HomeMy WebLinkAbout2016-06-21 Finance Committee Summary MinutesSpecial Meeting
Tuesday, June 21, 2016
Chairperson Filseth called the meeting to order at 7:04 P.M. in the Community Meeting Room, 250 Hamilton Avenue, Palo Alto, California.
Present: Filseth (Chair), Holman arrived at 7:38 P.M., Schmid, Wolbach
Absent:
Oral Communications
Chair Filseth: With that, first order will be Oral Communications, so is there anybody in the public who would like to speak before the Agenda? There are no public speakers for the agenda,
so with that we will move to Action Item one. Please proceed.
Action Items
Third Quarter FY 2016 Financial Report.
David Ramberg, Assistant Director of Administrative Services: Good evening Chair Filseth and members of the Finance Committee. My name is David Ramberg, I’m the Assistant Director of
Administrative Services Department. Item number one tonight is the third quarter financial report, so we’ll begin with that. The first, I’m walking through the presentation you guys
have before you, so Slide 2 is an overview slide and then we will get into more detail. For the Fiscal Year 2016, third quarter year-to-date General Fund view of things, on the revenue
side, revenues are up about seven percent from this time in our prior year. As a result of that, we are looking to expect by year end, a $6 million to $7 million surplus, and this is
driven primarily by a number of our big property, our big tax items, property tax, transient occupancy tax and the Utility User Tax (UUT) as well as a one-time item for the sale of the
former City Manager house, and we’ll go into the details and those are all detailed in the Staff Report as well. On the expense side, we have expenses at about 68 percent right now of
adjusted budget, which is tracking about normal. The next several slides we are going to get into a little bit more detail, and for that I’m going to turn it over to Laura.
Laura Kuryk, Accounting Manager: Good afternoon Council Members. I’m Laura Kuryk, Accounting Manager. So to continue on with David’s information, if we look at Slide 3 we have some highlights
on the revenue side. Property tax is up eight percent over the same period for the prior year through the first nine months of the year. Sales tax is basically flat after we adjust for
some timing differences. Transient occupancy tax is up 47 percent, a huge increase due to newly opened hotels. Documentary transfer tax is down slightly, $4.7 million down to $3.8. Utility
User Tax is up slightly, eight percent, from prior year. If you look at the comparison of where we are year-to-date compared to budget, Property Tax is at 62 percent, Sales Tax 64, Transient
Occupancy Tax 63, Documentary Transfer Tax 55, and UUT is at 83 percent of budget year-to-date. Next slide, for the General Fund on the expense side, we are tracking at about 68 percent
of our budgeted expenses through the first nine months. Typically we use a benchmark of like 75 percent, since we’re three-quarters of the way through the year, so overall we’re at slightly
less than that. If you look at the detail on Packet Page 8, you’ll see the expenses for major departments and pretty much they’re all tracking at below 75 percent. On the Public Safety
side, currently overtime is over budget slightly for the Fire Department and right at budget for Police, but that’s through the first nine months. So while overtime is over budget, salaries
are under budget, both being driven by vacancies, so on a combined basis, if you look at them in total, they’re well within the budget at 73 percent. Next slide is Slide 5, the budget
stabilization reserve. So as of the mid-year budget, we had projected a Budget Stabilization Reserve (BSR) balance of $36.9 million. This was updated in April, just recently here, and
we added another $3.5 million. Then it was revised upwards again in June, for $1.270 million, so at this time, based on the information we have right now, we are projecting we will end
the year with $41.7 million, or 22.5 percent BSR balance. On the enterprise side, the revenues are all right in line with annual budget. In total we’re at 73 percent of the annual budget.
Rate increases for most of the utilities are going into effect July of 2016. And on the expense side, we’re also tracking at 64 percent of annual budget, so revenues pretty much at the,
what you would expect for the three-quarter level, and expenses slightly below where we would expect to be. So with that we will open it up for questions or further comments.
Lalo Perez, Chief Financial Officer: I was going to add a couple of points quickly here, just to give you a little more information on some of the tax revenues. I think we told you at
the beginning of June we got an update from the County on the property tax and so we have a little more detail as to what transpired. So the returns were a little better than expected.
In addition, they revised their assessment review request, so they make an assumption that they are going to have, for example, the number they had this year was $30 million in revisions
downward for assessment review, and it’s actually more in the $20 million range, so that’s one of the reasons there is an additional tax amount coming out from the year. On the hotel
side, just to remind you, I think I mentioned this the last time we talked, we are doing better than expected with our B&B returns, and in addition we started receiving revenue from
the on-line hotel reservations, your Expedia, Hot Wire and so on. So we expect to have that continue. As a result, we believe that refreshing our Ordinance that took affect back in January,
so the on-line services sent us the revenues going back to January 15, to meet their legal obligation of the new requirement. So that’s part of what’s driving some of these numbers,
as well as the volume. We just had graduations from high schools and Stanford, so I’m sure the hotels were really busy and, hopefully, our restaurants too, so we might have even better
than expected numbers.
Chair Filseth: How much is the total from the on-line?
Mr. Perez: I’ll give you a range, because we can’t specifically talk to it, but combined it can be anywhere from $600,000 to $1.5. It’s been steadily growing.
Council Member Wolbach: Can I ask a quick follow up on that?
Chair Filseth: Please.
Council Member Wolbach: When you say the combined, do you mean the combination of the AirBnB and hotel on-line reservations?
Mr. Perez: Yes. That’s it.
Council Member Wolbach: I’m sorry, what was the range again?
Mr. Perez: $600,000 to a $1.5 million. I know it’s a wide range, but it’s in its infancy, so if you will, for the on-line and AirBnB, we have probably about a year now and it’s been
steadily growing.
Council Member Wolbach: Thanks.
Chair Filseth: Still, it’s a noticeable percentage, it’s a few percentage points.
Mr. Perez: Yes, and you know, the concern we had is, is it taking away from the other hotels, and what we’re seeing is there’s a slight drop in the occupancy, but there’s an increase
on the average night as well, so it offsets, it’s not impacting it at this point.
Chair Filseth: From the Claremont or whatever it is down there? When did we start getting, when did the 14 percent Transient Occupancy Tax (TOT) go into effect?
Mr. Perez: January of ’15.
Chair Filseth: January of ’15. Okay, so we only have a half a year, or a little less of fiscal year ’15? So we’re seeing, some of the bump we’re seeing is a whole year of…
Mr. Perez: Exactly. We are doing much better than we projected, and it’s kind of hard to guess at this point, so that’s why we would at least like to have a year, and that’s why I’m
giving you a wide range, because you know, let’s see how it really pans out.
Chair Filseth: Greg?
Council Member Schmid: Yeah, just a couple of quick questions, going through the numbers. On the General Fund Revenues, you mentioned the taxes were up substantially and yet on the,
Page 2, the chart shows total general fund revenues up zero percent, but adjustments accounting for the whole thing. That doesn’t sound like a good solid tax increase.
Ms. Kuryk: So what we’re seeing there is the raw numbers are up zero percent, but we have to account for some timing differences, so for example, on the charges for services appears
to be down 24 percent, from $18 million down to $13 million, but the fact of the matter is that that’s because of the timing of our invoicing to the Stanford Fire Department, so that’s
why we’ve made that timing adjustment of $3 million 765.
Council Member Schmid: Yeah, but the sales tax revenue is down and part of that seems to be a one-time adjustment for 2015, so that doesn’t forecast a bright future.
Mr. Perez: Yeah, I think we’re probably pretty flat with the adjustments. The concern we have, you know, business-to-business is still doing well, restaurants are still doing well, retail
is a concern, and part of it is the shift that we as a society are making, going more on line than brick and mortar.
Council Member Schmid: Yeah, so looking at the next year, we should be careful with the forecast.
Mr. Perez: Yeah, and you know, it’s definitely a concern of ours and, you know, you guys know we tend to be conservative as a result, because we don’t want us to commit funds thinking
that there is some revenue that’s going to come in that doesn’t materialize, and then have crisis reductions.
Council Member Schmid: Well, you always make our June sunny. On the expense chart on Page 6, you mentioned we are at 68 percent instead of 74, 75 percent, and some of those numbers are
striking. Community Services, Development Services go way down, and Planning, which I’m surprised at Planning because I thought they were very, very busy. I know they have had some turnover,
but I’m surprised at 61, 58 percent.
Mr. Perez: Yeah, but this doesn’t show you, and correct me here Laura, if I step out of proper statement here, is what we encumbered, so in other words, this is showing you what we spent,
but we may have a contract. Let’s pick on Planning since they’re here and you mention them, they may have a $500,000 contract for some consultant and to date they might have spent $200,000,
so there’s another $300,000 to be spent and that’s work in progress so it’s going to be spent. So it’s a timing issue of that. So that’s the thing that we don’t reflect here, what has
been encumbered for that particular work.
Council Member Schmid: Although I assume a lot of those things will be carried over into August and…
Mr. Perez: Yes, because they may not spend the whole $300,000. They may spend another $100,000 out of that, so some of that is timing for all of us here. Community Services is getting
ready for, you know, at this point in time maybe they haven’t made all the expenditures for their spring and summer programs and activities.
Council Member Schmid: So you’re expecting our expenses to reach the budget?
Mr. Perez: You know, I wouldn’t be surprised if we still have some savings on their expenditures at the end of the year, because we’ve experienced that over the last two years, but it’s
something that we’re definitely going to review as part of our ’18 process. This has to be part of that review. If we’re noticing a trend over the last couple of years we have to make
certain assumptions and what we’ll have to do is the analysis that since we’ll have three years of good data, you know, how much of that belongs in salaries and how much of that belongs
in non-salaries, because then maybe we need to readjust our vacancy factor savings that we’ve been estimating.
Council Member Schmid: Yeah, and I guess the last question just on the enterprise funds, I guess maybe it’s not surprising water and gas are well down, because of conservation, but would
you expect an adjustment? I mean, we’re raising rates substantially.
Mr. Perez: Yeah, well I guess, you know, I’m not completely up-to-date, but I’ve heard discussion that there might be some release in the targets in certain parts of the State, that
there have been ongoing discussions, but I’m not completely up to date. I think that will also depend because I think, as we mentioned before, it hadn’t dawned on me until I was talking
to the Utilities Staff the conservation in water impacted gas, because then you’re not heating up as much water, and you’re taking shorter showers and all of that, so it has a ripple
effect on our commodities. So it’s something that we will watch closely, especially since there are still projected rate increases.
Council Member Schmid: Yeah, I just wonder if there might be a connection when you increase rates by six, seven, eight percent it will fall even further?
Mr. Perez: There could be because, you know, this is the first time that we’ve increased every single commodity in a long time, none of us could remember. I think the average residential
bill went up about $24 dollars is my recollection from the budget preparation.
Council Member Schmid: Yeah, the six percent across the board. Okay, those are my questions.
