Rik Keller, Housing Consultant and Affordable Housing Advocate

Davis City Council comments 1/17/2023

Item 5: Inclusionary Multifamily Rental Housing Ordinance Review 

I have comments on the product and process:

1) It is an overly simplistic, opaque study with bad assumptions.

• The pro forma analysis has a lot of “black box” qualities: Doesn’t show the calculations used or major assumptions, so it is not possible to adequately vet, double-check, and critique the methodology, assumptions, and calculations.

• The study doesn’t use a sophisticated pro forma analysis: it is very crude and basic and doesn't allow changes in parameters of things like number of stories, unit sizes, and parking construction types and configurations.

• Because of this simplistic and opaque approach, it doesn’t offer flexibility in analysis or running different scenarios beyond the very limited canned ones shown.

• One terrible assumption: it considers one major parameter as given---the underlying land price. 

• If even the 100% market units don’t reach the 12% IRR threshold in the pro forma, then that tells me that the land price assumption is too high because we have had recent development proposals for multifamily development

• The fact is that land value varies by its scarcity and demand.

• This is a massive flaw as the City’s own density, parking, and inclusionary requirements have large effects on this parameter and hence development feasibility.

• If you increase affordable housing requirements, you reduce the bidding demand price for land

• In reality, land costs are not fixed and are influenced by the IRR that projects can achieve. If you make more affordable units required, that should actually lower land costs because the rate of return is now lower.

• Another issue: bringing up reducing/eliminating development/impact fees as the only feasible way to make projects work. If projects don’t cover their own impact costs, you are increasing City debt and subsiding developer profits. I’m shocked that this is the only solution put on the table by the consultants.

• There is also a statement on page 39 that “No incentives are needed in a policy that requires 15% - 25% of small, workforce units.” However, there is no data or analysis provided for this assertion. 

• In actuality, small units don’t usually end up providing affordability. The most expensive components of units are the kitchens and HVAC systems. Small units have much higher per square foot costs.

• The City of Davis has seen this inefficiency in the exorbitant proposed rents for the Olive Drive Mixed Use Project even after eliminating parking requirements.

2) Ironically, one good thing about the study is that it shows the City’s planning failure in targeting densities and incentives to get maximum production of affordable units.

• It states “Downtown’s new form based code does a great job at removing barriers to development. Unfortunately, this limits our options to offer development incentives as part of the policy.” and the “Residential high density zone encourages development that is denser than what is typically seen in areas outside of Downtown Davis and already removes commonly known barriers to multifamily development.”

• But a terrible assumption of the report is that the City can’t modify its density and parking requirements so that they can be used as incentives for increased affordable housing requirements.

• If you allow too much default density and reduce parking requirements in a given zoning district up front, you have given away for nothing incentives that you could offer for affordable housing production.

3) There is a failure in City’s process with the Housing Element Update lead to this.

• It has now been almost 5 years since the City scrapped its Affordable Housing Ordinance (AHO) for its interim ordinance that drastically weekend Inclusionary requirements.

• After breaking deadlines multiple times, back in May 2021, staff stated that it would finally provide a “comprehensive update” to the AHO as part of the HEU. But the HE just ended up kicking the can down the road further.

• The very limited nature of the report under review right now demonstrates the need to comprehensively address housing policy, not do it piecemeal like this.

• We must think holistically:

• The City lost an opportunity with the HEU, and needs to to re-group with actual affordable housing advocates leading policy rather than an advisory group stacked with development interests that pushed failed free-market trickle-down approaches.

• A proper approach is to carefully craft incentives such as increased density and reduced parking requirements that offset affordability requirements. Simply having large allowable densities and allowing by-right development without strengthening affordability requirements is bypassing half of the equation. Density does not necessarily (and usually doesn’t) equal affordability. Providing half of the equation in terms of incentives without receiving the other half in terms of actual commitments to affordability is missing the point.

Conclusion: This study is a poor excuse for a comprehensive analysis of the City’s actual policy option for increasing affordable housing production. The analysis put its thumb firmly on the scale to try to justify a weakening of the City’s inclusionary housing requirements. They claim that the requirements eat into developer profit margins and make it so projects won’t “pencil out,” In contrast, actual economic analysis of  the results of implementing inclusionary programs does not bear this out:

•  “The most highly regarded empirical evidence suggests that inclusionary housing programs can produce affordable housing and do not lead to significant declines in overall housing production or to increases in market-rate prices” (National Housing Conference’s (NHC) Center for Housing Policy: “Separating Fact from Fiction to Design Effective Inclusionary Housing Programs.” https://nhc.org/wp-content/uploads/2017/10/Separating-Fact-from-Fiction-to-Design.pdf

• “In fact, inclusionary policies may even promote more market-rate development in cities with very constrained housing markets...There is no credible evidence to suggest that inclusionary housing policies lead to lower rates of housing production. This is likely because developers are able to adapt to flexible inclusionary housing policies by bargaining over land prices and adjusting their profits in the short run.” landowners.https://inclusionaryhousing.org/wp-content/uploads/2016/09/Economics-of-Inclusionary-Housing-Policies-Effects-on-Housing-Production_a.pdf

The City should use evidence-based local policy solutions that further goals for inclusive, equitable, and affordable housing solutions.This process and product is not adequate.