AgdaPkt 2018-05-21 Joint SA PFA - Laserfiche WebLink

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3 In today’s market, a developer in Redwood City would likely seek a profit of approximately 18-20% of total development costs and a yield on cost (another measure of profit) of 5% - 5.25%.5 The modeled development would meet those returns. Assumptions Profit (as a profit as a percent of development cost) Yield on cost Today’s conditions 19.1% 5.06% Very Low Income 18.3% 5.03% Low Income 6 21.3 % 5.15% There are several options if the city is interested in increasing the affordable set aside to 20%7. Option 1 – Require developers to provide 20% of the units affordable to a mix of income levels. The consultant team modeled the finances of requiring 10% of the units to be affordable to Moderate Income, 5% to Low and 5% to Very Low. Assuming a 20% density bonus and land prices decrease 5%, this development would be feasible (19.9% profit, 5.1% yield on cost). Option 2 – Require developers to provide 20% of the units affordable to Low Income households. The profit for the modeled development would be 18.9% and the yield on cost would be 5.05%, which is at the low end of feasible Option 3 - The city may want to consider passing a local ordinance that mirrors SB 35 or offers a greater density bonus than required by the state. Developers in a number of cities (Cupertino, Berkeley, etc.) have shown a willingness to accept lower rates of return if there is more certainty in the process. Developers also save on financing cost associated with the quick approval process. In the State version of the legislation, developers are entitled to fast, guaranteed approvals if they meet objective zoning criteria and provide 50% of their units at affordable prices. Redwood City could develop its own version with thresholds tailored to local conditions. CEQA analysis would be required. Option 4– Consider tying higher affordable requirements to rezoning. Typically, land prices increase rapidly when cities increase the zoning. Increasing affordable housing requirements reduces the increase in the price of developable land. It is important to remember, land prices can only decrease so much. Housing developers may be unable to buy land and still make a profit if the requirements are too high. This is because commercial development or the current use are more profitable. In Lieu Fee Cities that are interested in having developers provide units instead of fees, use one of two strategies. They only allow in lieu fees with city permission or they set a high in lieu fee compared to the 5 Profit thresholds are based on risk, potential revenue from other investments, ability to get loans/investors, etc. 6 If the requirement targeted Low Income units, it would likely not have a downward pressure on land prices reducing profits to the level of existing conditions. 7 Affordable housing requirements above 15% may face additional State scrutiny, though it is likely that providing a 15% option would mitigate this risk. 7.A. - Page 51