As expected, the study session on the in-lieu fee for the proposed inclusionary housing ordinance was a difficult slog through a thicket of models and economic assumptions. While the Staff — and especially its consultant, KMA — ably and deftly described the proposed fee schedule and its justification, there is just no escaping that it is a difficult topic under the best of circumstances.

Thankfully we have a City Council that is as up to that tall task as any in Orange County. With a few exceptions — I think Council Member Loren Gameros mostly listened this time around, and Council Member Andrea Marr was regrettably absent — the Council asked really good questions, responded thoughtfully to the public commenters (both the developers and the affordable housing advocates), and clearly grasped the subject matter and its various trade offs. I emphasize this because I’ve reviewed tapes of other city councils wrestling with inclusionary housing policies and, I have to say, it rarely goes this well.

I only have a few stray observations that I’ll set down here, lest I forget about them when the IHO comes back for its next hearing in March:

If the in-lieu fee seems too high, then our inclusionary requirement is too high

I lobbed in a request as a written comment for KMA to clarify what, exactly, it was recommending as the City’s base fee for developments with densities 60+ DU/A — the base fee calculated from the 11% low/7% very low inclusionary requirement recommended by the Council majority during the last hearing on the IHO, or the base fee calculated from the 10% low/5% very low inclusionary requirement recommended by the Planning Commission. In addition to clearing up my own confusion I hoped this question would highlight the fact that the base in-lieu fee is nothing more than the quantification — in dollars — of the inclusionary requirements themselves.

And in that way, I think this discussion of the in-lieu fee made the trade-offs and challenges of the IHO policy in general far more concrete than they had been before. The difference between imposing an 11% low/6% very low inclusionary requirement for very dense developments versus a 10% low/5% very low inclusionary requirement for such developments seems inconsequential when expressed as percentages of units. As Council Member Marr expressed in the last City Council meeting on the subject, she felt comfortable adding an additional percentage point to each of these requirements “because I know there is at least that much wiggle room in the math” (emphasis mine), a line of reasoning which suggests that the difference between a 10%, 11%, or even 12% low income inclusionary requirement is ultimately a matter of policy preference and not one of material substance to the decision to develop a property.

But I’m concerned that just isn’t so. Because the in-lieu fee rate is so totally driven by the inclusionary requirements, the rates generated by the City Council’s recommended inclusionary requirements and the Planning Commission’s recommended inclusionary requirements is much larger than one or two percentage points might suggest. As I noted in my earlier post, in a hypothetical 100-unit project with a density of 60+ DU/A, the differing base fee rates between the proposals — $26.10 per sq. ft. of leaseable area under the City Council proposal, and $19.50 per sq. ft. of leaseable area under the Planning Commission’s proposal — results in a whopping $615,780 of additional fees for the whole project.

Just to drive this point home, you can re-run KMA’s in-lieu fee analysis with Council Member Marr’s original proposal of 12% low/8% very low for projects with densities 60+ DU/A. Assuming I’ve done my math right and you keep KMA’s “affordability gap” assumptions, I get a base fee of either $28.50 (using the low income requirement) or $31.29 (for the very low income requirement) per sq. ft. of leaseable area. As the in-lieu fee assumes the developer would opt for the cheaper of the two requirements, imposing a base fee of $28.50 per sq. ft. of leaseable area on my hypothetical 100 unit project above would generate a total fee of $2,659,050 – that’s $223,920 more in fees than the City Council’s final proposal, and $839,700 more in fees than the Planning Commission’s proposal. Man, those little extra percentage points really add up, and expressing those percentages in dollars is really helpful to illustrate how material they can be.

So, if the Mayor is right that “$26.10 [as the base fee] is an absolute nonstarter… just nobody is going to build in Costa Mesa” (and I happen to believe he is), then that means that the 11% low/7% very low inclusionary requirement imposed by the last City Council proposal is an absolute nonstarter, too. They are the same requirement, just one is expressed in starker terms.

