Council waits on drafting inclusionary housing ordinance, watches impact on neighboring cities

By SARA HALL

During an hour-long study session this week, City Council decided to hold off on drafting an ordinance aimed at requiring housing development projects to include affordable housing units until they get more information on the important issue.

City staff presented an overview of inclusionary housing on Tuesday (Jan. 24). A city ordinance would set minimum requirements for affordable housing units within multi-unit residential development projects. While staff was looking for feedback to start work on a draft ordinance, councilmembers weren’t ready to take that step. Those who commented during the discussion agreed that they need to take some time to conduct more research, gather feedback and carefully consider what kind of ordinance (if any) works for Newport Beach.

The benefit of taking the time to work through this is being able to see how similar ordinances impact other cities, Mayor Pro Tem Will O’Neill said.

“Being able to give them a little bit of runway to figure out how that’s affecting the applications that they’re receiving, and the width and breadth…of the in-lieu fees,” is helpful, he said. 

O’Neill suggested they see how similar plans are actually playing out in other cities before drafting their own ordinance. 

“I’d like to keep gathering information and figure out the right path forward,” he said.

The “wait and see” approach was echoed up and down the dais.

“We do need more time to sort of let this germinate and maybe think through some of the bigger picture (aspects),” agreed Councilmember Robyn Grant.

One missing piece is the next step of practical application, added Councilmember Lauren Kleiman.

Newport is unique, Kleiman added, and they need to fully understand the impact a potential ordinance might have on development in town before moving forward.

There might be other inventive options, Mayor Noah Blom added. 

“This seems like a broad sword on a specific approach that I don’t necessarily think is necessary right now,” he said. 

Councilmember Brad Avery suggested getting input from local developers. 

“It’s important to stay in touch with the development industry as you do this and get a lot of feedback as to what’s doable,” Avery said. “This is a developer’s town, this town was built by developers, essentially, and they all live here still.”

There’s risk involved with doing any kind of development and considering the current economy and cost of building and materials, it’s really tough right now, Avery noted.

“Any developer will tell you they need to see a home run, just on the face of it,” before committing to anything, Avery said. “If we really want to make this work, we’ve got to find a way to sweeten the pot.”

Getting feedback from the experts is a good idea, agreed Councilmember Erik Weigand. This is a lot to swallow for one study session, he said, and it’s a little premature to give feedback for a draft ordinance at this point. 

“I’m not really ready to see anything move forward tonight,” Weigand said and suggested they do more research, gather feedback and return for another study session before a draft gets sent to the Planning Commission.

During public comment, several speakers also reiterated the need for the city to take the time to get it right.

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Photo by Sara Hall

The city is in the process of developing an inclusionary housing program

As directed by Policy Action 1K (Inclusionary Housing Policy) of the city’s recently adopted 2021-2029 Housing Element, the city is in the process of developing an inclusionary housing program and evaluating the financial impacts that a program may have on housing development and the parameters that will make it most effective.

At Tuesday’s meeting, staff was seeking council guidance for framework of the future inclusionary housing program, including the inclusionary housing percentage, applicability of the program and alternatives for compliance.

Principal Planner Jaime Murillo asked for council feedback so staff could start putting pen to paper and draft an ordinance. 

The city hired Keyser Marston Associates to study financial feasibility of an inclusionary ordinance in Newport Beach, explained Community Development Director Seimone Jurjis. The city is unique, he said, considering the land values, geography and current development, and a consulting specialist helped tackle the difficult task. 

“The State of California is mandating massive amounts of affordable housing,” Jurjis said, and, because of that, the city had to put policies in place addressing affordable housing in the recently certified Housing Element. “The state has mandated the opportunities, now they want to mandate the construction and development of affordable housing.”

“We’re not here because we want to be here, we’re here because we’re trying to implement our Housing Element,” he added. 

Inclusionary housing is simply that minimum requirement for affordable housing, Jurjis explained.

The difference between an inclusionary ordinance and the density bonus development incentive, is that density bonus is voluntary and not required by the community or developer, Jurjis explained. 

“So, if a developer just chooses not to utilize the density bonus provision of state law, how does the City of Newport – how does any city – mandate affordable housing development?” Jurjis asked. “That’s what the inclusionary ordinance is, it’s just that basic minimum to say you will always add affordable housing or you will provide an in-lieu fee.”

Inclusionary housing is essentially an ordinance that would require any new housing development to include a set percentage of the number of units as affordable housing, Murillo explained. It also helps disperse affordable housing units throughout the community, he added. 

“This is really a tool that cities can use to mandate some of that new housing opportunity is set aside for affordable units,” Murillo said.