Chair Filseth: I just have one other question about sales tax? Have you looked or have you noticed any particular, I mean, granularity in it. Is it sort of across the board or are we
seeing Stanford Shopping Center is, you know, this trend, and Town and Country is that trend, downtown is this trend? You said business-to-business is still doing great. Any particular
color to that?
Mr. Perez: We definitely have that data. This last quarter I was really focused on trying to help get the budget through, so I’m afraid I haven’t had a chance to really go back to the
details, but we will look at that when we do the year-end we’ll give you summaries of what we’re seeing.
Chair Filseth: But nothing terribly shocking?
Mr. Perez: No. Staff just told me, because I asked for a quick recap, and you know, I haven’t had a chance to look at the details. That’s when they told me, well, retail is not doing
as well, but business-to-business is, and definitely our restaurants are doing well.
Chair Filseth: So I guess that’s questions. Any more questions?
Council Member Wolbach: I’ll make a Motion.
Chair Filseth: Let’s, I think we skipped to see if anybody from the public wanted to comment. Are there any body from the public who wants to talk to this item? With that, please proceed.
Council Member Wolbach: Alright, I’ll make a Motion that we approve the Third Quarter Financial Report.
Council Member Schmid: Second.
MOTION: Council Member Wolbach moved, seconded by Council Member Schmid to recommend the City Council approve the Third (3rd) Quarter Financial Report.
Chair Filseth: Do you care to speak to your Motion?
Council Member Wolbach: No need.
Chair Filseth: Care to speak to your second?
Council Member Schmid: No.
Chair Filseth: All in favor?
MOTION PASSED: 3-0 Holman absent
Chair Filseth: Motion passes 3 with Karen Holman absent.
Mr. Perez: I wanted to just thank Laura and David for all their good work on the report.
Chair Filseth: Thank you very much guys. Thanks for staying late with us tonight.
2. Review Updates to Commercial and Residential Impact Fee Nexus Studies and Recommend Framework for a Draft Ordinance to Adopt Housing Impact Fees for Residential and Commercial Construction.
Chair Filseth: Next item is updates to the Nexus Study, Impact Fee Nexus Study, so why don’t we don the Staff presentation, and then if there are comments from the public we’ll take
those and then Council questions or Committee questions?
Council Member Wolbach: Sounds good to me.
Chair Filseth: Welcome.
Hillary Gitelman, Director of Planning and Community Environment: Thank you. Good evening, Council Members, Hillary Gitelman, Planning Director. I’m joined by Eloiza and Sujata who are
going to give the presentation, and we’re all here to answer questions this evening. As you know, this is the second time the Committee has discussed this issue and we’ve brought back
some of the materials and questions, responses to some of the questions that the Committee raised at your first discussion.
Eloiza Murillo-Garcia, Senior Planner: Good evening. As Hillary said, we’re back to, hopefully, and hopefully we’ve answered some of the questions that you had for us the last time.
So the presentation will be very brief. I’ll give you a quick background, briefly touch on the conclusions of the two Nexus studies and talk about the supplemental analysis that we did,
as well as the next steps. So as you may recall, the City entered into a contract with Strategic Economics and Vernazza Wolfe Associates to develop two Nexus Studies for Commercial and
Residential Impact Fees and part of the reasoning for that is that the City’s updated housing element references updates to the two Nexus Studies. Final drafts of the two studies were
completed in November 2015 and we presented the results of the two Nexus studies to the Committee on February 16. At that meeting the Committee provided some direction to Staff and that
direction was to update comparisons to other jurisdictions in terms of the fees that are charged by other jurisdictions, to investigate raising the non-residential fees significantly,
to consider the balance between residential and non-residential fees and to consult with stakeholders. As a result, our consultant prepared a supplemental analysis, which you have in
your packet and that analysis looked at updated commercial linkage fees in other jurisdictions, updated housing Impact Fees for neighboring jurisdictions and comparisons with existing
in-lieu fees for for-sale housing. Staff also reexamined non-residential and residential fee recommendations and Staff organized a stakeholder meeting in April and that was attended
by approximately 15 participants from 12 different organizations and developers. So, this is a summary of the different fees for commercial. In the first column are the existing fees
and the existing fees are $20.37, and this is slightly higher than what you saw last time, because our fees adjust in May of every year, so they are now $20.37. In February the proposed
fees that we presented were based on the Nexus Study and they were $35 a square foot for office, $30 a square foot for hotel and $20.37, which is the existing fee for retail and restaurant
and other. Based on direction that we received, the new proposal is to increase the fee for office and Research and Development (R&D) to $60 a square foot, which is the maximum feasible
fee per the Nexus Study, and keep the other fees the same at $30 a square foot and retail/restaurant at $20.37 per square foot. For residential, the first column has the existing fees,
the second column are the fees that we proposed based on the Nexus Study in February, and those were $95 a square foot for a single family detached, $50 for all other housing types.
And the proposal based on the Finance Committee direction is $50 a square foot for all product types. So with your feedback, we are hoping to prepare a draft Ordinance on the fees, so
we’ll just give you a quick summary of what the Ordinance will encompass. So the Ordinance will give the City to charge an Impact Fee for rental housing, it will give developers the
opportunity and incentive to build affordable units on site, inclusionary requirements, which still apply to for-sale residential projects. We would have different fee structures for
commercial development, so for office, for restaurant or hotel there would be different fee structures. The Ordinance would simplify the in-lieu fee for residential development, which
would be $50 a square foot, as opposed to 7.5 percent of the sales price, which is what we currently have, and with that, with the current 7.5 percent of sales price that we have in
place, we have to wait until the units are sold in order to collect the fees. The Ordinance will also clarify projects which would be exempt from commercial Impact Fees and it will also
provide an exemption for pipeline projects that have obtained their Planning entitlements prior to the effective date of the Ordinance. The Ordinance will also consider adjusting the
threshold for inclusionary units from projects with five or more units to projects with three or more units and that is actually something that is mentioned in our housing element. At
this point we are not proposing to increase the existing inclusionary requirement of 15 percent, but that is something that can be examined at a later date. So the next steps are to
get your feedback and questions and then we’ll prepare an implementing Ordinance, which we hope to take to the Planning and Transportation Commission on July 27, then to City Council
for their consideration on August 22.
Ms. Gitelman: Maybe I can add just a couple more thoughts. That supplemental analysis that Eloiza referred to is your Attachment D, and that’s where Sujata and company have helped us
by looking at the total amount of fees that are charged for residential versus commercial projects, and if you recall, one of the Committee’s concerns was that this be balanced. That
we have some balance or logical relationship between what we charge on the residential side and the commercial side, so we didn’t look at these Impact Fees in isolation. We looked at
all the fees that would be charged. And that’s why we took your comments to heart, why the $95 a square foot for single-family detached changed to $50 a square foot. The other comment
that the Committee made was about wanting to raise the Impact FeeFee for office and that’s why you see the $60 instead of what was there before, $35. The other thing that was done in
this memo was to look at neighboring jurisdictions, to give you an update on that comparison, and if you will remember, we have some anxiety about setting fees that are quite a bit different
than other jurisdictions in the region, it just kind of paints a target on us. And so what we’re bringing forward, the $60 square foot for office based on your direction, I think we
still have some anxiety about that and would welcome reconsideration of that suggestion of yours at the last meeting. The last thing in this memo is a comparison about what a for-sale
developer would pay under our current fees, which are the 7.5 percent of the sales price versus the Impact Fees, and it’s an interesting comparison to make. I should say one more thing,
I was on my way over here to the meeting with Steve Levy, and he was saying, you know, “Gosh, we hate to charge a fee for rental housing,” and I think I would concur. I hate to charge
an Impact Fee for rental housing but we are precluded from inclusionary requirement on rental housing, so if someone builds for-sale housing we can impose an inclusionary requirement
and get a percentage of the units as affordable. We cannot do that for rental housing, so an Impact Fee is what we can do at this point, until the Legislature fixes that problem for
us. So with that I’ll turn it over to the Committee. Any questions you have for us we would be happy to answer them.
Chair Filseth: Before we do that, are there any members of the public who wish to speak to this item? It doesn’t look like there is anybody like that, so let’s do Council questions.
Can I ask a procedural question first? Why does this go to the Planning and Transportation Commission? I could see the Policy and Services, but…
Ms. Gitelman: We actually have to amend Title 18, you know, part of the fee program is in the zoning Ordinance, so we’re going to have to touch that Title 18, so it has to go to Planning
and Transportation Commission (PTC).
Chair Filseth: Council Member Wolbach.
Council Member Schmid: Questions, you say questions. You don’t want comments?
Chair Filseth: You guys want to do questions first or comments? Do we have a lot of questions?
Council Member Wolbach: How about questions and comments before Motions so we have a chance to speak our minds and ask questions before we go to Motions.
Chair Filseth: I’m agnostic. Do you care?
Council Member Schmid: Yeah, as long as I can make comments.
Chair Filseth: Okay. Let’s do both questions and comments.
Council Member Wolbach: Alright. So thank you very much for bringing back this updated information and reports. A couple of things I just wanted to clarify. We’re talking about a 30
percent, I’m sorry, a $30 per square foot recommended fee for hotels, 60 for office and R&D and 50 for all types of residential, correct?
Ms. Murillo-Garcia: Correct.
Council Member Wolbach: And that’s whether it’s for-sale or rental, residential. So that means that for, which one, one of them gets in-lieu, the other one gets an impact. Which one
is which? I just want to make sure I got that right.
Ms. Gitelman: For-sale units are in-lieu fees, or in lieu requirements. I mean, ideally those units would be located on site as an in-lieu requirement, I mean sorry, as an inclusionary
requirement, but if they can’t do it on site, then it’s an in-lieu fee.
Council Member Wolbach: Now the report or the presentation we just got said that we’re not removing our inclusionary requirements for for-sale, so the switch from on-site or inclusionary
BMR units for for-sale developments would only be switched over to an in-lieu fee in what circumstances? Remind me what circumstances would allow that, because our preference, of course,
us for in our Ordinance calls for it to primarily be on site.
Ms. Gitelman: That’s right and this was a discussion at last night’s Council meeting.
Council Member Wolbach: I just want to get the clarification.
Ms. Gitelman: Currently the Ordinance says that the requirement must be met with units on site except where that’s not feasible. We have an opportunity in this Ordinance we’re drafting
to be more clear about the standards that are required for infeasibility finding, and also the, what’s it called?
Council Member Wolbach: Fractional.
Ms. Gitelman: The fractional units.
Council Member Wolbach: If the numbers just don’t work out.
Ms. Gitelman: That’s right. You pay the fee for the fractional, the remainder.
Council Member Wolbach: Rather than rounding up or rounding down, it’s fractional.
Ms. Gitelman: That’s correct.
Council Member Wolbach: And if somebody wanted to round up they could do that instead of paying the fraction?
Ms. Gitelman: Well, we always like more units.
Council Member Wolbach: So that would be allowed.
Ms. Gitelman: Of course.
Ms. Murillo-Garcia: It would be allowed.
