May 9, 2006

SUBJECT:       2004-0167 - City of Sunnyvale Study Issue – Zoning Tools to Encourage the Development of Ownership Housing - This study examines modifications to the Zoning Code that would facilitate the conversion to, and development of, ownership housing while still maintaining protection to tenants that could potentially be displaced.  

REPORT IN BRIEF

The City of Sunnyvale has a long history of addressing the housing needs of the community. It has attempted to maintain a variety of housing by: 1) type; 2) ownership opportunity (for sale or rental); and, 3) price. In the mid-1980’s, community concern focused on housing affordability, and City Council took steps to protect against widespread condominium conversion and considered steps to encourage construction of rental housing. A below market rate (BMR) housing program was created to address affordability in both rental and for-sale housing projects, one of the first such programs in the country.

Since the 1980’s, a significant amount of apartment development has taken place, and, until recently, less for-sale housing has been built. Over the last 20 years, the homeownership rate in Sunnyvale has decreased from 51% to 48%. As a result, community interest has shifted to for-sale housing and a concern that a proper balance be maintained between rental and ownership housing. This study issue was initiated to address that concern.

This report considers the appropriate balance between ownership and rental housing, and suggests that 50% may be the balance that the community finds acceptable. It then identifies 45 potential options for encouraging homeownership, within the following categories:

• Options to encourage construction of single-family detached housing
• Options to encourage townhome construction
• Options to encourage construction of condominium flats
• Options to discourage owners from leasing their homes to renters
• Options to encourage condominium conversion

Staff and Planning Commission recommend that City Council approve 15 (in some form) of the 45 options, and adopt an ordinance to amend the zoning code to implement them. The recommended options would generally streamline processing and increase predictability for developers of single-family detached housing and townhomes, and would remove obstacles to condominium conversion, while still maintaining a stock of rental housing.

BACKGROUND

Since the early 1980s the City of Sunnyvale has taken a leadership role in adopting policies that encourage the development of housing. These policies have included making more land available for housing development, preserving affordable housing, requiring the development of affordable housing in all new development, and offering both education and financing programs to potential homeowners.

1.      The City initiated General Plan amendments to change land use designations from Industrial to Residential. Since 1980, about 900 acres of land were re-designated resulting in about 11,000 housing units.

·         Mary/California

·         Southern Pacific

·         El Camino Real

·         Mobile Home Park General Plan Designation

·         Futures Study

2.      The City enacted the Conversion of Rental Housing to Community Housing Projects (Sunnyvale Municipal Code Chapter 19.70) in 1982 to maintain an adequate supply of rental housing for low and moderate income residents. The main components of the regulations include:

1)     Restrictions on converting rental property during periods when rental vacancy rates are low,

2)     Regulations for bringing existing apartments into compliance with building standards for condominium conversions, and

3)     Regulations related to tenant (and buyer) protection and relocation assistance.

3.      The Below Market Rate (BMR) housing requirements (Inclusionary Zoning) were adopted in 1980 and require that a certain percent of new housing units be reserved as affordable to Low or Moderate income households. The original rate was 10%; however this was updated in 2003. The current rate for ownership projects is 12.5%; rental project rates are still 10% and will be 15% when rents recover. The 2003 amendments also require that condominium conversion projects designate 12.5% of the units as BMR units.

4.      Zoning requirements for apartment developments were modified in the early 1990s to “equalize” the requirements of ownership and apartment developments. Prior to this time park dedication was only required of subdivisions (ownership developments) and parking requirements were based on type of ownership. Both of these provisions were modified so that now all new residential developments have a requirement to dedicate park land (or contribute to the park dedication in-lieu fee fund) and to provide parking based on number of bedrooms and type of parking, not tenure of units.

5.      The First Time Homebuyer Support Program provides education, readiness training and down payment assistance to potential homebuyers.

6.      Housing for Public and School District Employees and Childcare Teachers, assists qualified employees and teachers in obtaining housing by providing education, loans and down payment assistance.

7.      Housing Mitigation fees are required for industrial developments over specified Floor Area Ratios (typically 35% FAR). These mitigation fees are used for implementation of affordable housing programs in the City and currently include acquisition and preservation of rental housing projects and assistance to homebuyers.

8.      Financial support is provided to non-profit agencies for the construction of affordable projects. Through the CDBG and HOME fund programs, and the housing mitigation (including the BMR in-lieu) fund, the City financially supports the construction and renovation of affordable housing.  The City has also contributed to the Housing Trust Fund of Santa Clara County which leverages funding for multi-family rental housing and home ownership programs.