Sorry, it is impossible to “do no harm” when you adopt an IHO

A consistent theme on the dais last evening was anxiety over whether IHO would actually support the goal of building more housing in Costa Mesa. I am not going to assuage those concerns. Here is the bottom line, which hopefully was driven home in bright red ink with this study session: inclusionary housing requirements are a tax, a disincentive, a discouragement and a penalty on the construction of housing. Period. We aren’t going to impose the IHO requirements or fees on the construction of market rate, single family tear-down/rebuilds in Eastside Costa Mesa or Mesa Verde. We aren’t going to impose IHO requirements or fees on the construction or reconstruction of large commercial or industrial projects. We will be levying this new tax only on new home developments in the Measure K areas. This has one, and only one, effect: less housing will be built on those sites than would have been absent the requirement or the fee. That’s just uncomfortable economic fact.

Now, I think the City Council is trying to justify taxing housing development with the “incentives” touted by KMA and the Staff, notably the increases in zoning capacity and the lessening of development standards, that will accompany (or really, trail by several years) the IHO. But again, while those are all well and good, you would get more housing if you upzoned and lessened your (frankly archaic) development standards and imposed no IHO requirement or fee. So there is no “do no harm” scenario; only a “do less harm than good” scenario. But when both the harm inflicted by the IHO and the good done by these potential reforms are difficult to quantify, “less harm than good” is almost impossible to guarantee. The City Council should feel anxious about that.

Which brings me to my last thought…

Why, again, is the HCD requiring us to adopt a policy it knows is a disincentive to the construction of housing?

Back when the City first started discussing the IHO in earnest, I pointed out that the “requirement” that the City adopt an IHO seemed to have been slipped in by Staff after the City Council adopted the final draft of our Housing Element, and that the claim was that the State made it a condition of providing preliminary approval of that document. Well, now I think it would be good to have some clarity around this point before the City Council votes on adopting an IHO that seems to be making some — maybe even most — of them a little queasy.

So I’ve taken the initiative and asked the Staff to clarify this point directly. Because as important as determining the source of the requirement is, I think it is also important to understand if any conditions were placed on this requirement. Last night, Mayor Pro Tem Jeff Harlan remarked, “I have come to the conclusion that the city has very little say in how housing gets developed and built… on the other hand, the city has a very strong finger on whether not anything actually get built. It’s easy for us to completely discourage housing.” If that is true (and I happen to agree with him that it is), why on Earth would HCD encourage a city to adopt a policy that has been used, in many other California jurisdictions, to do just that: completely discourage housing? It makes no sense, unless HCD put some guardrails around what we adopt. And we should hear what those were before the City Council votes.

My only guess is that, if HCD was the source of the requirement, it imposed it in the name of “affirmatively furthering fair housing” (AFFH) and specifically as a policy to help undo patterns of historical economic, racial and other demographic segregation in our housing pattern. If that turns out to be the case, then I think it’s time to have another discussion with HCD about whether an inclusionary housing ordinance in our circumstances actually would affirmatively further fair housing. HCD’s interest in inclusionary zoning from an AFFH standpoint is to encourage placing affordable housing in “high opportunity” zones within the city. But Measure K (and really Measure Y) exempts all of what I would consider “high opportunity” neighborhoods from building of any kind, meaning that inclusionary zoning will actually just concentrate what affordable housing we do produce on exactly the “low opportunity” (former commercial, former industrial) sites that AFFH seeks to avoid.

And thus the city finds itself caught yet again in the Chinese finger trap of California’s “Everything Bagel Liberalism” — by trying to do too much, such as both encourage housing production and righting so many historical wrongs, the State backs itself into the perverse position of forcing Costa Mesa to adopt a policy that will produce less housing than it would otherwise AND produce affordable housing exactly where the State doesn’t want it to go. So I hope we at least ask some questions about that before we try to also be everything to everyone, when in reality, we can’t accomplish that.