The DCP and the lingering impacts of the Great Recession

The question I ended my post with on Saturday was why would Santa Monica enact a Downtown Community Plan (DCP) that makes it easier to build commercial development than housing? Keep in mind that this is taking place during a local, regional and statewide housing crisis, and following a period of 30 years during which something like nine million square feet of commercial development were built in the city, but only a couple of thousand units of housing were built to house the many thousands of new employees.

But first, before getting into that, consider what’s happened in the rest of the city since the enactment of the LUCE in 2010 and the new zoning ordinance in 2015. That history gives a preview of what will happen downtown if the City Council enacts the DCP as currently drafted. The LUCE and the zoning also turn out to favor commercial development, and, sure enough, properties expected to be developed with housing in industrial areas and along the boulevards are instead being developed, or re-used, as one- or two-story commercial projects.

The two biggest examples are in the old industrial area. One is the “Pen Factory” being developed on the Paper Mate site. There the developer Hines had proposed to build 499 apartments to go along with 400,000 square feet of offices and other commercial development. This was too much office, and not enough housing for the big site, but Hines had followed the LUCE standards in developing its plan.

Council Member Kevin McKeown opposed the Hines project and supported the Residocracy referendum that ultimately killed it. He said that Hines would come back and negotiate a better project. McKeown’s intentions were sincere, and I had hoped that he’d be right, given that during the LUCE process he was one of the few who argued against planning staff that the LUCE’s development standards for the Bergamot area called for too much commercial development and not enough housing.

But after the City Council revoked the project’s approval, Hines didn’t renegotiate. They sold the project to new developers who are converting the factory into about 215,000 square feet of offices. Gone are 499 units of housing, along with all other benefits the City negotiated for, including new streets and a sidewalk on Olympic Boulevard. This fiasco would never have happened if the LUCE had not favored office development in the area in the first place—the developer would have had to build housing and would have planned accordingly.

Less well known, but equally a disaster, is what’s happening, or not happening, with the nearly three-acre property on the 2800 block of Colorado known as the Roberts Center. Under a development agreement that site was going to be developed with 231 housing units and only about 60,000 square feet of commercial. The project would have been coordinated with projects on either side of it so that, among other things, Pennsylvania Avenue could be extended through them, breaking up a super block, and helping traffic flow in the area. Now the property owner has abandoned the DA process and is simply rehabbing the existing buildings for new commercial uses. Again, no housing and no community benefits.

Since enactment of the zoning ordinance in 2015, the same thing is happening on the boulevards. Developers are downscaling and building commercial. Properties at Wilshire and Berkeley, and the old Jerry’s Liquor site, that were intended to be sites for apartments will instead become two-story mini-malls, featuring restaurants that will generate more traffic than the apartments would have. The developers needed no special approvals for these projects as they were subject only to administrative approval.

Downtown, where a few projects, under pre-DCP standards, are moving forward after City Council approvals, we can nonetheless see the future in the two-story commercial building recently completed at Fourth and Broadway. On this site there was going to be a mixed-use, primarily residential building, and a plan was approved. But when the developer had to change those plans, to add parking, the project came under new fees charged by the City. The developer opted to build a two-story commercial building, which was also only subject to administrative approval.

IMG_3794

The commercial building at 4th & Broadway built instead of housing.

The City, with the analysis from HR&A Advisors that I discussed in my previous post, has tried to show that housing development under the DCP will be feasible, but the City didn’t ask HR&A to compare the costs, risks, and profitability of residential development against those of commercial. Nor does the DCP take into account how few developers are willing to attempt developing housing in Santa Monica.

Housing development is not for the faint of heart. Two individuals, Craig Jones and Neil Shekhter, are responsible for most of the housing built in downtown Santa Monica over the past 20 years. It’s telling that they both ultimately got into trouble with their lenders. It’s a risky business. Unlike Jones and Shekhter, most developers and (especially) their lenders avoid risks. Given Silicon Beach there’s no risk now and plenty of gain in building one- and two-story retail and/or office buildings, which fly under Tier 1 and only need administrative approvals. It’s these projects that the DCP makes easy—precisely the projects that the rhetoric in the DCP says we don’t want.

So, back to my question, why have Santa Monica’s planners pushed a pro-commercial development plan for downtown? (By the way—I don’t doubt their sincerity. They believe they’ve come up with a “housing plan.” That’s part of what makes this so aggravating.)

It’s not simply a surrender by the planners to the don’t-change-anything crowd, although no one likes being yelled at. It’s true that the anti’s don’t want any more housing built, but housing is their target because housing is what has been primarily built since Santa Monica shut down major office development in the ’90s. (And hotels, but they don’t like them either.)

No, the reasons are deeper and go back to the City’s response to the Great Recession, and the disastrous final years of the LUCE process. Up until the recession hit in 2008 the LUCE was moving towards being a sensible plan that left the neighborhoods alone, continued the slowdown on office development, and concentrated considerable housing development in three commercial zones: downtown, the boulevards, and the old industrial areas near Bergamot Station.

But the recession created a financial crisis for the City. Suddenly I started noticing a big change in the City’s attitude towards the LUCE. The narrative was now all about how Santa Monica was a creative city, and our creative businesses were so important and wonderful, and how good it would be to have more of them. What do you know, but the planners started telling us that new development around Bergamot should be 60 percent commercial, mostly “creative office.”