In the mid-1980s, due to concerns about condominium conversions and available affordable housing for all segments of the community, the Council suggested a study issue that would explore apartment-only zoning districts. This study was never selected or ranked based on a concern of the legality of specifying tenure of housing units (The term “tenure” refers to the “holding of property” and includes several forms of rental and several forms of ownership. The U.S. Census uses the term to distinguish owner occupied and renter occupied housing units, which is how the term is applied in the remainder of this report). State statutes and case law prohibit or discourage tenure-based zoning requirements.

Since the 1980’s there has been significant apartment construction in Sunnyvale, but, until lately, less for-sale housing construction. In 2003, the Community Development Department prepared a Community Development Strategy to give direction to the Department’s work program over the subsequent five years. During the research phase of the study, the decline in the rate of ownership in the city was documented as follows:

Year	Sunnyvale Homeownership Rate
1980	51.0%
1990	48.9%
2000	47.6%

The rate of home ownership in Sunnyvale is now lower than the national, state and Santa Clara County averages:

According to the 2000 Census, neighboring cities have a variety of homeownership rates:

As part of the data collection and analysis for the Community Development Strategy staff noted those areas of the city with lower rates of homeownership tended to have more property maintenance issues, and that areas with higher rates of homeownership tended to have a greater investment by residents in the neighborhood. As a result of the above research and observations, staff recommended, and the City Council adopted, a goal to encourage households to invest in the city and its neighborhoods through homeownership.

The Zoning Tools to Encourage the Development of Ownership Housing study issue was originally ranked 7 of 12 by the City Council for 2004 but was deferred by Council until 2005/2006 in order to undertake study issues related to auto dealer signage (Attachment A).

EXISTING POLICY

General Plan Policy

The City adopted its first General Plan in 1957, and has continually updated it to reflect changing community values. The General Plan provides long-term broad-based goals and policies to guide the development of the community.

Land use and Transportation Element

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.

Policy C2.1   Provide land use categories for and maintenance of a variety of residential densities to offer existing and future residents of all income levels, age groups and special needs sufficient opportunities and choices for locating in the community.

Policy C2.2   Encourage the development of ownership housing to maintain a majority of housing in the city for ownership choice.

Policy C2.3   Maintain lower density residential development areas where feasible.

Housing and Community Revitalization Sub-Element

GOAL D:  MAINTAIN DIVERSITY IN TENURE, TYPE, SIZE, AND LOCATION AND OF HOUSING TO PERMIT A RANGE OF INDIVIDUAL CHOICES FOR ALL CURRENT RESIDENTS AND THOSE EXPECTED TO BECOME CITY RESIDENTS.

Policy D.4   Provide a mixture of owner and rental housing opportunities by allowing conversion from apartments to condominiums or cooperatives when a benefit to the overall city housing situation can be shown and when the citywide vacancy rate for rental units warrants.

Action Statement D.4.a   Continue the Condominium Conversion regulations that provide a system for evaluating condominium and cooperative conversion proposals.

Other General Plan policies relating to the provision of housing and the provision of ownership housing are included in Attachment C.

Zoning Code

The pertinent zoning policy for this study is drawn from the Zoning Code land use tables, development standards (height, setback, bulk, parking, etc.), affordable housing provisions, condominium conversion requirements, and land use development processes. Relevant policy is also found in the City-wide design guidelines (Attachment C). The following sections of the Zoning Code (found in Attachment D) may be considered for revision in this study:

1)     Chapters 19.16 through 19.34 for Zoning Districts, Uses and Related Development Regulations,

2)     Chapters 19.38 through 19.60 for General Development Standards, and

3)     Chapter 19.70 for Conversion of Rental Housing to Community Housing Projects requirements (see below).

Condominium Conversion Requirements

The City’s existing conversion policy (Conversion of Rental Housing to Community Housing Projects), as listed under Chapter 19.70, establishes process review requirements, and extends protection measures to both current tenants and potential buyers.  The Code sections are summarized below, and the full Code is in Attachment B.

Apartment Vacancy Surplus Required for Conversion (19.70.020, 19.70.030)

No permit shall be issued for conversion of any apartment building unless the vacancy rate (as determined for the entire city) has exceeded 3.0% for at least one year prior to the application.  Twice a year (in April and October), the Director of Community Development determines the apartment vacancy rate and apartment vacancy surplus based on a survey of a representative sampling of apartments.

Use Permits and Special Development Permits (19.70.040)

a.      Approval through a Use Permit or Special Development Permit process is required prior to the conversion.

b.      When a surplus exists, condominium conversion applications may be filed annually in May and November.

c.      When more than one application is filed and approval will result in the vacancy rate being exceeded, the City Council determines which application will be approved based on a composite score (outlined in 19.70.060).

d.      Applications require information on the tenants, units (including building and pest reports), and proposed sale price.

