN-LIEU FEE ANALYSIS
RENTAL APARTMENT DEVELOPMENT
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH,CALIFORNIA
Moderate Income Low Income
I. Rent Difference
A- Studio Units
Market Rate Units $2.652 $2,652
Affordable Units 1,932 1,031
Difference $720 $1,622
B. One-Bedroom Units
Market Rate Units 53,189 $3,189
Affordable Units 2,205 1,175
Difference S984 $2,014
C. Two-Bedroom Units
Market Rate Units $4,856 $4,856
Affordable Units 2,469 1,311
Difference $2,387 $3,545
D. Three-Bedroom Units
Market Rate Units $5,501 $5,501
Affordable Units 2,730 1,"2
Difference $2,772 54,059
It. Distribution of Total Units
Studio Units 15% 15%
One-Bedroom Units 50% 50%
Two-Bedroom Units 30% 30%
Three-Bedroom Units 5% 5%
III. Annual Affordability Gap Per Affordable Unit $17,455 $30,201
Less. Property Tax Difference (4,430) (7,660)
Annual Affordability Gap Per Affordable Unit $13,025 $22,541
IV. Net Affordability Gap Per Affordable Unit ' $192,000 $332,000
V. In-Lieu Fee
Per Total Unit $19,200 $33,200
Per Square Foot of Net Leasable Area " $20.70 $35.80
The market rents are drawn from the pro forma analyses. See APPENDIX D EXHIBIT 1:The affordable rents are
based on the H&SC Section 50053 calculation methodology.
Based on the unit mix distribution applied in the pro forma analysis.
Based on the rent differential capitalized at a 4.3%rate to establish the value, and a 1 1%property tax rate.
' Based on the Annual Affordability Gap Per Affordable Unit capitalized at the Threshold Return on Total Investment.
Based on the Affordability Gap Per Affordable Unit multiplied times the total number of units in the project.
° Based on the Affordability Gap Per Affordable Unit divided by the average net leasable area per unit
Prepared by Keyser Marston Assoc,ates
Filename HS Rent Inclusmnary 5 6 20,ILF Page 17 of 20
APPENDIX C
RENTAL APARTMENT DEVELOPMENT
RENT SURVEY
FINANCIAL ANALYSIS: INCLUSIONARY HOUSING ORDINANCE UPDATE
HUNTINGTON BEACH, CALIFORNIA
Prepared by.Keyser Marston Associates,Inc.
File name:MB Rent Inclusionary 5 6 20,App C Titles Page 19 o120
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Res. No. 2021-50
STATE OF CALIFORNIA
COUNTY OF ORANGE ) ss:
CITY OF HUNTINGTON BEACH )
I. ROBIN ESTANISLAU, the duly elected, qualified City Clerk of the
City of Huntington Beach, and ex-officio Clerk of the City Council of said City, do
hereby certify that the whole number of members of the City Council of the City of
Huntington Beach is seven that the foregoing resolution was passed and adopted
by the affirmative vote of at least a majority of all the members of said City Council
at a Regular meeting thereof held on September 21, 2021 by the following vote.
AYES: Bolton Delgleize, Carr, Posey, Moser. Kalmick
NOES: Peterson
ABSENT: None
RECUSE: None
ew4ii�
City Clerk and ex-officio Clerk of the
City Council of the City of
Huntington Beach. California