At a study session on Sept. 14, 2021, council directed staff to study financial implications of inclusionary housing. They also asked staff to return with a recommendation on the percentage that could be supported. The city was in the early process of updating the Housing Element at the time, Murillo pointed out.

Last year, staff returned to a council study session on March 22 to present the results of the financial impact analysis that Keyser Marston had prepared. However, at the time, there was uncertainty about whether or not the Housing Element would actually be found compliant by the California Department of Housing and Community Development.

“A lot of cities, including ourselves, were having a hard time getting the approval from the state,” Murillo said.

In September, the city adopted a Housing Element that was found to be compliant. 

The update of the 2021-2029 Housing Element is required by HCD in response to the 6th Cycle Regional Housing Needs Assessment allocation of 4,845 new housing units assigned to the city.

Providing some background on the court decisions that led to how inclusionary housing is allowed, President of Keyser Marston Associates, Inc., Kathe Head, said the two key factors are the jurisdiction’s effort to fill the unmet need for affordable housing and the developer’s need to make a profit from a project otherwise it won’t be built.

“It’s a balancing act between the need that you’ve been assigned by the state versus needing to have development of all kinds happening in order to achieve that affordable housing,” Head said. 

But the courts told cities that the requirements cannot be confiscatory and the requirements cannot deprive an owner of a fair and reasonable return on their investment, she explained.

“Now, they conveniently did not tell you what that meant,” Head added. 

The situation across the state is that every jurisdiction needs to conduct a financial analysis, “whether they do it in-house or they hire a consultant or they throw darts at it,” there needs to be some notion that the requirements are not confiscatory or depriving an owner of a fair and reasonable return, she said. 

The jurisdiction needs to consider those two aspects (confiscatory or depriving an owner of a fair and reasonable return) while also avoiding creating a constraint to housing, Head added. 

In Newport Beach’s case, the purpose of the Keyser Marston analysis was to look at what requirements could be imposed while creating that balance. For her analysis, she looked at how much would land costs have to go down to cover the lost income because it’s still going to cost the same amount of money to build the project no matter what. The variable is the land, she added. The other measurement Head looked at is how much would market rate rents or sales prices have to increase to then mitigate that impact.

Murillo presented the “beginning outline” of a staff-recommended possible inclusionary ordinance as a starting point. 

“The ordinance itself is totally flexible and we can change any of these components,” Murillo said.

The staff recommendation is “minimal,” Jurjis added. 

Staff suggested that the applicability should apply to all residential projects with a net increase in units citywide. 

In terms of the minimum percentage for the inclusionary requirement, staff recommended following the findings in the financial impact analysis report. For rental projects, that would be 7% for low or very low-income in all four sub-areas of focus: Airport area; Coyote Canyon; Newport Center and West Newport Mesa and Banning Ranch. For ownership projects, 8% moderate income requirement in Coyote Canyon, Dover Westcliff, West Newport and Banning Ranch and 5% in Newport Center.

The threshold for the inclusionary housing in-lieu fee is recommended at 50 units or less for rental projects, and allowed for all ownership projects. The fee is recommended at $36.60 per square foot for rental projects and $33.80 per square foot for ownership projects (for both rental and ownership, the fee would be calculated considering the total units in the entire project).

When the state allowed rental inclusionary they also required jurisdictions to provide options to on-site production, most communities include an option for an in-lieu fee, Head said. So staff would also encourage that the ordinance be flexible through alternatives, including off-site affordable unit construction, land dedication and off-site conversion/preservation of affordable units.

“This is really interesting,” O’Neill said after the presentation, “and also, I think, shows just how difficult it’s going to be to reach the RHNA numbers, eventually, down the road.”

He questioned whether inclusionary housing ordinances actually lead to more housing production, noting that all the studies he’s read point to the opposite effect. A lot of research shows, especially in California, that this actually “decreases housing production significantly across the board in almost all California communities,” O’Neill said. 

“There’s no doubt there’s a ton of literature out there that says inclusionary is really stupid and doesn’t ever help,” Head said. 

In her own informal study from a few years ago she compared four cities that had ordinances in place for at least a decade.

“I looked at them before and after to see if there was any discernible difference in what happened to building permits,” she said. 

There was no clear pattern, she added, the number of permits went up and down. But there was no big drop in housing projects, she pointed out. 

Head acknowledged that an inclusionary housing requirement, or any kind of affordable housing requirement, is going to have an impact on local development economics. But there are a lot of factors that play into housing development, including cost of land, price of materials, the overall economy and more.

“The key to doing an inclusionary housing policy that has a chance of working is to moderate the requirements,” Head said. “So as not to create a requirement that creates a constraint to housing.”

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Sara Hall covers City Hall and is a regular contributor to Stu News Newport.