Proposed changes to the Below Market Rate (BMR) Housing Program were first presented to City Council on October 8, 2002. Following discussions with members of the development community regarding economic viability and administrative procedures, Council requested that a study session be held on October 22, 2002 and continued the item to the November 12, 2002 City Council hearing.

Further review of the proposed changes during the October 22^nd study session revealed the need for more detailed economic analyses. Bay Area Economics (BAE), the consulting firm that recently conducted an inclusionary zoning study for San Jose, was hired to assist Staff with the necessary analyses.

Specifically, the scope of work included an assessment of the financial impact on developers resulting from: an increase from 10% to 15% of required BMR units; a decrease from 10 to 7-unit projects that are subject to the BMR requirement; and, the proposed sale prices and their effect on developer profit. BAE was also asked to facilitate two workshops with the development community and other interested stakeholders to gather their ideas and input on the proposed changes and BAE’s feasibility analyses. The workshops took place on November 22, 2002 and December 13, 2002. BAE subsequently produced a report (see Attachment 1) that incorporated input from the workshops with results of the feasibility analyses. The report was routed to interested members of the development community for comment prior to publication.

The results of BAE’s analyses show that:

• Given a profitability threshold of 10%, ownership projects ranging from small-lot single-family homes to high-density multifamily developments remain profitable when 15% of the units are below market rate;

• With the current vacancy rate for rental units at greater than 3%, multifamily rental projects will not be profitable if 15% of the units are below market rate (nor are they profitable in today's market without a BMR requirement).
• Projects with 7 units meet the profitability threshold of 10% when 15% of the units are below market rate.

Based on these findings and input from the development community, Staff is recommending the following:

1. Increase the percentage of BMR units required for ownership projects from 10% to 15%;
2. Maintain 10% BMR units required for rental projects until the rental market vacancy rate is 3% or less, and then require 15% BMR units;
3. Modify the number of units in exempt projects from less than 10 to less than 7;
4. Establish the initial BMR sale price of a purchase unit:

1. Based on the mortgage affordable to households at 80% area median income (AMI);
2. Allow consideration of a higher sale price based on the cost of construction (e.g. as determine from the RSMeans Residential Cost Data book or similar estimating data, or based on developer pro-forma) up to a maximum of 120% AMI;

5. Add condominium conversions to the types of residential development required to dedicate units;
6. Extend the deed restriction for purchase units from 20 years to 55 years;
7. Extend the deed restriction for rental units from 20 years to in perpetuity;
8. Revise the priority categories for future program participants;
9. Lower the income limits that qualify for rental units from 80% AMI or less to 70% AMI or less and for purchase units from 80% - 130% to 70% - 120%;
10. Annually calculate and publish the initial sale prices per number of bedrooms based on the area median income reported by HUD;
11. Limit the return to owners of BMR units to 1/3 Bay Area CPI; and,
12. Revise the rental increase method from the percentage increase in median income to the percentage increase in market rent or 5%, whichever is less.

Staff will also be revising the BMR program administrative procedures to improve the City’s ability to monitor and enforce program compliance. The revised ordinance and procedures will replace the requirements in Legislative Policies 2.3.3 and 2.3.7 (in Attachment 7). Staff recommends repeal of these policies.

In 1980, Sunnyvale adopted an Affordable Housing Ordinance, which can be found in Chapter 19.66 of the Sunnyvale Municipal Code. The Ordinance established the requirements of the BMR Housing Program. At the year 2000 Study Issues workshop, City Council directed Staff to explore options for affordable housing for teachers and City employees including a comprehensive review of the BMR Housing Program. More specifically, City Council requested that the review cover the availability of housing units, eligibility and housing preferences and the types of housing development offered in the Program. This was to be a two-year study to be brought to City Council in two phases for the 2002 calendar year.

