How to bust a housing boom and a housing boon: more on the DCP

I’m sure readers are trembling with anticipation after I ended my last post with this cliffhanger: aside from drastically reducing the advantage that residential development in downtown Santa Monica had over commercial development in terms of FAR, how otherwise would the Downtown Community Plan (DCP) discourage housing?

The answer in great part has to do with the higher “community benefits” burdens the DCP places on residential compared to commercial development. This disparity is most impactful with respect to affordable housing. While the whole of our society has failed to provide affordable housing for all income levels, it’s not a problem the whole of our society wants to solve. In particular, people who have housing tend to want future residents to pay for both their own housing and the housing of those who can’t afford market-rate housing.

In Santa Monica many residents want developers to pay for affordable housing out of their profits. They believe these developers, who are riding a boom fueled by low interest rates and high rents (a boom that, based on history, is sure to bust), are making too much money. (No surprise, but many of these same residents voted a few years ago against a small tax on the profits property owners (who already pay low taxes because of Prop. 13) will make when they sell their properties, the values of which have been inflated by the housing shortage.)

“Inclusionary” housing requirements can be a good thing, provided that they are not so onerous that they prevent housing of all income levels to be built. The housing market is fungible, and a shortage of housing for the majority of people who do not qualify for affordable housing inevitably drives up the cost of housing for all. This, in a vicious cycle, increases the number of people who qualify for affordable housing (because rents increase) even if they have full-time jobs.

Purportedly to increase affordable housing development, the City of Santa Monica has conducted “nexus” studies (required by the Supreme Court on constitutional grounds) and feasibility studies, to maximize how much affordable housing the City can make developers, both residential or commercial, either provide or subsidize. The burden is nearly 10 times higher on residential than on commercial development.

Under the DCP, a developer of a Tier 2 commercial building will be required to pay an “an affordable housing commercial linkage fee” equal to 23% above the base fee required under the City’s affordable housing production program. These fees currently range from just below $10 per square foot for retail or creative office to a little more than $11 for regular office. Add 23 percent, and you’re at about $13 per square foot.

As opposed to commercial development, the affordable housing burden placed on market rate housing is not expressed as a per-square-foot fee. Instead, it’s a requirement to build the housing, either onsite or, in limited circumstances, offsite. Depending upon the size of the project, between 15 and 25 percent of the units in a Tier 2 residential project must be affordable. How much does this cost?

The numbers are in an analysis that the City commissioned to show that housing development under the DCP would be financially feasible. The City’s consultants, HR&A Advisors, found that on a site where the height limit was 60 feet, a developer could build, on a typical 15,000 square foot, double-lot site, a project with 45 apartments in 48,571 gross square feet of development. (Under the old zoning I discussed in my last post, such a project would have nearly 60 units — so much for the DCP being a “housing plan.”)

For such a development, assuming the developer could find a suitable site within 500 feet, the developer could satisfy the affordable housing obligation by building 12 affordable units offsite. HR&A analyzed the project on that basis. According to HR&A, these units would cost the developer $5,964,121. Based on the project’s gross square footage of 48,571, that works out to about $122 per square foot of development. (I should note that developers have commissioned an analysis that says the costs are higher than HR&A says, but for these purposes I don’t need to get into that.)

So there it is: $122 vs. $13 per square foot. The affordable housing tax on a square foot of residential will be $109 per square foot more than that on commercial development, representing about 20 percent of the cost of development. To put it in other terms, the cost of affordable housing for a 1,300 square foot three-bedroom unit, the kind that the City says it so wants developers to build for the next generation of Santa Monica families, is $158,600.

What about that half-point of additional FAR, in HR&A’s example an additional 7,500 square feet, that the residential developer would get? Won’t that pay for everything?

Do you want to buy a bridge?

If the developer of HR&A’s prototype provided the affordable housing on-site, in which case the obligation would be for nine affordable units, the 7,500 gross square footage bonus would not even cover the floor area required for the affordable units, let alone be a source of profit. Leading to a question: why is the floor area for onsite affordable housing counted against the FAR limit? If the City wants to get affordable housing built, and wants developers to pay for it, the least it could do is not apply the affordable units against FAR limits (or, for that matter, maximum heights).

Possibly if the developer builds the affordable offsite, as modeled in the HR&A analysis, the profit from the 7,500 bonus square feet would compensate at least somewhat for the cost differential between residential and commercial, but the availability of suitable sites within 500 feet of a given project or, in fact, anywhere downtown, is so limited that it’s not worth running the numbers.