Council Member Wolbach: Okay, so that clarifies one of my big questions. I wanted to make sure we weren’t going to make it easier to just pay an in-lieu or an Impact Fee and get out
of having it on site because of the policy preference, you know, for all the reasons, that having the (inaudible) mixed with for-sale is advantageous for Policy and community benefits.
With the single family home detached, would that apply to single family redesigning their home or would it only apply to a development that includes a certain number of homes? Who would
that apply to? Like what’s the lowest threshold for that to be applied?
Ms. Murillo-Garcia: So it’s currently projects of five units or more.
Council Member Wolbach: That’s what I thought. I wanted to clarify it so thank you for that. So an individual redesigning their home or buying a home, tearing it down and rebuilding
it would not have to pay this, correct?
Ms. Gitelman: That’s correct.
Council Member Wolbach: And on…
Ms. Gitelman: I’m sorry. Just one, I mean, the inclusionary requirements currently are set in the Code for projects of five or more units, but it is possible to charge an Impact Fee
for even one net new unit. So it would be a remodel, but if someone proposed one new for-sale unit, a net new unit, you could in theory charge an Impact Fee. So you could charge the
$50 a square foot if you chose to.
Council Member Wolbach: Okay.
Ms. Gitelman: And that’s a decision point we’ll have to make. It’s a policy decision.
Council Member Wolbach: Would that also apply to an accessory dwelling unit?
Ms. Gitelman: We could apply it to an accessory or we could decide there are certain types of units that are exempt.
Council Member Wolbach: Okay, as a quick comment, I would certainly recommend that we not apply that to accessory dwelling units. With rental, you mentioned you heard some concerns about
an Impact Fee or an in-lieu fee for, I guess it’s an Impact Fee for those. If the, if under the new proposed Ordinance we are putting together, if a developer was constructing rental
housing detached, and they provided Below Market Rate (BMR) housing…
Council Member Holman arrived at 7:38 P.M.
Chair Filseth: I’m sorry. Can I interrupt you for a moment for a procedural point? So Council Member Holman has just joined us. Is there any restriction on how she can participate, given
that she was not here when the Staff presented?
Molly Stump, City Attorney: No, this is what’s called a legislative item. It’s a policy item and so it doesn’t have that requirement that the full record be reviewed.
Chair Filseth: Thanks very much. Sorry to interrupt.
Council Member Wolbach: Nope. I want to make sure that Council Member Holman has a full ability for participation, so glad to hear that. Under this proposal, would a developer of a rental
property be able to provide on-site BMR units and get out of the Impact Fee?
Ms. Gitelman: Yes. That was a point that the Committee made at our last visit and I think we agree with it and one of the ideas of setting a fee that’s not inconsequential is we would
like to incentivize, actually getting the units, either on or off site, rather than just collecting the money.
Council Member Wolbach: So just to clarify, we’re talking about $50 a square foot for rentals, $50 a square foot for ownership, and in either case you don’t have to pay anything if BMR
units are on site?
Ms. Gitelman: Yes.
Council Member Wolbach: Okay, great. Kind of a comment on hotels, maybe also a question, which is, is there any ambivalence about going up as high as $30 a square foot on hotels? I think
that certainly my own position, probably a lot of other people in the community is that, you know, priority for housing over office, hotels or somewhere in the middle as far as the policy
applications for the City at this point in our development and considering our budget. As we were just discussing the previous item, a substantial part of the City budget does come from
Transient Occupancy Tax (TOT). We did just increase the TOT and I’m a little bit ambivalent about increasing the hotel fee up to $30 a square foot from about $20. I’m just wondering
if there’s any other thoughts from Staff or as my colleagues chime in, any thoughts about leaving that at $20 or even $25 as opposed to $30. And I’ll also just mention, on office, I
think I’m pretty comfortable with going to $60 with going to the full feasible, but if Staff had more explanation of why they were not comfortable with that, I would be happy to hear
that. So two questions, I guess. One is mixed feelings about the hotels and more argumentation for why we shouldn’t go to 60 for office and R&D.
Ms. Gitelman: Okay, well let me start that and others can pile on. I mean, these are really policy questions. I think it’s going to be ultimately up to the City Council at what level
we set the fees, as long as we set them within the constraints that are provided by the analysis that’s been done. If you look at Table 2 or Figure 2 in Attachment D, you see what neighboring
jurisdictions are charging for hotel and office/R&D and I guess…
Council Member Schmid: What Page was that?
Ms. Gitelman: I’m sorry, Packet Page 216. And going back to just personally, I feel like my anxiety level increases as we start to deviate from other jurisdictions, and so you know,
just using my anxiety as a marker, I think you’re right to question the $30 for hotel. The highest we see in this chart is $18, that’s charged in San Francisco. Similarly on office,
the highest we see is around $24, $25 a square foot in Mountain View and in San Francisco.
Chair Filseth: Can I ask, I know I’m interrupting Cory here, but can you elaborate a little bit on that. Why are you worried about that? Is it you think there’s a legal liability or
you think we’re at risk of losing some of these projects to other neighborhoods where the fees are lower?
Ms. Gitelman: You know, I’m not a lawyer, so I’m not going to speak to legal liability, but…
Council Member Holman: I happen to have one here though.
Ms. Gitelman: But, you know, we don’t like to be the target of…
Chair Filseth: You said that before. What do you mean?
Ms. Gitelman: I think that we know that Impact Fees are an area where there have been legal challenges and I’m just hypothesizing that if someone was looking for another jurisdiction
to try out their arguments on, that they would potentially select one that has gone far beyond others in the field.
Chair Filseth: So you’re worried about legal exposure and being an attractive target for that kind of stuff.
Ms. Gitelman: I’m not a lawyer. This is kind of philosophical anxiety. Molly would stop me if I go too far.
Chair Filseth: I’ll let Cory continue.
Council Member Wolbach: Okay, thank you for that. So I guess, just to wrap up with some comments for now, I think I’m okay with these Staff recommendations. The only one I feel a little
bit of anxiety about myself is the hotels, and again, the reason for that is that what we get from hotels and the TOT is substantial for our City budget, which allows us to pay for operating
expenses and services that (inaudible) and my understanding is that, although a couple of us weren’t on Council during the worst part of the downturn, a couple of the others here were,
and my understanding was that things were pretty tight and I want to make sure we don’t lose those opportunities, whereas with office and R&D I think there’s a pretty broad consensus
on the Council that we want to prioritize housing ahead of office and R&D so I actually, having the Impact Fee on office and R&D for affordable housing at the full feasible range is
something I’m comfortable with. So those are my questions and comments for now.
Chair Filseth: Greg.
Council Member Schmid: Okay. Let me go back to the beginning of this whole process. The housing element (inaudible) as part of the Comp Plan and it was approved already as part of the
comp plan, had the statement added in that there is concern that commercial developments are not paying an equitable share of funds for affordable housing. On that Page there was a six-year
tracking of funds gathered and it showed that residential housing was paying $13.4 million, commercial housing was paying $11.7 million, and that does not include the building of the
15 percent at site. So it was clear residential housing was paying a substantial amount. Now…
Council Member Holman: Which Page are you on, Greg?
Council Member Schmid: That’s the housing elements.
Council Member Holman: Oh, the housing element, okay.
Council Member Schmid: That’s the beginning of this process. Now I do appreciate that we are coming back to this and on Page, the chart on Page 3 shows $60 for office/R&D and $50 for
housing. Now I appreciate that the commercial fee has been raised substantially to that level, but I looked at it and I said, “Is this really addressing the issue of commercial fair
share?” If you just take that, those fees a step further and saying, “Who’s paying what?” If office/R&D builds a 1,000 square foot office then we charge $60,000. With that they can add
four new jobs. Market rate housing even at the low end of a rental unit, can build one unit per 1,000 square feet, which at a max can probably get the average of 1.2 employees, so we
are in a situation that deals with Palo Alto’s uniqueness. Palo Alto’s uniqueness is, we have an imbalance between commercial development and residential. There are three jobs for every
employed resident. There are no other cities in California with that ratio. There are only a handful, three or four, in the whole country with that kind of ratio, and that is driving
a lot of our issues. It’s driving issues with traffic, with parking, with density, and it’s driving an issue on property tax. Commercial property is paying 25 percent of the property
tax, and that is declining by one percentage point per year. So, you know, increasingly we look to residents and the general fund tax money, sales tax and property tax, schools look
to property tax, county looks to property tax, community college looks to property tax, special districts look to it, and business is not paying their fair share. Even with this adjustment,
you look at the outcome, the outcome is for the same cost you can build one small housing unit, property rental housing unit, and you can add four jobs. Now when you monetize that it
means the 1,000 square foot built for office space earns a lot more money than one small rental unit, and it shows up around ten. If you look at our mixed-use areas, the downtown, El
Camino, California Avenue, Pedestrian and Transit Oriented Development (PTOD) district, mixed use district, the only housing that gets built in the last five or six years are enough
units to give density bonus on office space. There is a huge financial incentive to build office, and the reason is, you can fit four jobs in, where you can only fit one small housing
unit. I would think, if we’re looking at fees that would right this balance a little bit, $60 for commercial fees would make sense, if residentials are paying $50. If we ask residentials
to pay $50, that’s a huge disincentive on top of the monetization of the jobs ratio. A huge disincentive to build housing, so why are we charging housing a fee to build more housing
when they are struggling to even maintain the 3:1 ratio? So…
Ms. Gitelman: If I can jump in and offer a response. On the first, you know, to compare the cost of developing housing with the cost of developing commercial office space, I’d refer
you to Table, Figure 1 in Attachment D. It’s Packet Page 215, and in a minute maybe Sujata can walk us through table. It’s showing for the prototypes that were used in the Nexus Study,
what it would cost to build the office prototype versus the condominium prototype versus the other prototypes, and you’ll see that the office/R&D by far is higher in terms of when you
look at all the fees and Impact Fees combined. I would also refer you to the comparison that was done between the current in-lieu fees charged, so this is going to be the year four in
the same memo. What we’ve done is compare what the City charges today in existing fees for for-sale housing with what we would charge under the proposed fee, and you’ll see, I’m trying
to jump to the conclusion here, with the existing fee, (inaudible), yeah, it is quite a bit less, $40,000 for single family detached and with the Impact Fee per market rate with $50
a square foot, it would be $150,000. So it would go from $40 to $150.
Council Member Schmid: Where are those numbers?
Ms. Gitelman: This is Figure 4, Packet Page 221.
Council Member Schmid: Cost to developer of in-lieu fees would pay $40,000, is that what you’re looking at?
Ms. Gitelman: That’s right. That’s what we currently charge. And with the recommendations from the study, we would be charging $150. Quite a bit more.
Council Member Schmid: Right, which is a huge disincentive for anyone to build a resident.
Mr. Gitelman: It increases the cost and acts as an incentive to actually provide the units rather than…
Council Member Schmid: Right, then why are we creating disincentives for housing when we live in a community that has the most unbalanced ratio of jobs-to-employee rate, why should we
triple the fees?
