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5 The team then modeled what would happen with a 15 percent inclusionary zoning requirement affordable to Moderate Income households. With the affordable units, the developer would be entitled to a 10 % density bonus, or 1.5 units (rounding up to 2 units). As with the rental development, they would be entitle to zoning flexibility as well. Additionally, the city would typically no longer charge affordable housing impact fees, reducing the costs for developers by $32,500 per unit. In today’s market, a developer in Redwood City would likely seek a profit of approximately 12-17% for townhome ownership developments. (Yield on Cost is not used in for sale developments and profit thresholds tend to be lower for ownership compared to rental developments.) The modeled development would meet those returns, but it is heavily dependent on a developer being able to use those density bonus units. Assumptions Profit (as a profit as a percent of development cost) Today’s conditions 14.2% Moderate Income Units with 2 density bonus units 15.5% In lieu Fee Most cities calculate in lieu fees differently for ownership and rental developments because the lost profit associated with the ownership unit is greater than with a rental unit. One option is to base the fee on the sales price of the market rate units. For example, the fee could be the sales price of the market rate unit, minus the affordable price. Fractional Units In the rental example, a fractional unit is not a significant cost to a developer, because they are supplying over 30 affordable units. For the modeled townhome development, where they are only supplying two units, a fractional unit can be a more significant cost proportionally. In the model, adding in a $250,000 in lieu fee would reduce the profit to 13.5%. 7.A. - Page 53