Following two study sessions each with the Planning Commission and the Housing and Human Services Commission, the proposed changes were presented on September 23, 2002 at the Planning Commission Hearing and on September 25, 2002 at the Housing and Human Services Commission Hearing. The Housing and Human Services Commission concurred with Staff recommendations. The Planning Commission recommended several modifications to Staff recommendations as follows:

1. Increase the required percentage of BMR units to 12.5%;
2. Keep the existing requirement for exempt units at 9 units or fewer;
3. Keep the in-lieu fee for purchase units the same to be consistent with 9 units or fewer exempt;
4. Allow development of a point system to establish the priority assignment of BMR units, and establish categories based on professions rather than employers;
5. Set qualifying income limits for purchase units at 70% - 120% AMI (original Staff recommendation was 70% - 100%), and revise the new home sales price formula to reflect affordability; and,
6. Approve rent increases of 5% or the percentage increase in market rent in Sunnyvale, whichever is less; however, evaluate rent when tenants move out.

Item 5 has been incorporated into Staff recommendations. Since the Housing and Human Services Commission and the Planning Commission review, staff has worked with an economic consultant and the development community. Staff recommendations have changed slightly based on that feedback.

General Plan Goals, Policies and Actions related to this issue are listed below.

Goal C2: Ensure ownership and rental housing options in terms of style, size and density that are appropriate and contribute positively to the surrounding area.

Action C2.1.1 Ensure consistency with the City’s Housing and Community Revitalization Sub-element.

Goal A: Foster the expansion of the housing supply to provide greater opportunities for current and future residents given environmental, social, fiscal and land use constraints.

Goal B: Move toward a local balance of jobs and housing.

Goal D: Maintain diversity in tenure, type, size, location and cost-of-housing to permit a range of individual choice for all current residents and those expected to become city residents.

Goal E: Maintain and increase housing units affordable to households of all income levels and ages.

Goal I: Ensure compatibility of Federal, State, regional and countywide housing programs with local policies and needs.

The Consolidated Plan, which is required by the U.S. Department of Housing and Urban Development (HUD), establishes priorities, strategies and objectives designed to correspond with adopted goals from the Housing and Community Revitalization Sub-element. The following Consolidated Plan Objectives support the Housing Sub-element Goals and Policies listed above:

These Objectives are identified as high priority in the Consolidated Plan.

Existing BMR Regulations

The following regulations in the existing BMR Program will be affected by the proposed changes:

• 10% of units are dedicated to the BMR Program for residential developments of 10 or more units in all zones with the exception of R-0, R-1, R-1.5, R-1.7/PD;
• A deed restriction of 20 years for both purchase and rental units;
• Household income limits of low to moderate (80% - 130% AMI) for purchase units;
• Use of the percentage change in area median income to allow rent increases; and,
• Use of 100% of the Bay Area CPI as the index in the calculation for the resale price of purchase units.

As of the year 2000, the ratio of jobs to housing units in Sunnyvale was 2.37. There were 124,450 jobs (ABAG Projections 2002) and 72,756 employed residents (U.S. Census 2000), or 1.71 jobs per employed resident. Even if all employed residents living in Sunnyvale also worked in the City, nearly 42% of the people employed in Sunnyvale in 2000 would not live in the City. This large percentage and the high jobs-to-housing ratio are indicative of a housing shortage in Sunnyvale that has resulted in a dramatic increase in the cost of housing.

The 2002 median income for a family of four in Silicon Valley reported by HUD is $96,000. Attachment 3 contains a table showing average incomes in the Bay Area for a variety of occupations published in a June 2002 report by the Nonprofit Housing Association of Northern California. The salaries for these occupations range from 20.8% to 66.5% of Silicon Valley median income. Childcare workers make the lowest annual salary at $20,000 (20.8% of median) and registered nurses make the highest annual salary at $63,800 (66.5% of median). According to HUD income-limit definitions, all of the salaries listed in the table are considered to be low income (80% or less of median income). Half of the salaries listed are considered to be very low-income (50% or less of median income).