Council Member Wolbach: Chair Filseth, can I jump in with (inaudible).
Chair Filseth: Yup. Are you done? Are you ready to take a question on this. Cory has a question, please proceed.
Council Member Wolbach: Well, actually I was just going to respond to your question, which is, we’re providing a disincentive for building market-rate housing that does not include affordable
housing, because if the development includes our 15, or of it’s over five acres, our 20 percent of affordable housing included on-site, we waive the fee, so this disincentive is just
against totally market-rate housing. There would be no fee, we would eliminate the fee if it includes the BMR on-site.
Council Member Schmid: Increasing the disincentive for housing, tripling for housing in general.
Chair Filseth: How about if we let Karen weigh in on this?
Council Member Holman: Yeah, so I look at this a little bit differently, I guess. I appreciate the perspective, because I think it’s, you know, we’re here to vet these issues, right?
I sort of agree with Council Member Wolbach, but I guess the other thing that I would argue too is, I don’t think we’re even close to creating a disincentive. With what housing goes
for in Palo Alto, I don’t think we’re even close to disincentivizing housing. We’re raising what it costs to build housing here, but I don’t think it’s close to a disincentive.
Council Member Schmid: Why in every mixed-use area in town the only housing that gets built is that which gives the density bonus of office space? The incentives are not working now.
Council Member Holman: Well, markets shift and we also talked about changing that so the density bonuses could not be applied to office space, so markets shift. You remember when Hyatt
Rickey’s, that site changed from a hotel to housing, it’s because that what was hot then was the housing market, so markets shift, they vacillate, so you know, right now and what has
been the most recently hot is the office market.
Council Member Schmid: (inaudible) economics are saying you are stupid if you invest in housing, and we are increasing the disincentive.
Chair Filseth: If I can interpret what Karen said, it’s essentially what she said is, look, at this point in time the demand for office space is so strong that the premium you can get
by building an office space over housing is so big that the difference in the Impact Fee on housing doesn’t make a difference, you would still go for office space, if you can. And that’s
our job as Council is to sort of, with zoning policy, is to try to manage that. I think both you and Cory have correct views on this. It seems to me that the way to think about this
is that there are two effects that are sort of, you know, not, it’s somewhat of a (inaudible). One is, how much housing you build and the other is, what is the mixed-use market rate
versus, you know, market rate. Because somebody has to pay the going market rate, right? So then your question is, your problem is when you adjust the Impact Fees, at some level you’re
adjusting the mix, how much, and the inclusionary law too, right? You’re adjusting the mix of how much market rate versus how much below market rate, but then at some level you’re also
depending on the elasticity, right? Impacting the total amount of housing as well, and so you’re trying to modulate both those things at once, right? I mean, I think that is where you
were going, right?
Council Member Wolbach: Yeah. But, if I might, also kind of picking up on what Chair Filseth was saying about our zoning policies, and you know I am completely aligned with your concern
about our jobs/housing imbalance. I think you and I probably, as much as anyone on Council and in the community talk about this. I completely agree that it’s a major concern.
Chair Filseth: We know you want to bring fracking to town (crosstalk) Sorry, go ahead.
Council Member Wolbach: For the record, no, no fracking. I’m not sure if I got that joke, but I just want to be clear for the record.
Chair Filseth: Instead of housing.
Council Member Wolbach: Yeah, so you know, and that’s why I’m very supportive of the higher Impact Fee for office development, so that the office development would pay more of its fair
share towards addressing this concern. Also, it would provide more of a disincentive towards office and more incentive towards housing, because housing has lower fees, and we also, as
Chair Filseth was saying, we have records indicate, we have other tools at our disposal and we are definitely working on and exploring and developing those other tools through planning,
through zoning, through exploring alternative zoning options that would allow more affordable construction of housing, whether its micro units or mixed use or whatever, through pilot
cap on office development, through our comprehensive plan update. I see this as one of these tools, but certainly not… If we were dealing with this in a vacuum, if this was the only
thing on the table that we could use to address the jobs/housing imbalance, I would be more worried. But I think this is just one of the many tools that we are working on.
Chair Filseth: Hillary, did you want to weigh in on this as well? Did I overlook you when I…
Ms. Gitelman: No, no, I was just going to point out that the table we looked at, that last table that shows the cost to the developer if they paid current in-lieu fees versus the new
fees, also shows the cost to the developer if they provide the units on site.
Council Member Wolbach: Which Packet Page was that?
Ms. Gitelman: It’s Packet Page 221, and you can see by far the most expensive thing for a developer to do is to provide the units on site, and Sujata can answer any questions you have
about this exhibit.
Council Member Wolbach: Is that currently or in the future?
Ms. Gitelman: Both.
Ms. Srivastava, Principal from Strategic Economics: So the way that this analysis is laying it out, it describes the prototypes in the first few lines. So it’s, you know, a 20-unit single
family home, a 10-unit single family attached, and a 35-unit condo, each with their per-unit price points. It walks you through what your existing inclusionary BMR requirement would
be, which is 15 percent, so you would have three inclusionary units in the single family detached, you would have, if you rounded it up, you would have two single family attached and
you would have about five condominiums, right. So if a developer could, for some reason, demonstrate that it wasn’t feasible to provide the units on site and paid the in-lieu fees, the
next line quantifies what those total fees would be at 7.5 percent of the sales prices. So then, from a developer’s perspective, just so you can look at this as apples-to-apples, we
then take that number and divide it by how many market rate units there are, so for each market rate unit, what’s the effective cost of that, and it’s $40,000 for a detached unit per
market rate unit. And it’s $17,000 for the condo unit. So just walking you through the rationale here. Now another way to look at the cost to a developer is, what are they losing in
terms of the revenues that they would have made if all of the units had been sold at market rate. So the next set of calculations are what we call “foregone revenues”. So if they had
been able to, it’s in effect the subsidy they are providing because rather than charging $3 million on a single family detached, there is a price restriction on it because it’s a BMR
unit. So for a single family detached home, the foregone revenue of providing those units on site is $459,000 per market rate unit. So what this is really showing is that you’re getting
a lot more value out of a development if you’re able to get those units on site. The cost to a developer in terms of foregone revenues is substantially higher, so it’s really just demonstrating
that you kind of get more value out of a development if you can get that 15 percent. And then the final two lines are, what would be the Impact Fees, if you actually charged them as
Impact Fees rather than the existing policy, so the maximum line is actually quite high, but it’s still lower than what you get if you actually get those units build on site. So it’s
just a way, another way to think about it in terms of the cost of developing the units on site versus the different kinds of policies that you have in place.
Chair Filseth: So can I, let me make sure that I understand what you said here, right? If I look at the single family detached column, I’ll pick that one, right. So the in-lieu fee revenues
per market rate is $40,000 and the foregone revenues per market unit if they put it on site is about ten times that? So what that means is, if I build 11 units and I pay the Impact Fee,
then it’s going to cost me $440,000, and if I dedicate one to below market rate, it’s going to cost me $459,000, so basically the point I’m indifferent is about 10 percent of the units.
Am I reading that right?
Ms. Srivastava: Well, the map will work out differently, depending on how many units you’re spreading it across, because I’m doing kind of a per market rate number, so…
Chair Filseth: But there’s some point it’s a breakeven, like how many I dedicate, right?
Ms. Srivastava: If you have a larger project and you’re able to spread that over a larger number of units, of course, it’s more advantageous just to try to do the inclusionary. But I
think that the pure policy perspective, what you’re really trying to do, and I’ve noticed in looking at your inclusionary policy versus some other communities is that your in-lieu fee
is set at a relatively lower number than, you know, what normally you would do if you really wanted folks to build units on site. So you could, if you’d actually looked at often the
inclusionary, or the in-lieu fee is set at what the difference is between what it costs to build that unit and what the household can afford. So sometimes you just want to kind of make
sure that your policy is reflecting kind of what the true cost is of what that difference is to a household for a low/moderate income household. And the Nexus Study is actually what
that’s quantifying, right. It’s really actually quantifying what that gap is, so it allows you to sort of be able to capture more of that.
Council Member Schmid: Yeah, if I could as the question, it’s not just looking at the housing fees against building the housing, but it’s comparing it to what we’re asking commercial
to pay, and above in 1A and 1B you can compare the office with the apartment and it seems to me the office development prototype of 100,000 square feet on…
Council Member Holman: What Page?
Council Member Schmid: 1B, Page 219 and the apartment of 68,000 square feet, so the numbers are roughly similar. You are charging…
Ms. Srivastava: For the single family detached and the office/R&D, is that what you’re comparing?
Council Member Schmid: Well, I’m comparing because that’s the only things that are getting built in Palo Alto at the moment, and you adjust for size, it’s roughly the same number. We
are charging new housing the same amount we’re charge new businesses, but the new businesses get four employees, these small apartments get one or two people. That’s not equal. That
says we are putting a higher cost on new housing than we are on new office.
Ms. Gitelman: Just a couple observations. First of all, you have to look at the size of these prototypes.
Council Member Schmid: I did, 100,000 and 68,000.
Ms. Gitelman: And the difference between these two charts is that we saw that discrepancy that you’re pointing out in the top chart between what is charged for single family detached
and what is charged for office/R&D, and because of the Committee’s request that we balance these costs, that’s why you see the change in the lower table. So single family detached has
come down to effectively match the prototype for office/R&D, and then single family attached condos and apartments (inaudible)
Council Member Schmid: I mean, the opportunity for single family detached is like zero (crosstalk). You can compare it to the apartment on the far right, those are the ones that are
getting built. But it’s 68,000 against 100,000 office, so that translates into 400 workers and maybe 100 apartment dwellers and 400 workers generate more money. The financial incentives
are still resting with the commercial property.
Ms. Gitelman: You know, these are policy choices. I think we’re looking to the Committee and ultimately to the Council to help us find the sweet spot here for both the commercial linkage
fees and the in-lieu and Impact Fees on the housing side.
Chair Filseth: So if I can summarize, what I think you said is that you’re feeling is that there is still sort of an imbalance between how much we’re charging for commercial versus residential
when you look at the numbers of people involved?
Council Member Schmid: Yeah, monetization for workers is much higher than (inaudible).
Chair Filseth: Council Member Holman.
Council Member Holman: So I have a different track, but it also has to do with housing projection or, it’s not like you‘ve never heard me say this before, the loss of housing. So a couple
of things here. Is the single family detached, I agree with whichever one of my colleagues said that the opportunity for that is not very great. We have some opportunity, but not very
much. And, I want to make sure we’re talking apples-to-apples here, so is this as part of new development, or is this, I tear down my house to build a new house, so here’s my question
about that. So we’re talking about whether it’s a single family, whether it’s single family attached, whether it’s condos or apartments, we’re talking square feet and net, not gross,
but we’re not talking number of units, we’re only talking square feet.
Ms. Gitelman: Let’s be clear, gross square feet for net new units based on square footage. I mean, that’s how I think these…
Council Member Holman: It’s not clear here.
