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  • Cynthia McDonald

Adopting an IHO: Planning Commission Meeting Round 1

On Monday, November 13, 2023, the Costa Mesa Planning Commission (well, most of it, three members were absent) held the first of two required hearings on the new Inclusionary Housing Ordinance (IHO). The next hearing date will be December 11, 2023.

Because this is a long post, I'll start off giving you my opinion and then you can read more about how I formed it below. But first, anyone with a curiosity about affordable housing needs to read "The Affordable City" by Shane Phillips, a short book from 2020 that is the best I've seen on the subject.

Costa Mesa has needed an IHO for years. Recently the City Council chambers have been filled with tenants telling their tales about housing insecurityhaving to live with two or three families in an apartment and facing eviction so their landlord can "flip" their apartmentall while developers are processing applications for million dollar condos and luxury apartments.

Is the IHO the sole mechanism for building a supply of affordable housing? Is it the only way to create stability for residents? No. It must be combined with other programs. In other words, it is one tool in the toolbox. But without an IHO, those other programs will not achieve their goals either, because the IHO has the incentives and mandates that will make developers realize that Costa Mesa is no longer the “easy lay” it was.

I think the IHO, as currently structured, is a good start. However, I believe the ordinance could be strengthened by increasing the percentages of affordable units required in a project, decreasing the threshold number to less than ten units, and raising the in-lieu fees to discourage developers from avoiding building affordable units. In addition, the draft ordinance does not apply to projects that comply with the current General Plan. For example, a developer could build a conforming residential project in SoBECA on property not selected for rezoning by the City, and none of the units would have to be affordable. The City must look at closing that loophole in all the overlay zones.

So what happened on Monday that led me to that opinion?

The hearing on this item started with a report on how the City arrived at this draft IHO. In September of 2021, at the City Council goals setting meeting, the City Council identified “Diversify, stabilize and increase housing to reflect community needs" as a goal.

About a year later, in November 2022, the City adopted an updated Housing Element. That Housing Element update subsequently went through revisions multiple times (I believe about five), the final version of which was received by the State on March 10, 2023. There are 44 programs in the Housing Element. They can be found on the City’s website in Chapter 4: Housing Plan.

On May 9, 2023, the State sent a letter to the City stating it accepted the March 2023 version of the updated Housing Element, however, because our updated Housing Element was not timely submitted to the State, the State has deemed it “out of compliance” and it will not deem it “in compliance” until the City completes the rezoning of properties as contemplated by the Housing Element, along with implementation of all the programs, including the adoption of an Inclusionary Housing Ordinance (Program 2A). To date, the Housing Element is still not in compliance.

There appears to be some confusion on the part of the City as to whether Program 2A must be adopted because Staff indicated in the presentation at Monday’s Planning Commission meeting that the Housing Element only calls for the City to “consider adoption of an inclusionary housing ordinance,” which conflicts with the language in the last version of the Housing Element found in Chapter 4 on page 4-6 (see screenshot).

While the City's Director of Economic and Development Services, Jennifer Le, noted that the City Council always has the final word on adopting ordinances, the language in the letter from the State and the language in the Housing Element seem very clear that the City is required to adopt an IHO. I would like to know where the confusion arises, but despite that confusion, the Planning Commission hearing on the draft IHO made it clear that the City has invested too much time and money to simply throw away its work, and the work of Keyser Marston Associates, the consultant it hired to assist in its creation.

Staff presented a review of the steps made in drafting the IHO. Multiple financial analyses of prototype developments were made by the consultant, including a recent revision prompted by the complaints of developers that they would not make enough money if the prior analysis was used because the land valuation was too low (more about that below). Based on the last analysis, an ordinance was drafted and structured with the following components:

  • Minimum project size;

  • Percentage of total housing units in a project to be set aside as affordable units;

  • Required income categories for affordable units; and

  • The period of time the units would need to remain affordable

Staff remarked that a comment heard from developers was the difficulty in incentivizing owners of commercial and industrial properties to sell in order to develop residential properties. This issue also came up as part of 2022's Measure K, which focuses on redevelopment along the city’s corridors. Landowners whose properties have successful businesses operating on the land don’t want to sell at a cheap price, and who can blame them? We are close to the beach, where property is more desirable and (no shock here) more expensive.