Minimum Requirements to Protect Tenants and Buyers (19.70.050)

a.      Prohibition of discrimination against prospective buyers with children.

b.      Tenant Protections, including first right to purchase, permission to terminate lease, brief extension of tenancy, and limited relocation expenses.

c.      Buyer Protections, including copies of property report, building history report, pest report, Use Permit (or SDP), and Statement of Compliance with California Real Estate Department requirements.

d.      Site Improvements and amenities, including:

1)     Minimum 300 cubic feet weatherproof, lockable storage;

2)     Individual hookups for washing machines and dryers (unless common facilities) and new appliances;

3)     All existing and proposed utilities (including communications) placed underground per SMC 19.38;

4)     Off-street parking provided per SMC 19.46;

5)     Compliance with Fire and Building requirements, including installation of smoke detectors, and compliance of wall & floor/ceiling assemblies with Uniform Building Code and noise/vibration requirements.

6)     Utility distribution system, including separate metering and billing of gas and electric.

7)     Utility Safety Devices, including accessible electric panels, and accessible water shut-off values for all outlets.

8)     Insulation of appliances determined to be a source of noise or vibration; and

9)     Guarantee of all major appliances for at least one year.

e.      Compliance with all other Codes relating to health and safety but not previously addressed.

Evaluation of Projects and Application Scoring (19.70.060)

1. In addition to meeting the SMC 19.70.050 requirements, all applications shall be evaluated for impact on the housing market.
2. Provides a means of ranking competing applications submitted at the same time.
3. Scoring criteria to determine mitigation of social and economic impacts to existing tenant and prospective buyers.
4. Scoring of additional project amenities.

Certificate of Use and Occupancy for Community Housing Project (19.70.070)

Certificate required for all conversions prior to the sale, lease, use or occupancy of a project.

Community Development Strategy

In 2003 staff presented proposed goals for the Community Development Strategy to the City Council. These goals, as modified and adopted by the City Council, included:

Homeownership: to encourage households to invest in the City and its neighborhoods through homeownership.

California State Regulations

In 1985, the State Legislature passed the Ellis Act, which prohibits cities from compelling the owner of residential rental property to retain it as rental property.  However, both the Ellis Act and the Subdivision Map Act allow cities to continue regulating the process of converting property from rental to ownership through the enactment of condominium conversion ordinances.  Process controls may include restrictions on the timing and quantity of apartment conversions. The vacancy rate restriction in the Sunnyvale regulations controls the timing (i.e., it is appropriate to convert when the vacancy rate is above 3%).

DISCUSSION

City policy supports the goal of homeownership as one housing option. The intent of the goal is to encourage households to make longer term social and financial investments in their neighborhoods and community.

City policy also supports the availability of rental housing, primarily to ensure that households that cannot afford to buy a house (or chose not to buy a house) have the opportunity to live in decent shelter which they can afford. In fact, as pointed out earlier, in the mid-1980s, the City Council considered a study issue to explore the creation of apartment-only districts in order to encourage construction of more rental housing.

This study, therefore, first considers two questions:

1.       What are the legal parameters affecting homeownership?

2.       What is the appropriate balance between owner and rental housing in Sunnyvale?

Legal Parameters

It is a well-settled principle that cities may not enact legislation that prohibits homeowners from renting their properties.  California courts have invalidated local ordinances that have attempted to restrict occupancy to owners only.  These types of restrictions are deemed unconstitutional on privacy and equal protection grounds.

Based on staff’s research, some Homeowners Associations (HOA) have imposed a maximum allowable percentage of rental units in a residential complex, with the burden of enforcement falling on the HOA.  Since this agreement is between two private parties, namely the HOA and the homeowner, the City is not at risk since there is no governmental action.  However, case law has not yet clearly established whether or not these HOA residency clauses are enforceable as a reasonable restriction on property.

Cities typically establish owner-occupancy requirements in their Below Market Rate (BMR) and other low-income housing programs.  There is precedent that allows cities to require owner-occupancy in low income housing programs due to the governmental benefits bestowed upon participants that are not available to the general public. 

As a general matter, courts are highly deferential to zoning laws enacted by cities.  Therefore, it is legal for a community to express a goal for increased home ownership in the community as long as that policy is reasonably related to the public welfare.  Consistent with their police power, cities may extend reasonable incentives to types of housing (such as townhomes) that have a higher propensity to be owner-occupied.

Appropriate Balance of Ownership and Rental

Ultimately, the appropriate balance of ownership and rental housing is a policy decision for the City Council, subject to legal guidelines. The percent of owner occupied vs. rented housing has decreased over the last three decades due to increased number of apartment units built and a general trend in the region for property owners to acquire housing as an investment (renting out the units). Staff has reviewed historical data and determined:

• In 1980 the homeownership rate was 51.0%. In 1985 the sentiment of the community, as expressed by City Council (e.g., exploring an apartment-only zoning district), was that more apartments were needed to provide adequate affordable housing.