Ms. Srivastava: I think the Ordinance could clarify whether it’s a net or gross.
Council Member Holman: So repeat that, if you would, please.
Ms. Gitelman: I guess the way that I’ve been thinking about this is, we’re charging for net new units, so you don’t pay this fee if you’re remodeling an existing unit. You pay it potentially
for a net new unit, although there is the potential that we wouldn’t charge, like for in-lieu fees, we don’t charge until they’re five units, five net new units. And then you could base
the fee either on per unit or per gross square foot, and you know, the Ordinance could specify which of those two we would use. This is suggesting per square foot.
Council Member Holman: So my question is this.
Chair Filseth: Let me see if I understand your question, which is, if I tear down my one story (inaudible), 1,200 square feet, and put up a two story one instead, which is 2,400 square
feet, do I pay the Impact Fee?
Ms. Gitelman: No you do not pay it.
Council Member Holman: Well, that was one clarification, but I have two things. One has to do with that, and one has to do with the other. So again, so if you’re adding new units you
pay an Impact Fee on that or an in-lieu or whatever, but what if you buy or have a piece of property that has, I’ll make up a number, 20 units on it. You want to redevelop that and you
want to build 12 larger, more luxury units. Are you escaping any Impact Fee at the same time that you’re removing 10 units?
Ms. Gitelman: Well, we haven’t addressed the loss of units. I mean, that’s a policy issue we could address. (crosstalk).
Council Member Holman: My policy is, we should do something about it.
Chair Filseth: Does it happen?
Council Member Holman: Yes it happens.
Ms. Gitelman: You know, we do lose units.
Council Member Holman: Yes we do.
Ms. Gitelman: I don’t think on that scale.
Council Member Holman: Not on that scale, I’m just making up a number, but yes we do.
Ms. Gitelman: But you know, the impact and in-lieu fees we’re talking about are on net new units.
Council Member Holman: I know, but what I’m saying is, I think we’re leaving a big escape hatch here, and so from my perspective what has a greater impact on our housing stock than taking
out housing units? I mean, it’s a direct impact. We are, if we’re losing a housing unit, that’s an impact.
Ms. Gitelman: I completely agree with you. I think that’s a policy issue that we’re going to have to address through a different Ordinance. This Ordinance is based on the theory that
when you add new housing, you’re actually creating housing demand because those people who live there go out into the community and they buy things and they, you know, drive around and
they, you know, we add jobs when we add housing units, and so they have an impact or housing demand, so it’s, this whole thing is structured on the idea, on that idea. And we would have
to develop another Ordinance or another approach to the loss of units. I am not disagreeing with you. I think that’s a tremendously important policy issue that we would tackle.
Council Member Holman: So it really wouldn’t, I guess I’m looking to the City Attorney on this, so that wouldn’t be, it’s not the same kind of Impact Fee we’re looking at here, but it
wouldn’t be an Impact Fee? I would argue even that, you know, my property is Zoned R-2, I have my house and a cottage. If I decide to eliminate that cottage, I’m eliminating a housing
unit. I think I should pay for that.
Ms. Gitelman: Pay for the loss of the unit?
Chair Filseth: I don’t think there’s disagreement here. If I can weigh in for a second here, I think the Planning Director’s assessment of this is correct. Which is, it’s a different
problem than the Impact Fee regimen is attempting to address. We could try to put it on one giant ball and try to address everything in one Motion here, but that’s probably complicated.
Council Member Holman: I agree with what you’re saying and I head what you said. I’m just trying to make the point though, that it is absolutely an impact, and I worry that if we don’t
try to do something to address it, maybe not exactly here, but at the same time or in a reasonable amount of time, it’s going to get pushed off for five years, you know, and so I really
worry about that. And it does happen. As property gets more and more expensive here, I mean I do watch sale ads, real estate ads…
Ms. Gitelman: Not that I ever want the use the City of Berkeley as a mode for our behavior here in Palo Alto, Sujata indicates that they are pursuing something like that. Do you want
to explain how they are going to go about it?
Ms. Srivastava: They are looking at something, it’s a little different because they’re looking at the demolition of older apartment buildings, and they’re trying to create a new mitigation
fee to address that. In a way it’s sort of similar to something that’s like a loss of wetlands or some other type of resource to a community, and I mean, I think the City of Berkeley
is willing to go out there and see how this plays out. But it’s a, there is a methodology that we’ve been developing with them to try to quantify what that is. It would be different
from this one, but there is a possibility of trying to investigate something like that.
Council Member Holman: So I hope my colleagues will support pursuing something in parallel to this, because…
Council Member Schmid: If you support this.
Council Member Holman: Trading votes is not a very good way to try to…
Chair Filseth: I think we’re getting into dangerous territory here, and we could put tree trimming in here as well, I mean (crosstalk) but this is not exactly the same here. Sorry, go
ahead.
Ms. Stump: If I could just procedurally…
Council Member Wolbach: (inaudible) said what I was going to say.
Ms. Stump: Right, yeah, so procedurally it’s outside of the scope of really what you’ve identified what you are taking on tonight, so it really is in the nature of a potential additional
work item. So I think, actually, that in our process that could be certainly something that’s raised here as a discussion point, but ultimately I think it’s the nine of you that would
need to look at that and whether the Staff should add that to their work plan and then, again, how that gets coordinated with all the other tasks that this small work unit is doing.
Council Member Holman: Well, of course, all nine of us would have to direct it, but I was just trying to raise it here so we could attempt some discussion of it.
Ms. Stump: Yes, exactly, and a little bit of discussion is appropriate this evening in the nature of a potential coming agenda item, but not an extensive one, both because we’re not
prepared. I mean, it’s a very complicated topic and there might be different types of approaches that could be taken to meet the policy goal, but also because we hadn’t specifically
notified the public that we will be talking about that topic.
Council Member Holman: So one other thing is on, I don’t remember what Page it’s on, but actually I do, it’s Packet Page 25. Packet Page 25 in the paragraph under “Housing Impact FeeFees
for Neighboring Jurisdictions” and it talks there about San Francisco in the last sentence, “However, San Francisco has adopted fees ranging from $199,000 to $522,000 per unit.” I’m
presuming that’s built unit or new unit? Okay, “depending on the unit size, which are somewhat similar to the maximum fee levels calculated for Palo Alto.” So is that, I presume that
is calculated on their ’15, oh that’s fees, it’s not in-lieu. They just adopted a 25 percent inclusionary law, ours is 15. I don’t know if that’s something this group wants to talk about,
but…
Ms. Stump: They haven’t adjusted their…
Council Member Holman: They have not?
Chair Filseth: My guess is changing the inclusionary threshold from 15 to 25 percent is probably outside the scope of this meeting too?
Ms. Stump: I think it’s in the nature of the prior item.
Council Member Holman: Again, bringing it up because where else would we bring it up, you know. So that was one point, and then I think there was something else. Oh, just a little bit
of clarity or clarification. Well, one thing, just curiosity, who was in the stakeholder group?
Ms. Gitelman: We invited a wide range of people that we knew to be interested in developing housing and commercial space that would potentially be subject to these fees, so we had housing
developers in the room and commercial developers. It was an interesting mix. Someone from the research park at Stanford, for-profit developers, nonprofit housing developers were represented.
You know, it actually had a lot of interest.
Council Member Holman: So I was caught by, on Packet Page 27, the very last comment here from the working group, it was, “The City should allow developers to build new affordable housing
on or off site instead of paying fees.” Also, “Developers should be able to rehabilitate and deed restrict existing units for low income households instead of paying fees.” I thought
that was interesting, given that that’s who the group was and the response from Staff was that these options can be considered in the orders that would be required to adopt the new fees.
So, I mean, this is kind of what we’re talking about is building units instead of paying fees, so is that whoever this was, talking about, is it the same ilk?
Ms. Gitelman: Yeah, I think this comment actually came from a commercial developer, so they’re used to building office space and they’re saying, hey, instead of paying these $60 a square
foot fees, why don’t you let us build the units on site or deed restrict units elsewhere as below market rate units. That might be a great idea that we could consider as an option as
we draft this Ordinance. I’d be interested to hear what the Committee thinks about that.
Council Member Holman: I think it is interesting if somebody could deed restrict units someplace else that already exists that currently aren’t deed restricted. I didn’t see anything
in the Staff Report or presentation that addressed that. Did I overlook it?
Ms. Gitelman: No, this is the extent to which we’ve addressed it is to say it’s an interesting idea that we could consider, so I’m glad to hear the Committee’s interest in that.
Council Member Holman: Well, at least one of us is. About building existing units as opposed to paying fees, again, I didn’t notice this in the Staff Report, is we could require them
to be built, but I think, you know, I don’t know what other Council Members think, that would it be at the City’s discretion as opposed to at the applicants discretion, which it is now,
as opposed to a mandate that you will build the units on site and a requirement of that that we could say, it’s the City’s discretion. Like if they’re building four bedroom units, do
we really want to build four bedroom because our inclusionary law says they need to be similar units? So could it be the City’s, I guess it could be the City’s discretion, no we don’t
want four bedroom units, we’d rather take the money, or we’d rather you build two two bedroom units, or something of that nature? So what kind of latitude do we have there?
Ms. Gitelman: That’s a good question and I think our intention was to try to specify in this Ordinance that our preference is for units on site, to be built on site. This is when we’re
talking about residential projects, and that we would allow the payment of in-lieu fees instead of building units on site in very specific circumstances, and we would try to specify
what those were. Right now all we say is, you know, in the Code is infeasible.
Chair Filseth: At the moment the Code is not terribly specific, (crosstalk) each developer can basically choose. I think…
Ms. Gitelman: Well, the developer has to make the case, and we have to accept that it’s infeasible, but there’s no standard.
Chair Filseth: In practice we normally accept, right?
Ms. Gitelman: I’m not sure. In the practice you’re most familiar with because it came up last night, there has been an assertion that it’s infeasible and thus far we have carried that
suggestion forward to Council.
Ms. Stump: And if I could add, you might be recalling that in the context of active litigation, we have settled cases for the payment of fees, but that’s a little bit different. That’s
arguably not fully within our Ordinance. I mean, we have certainly tried to implement the Ordinance.
Chair Filseth: I mean, it’s an interesting line of discussion and I sense it’s the argument that if we don’t bring it up here, where would we bring it up, but I want to make sure that
we’re staying within the bounds of what we’re supposed to be talking about tonight and what’s agendized and what’s appropriate for Finance as opposed to the larger Council.
Council Member Holman: Well that is agendized I would think.
Ms. Stump: (crosstalk) is the inclusionary so…
Ms. Gitelman: Well, it’s a part of this Ordinance. Yes, and I think we were expecting to get this kind of discussion about the parameters of the Ordinance. In fact, you’re giving me
an opportunity to raise one thing in the Staff Report that I would like to correct and it came up in the presentation as well, and was part of the conversation yesterday too. We had
a statement in here that the Ordinance could provide an exemption for pipeline projects that had received their entitlements, and while that’s a true statement, I think last night we
suggested, and tonight I am suggesting again that since Impact Fees are paid at the time of building permit issuance, that is probably not a policy recommendation that we would carry
forward into this Ordinance. Instead, we would just say that fees are payable when they’re payable, which is at building permit issuance. So the only projects that would be exempt would
be projects that had already received their building permits at the time the Ordinance becomes effective. I just wanted to correct that in the record and hear any objections to that.