But more on the proposed ordinance:

  • The properties covered by the IHO would only include those that would be rezoned for residential use at higher densities than currently allowed;

  • Projects with fewer than 10 units, condo conversions (apartment complexes converted from rental to homeownership units), and any project in the Fairview Developmental Center Specific Plan would be exempt;

  • For rental housing, thresholds for affordable units for low- and very low-incomes were established based on the number of dwelling units per acre on the land;

  • A minimum 55-year covenant period for rental housing;

  • For-sale housing would not be required to produce affordable units on-site, but could use an alternative method, such as payment of in-lieu fees, land dedication, off-site concurrent building of affordable for-sale units, or on-site production of affordable rental units as a part of the total project;

  • For sale affordable housing would have a 45-year covenant;

  • Affordable units would be required to be substantially similar to market rate units, but there is discretionary approval by the final review authority on this;

  • Developers would not be able to use phasing to avoid having to comply with the ordinance; and

  • Reduced parking rate of 1.75 spaces per unit.

Despite two prior study sessions, there were some questions from the Commissioners that showed me that some had not fully read or digested the Agenda Report. One of the questions that came up was about our neighboring cities that have IHOs. That information was provided in the Agenda Report and had been provided at the study sessions as well. While it was noted that Newport Beach does not have an IHO, a quick check of that city’s website shows that adoption of an IHO is required pursuant to its compliant Housing Element.

A question was asked about adjusting the in-lieu fee versus the percentages of affordable units required. If we really want affordable units to be built, why would we adjust the threshold percentages downwards? Wouldn’t that be moving in the opposite direction of what we want? By allowing developers to pay fees instead of building units, the City is kicking the can down the road and only market-rate units will be built. The in-lieu fee is easier to change, but the fee needs to be high enough to discourage developers from making it their first choice when looking at alternative compliance options.

But where do the in-lieu fees go? They can be held in a fund, but they can also be used to pay into a project if a developer can’t make his project “pencil out” without them. In other words, we will pay off developers to get them to include affordable units in projects.

As noted by Jennifer Le, the cost of concurrent processing of projects is labor intensive and would require hiring additional staff. She also mentioned that “our building permit and plan check fees were established some time ago and I would not say they are cost recovery.” Costa Mesa’s fees have been lower than other cities for some time and the City doesn’t seem likely to increase them any time soon.

Public comment seemed to be split between more on the side of the residents who need affordable housing, versus advocates for the development community who are resistant to any affordable housing requirement and want to keep the fees and threshold percentages as low as possible. One developer struggled with politically correct words in bringing up the possibility of providing a separate project that is all affordable units to compensate for a 100% market-rate development. While 100% affordable projects are allowed and given special bonuses, this sort of arrangement borders on redlining and we question whether the City wants to encourage it.

After the close of public comment, the consultant brought up the point that Costa Mesa is trying to incentivize developers with high-density bonuses to build in Costa Mesa. Incentivization is an important tool, but it must be mixed with mandates in order for affordable housing programs to be successful. Developers are in the business of making money. They want to make as much money as possible, and unless you require them to build housing that is affordable to a range of income levels, they will thumb their noses at the less fortunate and build a product designed for those who can pay the highest price.

There was a comment about this being a really messy subject. It may be a difficult subject for those who don’t want to dive into the wonky world of housing policy. However, it has been dealt with many times and in many places. IHOs have been adopted by many cities all over the United States. They aren’t new, and we have many examples from which to draw and best practices that are widely available, in fact, Staff has already contacted neighboring cities.

As I wrote above, get the Shane Phillips book if you want to learn about this subject.

Finally, I can’t get past Commissioner Toler's comment that “our customers are very skittish; they're very sensitive and interest rates are very high, and there is competition all around us, and if you can get hotcakes next door for cheaper . . . ” By customers, he means developers. While I recognize that business and development play a major role in our city, the very most important part is the residents. The Planning Commission and City Council’s primary customers are its residents and they need to focus on serving our needs first.

Costa Mesa First brings people together to create a great place to live, work and visit. Our mission is to educate Costa Mesans about planning policies in Costa Mesa so they make knowledgeable choices when voting. We encourage residents to choose walkable, bikeable and inclusive neighborhoods, and the land use and transportation policies and investments needed to make Costa Mesa flourish. Our primary objective is to require Costa Mesa's leaders to put the residents of Costa Mesa first.

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