The BMR Program is one of the primary programs in Sunnyvale to address affordable housing needs of residents. Currently, there are 180 BMR purchase units and a total of 632 affordable rental units, some of which are part of the BMR Program and some that are part of other affordable housing programs. There are currently 279 people on the city's waiting list to purchase a BMR unit. Please note that this figure does not include the number of people waiting for a BMR rental unit because the waiting lists for rental units are kept and managed by the apartment property managers. To meet today’s demand for BMR purchase units, Sunnyvale would need a 34.4% increase in the supply of units. When the BMR Program was first implemented, the development community expressed concerns of difficulty complying. A density bonus was added to the Program to address their concerns. Based on the level of development activity since the inception of the Program, it should be noted that the BMR requirements appear not to have deterred residential development in the community.

The Housing and Community Revitalization Sub-element establishes affordable housing goals, which are required by State law. These goals include reduction of the jobs/housing ratio and provision of a variety of housing types at a range of prices. As part of the housing element law, the State of California has adopted a process for determining each local jurisdiction’s fair share of regional housing needs. Each city’s regional fair share is projected based on job growth and household growth for that city. The Association for Bay Area Governments (ABAG) has determined Sunnyvale’s regional share through 2006 to be an annual average of 511 units, 146 of which are needed for low and very-low income households (Housing Sub-element, p. 36).

Staff considered several factors when developing recommended revisions to the BMR Program:

• The Housing Sub-element requirement for supply of affordable housing;
• The jobs/housing ratio in Sunnyvale;
• The potential impact on housing development given cost constraints and land availability;
• Appropriateness of the income levels for current qualifying households;
• Demand for BMR units and wait list backlog;
• Maintenance of the affordability of existing purchase and rental units;
• Prior experiences administering the program; and,
• How Sunnyvale’s program compares to programs in other comparable (in terms of location, population and/or economy) California jurisdictions.

The BMR Programs of the other comparable California jurisdictions surveyed served as the benchmark for some of the recommendations, particularly for specific numbers such as the percentage of required units. Attachment 2 shows a comparison of the BMR Programs of other jurisdictions surveyed. In addition to information gathered to formulate staff recommendations, suggestions made during the September 5^th joint study session with the Planning Commission and the Housing and Human Services Commission and during subsequent sessions with developers and other stakeholders on October 22nd, November 22^nd and December 13^th have been considered.

RECOMMENDED REVISIONS TO THE ORDINANCE

Staff Recommendation: Increase the required percentage of BMR units for ownership projects from 10% to 15%; maintain 10% for rental projects while the vacancy rate is greater than 3%, and increase to 15% when the vacancy rate drops to 3% or less (as reported semi-annually in the Sunnyvale Vacancy and Rent Survey).

Staff Recommendation: Decrease the number of units for exempt projects from less than 10 to less than 7.

During the September 5^th joint study session with the Planning Commission and the Housing and Human Services Commission, a suggestion was made to exempt development of less than 7 units since 15% x 7 units = 1. The recommendation of less than 7 units meets the intended goal of capturing units in smaller housing developments while avoiding potential administrative complications associated with having to round up or down for a fraction of a unit. With this recommendation, Staff recommends monitoring the size of future developments to assess whether a lower number of exempt units is appropriate.

The purpose of the in-lieu fee is to offer an alternative to housing developers of smaller projects (less than 20 units) to provision of BMR units. The existing requirements in the code state that developments of not less than 10 and not more than 19 units or parcels may elect to pay an in-lieu fee.

Staff Recommendation: Change the code to read "not less than 7 and not more than 19 units or parcels" for consistency with the recommended number of exempt units.

The in-lieu fee was also reviewed to determine whether the formula should be changed. The fee should provide ample incentive for developers of smaller projects to provide BMR units while offering them an alternative should they choose not to do so.

The existing formula for purchase units multiplies the number of BMR units that would have been provided by the difference between the Fair Market Value and the BMR Price of the unit. The existing formula for rental units capitalizes the difference between the Market Rent and the BMR Rent over the current 20-year deed restriction period, using 100% of the Bay Area CPI as the index.

Staff Recommendation: Maintain the existing in-lieu fee formulae for both purchase and rental units, with the exception that the fee calculation for rental units be capitalized over 99 years rather than 20 years. This change would make the in-lieu fee calculation for rental units consistent with the recommended rental unit deed restriction of in perpetuity.