Council Member Holman: None. So I’ll stop there.
Chair Filseth: So, say that again. I want to make sure I understand that.
Ms. Gitelman: Okay, typically Impact Fees are paid when you pull your building permit, so if we adopt an Ordinance, I guess I’m suggesting that the only projects that would be exempt
from the new fees would be those that had already received their building permits.
Chair Filseth: Okay, so that if we change the Impact Fees, we raise the Impact Fee on such and such a project, then the project which hasn’t received its building permit has to pay the
new Impact Fee, not the old one.
Ms. Gitelman: Correct.
Ms. Stump: But Council has the authority to have a phase-in time.
Chair Filseth: Unless Council chooses to have a phase-in, right.
Ms. Gitelman: That’s right, and we suggested an alternate approach in the Staff Report, and I’m just saying based on the conversation last night, I think the more favorable approach
in terms of the amount of money that the City would collect would be to apply it at the time of the building permit issuance, but it is a policy decision.
Chair Filseth: Okay.
Council Member Holman: I’m stopping for now.
Chair Filseth: So it seems to me like we’ve really sort of so far touched on kind of two major topics. One is the issue of how much money we collect from commercial projects versus residential
projects, and is it appropriate and also is the amount of money that we collect from residential projects a disincentive to build housing. That seems like one of the major, I’m just
trying to recap for the moment, the major things we’ve discussed. And the second one, I’m not sure how to quite summarize, but I guess I would say it’s the discussion of should we dig
into the definition of feasibility and the latitude the developer has to choose between the Impact Fee and actually putting the unit on site. Is that an accurate summary?
Council Member Holman: We could look at it in either direction, whether it’s the flexibility or discretion that the developer has or the City has? I guess you could look at it from either
direction.
Chair Filseth: At whose discretion is it to choose.
Council Member Holman: Yeah, I mean, being a Council Member I think it’s always better if the City has that discretion. We’re in charge of our own fate, right? And we’re sensitive to
current need.
Chair Filseth: And the Staff’s suggestion on this point has been, if I can interpolate what you’re suggesting, well you can influence this by raising or lowering the Impact Fees to make
it more or less economic, right, to include it on site, versus pay the fee. That’s’ one of the levers is what you said?
Ms. Gitelman: Yeah, and we could also be super clear in the Ordinance that our preference is to get the units on site, and you could only get out of that if you do the following things.
Ms. Stump: So just to clarify, the City can put requirements in the Ordinance. It’s not just a matter of influencing things by the level of the fees. However, I think that what we would
encourage is that those decisions be made in the Ordinance itself to the greatest degree possible, and there be clear standards so that the City (crosstalk) inconsistently.
Chair Filseth: You don’t want the Council and the Planning Director to site each one on a case-by-case basis. You want the Ordinance to say here it is (crosstalk) anybody going into
it knows what they would get, right?
Ms. Stump: That’s exactly right.
Chair Filseth: So are there precedents for how to define that clearly? You know, have other cities sort of figured out how to do this right?
Ms. Gitelman: I’m sure there are other Ordinance s we can look at that have more definition than ours do.
Chair Filseth: Great, we’ll send Staff back to do more work.
Ms. Gitelman: That’s not going to be hard.
Chair Filseth: Before we proceed…
Council Member Holman: Just, (crosstalk) same topic, same question, there was something said earlier which I don’t want to get lost, is except in specific set of circumstances, or specific
circumstance, like we might have, you know, I am reluctant to use BB, so I won’t but you get the idea, we might have an occasion where we really need the money to apply to some other
project, so we might opt to have the in-lieu fees instead of the housing units. You know, pick a project, just X, Y, Z address. I don’t know, I’m raising the question.
Ms. Stump: I think what we’re going to be looking at is that both Staff and the development community have direction on what the policy parameters are that they are to be applying, and
that the principal there is to avoid too much discretion on the part of Staff leading to the potential for what can be called an arbitrary decision. So we really do need the Council
to grapple with these issues as policy matters and set our parameters in the Ordinance.
Council Member Holman: I appreciate that. I must have misunderstood what you said earlier.
Ms. Gitelman: Yeah, I don’t think we want to put ourselves in the position of making a case-by-case decision. “Oh we have a good project that we need money for, so this time we’ll do
it this way, whereas last time we do it this way.” I think we need to set some pretty clear parameters.
Chair Filseth: Before we proceed, right, I know we closed this off, but we actually do have one member of the public who wants to speak, right. Since there’s only one, if it’s agreeable
then we’ll have Herb speak now. Are you okay with that? You’re next in line, right?
Council Member Wolbach: That’s fine. I’d actually like to hear from Herb.
Chair Filseth: Herb. Welcome.
Herb Borock: Thank you Chair Filseth, Committee Members. I haven’t read the Staff Report and so I just wanted to focus on one thing, which is the concept of changing the current in-lieu
fee on residential to 7.5 percent of sales price to an Impact Fee of $50 per square foot. Currently, it’s not something that affects whether you’re building something, because you don’t
know what that fee is until you sell it, and who pays it is really a question of elasticity of demand. I haven’t seen a settlement sheet for the sale of a house recently whether that’s
bundled into the sales price, so whether that’s a fee that’s added on, the buyer, the seller or they split it. The second thing is, how does $50 compare to 7.5 percent? Suppose you had
a 16-unit residential single family development of about 6,000 square foot lots of roughly 2,500 square feet above ground, and 2,500 square feet below ground in the basement, which is
5,000 square feet, and you charge the $50 on all the square foot, including the basement, you would end up with about $2 million of an Impact Fee. I don’t know if you know any 16-unit
residential developments and how many they are projecting for a fee and what they’re selling for and whether they have basements, but I suspect this $50 fee is much smaller than the
7.5 percent. That would be a sale price of $666.67 a square foot, which is very low in Palo Alto. In terms of residential versus commercial, it’s really why you’re doing it. The Nexus
on commercial was that it generates employment and a part of that employment are low income employees who are living in Palo Alto and you want to find money to pay for it. The other
thing in terms of in-lieu fees versus building on site, there are two things. One, whenever that fee is set it’s a point in time, and as the price escalates, it’s cheaper to do it as
an in-lieu fee. The second is, whenever it’s calculated it’s done the way a developer would, which is to ignore borrowing money. The investment is not the entire cost of construction.
If you get a construction loan for 90 percent or whatever construction loans are for a property, your investment is 10 percent of that, but the in-lieu fees and developer’s arguments
versus one or the other don’t match. The final thing is, originally for inclusionary units, it was the cost of, the marginal cost, that is just the actual construction costs of that
unit, no land cost and no soft costs, and it changed in these years by Staff recommendation and not by a policy that the developer should make a profit on the inclusionary units, so
it started off the other end, which is what is the income range for say moderate income, and then worked backwards to create a unit for those people so that the developer can make a
profit. So it’s a little bit of difference. And you can set a policy by saying, we’re zoning this for this type of property, and if the City says that should be residential and continuing
Councils say the same thing, eventually a commercial area will become residential, and that happened along El Camino in ’78. Thank you.
Chair Filseth: Thank you. So I kind of want to try to herd us along a little bit, and I have a couple of thoughts on at least the first bucket of stuff. Do you want to say something
first?
Council Member Wolbach: Yeah, actually I would, because I was going to suggest, well I had a couple of questions and I wanted to follow up on and as we were going through some of these
charts, I actually realized I had more questions than I thought I did, and I was actually going to slightly reframe or suggest a reframing the key questions that you were trying to identify
earlier. So how would you like me to go through those, reframing first or questions first?
Chair Filseth: Why don’t you do questions first and make it terse.
Council Member Wolbach: I’ll try, but I thought I understood this better than I did, so now I feel like I might be more confused.
Chair Filseth: I actually have a question on this too, and I’ll ask when you’re done. Okay, go ahead. I think I understand the commercial side pretty well. I’m not sure I understand
the housing side, but go ahead.
Council Member Wolbach: Right, so actually one of my questions is about that. Packet Page 221, so it’s Attachment G, Figure 4, I guess, I apologize, I don’t mean to be critical here.
I just have a hard time identifying how much of this refers to status quo versus the recommended proposal from February, recommended proposal now, maximum feasible, maximum justified.
Are all these in here, walk me through this again. I’m just a little bit… The cost to developer if in-lieu fees are paid, right in the middle of the Page, or right in the middle of the
figure. That’s under status quo, or under recommendations?
Ms. Gitelman: That’s today.
Council Member Wolbach: So that’s the status quo.
Ms. Srivastava: That’s the 7.5 percent In-lieu Fee.
Council Member Wolbach: Okay, so that, all that section is today. And then the next section down, I guess the bottom line of that next section is the one that matters, where it says,
“Foregone and in-lieu fee revenues per market rate unit.” And that’s today?
Ms. Srivastava: Correct.
Council Member Wolbach: Okay, under new Ordinance, once it’s finished, these will be substantially different, right, and that’s where we get to the section at the bottom of the Page?
Ms. Srivastava: Yeah, so the last one, correct, the last one is, if you implemented an Impact Fee, but the difference is that, well, you’re looking at Attachment G, right?
Council Member Wolbach: I’m looking at Attachment G.
Ms. Srivastava: So you’re looking at the maximum justified fee, which is the very ceiling of what you could potentially charge under the Nexus Study, which is not what we have recommended.
Council Member Wolbach: Right, I’m actually looking at the next section.
Ms. Srivastava: And then the next recommended Impact Fee is based on the direction, I believe the direction from the Finance Committee, so it’s $50 per square foot.
Council Member Wolbach: Right, so basically the two, or I guess the… I’m trying to figure out which numbers to compare here. I guess the most important numbers to look at are the in-lieu
fees today versus what they would be, so the $40,000 versus the $150,000 or $31,000 versus $105,000 or $17,000 versus $105,000. Because I’m trying to get to apples-to-apples.
Ms. Srivastava: Yeah, I think that’s…
Ms. Gitelman: Yeah, I think that’s one comparison, but I think it’s also instructive to look at what it costs the developer if they do it on site, versus pay the fees, whether they are
the new fees or the old fees.
Council Member Wolbach: So the on-site doesn’t change?
Ms. Srivastava: That’s right.
Council Member Wolbach: So this actually ties into what I was going to suggest is that I actually see at least four different questions we’ve been talking about. Some were pretty easy
to push off, some are ones I think we really need to address or think about tonight. So those are, one is basically commercial versus residential, whether we want to incentivize. I think
the general consensus as a community, as a Council and as a Committee, where our priorities lie on commercial versus, especially office and R&D versus housing with the preference more
towards housing over office and R&D. Secondly, Council Member Schmid’s point about how much we are encouraging or discouraging housing in general. Are we creating a disincentive to construct
housing at a time when a region of the City has a dearth in housing.