• In 1997, the City Council adopted a policy to encourage opportunities for homeownership (Land Use and Transportation Element). In 2003, through the CD Strategy, the Council reiterated the goal of increasing homeownership. In 2000, the homeownership rate was about 47.6%.

• An ownership rate between the two rates of 47.6% and 51.0% for the two types of tenure may be appropriate. The average of these two rates is 49.3%; however, based on the policy to maintain a majority of housing for ownership choice and acknowledging that some of these housing units will be rented, staff has concluded that an equal balance of ownership and rental units is reasonable for Sunnyvale, subject to City Council confirmation.

To assure that the owner occupancy rate reaches 50%, the opportunity for ownership housing would have to be higher than 50% because homeowners have the right to lease their property to another household.

Staff estimates that approximately 1,500 housing units are currently approved or under construction, of which 90% are ownership opportunities. These additional housing units will result in an increase in the ownership opportunity. Using a similar rate of ownership by housing type, staff estimates that an actual ownership rate of 48.4% will be achieved when these housing units are completed and occupied.

The current real estate market favors construction of ownership units, and it appears that Sunnyvale is on its way toward achieving a 50/50 balance of rental and ownership units. This market, however, is not likely to continue forever. As interest rates rise, and as apartment occupancy and rents increase, the market will gradually shift from owner to rental housing. The real estate market is the strongest determinant of which type of housing will be developed. When the market achieves a balance between favoring for-sale and favoring rental construction, City regulations could tip the balance to favor one type over the other. It is the purpose of this study to determine what changes to the City’s zoning regulations might encourage construction of ownership housing.

Encouraging Construction of Housing Most Likely to be Owner Occupied

Staff evaluated various types of housing to assess rate of owner occupancy and zoning regulations that may contribute to their construction. Following are the various types of housing and the zoning code definition.

For purposes of clarity, staff also provides this definition:

The following table indicates the approximate current rate of owner-occupied units in Sunnyvale, in descending order.

Staff has evaluated these housing unit types and is suggesting zoning tools that could affect the decision to construct ownership units.

Mobile Homes:

The mobile home owner occupancy rate is particularly high because most of the mobile home parks in Sunnyvale require owners to occupy their units.

Sunnyvale has 17 mobile home parks, consisting of about 400 acres and about 3500 mobile homes. Because mobile home parks require large tracts of relatively low-priced land, it is unlikely that new parks will be built. Section 19.72 of the Municipal Code contains provisions intended to preserve existing parks and protect their residents. Staff offers no additional options to encourage mobile home park construction and preservation.

Single-family Detached Housing:

The most direct way to encourage homeownership would be to rezone large areas of the city for single-family detached housing. The only large vacant residential site, the Corn Palace on Lawrence Expressway, is already zoned for single-family development (R-0/PD and R-1.5/PD). The rezoning of any other large areas in the city to single-family detached zoning districts would require a “downzoning” from a higher density or more intensive use category.

Another option is to encourage single-family housing on in-fill sites as they redevelop. Infill ownership housing has recently been built in several instances:

·         The Church site on Mary at Iowa, originally zoned R-0, was rezoned to R-2 to construct 34 single-family homes.

·         The Mary Avenue Shopping Center on Mary at Washington, originally zoned C-1, was partially rezoned to R-1.7/PD to construct 31 single-family homes.

·         The Sunnyvale Nursery site on Sunnyvale-Saratoga Road near Cheyenne, was zoned R-2-PD and was approved for 25 single-family homes.

·         Numerous small (e.g., 4-unit subdivisions) sites formerly developed with one single-family unit or duplex.

In each of the above instances, the previous use and zoning of the site was such that a developer could purchase the land and make a profit building housing at densities at the low-medium density range (8-14 dwelling units per acre). In each instance, deviations, as authorized by the zoning code, were granted to achieve the density and to provide single-family detached housing. The fact that deviations were necessary increased the risk for the developers, because they had to invest considerable time and money before knowing if they could achieve the number and size of units which would make their projects profitable.

With only one exception that staff is aware of, single-family detached development has only been built on sites zoned R-2 or lower density. The number of potential infill sites already zoned R-2 or lower which can economically redevelop into single-family dwellings is limited (less than 50 sites). Other potential residential sites, including most of those in the Industrial-to-Residential areas, are zoned for R-3 or higher density (R-3 allows medium density or 15-27 dwelling units per acre).

Listed in the following table are possible tools to make single-family development more likely. Those designated with an asterisk (*) were suggested by housing developers.

Options to Encourage Construction of Single-family Detached Housing