Staff Recommendation: Design a preference system based on points to establish the priority assigned to applicants of the BMR Program. The existing priority categories are broadly defined as: 1) persons who live or work in Sunnyvale, and 2) persons who do not live or work in Sunnyvale. A point system would more specifically establish priority to improve management of the wait list.

Staff is also recommending that the priority categories be defined in the code, but that the specifics of the point system be defined in the administrative policy guidelines for the program. The priority categories are as follows: school employees in the four school districts serving Sunnyvale, public employees in Sunnyvale, other employees in Sunnyvale and residents in Sunnyvale. Please note that these categories are not in priority order, as that will be established in the point system.

Staff Recommendation: Add condominium conversions to the existing required residential developments subject to BMR dedication. Given the limited opportunity for high-density residential development in Sunnyvale, this change will offer another much needed opportunity to add more BMR units.

In addition to condominium conversions, Staff evaluated Assisted Living Units and determined that the services provided with these units do not sufficiently fit the model for the BMR Program. These developments are subject to Use Permits, and a case by case analysis can be done to determine whether any of the units should be reserved for moderate or low-income persons.

In the October 8, 2002 report to Council, Staff recommended that Council adopt a study issue to evaluate the impact on development if single-family and mobile home Zoning Districts (R-0, R-1, R-1.5, R-1.7/PD) were required to dedicate BMR units. At the City Council study issue workshop in December 2002, Council dropped the study from further consideration.

Staff also recommended that Council adopt a study issue to modify the residential development standards to support the density bonus currently offered in the BMR Program. Council also voted not to pursue this study.

The 20-year deed restrictions of 14 BMR purchase units and 295 affordable rental units will expire by the year 2006.

Staff Recommendation: Increase the term limit for purchase units from 20 years to 55 years and the term limit for rental units from 20 years to perpetuity. This modification would not affect existing BMR owner or rental properties. The new limit for rental units would ensure that BMR units remain in the program, thereby increasing the supply of affordable rental units over time. These term limits are similar to those adopted in several local cities with BMR programs.

In the joint study session with the Planning Commission and the Housing and Human Services Commission, it was suggested that purchase units remain in the BMR Program in perpetuity. Staff has reviewed the suggestion, but has decided to recommend a term limit of 55 years so that future generations of families who remain in the unit for the term of the deed restriction have an opportunity to create wealth thereby improving their economic status. This fulfills one of the primary goals of affordable housing, which is to allow an opportunity for lower-income families to move up on the economic ladder.

These revisions would apply to both new units and units that are resold through the program.

The current calculation of rent targets households who are low income and uses 25% of gross income as the percentage of income dedicated for housing cost.

Staff Recommendation: Use 65% AMI and the HUD affordability guideline of 30% of gross income to calculate the BMR rent. This change will better serve lower-income households by lowering the percentage of median income upon which the rent is based.

Staff Recommendation: The rent increase shall be the lesser of 5% or the percentage increase in the average market rent as published in the semi-annual Sunnyvale Vacancy and Rent Survey. Percentage increase in median income has historically been used, but this has resulted in rent increases that have outpaced wage increases of the lower-income households that occupy BMR rental units. It has also resulted in allowable BMR rents at or above current market rents. A comparison of the existing and recommended rent increase methods is shown in Attachment 4.

This revision would apply to all existing rental units as well as future BMR units.

Staff Recommendation: Establish a minimum sale price affordable at 80% AMI, and allow consideration of higher sale prices up to a price affordable at 120% AMI through evaluation of the cost of construction.

This recommendation has been refined since the October 2002 staff report. Staff has clarified that a minimum sale price that is affordable to households at 80% AMI will meet or exceed a profit threshold of 10% for ownership projects requiring a 15% BMR unit dedication. Higher sale prices up to those affordable to households at 120% AMI will be calculated based on the current practice of using the developer-provided pro forma or a construction estimation manual such as RSMeans.

In addition, staff has recalculated the purchasing ability for the income groups using 30% of income and reserving 5.8 to 9.3% (varies according to sale price) for taxes and property insurance or homeowners dues (whichever applies). Sale price ranges and other housing cost estimates are shown on page 15 of Attachment 1.