Why this change? It was obvious, and not really hidden: residents cost the City money for the services they need, while commercial projects pay more taxes to the City than they consume in services. Imagine City Hall as a big cash register. Let L.A. build the housing along the Expo line, and provide the services. Santa Monica will provide the jobs and collect the taxes.

It was around then that the double FAR for housing downtown got thrown out. For five years the planners have been drafting this anti-housing DCP without explaining what was wrong with the old development standards and administrative approval processes that actually got a lot of housing built, creating the downtown they say they admire and want to build upon.

Thanks for reading.

 

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.

More on Santa Monica’s DCP: discretionary review and parking

As I’ve written in two recent posts, tomorrow night the Planning Commission will review the Santa Monica Downtown Community Plan (DCP). After staff makes revisions to the current draft, the City Council will review and presumably (one hopes) vote on the DCP next spring. There will be plenty more time to comment on the DCP, but there are still two issues I’d like to focus on now: discretionary review and parking.

Discretionary review. Since even before the start of the LUCE general plan updates in 2004, Santa Monica has become addicted to discretionary review of development projects. Since discretionary review complicates the approval of any project other than basic, by-right development, discretionary review encourages mediocrity. Not only that, but because by-right planning is typically car-based planning (because the basic standards evolved over the 20th Century to accommodate cars), by-right projects typically generate more driving than larger, but more thoughtfully designed, projects. (Meaning that more people drive to and from a basic retail box surrounded by parking than they do to and from a larger apartment building.)

Discretionary review, however, didn’t arise from bad intentions. The original purpose of discretionary review, aside from allowing more detailed design and environmental review of large projects, was to permit more ambitious projects, but to “tax” them by having them pay “community benefits” to reflect some of the value that developers received from community investment and compensate for costs that development might cause the community to bear.

Using discretionary review for these purposes channels the “Community Benefits Agreement” movement that social justice organizations like the Los Angeles Alliance for a New Economy (LAANE) have successfully promoted and implemented.

But for every yin there is a yang, and while the ultimate purpose of organizations like LAANE was to bring economic development to under-invested communities, anti-development elements in affluent communities latched onto discretionary review as a means for slowing, downsizing, or even stopping development by making development more costly and subject to delays, and riskier to the developer, who never could know for certain whether the project would be approved.

At which point discretionary review came to serve a third function, also negative. Policymakers and officials began to use discretionary review as a cover for not articulating definitive standards. They filled planning documents with rhetoric about, and pictures illustrating, general policies, but projects that would make those policies real were made subject, at ever-smaller thresholds, to discretionary review.

But then, cue the irony. In a healthy city like Santa Monica developers can make money if they can run the discretionary review gauntlet, and some developers here did so. Some projects were approved and some of them even got built. Yikes! The anti-development folks did a 180-degree turn, and suddenly what angered them most about the planning process was discretionary review. Now, they said, corrupt government officials were approving development agreements (DAs) without listening to the residents! (In fact, the officials had been too intimidated by the anti-development crowd to put real standards in their plans, and that’s why even routine projects required DAs.)

In Santa Monica this reversal, the attacks by anti-development groups on the development agreements they once championed, resulted in irrelevancy for the most important elements of the LUCE, namely, those dealing with the old industrial areas around Bergamot Station. It’s become clear that only by-right projects will proceed there, and any complicated projects, including for Bergamot Station itself, will be hopelessly tied up in “process.” Now the City is about to voluntarily do the same to downtown. The version of the DCP published in February was bad enough, requiring any development over 100,000 square feet to get a fully-discretionary DA, but now staff is suggesting that that threshold be reduced to 60,000 square feet.

So you wonder—what will it take for policymakers to realize that however they structure the process, with more review or less, the anti-development side is going to slam them if anything gets built? Why cater to them? They’ll get you coming or going. Why not try to develop zoning with definitive standards that equate to good projects (with good community benefits), so that 30 years from now the future residents of Santa Monica might look back and say that back then the wise were in charge (no doubt comparing them favorably to the policymakers of their day, who of course would be corrupt and stupid)?

Parking. Back in the ’60s, when Santa Monica was purportedly a sleepy beach town and/or leafy suburb run by the northern wing of the John Birch Society, the powers-that-be did something years ahead of their time. They created a shared parking district around what was then called the Third Street Mall. Property owners were assessed (taxed!) to build shared parking structures, and in turn were relieved of obligations to provide parking on site if they developed their properties.

Flash forward half a century, and in our “progressive” city, planners have come up with a downtown plan that is loaded with parking requirements, often calibrated for specific uses, meaning that a building’s future uses will be tied to its parking. This after the City has built shared parking at the main library and added more spaces in the parking district.

We’re told downtown is gridlocked. Then why require minimum amounts of parking? Readily available parking attracts drivers. Street parking downtown is not like in other neighborhoods, where residents need permit parking to make sure unrestricted spaces on the street are available to them. I don’t know of any streets downtown that don’t already have restrictions on street parking. Why should it be the City’s job to worry if future businesses or residents have enough parking? Let developers figure out if their tenants will need parking, and how much.

Furthermore, if parking is needed or desired, the City should not build and subsidize it. In fact, the City should open up zoning to allow private parties to build parking structures. If people need parking enough, they’ll pay enough to make it a business.

Santa Monica should expand the parking district to include all of downtown, eliminating parking requirements. Many cities around the country are doing this, as this map shows. Progressive Santa Monica is falling behind the curve.

Memo to Planning Commission: be bold. Ask staff to evaluate deleting all parking minimums in the DCP.

Thanks for reading.