The lopsided burdens on residential development don’t end with affordable housing. The per-square foot parks fees charged on commercial development are magnitudes lower on a square foot basis than the per-unit parks fees charged on residential. Infill housing is well known as the most efficient development model for energy usage (codified as such by the state’s climate change laws), yet the City piles on transportation costs (an onsite shared bike requirement?). Infill multi-unit housing also provides for the most efficient use of water, but now the City is adding a new water conservation requirement and/or fee. (Water is a regional resource, yet the City fetishizes its local ground water, much of which, of course, comes from wells in Los Angeles. If it were serious about reducing water consumption, sooner than make it more difficult to build water-thrifty apartments and condos it would require homeowners to replace their lawns with drought-tolerant landscaping.)

I hope by now it’s evident that the DCP is far from being a “housing plan.” I fear it would bring Santa Monica back to where it was 25 years ago, when the courts found that the City’s policies unlawfully prevented housing from being built. I hope it doesn’t come to that.

This post also will end with a cliffhanger, for my next post: why is the City doing this?

Thanks for reading, and have a good Memorial Day weekend.

10 thoughts on “How to bust a housing boom and a housing boon: more on the DCP

  1. Pingback: New realities and housing policy in Santa Monica | The Healthy City Local

  2. Pingback: The DCP and the lingering impacts of the Great Recession | The Healthy City Local

  3. Based on your response Frank, should it be assumed that you are suggesting the cut-off number for SM residents is to match Hawthorne at +/- 13,500ppsm? Or are you saying inso far as Hawthorne has none of the daily density issues discussed that SM has, and as we far far exceed the +/- 13,500ppsm on a daily basis, that you want to see a reduction in our daily density. That would be a positive direction, and could be accomplished, slowly to be sure, by adaptive re-use of commercial office space as residential, reducing the daily workforce accordingly. As to the difficulty and uncomfortable discussion of population control, the only solution I can immediately think of is education. You can help by not advocating for unfettered growth.

    • Bob — I only brought up Hawthorne because you and your friends somehow think Santa Monica is uniquely dense. There are many other areas in the region that are more dense than Santa Monica — many of them are subsumed in the City of L.A.’s overall density — and none of them have Santa Monica’s resources. Certainly there are many places in the world that are quite pleasant where population and daytime densities are higher than in Santa Monica. Indeed, some of the most desirable areas w/in Santa Monica have much higher densities than the city’s average, such as mid-Wilshire and our own nabe, Ocean Park. More to the point, adding housing to Santa Monica does not increase the daily workforce coming into SM, or cut-through traffic, or visitors who drive into Santa Monica. It’s a solution more than a problem. Your continual calls for pro-housers to tell you what would be a maximum population for Santa Monica are, as I said in a column previously, “incoherent,” given the small amounts of increased housing that even the most optimistic of us can plan for over the next 20 years. In 20 years someone else can consider answering your question, but even by then Santa Monica will not be overbuilt.

  4. Bob, thanks for linking your piece. Sunlight is the best antiseptic and the more people who read SMart’s more recent pieces, the more it undercuts any support your group ever had.

    • Crawled out from under your rock have you? And for those who might find my comment antagonistic… this guy consistently blocks people as he is seemingly incapable of responsible discourse when challenged. The blocking in itself is not a bad thing, as he contributes little to nothing of whatever topic is at hand and merely gives relief to those that don’t have to see his dribble. And note that his post at this point, is only a pejorative, not a response to anything dealing with the subject. Back to the darkness Matute.

      • I’m going to ask you both not to make negative comments about the other’s perspective on my blog — keep negative comments to the content.

  5. Why is the City doing this? It doesn’t really want low income residents, but is delusional in its thinking that it is doing “the right thing.” It fears change, fears a loss of control. The result? No forward progress.

  6. And for some clarity on how additional affordable housing may actually come to pass, read the link below. But the larger question, never answered of course is, with the residential density of SM reaching 12,000/sq. mi, and the daily population reaching well over 40,000+/sq. mi in the downtown area, what is the targeted number that Frank and other pro over-development advocates advocate for? And, when that number is reached, what will their objections be then when they have to justify their position and tell people ‘sorry, no room here”. Clearly, if we can build 5 to 7 story buildings now, we can build 10 to 14 story buildings and up. Structurally that is a no brainer, and if we aren’t going to be concerned about sustainability now, when we still have a chance to have some semblance of control on water, waste and energy consumption, why would we worry about it down the road.Give us all some numbers Frank for when enough is enough.

    • I don’t know, Bob. How many children do you think our children should have? And let me know when Santa Monica’s population density at least gets to that of Hawthorne.

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