The existing regulations have no provision for annually adjusting the sale price of BMR purchase units. Staff is recommending that the sale price range of new BMR purchase units (referred to as the initial sale price above) be reviewed annually to incorporate changes in the area median income, interest and tax rates, and insurance costs. The same formula using 80% AMI and 30% of gross monthly income for total housing costs would apply.

Staff Recommendation: Annually review the sale price range of new BMR purchase units to incorporate changes in area median income, interest and tax rates, and insurance costs.

This revision would apply to new BMR purchase units.

City Council previously requested that a provision to index the resale price of existing BMR purchase units be included as part of the overall Ordinance revision. Staff is recommending that the resale price be indexed using 1/3 of the Bay Area Consumer Price Index (CPI) for housing. HUD has recommended using this index in the HOME Program. The index is recommended for geographic regions that experience significant volatility in the real estate market, similar to Sunnyvale.

Other indices such as percentage change in median income and 50% of the Construction Industry Research Board Index (CIRB) were studied. The resulting percentage increases in the sale price of purchase units would not sufficiently control the long-term affordability of the units. Staff compared annual percentage increases from 1997 through 2002 for three indices: 1) median income; 2) 1/3 of the Bay Area CPI; and, 3) 50% of the CIRB (see Attachment 5). Application of 1/3 of the Bay Area CPI yields the least volatile results of the three indices, and will therefore better ensure that sale prices remain affordable to qualifying households.

Staff Recommendation: Replace 100% Bay Area CPI with 1/3 Bay Area CPI.

This revision would apply to resale homes with deed restrictions specifying these requirements.

This study issue is exempt from CEQA per Article 5, Section 15061(b)(3) where it can be seen with certainty that there is no possibility that the activity in question may have a significant effect on the environment.

There is no fiscal impact to the General Fund.

A study session with City Council was held on October 22, 2002. Several members of the development community attended. Following the study session, two workshops were held with the development community and other interested stakeholders on November 22, 2002 and December 13, 2002. 17 interested parties attended these workshops including 10 from the development community. The list of attendees is shown in Appendix A of BAE’s report. Staff has also held phone conversations or meetings with the development community members who requested them.

In addition, BAE distributed the draft report to members of the development community who attended the workshops, allowing them the opportunity to provide input before it was published.

Public contact for the Planning Commission, Housing and Human Services Commission and City Council hearings was made through an advertisement in The Sun, posting on the City’s official notice bulletin board and posting of the agenda and report on the City’s web page.

An initial presentation of the project and its status were presented to the Housing and Human Services Commission on June 26th. A subsequent informational meeting for interested parties (housing developers, apartment managers and the general public) was held on August 22^nd. Invitations were mailed to a list of 27 housing developers, and a meeting notice was published in the Sunnyvale newspaper, The Sun.. 10 people attended the meeting.

Staff presented the proposed revisions to the current BMR Program. Members of the development community expressed a general concern about profitability. One member of the rental property management community expressed concern with increasing the deed restriction of rental units to perpetuity due to the risk of having to support vacant units when qualified renters are not available. Participants made suggestions to modify the development standards to create incentives in addition to the density bonus, and to allow replacement BMR rental units when new tenants cannot be found for recently vacated designated units.

Following the August informational meeting, a joint study session with the Planning Commission and the Housing and Human Services Commission was held on September 5^th. One member of the public who had previously corresponded with Staff via e-mail (discussed below) attended this meeting to reiterate her concern with the percentage rent increase currently allowed for BMR units. Members of both Commissions commented on the proposed recommendations and offered several suggestions as follows:

• Require that exempt projects have less than 7 units;
• Reconsider a prior proposal to require that a fee be paid for small developments of less than 75% density due to a concern that this would deter development;
• Further evaluate the practicality for the inclusion of single-family residential Zoning Districts due to a concern with the higher cost of land for larger lot sizes in single-family residential zones;
• Consider using an index other than 1/3 of the Bay Area CPI, such as 2/3 of the Bay Area CPI, in the resale price formula to avoid resale prices that are less than the sale price of new BMR units and to offer occupants of purchase units higher return on investment; and,
• Require that BMR purchase units remain in the Program in perpetuity rather than 55 years.