Chair Filseth: Bearing in mind everything is relevant.
Council Member Wolbach: Right. And to what degree do we want to encourage or discourage. I’m saying these are open questions. And three, do we, how much do we want to encourage or discourage,
how much do we want to encourage housing on-site, BMR on-site versus paying fees. And then the last is this kind of question of defining infeasible and getting that a little bit more
clarified. The last one I’d be happy to say, let Staff deal with that because it wasn’t discussed much in the Staff Report and I don’t want to get into it in depth.
Chair Filseth: The last two seem to me like two different sides of the same coin.
Council Member Wolbach: Yeah, they are a little bit connected. I don’t think, unless Staff recommends differently, I don’t think we want to get into a deep conversation tonight about
how the Ordinance should define infeasible.
Chair Filseth: That’s my intuition. If it’s an action tonight, it’s to ask Staff to go (crosstalk). But what I want to do is I want to make sure we make some progress on the stuff we
can make progress on, not just send the Staff off and this goes another six months (inaudible).
Council Member Wolbach: So when it comes time for a Motion, I’m going to suggest that we just let Staff go and run on that one. On encouraging, going back to this, encouraging BMR on
site or off site, we have units, one of our goals, right, Page 2 of Staff Report, Packet Page 19 is to create incentives for developers to build new affordable units on or off site,
instead of paying the Impact Fees. That’s our priority, that is our policy, and I don’t think we want to change that. So then the question is, looking at these numbers on Attachment
G, it costs 1.5 to 4 times as much almost to provide it on site or to build, or to actually build the unit than it does to pay the fee, even under the new fees. Am I reading that correctly?
Ms. Srivastava: Yeah, I mean, it’s the foregone revenue, so it’s kind of a theoretical value, right. It’s not what they actually pay out of pocket like they do when they pay a one-time
fee, but it is the value of what they’re missing out on. It’s basically the opportunity cost.
Council Member Wolbach: Right. Actually, I didn’t see apartments on this.
Ms. Srivastava: That’s because they’re not subject to the 15 percent inclusionary plan currently..
Council Member Wolbach: But we are, didn’t I hear it said earlier that under the proposal we would suggest, though not require that they build BRM on site for apartment rentals and that
if they did that we would waive the Impact Fee.
Ms. Gitelman: Correct. We’re saying that we would charge them the $50 fee as an Impact Fee and they would not have to pay that fee if they provided the units on site.
Council Member Wolbach: Right, and so…
Chair Filseth: That’s how it’s working now, isn’t it, one or the other?
Ms. Gitelman: Right now we can’t charge on rental housing. We’re talking about rental.
Council Member Wolbach: Right.
Ms. Gitelman: And it would be great not to have to do that, but until the legislature fixes the inclusionary thing, that’s kind of…
Council Member Wolbach: Right, so let’s all support I think it’s Kevin Mulland’s bill to overturn Pulver decision, but in the meantime… So I guess I was looking for that fourth column
on there to add that in. So I guess I am struggling a little bit with this, because the goal, you know, our stated goal and I think all of our preference, is, most of us have a good
understanding of all the policy benefits of having BMR units interspersed with market-rate housing, you know the social benefits for everybody, and for the community, not to mention
they’ll actually get built rather than going into an affordable housing fund that never, you know, might or might not get used in a timely fashion. So the question is, how much stock
should I, how concerned should I be that the foregone revenue, the opportunity cost is going to pencil out to be higher than just paying the fee and developers are just going to pay
the fee?
Ms. Stump: You make a rule that they can’t just pay the fee.
Council Member Wolbach: Which we can do with the ownership but we can’t do with the rentals.
Ms. Gitelman: That’s right.
Council Member Wolbach: Okay. So I guess we… Yeah, alright. You know, if we’re ready to make motions, I’d be happy to offer one, (crosstalk) but if the Chair wants do another round of
questions, I’d be happy to let that happen.
Chair Filseth: Well, we haven’t gotten to the Chair yet, so…
Council Member Wolbach: Yeah, alright.
Council Member Holman: I have a couple of clarifying questions, Herb brought this up and I had it on my list. If we’re talking about, most of this would apply in single family homes,
but not exclusively. There’s other zoning that allows basements. Do basements count as part of the square footage? They do in commercial space, count as square footage, right?
Ms. Gitelman: Yeah, I don’t think they count as square footage in residential.
Council Member Holman: They don’t, but should they for calculating Impact Fees, because it is. I mean, you know, probably sometimes (inaudible) to go look at houses, it’s like livable
square footage that’s as big as the house.
Ms. Gitelman: I don’t think we can change the definition of gross square feet tonight, but you could give us the direction to apply the fee based on gross square footage plus basement,
certainly. You know, whatever, we should…
Ms. Srivastava: I’m not sure. When we looked at the new development projects we didn’t see basements on the newer projects. (crosstalk)
Ms. Gitelman: Single family detached we’re getting basements and we’re getting basements in part because it doesn’t count towards FAR.
Council Member Holman: Exactly, which is an incentive to demolish existing housing too. But we also have, oh shoot, it just slipped out of my head. We’ve only had I think one project
like this, but again you know, zone for what you want, right. What’s the housing type that we have in our code that allows basements? It’s like smaller units on smaller lots? I mean,
it’s more units on smaller lots?
Ms. Gitelman: Village residential?
Council Member Holman: Thank you. That’s what it is, village residential, and it allows for basements. I think we’ve only seen like I said, one project like that, but I think as long
as we’re doing this we ought to cover what we need to cover. We’re not going to go back and clean this up for a while. And the other thing is, do we have, I haven’t seen that there’s
an inflationary rate in any of these fees.
Ms. Gitelman: Well, I think the City has a standard practice of adjusting Impact Fees on an annual basis, as Eloiza indicated, so, I mean, we think that kind of regular adjustment will
happen and then it’s probably good best practice to have a more in-depth look every, you know, seven to ten years or something.
Council Member Holman: The other thing was a question that Herb asked, was about which is greater, the 7.5 percent or the Impact Fee?
Ms. Gitelman: That table that we have been looking at, (crosstalk) it shows that analysis.
Council Member Holman: Okay, and I didn’t catch which is it?
Ms. Gitelman: If you’re paying the fee, the $50 a square foot with these prototypes is going to be more than the 7.5 percent, again with these prototypes.
Council Member Holman: Okay, thank you.
Chair Filseth: So I have a sort of a very high-level question here, which is, I understand the principle of the Impact Fee on the commercial, and you folks started to get at this, what
I’m going to ask in a minute here, a little bit earlier, but the principle is you have the maximum, I’m sorry, you have the justifiable level and the feasible level. And the justifiable
level works as follows, if I understand it right, say I put up an office building and it produces a bunch of jobs, in order to support those jobs, I need a certain amount of housing
and a certain amount of that housing needs to be affordable because I have a mix if different kinds of jobs and so forth and some people live here and so somebody has to pay the cost
of that affordable housing, and the Nexus Study is a calculation of that, and you can agree with the Nexus Study or not agree to the Nexus Study. You guys have a giant model running
on a thousand core computer that crunches the stuff out. You have your model, right. But if we accept that number and that number, which is the justifiable number is the cost of providing
the affordable housing of that project, that’s the justifiable cost. The feasible cost is the one at which in principle of which, the threshold of which, if we raise it a dollar more
the developer is going to say, “I’m not going to build that building, I can’t make money on it. I’m going to go to some other town and do it there.” And that’s the two parameters and
historically all our fees have actually been below the maximum feasible cost, okay, but in principle, we we’re talking commercial here, in principal anything less than the justifiable
cost is a subsidy from the community to the developer, right. Because the developer is imposing a cost on the community of providing affordable housing and your formula calculates that
cost. And if I agree with your formula, than whatever the difference between the justifiable fee is and what we charge is paid by the community, right?
Ms. Gitelman: This assumes all the affordable housing actually gets built.
Chair Filseth: Assuming the affordable housing, and I am assuming the affordable housing gets built and it doesn’t to, you know, the local (inaudible) with his army out in the desert
somewhere.
Ms. Gitelman: Or by neighboring communities, long commutes to…
Chair Filseth: Assuming that it actually gets built, right, that’s the principle. The housing one I’m less clear on. So are we saying the same thing, which is that if I put up an apartment
building, the fact that I’m putting up an apartment building causes a need for affordable housing, if I haven’t put in any. Why is that? I mean the jobs thing I understand, okay. If
I put up housing for 100 units, market-rate housing, why do I need 15 affordable units to go with that?
Ms. Srivastava: So it’s a more indirect relationship where what you are demonstrating is that new households, they are new to your community. They weren’t here before. They are spending
money in the local economy, and I think Hillary described it well. You know, they’re going to the coffee shops, they’re going to the gyms, they’re generating demand for services that
are associated with jobs. (crosstalk) Right. And many of those are low-wage jobs because they are the nail salons, and they are your housekeepers, right. So, we are only capturing the
ones that are very low, low and moderate income households that are related to those.
Chair Filseth: Got it. So in other words, if I put up a purely residential project, there is a cost to society in terms of, to the community in terms of providing affordable housing
and if the developer of the apartment building pays less than the justifiable rate for that, then that also is getting subsidized by the community, assuming it gets built. Okay, and
the reason that I’m sort of thinking about this stuff is going back to Greg’s issue of, you know, the fees for housing versus the fees for commercial and so forth, right. Because by
extrapolation from what, as you were talking, I was thinking, well, why do we have a fee at all on housing? I mean, why shouldn’t the Impact Fee for housing be zero, right, if we’re
going to encourage housing. But the answer is, because there is a subsidy paid for by the community, right, if we don’t set it at the justifiable. We’re only talking about the feasible
level here, right, if there is a subsidy by the community. So as I think about Greg’s issue, which is, commercial versus residential, you know, because I mean, somebody’s got to, if
we want affordable housing in town somebody’s got to pay for it, right. And if the developers don’t pay for it, then the general fund has to pay for it or somebody’s got to pay for it.
So the issue of, so Greg’s talking about, you know, why shouldn’t the Impact Fees for residential be significantly lower because of this balance between, I mean, I think that’s where
you’re going, because the balance of commercial, and then but I’m sort of thinking about it the other way, which is, why shouldn’t the commercial ones be higher. And it comes back to
the issue of the target on your back that you talked about, right?
Ms. Gitelman: Well, it’s not…
Chair Filseth: But we can’t have it all ways here, right.
Ms. Gitelman: I mean, I think we’ve provided a couple of different reasons in the Staff Report about why we don’t think you should set the fees above the maximum feasible.
Chair Filseth: Yeah.
