Sorry for being a bit behind — I’m definitely feeling a bit of vacation hangover. Thankfully Planning Commission last night had only one item, which was the conversion of the old Trinity Broadcasting Network building into an “event center”. The item was approved almost unanimously (Commissioner Jon Zich voted no), and I wish I had more to say about it. I’ll let Cynthia McDonald’s very capable write up over at Costa Mesa First give you the color; she’s right to point out that this property raised eyebrows when it was added to the sites covered by 2022’s Measure K ballot measure (despite not being suitable for housing) and now it’s clear it will stay a commercial venue.

So let’s move on to the fun stuff: the inclusionary housing in-lieu fees study session this evening at City Council! Wooooo!

Anyways, last week at City Council Ms. McDonald was grumbling that Mayor Pro Tem Jeff Harlan pulled some strings and got the presentation by our affordable housing consultant, Keyser Marstan Associates (KMA), on its in-lieu fee calculations pushed from last week’s City Council meeting to a special study session this week. Not only do I doubt that is actually the case, I also don’t have any idea why last week would have been a better venue. The agenda was already packed thanks to the rain delay from a couple of weeks ago, and doing a deep dive into affordable housing math at 2:00am doesn’t even excite me. So I for one am glad we have a whole evening just to discuss the fees. So what will we be arguing about?

Well… math. A lot of math.

At the meeting where the IHO had its first reading, I stood up and spoke somewhat critically about the approach taken by the City Council to rely on mathematical models produced by KMA to find the “sweet spot” (as Mayor John Stephens put it) where regulatory burden didn’t overwhelm the incentive to redevelop our Measure K sites. My point was that math can give you a false sense of security, especially in matters that are effectively social science (in this case, economics): the variables are often difficult to estimate or potentially unknowable, and each landowner may value the different inputs well, differently. The critique was intended to directly appeal to Council Member Andrea Marr, a Naval officer and a licensed professional engineer as well as one of the biggest supporters of adopting an inclusionary housing policy in Costa Mesa. Honestly I thought an engineer would appreciate the critique that math, as useful as it can be, does have its limits. Man, was I wrong. My approach instead left her exasperated that, despite the IHO generally moving in a more liberal direction, critics of the policy (including myself) still wanted more.

Whoops. Turns out I have a long way to go in the art of persuasion. But I stand by my critique, though, and it goes double for the discussion this evening.

If you want a headache, feel free to try and parse through KMA’s analysis of its recommended in-lieu fee schedule. I’ve pasted their recommendations below:

You gotta love outputs expressed to the penny for such a difficult calculation: how much per square foot of total leaseable area would a developer be willing to pay to buy itself out of the IHO’s required affordable units? But sometimes precision can be misleading, and I think it is here.

What’s up with the maximum fees for developments with 60+ DUA?

As noted above, the fees cap out at $26.10 per sq. ft. of leaseable area for developments 60+ DUA. If you flip all the way to the back of the KMA Analysis to Attachment 2: Appendix C, you’ll see a pro forma breakdown of how they got to the supportable in-lieu fee. I can source the rate for the developments <60 DUA at $13.80 per sq. ft. of leaseable area, but the developments 60+ DUA don’t match the analysis: the analysis says the supportable fee is, at most, $23.80 per sq. ft. of leaseable area, not $26.10 (see the very bottom line):

But wait: is this the wrong table? Look closely at Part IV, Assumptions: It is assuming an Inclusionary Housing Percentage of 10% Low, or 5% Very Low. That isn’t what the City Council recommended: It recommended 11% Low, and 7% Very Low, for developments with densities 60+ DUA. And if we re-run the calculations with an 11% inclusionary requirement instead of a 10% inclusionary requirement… *tap tap tappity tap* then, ta-da: we get $26.10 per sq. ft. of leaseable area. Phew!

But… oh no, the $23.80 amount, based on the Planning Commission recommendations, is used by the tables calculating the fractional unit payments, which start at $23.80 per sq. ft. of leaseable area. And then, wait until you flip to KMA’s memorandum to staff dated the same day:

The “reduced Inclusionary Housing requirements” referenced in the first sentence refers to the 10%/5% thresholds recommended by the Planning Commission for developments with densities of 60+ DUA. But now the maximum fee recommended by KMA for developments with 60+ DUA is… $19.50, which ties to the lower estimated supportable in-lieu fee back in Attachment 2: Appendix C. So which is KMA recommending for developments with densities 60+ DUA at a 10% low, or 5% very low threshold? The higher fee estimate of $23.80, or the lower fee estimate of $19.50? My head hurts.

Sadly, it does really matter. If you have a 100 unit building at 60+ DUA, and the average sq. ft. per unit is 933, you’re looking at 93,300 of total leaseable sq. ft. If the rate is $26.10, your total in-lieu fee would be $2,435,130. If the rate is $23.80, the total in-lieu fee would be $2,220,540. And if the rate is $19.50, the total in-lieu fee would be $1,819,350. A difference of $615,780 from the highest KMA recommendation to the lowest is pretty huge. But that’s not the only thing that feels off here.

Why are we straight-line adjusting the fees between 15 and 20 units?

On the one hand, I appreciate that KMA is looking out for the small developer by reducing the fees for smaller developments, and that’s appropriate. But look carefully at either in-lieu fee schedule and you’ll see that the “step ups” in the fees for each unit between 15 units and 20 units are all the same. So all KMA did was take the maximum fee (whatever it is), divide it by six, and then added that amount to each step starting at 15 units. Do the economies of scale neatly increase in even increments from 15 units to 21+ units? I have no data to support this, but my gut says no. And KMA doesn’t give a reason for this approach.

Also, there is a bit of inconsistency with the City Council’s recommendation, which was that, for rentals, only developments fewer than 50 units would be permitted to pay in-lieu fees. So why is 21 units is the right place to peg the maximum fee and not, say, 30, 40 or even 50 units? Developments with more than 50 units won’t be able to pay these fees anyway. Which gets to my last point…

Why are we assuming a development will have 300 units to calculate the in-lieu fee when in-lieu fees are prohibited for developments greater than 50 units?

Go back and take a closer look at Attachment 2, Appendix C above. Did you catch the number of units that the table assumes for developments 60+ DUA and developments <60 DUA? They are 300 units and 176 units, respectively (see Part IV of the calculation). Uh, why? Again, the City Council recommended that rental developments with 50 units or more be barred from using in-lieu fees. Now, I happen to disagree with that and I hope the City Council will raise that limit quite a bit. But it would be nice to have analysis that actually tied to what the City Council recommended.

The good news is that the calculations are sufficiently simple that it probably doesn’t make a lot of difference, since the affordability assumptions are really what are doing the work. But once again, it is slippery to assume that the economies of scale for a 49 unit building are the same as a 300 unit building. So even if the fees for both are proportional, it may “hurt” one development much more than the other to pay them.

So now what do we do?

If you’re still reading, hopefully you now can see why inclusionary housing is so difficult to do well. But I do think that there is a simple approach the City Council can take, which is to set the inclusionary fees as low as is supportable. Assuming it is easy to raise them later (which I would think it would be, though hopefully Staff will clarify tonight), it would be much safer to start low and then dial fees up than to start too high and have to guess at what is low enough to encourage development.

And I don’t think the City should fret too much about foregone revenue from setting the fees too low, or even foregone affordable units in the event many developers choose to use the fee rather than than produce affordability. And that is because the city will still be getting units in that scenario, and getting invaluable information from developers and landowners about how the policy is effecting their thinking. We need to re-learn what it takes to develop housing in Costa Mesa after a nearly 7-year hiatus.