Staff incorporated the first three items into the recommendations that were later made at the September 23^rd Planning Commission Hearing and the September 25^th Housing and Human Services Commission Hearing. Following a Staff review of the fourth item, it was determined that it would not be beneficial to the Program to have the resale price of older units be equivalent to the sales price of new units. Having different priced units should allow a broader range of the benefit population to be served. In addition, using the national standard of 1/3 of the CPI established by HUD and used in other housing programs will facilitate the administrative processes associated with resale of purchase units. Staff also considered the fifth item, which was discussed in detail under "Term Limits of Deed Restrictions" in the "Recommended Revisions" section of this report.

As previously noted, on September 23, 2002, the Planning Commission considered this study issue and made recommendations to City Council. Those recommendations are listed in the Alternatives section of this report.

Following the Planning Commission Hearing, this study issue was presented at the September 25^th Housing and Human Services Commission Hearing. The Commission concurred with all Staff recommendations. A comparison of staff recommendations, Planning Commission and Housing and Human Services Commission recommendations is shown in Attachment 11.

As previously noted, following the November 22^nd and December 13^th workshops and publication of BAE's feasibility analyses, staff refined the recommendations for percentage of BMR rental units required and sale price determination.

All public correspondence is included in Attachment 6.

A current occupant of a BMR rental unit submitted an e-mail expressing concern about the rent increase with her lease renewal, and asking for information on how the proposed changes will affect her current situation and future rent increases.

Several letters that discuss the concerns of the development community and other stakeholders were submitted to the Planning Commission and the City Council prior to the hearings that took place on September 23^rd and October 8^th, and for review in the October 22^nd City Council study session.

1. Repeal Legislative Policies 2.3.3 and 2.3.7 once revised ordinance becomes effective.
2. Approve the following revisions to the Below Market Rate Housing Program and adopt the changes in the Affordable Housing Ordinance (SMC Chapter 19.66):

1. Increase the required percentage of BMR units for ownership projects to 15%;
2. Maintain a requirement that 10% of units be dedicated as BMR for rental projects and increase the percentage to 15% when the vacancy rate drops to 3% or less as indicated on the semi-annual vacancy survey;
3. Allow projects of less than 7 units to be exempt from BMR Program requirements;
4. Add condominium conversions to the types of residential development required to dedicate units;
5. Revise the in-lieu fee to be consistent with exempt projects of less than 7 units and a rental unit deed restriction of perpetuity;
6. Extend the deed restriction for purchase units to 55 years;
7. Extend the deed restriction for rental units to perpetuity;
8. List priority categories for program participants based on a point system;
9. Lower the rental unit income limits to 70% AMI or less and the purchase unit income limits to 70% - 120% AMI;
10. Establish the minimum BMR sale price based on affordability for households at 80% AMI, and allow higher sale prices (maximum price affordable to households at 120% AMI) based on the estimated cost of construction;
11. Annually review the sale price range of new purchase units to adjust for changes in the area median income, interest and tax rates, and insurance costs.
12. Institute 1/3 Bay Area CPI as the indexing method to annually adjust the resale price of existing purchase units; and,
13. Revise the rent increase method to the lesser of 5% or the percentage increase in market rent in Sunnyvale.

3. Approve the recommendations in Alternative 2 with modifications.
   
4. Approve the Planning Commission recommendations, which are similar to Alternative 2 with the following modifications:

5. Approve the Planning Commission recommendations with modifications.
6. Do not approve revisions to the Below Market Rate Housing Program.

Staff recommends Alternative 1 and Alternative 2, which includes the introduction of an ordinance.

Prepared by:
Christine Cannizzo
Project Planner

Reviewed by:
Trudi Ryan
Planning Officer 

Annabel Yurutucu
Housing Officer 

Robert J. Paternoster
Director, Community Development Department

Approved by: 
Robert S. LaSala
City Manager