As I wrote in my reflections, it was clear from the discussion at the last City Council meeting that there was a divide on the City Council about how housing affordability works, and unsurprisingly that meant there were stark disagreements over what policies should be pursued to achieve that affordability. I’ve been noodling on how the Council might address this disagreement given the positions of the parties:

On the “supply side”, which I would count myself as a firm member, is the belief that it is actually very difficult to construct new housing in California, and in Costa Mesa in particular. This side also believes that building for all income levels, not just deed restricted affordable housing, is key to addressing overall housing affordability.

The “demand side” on the other hand, looks at the problem differently: they seem to assume that the prospect of building in Costa Mesa is so compelling that developers will likely build abundantly even if KMA’s recommended IHO criteria is imposed. They are centering the overwhelming need for deeply affordable housing and working backwards from that.

So here is how I think we could square this circle: what if we phased the IHO’s requirements in over time? Here’s how that could look:

• For the first say, 4,000 units, we could start with the Planning Commission’s suggestion that 2 acre parcels are exempt and that 5% very low income or 10% low income inclusionary units are required for developments greater than 60 DUA.
• Once we hit the 4,000 unit mark, we could then say that the next level of inclusionary housing will be required for the next 4,000 units: perhaps the 2 acre exemption drops to apply only to 1 acre parcels, developments less than 60 DUA have a small inclusionary requirement (say, 4% very low or 7% low) that can be met with an in-lieu fee, and developments greater than 60 DUA jump up to 7% very low or 11% low income.
• Once we build those, then next 4,000 units could then have the final, go-forward requirement, which would be in line with what the affordable housing folks want: no acreage exemption; developments less than 60% DUA increase their inclusionary requirement to 5% and 8%, respectively, and developments greater than 60% increase their inclusionary requirement to 10% very low or 15% low.

All of these levels would be worked out and published up front, so that no one was surprised when new levels of inclusionary housing are required.

Now, there would still be some details to work out; for example, I’d like to see developments less than 25 units be exempt outright no matter what “level” we are on, and personally I think in-lieu fees should always be available even for very large projects.

But overall, I think this compromise could be beneficial because it gives both sides an opportunity to get what they want even if the other side’s assumptions end up being right. If the supply folks are right and housing is difficult to build, it will be slow going even with the initial modest requirements and it could take us a while to get up to 4,000 units. However, the gap between feasibility and the regulations wouldn’t be so large that it couldn’t be potentially addressed with other entitlement benefits, such as modest or absent parking requirements, height allowances, impact fee discounts, etc. And if the supply people are wrong and entitling 4,000 units turns out to be super quick and easy, then at least we get supply. 4,000 units is a lot of housing!

On the demand side, this approach gives them a path to levels of deed-restricted affordability that isn’t even on the table. If their assumptions are correct, the first 4,000 units will be a breeze to build and they will still get up to 400 affordable units out of the bargain. And in the long run, after 8,000 units are built, the requirements will be higher than currently contemplated. Due to concerns about confiscating property entitlements it is somewhat difficult to raise inclusionary rates without some offsetting benefit. But if it were set up such that the inclusionary rate would increase to these levels with a sufficient amount of production, then there would be no concern about confiscation because the rules would have been determined in advance.

Now, I think there are some important nuances the Council would need to consider if they went down this road. First, they MUST install “circuit breakers” that would allow the Council to veto moving to the next “level” of inclusive requirements if, despite the first 4,000 units being built, there were reasons to be concerned about the health of the market or the feasibility of the next 4,000 units. So many considerations go into homebuilding — appropriate sites, financing, price of labor and materials, etc. — that it is very possible that construction will get progressively more difficult as time goes on. To allow those requirements to just robotically march upward without engaging in a careful analysis would be really foolish.

4,000 units also might not be the right number. I just ballparked what seemed like the right amount of housing you’d want to see built before you drew conclusions about whether the next level was feasible. Maybe it should be higher or lower, or maybe the trigger should be achieving a particular rate based on a rolling average of yearly housing production. I think there are a lot of options here.

Also, admittedly this proposal suggests its own counterproposal: why not start with high inclusionary requirements and, if we don’t see enough production, reduce those requirements until we do? I think this has a few operational problems. First, housing takes a long time to build, so if we end up delaying meaningful production for several years while we experiment, that pushes out the point when we will see new housing come online for maybe a decade or more. We’re so far behind producing housing that we don’t have that kind of time to waste. Second, in the years where the bars are too high, we aren’t rebuilding the entire ecosystem of building that needs to exist for robust and efficient construction to occur. We need developers (of all sizes, but particularly smaller ones), construction firms, general contractors, suppliers, tradesmen, laborers, concrete manufacturers, pipelayers, etc. all to move to Costa Mesa and have an expectation of being employed. Allowing our sites to effectively lie fallow until we can fine tune our way to a few projects penciling here and there won’t support the development of that ecosystem. And without that ecosystem in place, each project will be significantly more expensive, and the lack of building will be a self-fulfilling prophesy as it has been in the years under Measure Y.

Third, setting up the system this way incentivizes developers to hold out for a better deal. If they know the city will reduce its inclusionary housing requirements — effectively, lower taxes on development — if little housing is built, then that undercuts their desire to move quickly. On the other hand, if developers understand that low rates are a one-time offer, that incentivizes them to get started right away. And we need housing right away.

And finally, I think my approach presents the best scenario for learning about how development works in the city. By starting with the better scenario for development, you have a good chance of seeing some projects brought forward. This would give the city the opportunity to ask those developers questions, figure out how much burden the regulations really impose, and what kind of projects those developers are willing to build (big ones? small ones? both?). However, starting with high requirements substantially ratchets up the risk that no developments will be proposed, and it is difficult to learn from nothing. We’re seeing that right now: without an active development pipeline, it’s really hard for KMA or anyone else to estimate the kinds of projects we’ll see in the future under zoning liberalization.

So that’s it: phase the requirements in over time, and give everyone an opportunity to be right.