Ms. Gitelman: For one, one of our objectives is to generate revenue, generate funds for affordable housing development. (crosstalk)
Chair Filseth: But if the model is right, okay, if not enough affordable housing gets built, then I have actually made the affordable housing problem worse, because if I put up this
office building, okay, and your model says in order to support that office building we need 20 affordable housing units and we only get 10 built, now I’ve actually made my affordable
housing problem worse than it was before. I mean, it’s the same argument as I lose money on every widget, but I make it up in volume, right.
Ms. Srivastava: We would have to, you know, chase that line of reasoning down with examples to test that theory out, but we provided that reason for not going above the maximum feasible
and also because, you know, these fees are set at a point in time. It wasn’t at the peak of the market, but the market is strong right now and so we feel like there will be downturns,
there will be projects that don’t exactly mirror these prototypes and it would be strategically not a wise decision to set something based on the maximum justified because then you lose
the argument, basically, that you’ve created room there to account for these variabilities in the market and the prototypes and the methodology and all that stuff.
Chair Filseth: But the risk is, there’s two risks. One is, somebody will sue, right? The other is we’ll lose the building to Menlo Park, okay. But if we’re losing money on the building
or if we’re losing affordable housing on the building, then it shouldn’t bother us too much that it goes to Menlo Park.
Ms. Gitelman: Then we won’t get the funds to put towards affordable housing in our community.
Chair Filseth: But it will create a demand for more affordable housing than it actually produces, so we’ll be worse off in affordable housing.
Ms. Gitelman: Well, that would depend on the specifics of the project or the prototype, so we’d have to test that theory. I mean, I recognize your theory, that it could create a greater
demand then you are able to satisfy with the fees that you collect, but I don’t know that to be true in 100 percent of the cases, or even 50 percent and we would have to test that.
Chair Filseth: But the model here says, the justifiable fee for office is $264 a square foot and we’re proposing $60, now that’s a lot of leeway.
Ms. Gitelman: It is.
Chair Filseth: So I guess the thing that I kept thinking as you were talking is if we really think that there’s a problem with the imbalance between the commercial side and the residential
side, maybe we should consider more than $60 on the commercial side, any amount of leeway and the principal of, you can’t make up in volume what you’re losing on each one.
Ms. Gitelman: I think our recommendation, if you’re seeking a greater balance, is not to raise the commercial, but to lower the residential. Because the residential we’re suggesting
is high too, when you compare it to other communities.
Chair Filseth: But then we’re subsidizing that, you’re subsidizing both.
Ms. Gitelman: It is the case that communities do not charge what they can.
Chair Filseth: I’m aware of lots of communities in the United States, okay, who wanted to attract jobs, industry, development and it may again be true in Palo Alto in some years, but
less strong at the moment in Palo Alto.
Ms. Gitelman: Understood, and I think $60 a square foot since then.
Chair Filseth: As for the other issue, which has to do with encouragement of developers to put it on site instead of paying an in-lieu fee, that seems like a desirable thing to me too.
I think whatever Cory’s line of reasoning was let’s direct Staff to go figure out how to do it is probably the most prudent. I personally would like to see us adopt a fee regimen tonight
and that can move forward while you investigate how to do it. Okay, that was my question.
Ms. Gitelman: I don’t want to lose sight of the idea too, that Council Member Holman pointed out, which is the opportunity to encourage the commercial developers to build units on site
where there is a mixed-use zoning district, or to build off site, or to deed restrict existing units, if the Council is amenable to those solutions as a way to address the housing impact
of the commercial development.
Chair Filseth: It’s a reasonable thing, I think it’s a reasonable thing, but you know, as long as we avoid sort of the pathological case that we seem to get a lot of where, you know,
it ends up being the project we pulled off the consent calendar last night as one of those, you know. Several tens of thousands of square feet of office space plus two apartments.
Ms. Gitelman: But if they were deed-restricted as affordable apartments to address that project’s affordable housing demand?
Chair Filseth: I’d rather there were ten there instead of two, or twenty or something like that. Two at a time, we’re not going to get that far.
Council Member Wolbach: Well, maybe we could reduce it proportionally, so the proportion, sorry, I was just going to say, if they provide… if their Impact Fee that they’re going to pay
is X and they provide, and that’s designed to provide for the construction of Y units, and they provide 0.5 Y units on site, then they would only have to pay 0.5X. Sorry for the algebra.
Chair Filseth: That’s fine. Probably the point that we agree on is, or that we all agree on, is that it’s a desirable thing and we need to design it so it’s not easy to abuse, right.
We give out some huge concessions for a really, really tiny impact on… Okay, do you have a Motion in mind?
Council Member Wolbach: I did.
Chair Filseth: Does anybody else want to comment?
Council Member Wolbach: Actually, I wanted to ask, because I mentioned my hesitancy around, before I make a Motion, I want to hear your all thoughts, I’d mentioned my ambiguity around
the hotel rates because of the bottom line financial benefit to the City from hotels, but at the same time recognizing the jobs that hotels create and the housing that goes with that,
so I’m ambivalent about where between 20 and 30 we should set the rate for hotels, so I would like to hear from my colleagues before I do a Motion.
Chair Filseth: Can I throw a thought on that, 50,000 square foot hotel, $10 a square foot difference, $500,000. What’s the cost to build a hotel around here, $100 million or something
like that?
Council Member Holman: I have a question for Staff. So for hotels, does anybody, maybe it’s a question for you, does anybody require the hotel development to provide BMR units on site?
And the reason I bring that up (crosstalk), yeah, and the reason I bring that up is because so many of the hotel staff are, you know, the wait people and the maids and that sort of thing,
that otherwise are going to be traveling or scrambling trying to find a place to live that they can afford to serve the hotel. Does anybody do that?
Ms. Srivastava: I’m not aware of any community that’s done that.
Council Member Holman: Is there any reason we couldn’t do that?
Ms. Gitelman: Where we have mixed use zoning we could think about doing that. I know the hotel developers I’ve worked with in the past we’ve asked those questions, you know, would you
consider, and it’s rare that they’re receptive to that idea. I mean, it’s a developer that builds one thing and they don’t know how to build another thing. But…
Council Member Schmid: Turnover is too high to do that.
Ms. Gitelman: Pardon me?
Council Member Schmid: Turnover is too high in hotel employment. I don’t think it would work.
Council Member Holman: I don’t know why turnover is an issue. It’s like the unit is available for whoever is working there.
Ms. Gitelman: I mean we would certainly offer that as an option, and try to encourage that. The question is whether the Council would want to require that in mixed-use districts. I think
you would get some pushback from the…
Council Member Holman: So it’s usually not mixed use. It’s the hotel overlay. So if someone’s going to build a hotel, I think like some other Council members, that 2.0 is too high. We
went to 1.5 and it still not incentive to build a hotel, so could we not incorporate that into the hotel overlay? Should the Council Members want to go there.
Ms. Gitelman: Yeah, I would have to look into that. I’m not familiar enough with that overlay zone to advise you on that right now.
Council Member Holman: I didn’t mean to be argumentative, Greg. It’s just like the unit would go with the staff person, not a dedicated unit to a person, it would be for the staff.
Ms. Gitelman: I’d have to look into that.
Council Member Holman: Is anybody else interested in that?
Council Member Wolbach: As an option, but I am sympathetic to the concern that, you know, if somebody is good at doing one thing and don’t know how to do something else, they might just
not do it, might not engage at all if we require them to do mixed use where they’re not prepared to do mixed use. As long as…
Chair Filseth: I wonder if that ends up in the bucket of stuff that’s investigate how to sort of, you know, influence developers to put it on site versus do the in-lieu, I wonder as
part of that.
Council Member Wolbach: Actually, that’s kind of the direction I was going to go.
Council Member Holman: And I guess I’m trying to get away from this mixed-use thing because I think every hotel that’s been built in the last several years has been built with the hotel
overlay, not in mixed-use zoning, not with mixed-use zoning. I just want to make sure we’re talking apples-to-apples.
Council Member Wolbach: So we might have to change our zoning to allow for hotel zoning to include residential mixed with hotel?
Council Member Holman: We do still already allow for extended stay, and I guess when it comes to, it’s not what they build, it’s like, it’s a place for people to sleep and it’s the same
thing as a hotel room. (crosstalk) I’m not arguing with you. I’m just saying I’m just not understanding the difference particularly.
Chair Filseth: Alright, do you have a Motion in mind?
Council Member Wolbach: Yeah. So I’ll move that we recommend drafting of an affordable housing Impact Fee Ordinance using the Staff recommendations found in Table 1, Page 3 of the Staff
Report. I can read those numbers if it’s necessary, but I don’t think it is. And that we…
Council Member Holman: I’m sorry, looking at column 2 or column 3?
Council Member Wolbach: Oh, column 3. (crosstalk). It’s the column that’s proposal based on Finance Committee direction, and that we also direct Staff and PTC to explore options for
office and R&D and hotels to proportionally reduce their Impact Fee payment by providing BMR housing on site or off site, yes.
Ms. Gitelman: And would you be amenable to deed-restricting existing market-rate units as below market to meet some of the requirement?
Council Member Wolbach: Yes, potentially including that.
Council Member Holman: I’ll second that. Are you through with your Motion? Okay, I’ll second it then.
MOTION: Council Member Wolbach moved, seconded by Council Member Holman to recommend:
Staff draft an affordable Housing Impact Fee Ordinance using the Staff proposal based on the Finance Committee recommendations found in Table 1 of the Staff Report; and
Staff and Planning and Transportation Commission explore options which would allow Office, R&D and Hotels to proportionally reduce their Impact Fee payment by providing Below Market
Rate housing onsite or offsite or by deed restricting existing units as affordable.
Chair Filseth: Care to speak to your Motion?
Council Member Wolbach: We’ve spoken a lot tonight, so I won’t say too much more. I will try to be fairly terse, but just to summarize, frankly, I am fine with milking developers, but
I don’t want to kill the cow. I think that it is reasonable to demand all that we can of developments to compensate the community for the impacts of their development, particularly when
it comes to the need for affordable housing, and setting these fees at the maximum feasible for commercial development is prudent and reflects, I think, a growing sense in the community
that we have a preference for housing, particularly affordable housing over rampant commercial development, and further, that I think this will help further the goal of providing affordable
housing units on site rather than simply paying fees.
Chair Filseth: Care to speak to your second?
Council Member Holman: Yeah, I think it’s definitely going in the right direction. Definitely rather have the units on site than the money, because it never covers the cost of actually
building the units. I do, though, have the question still about, for instance, one four bedroom unit versus two twobedroom units, if we have any way of doing that, because our BMR Ordinance
talks about similar units when we’re doing the affordable units, so I don’t know how we address that or if we just live with whatever the developers building is what we get for the affordable
units. You know what I’m saying?
Chair Filseth: Are you asking the question about if you tear down four small ones and build two big ones?
Council Member Holman: No, I’m saying if a developer is building six units of 1200 square foot each, then our inclusionary Ordinance talks about having the BMR units be also 1200, I’m
making it up, 1200 square foot units, so that wouldn’t be a four bedroom, but… So how do we address that?
Ms. Stump: So Council Member Holman, is your idea that in some cases it might be more practical or desirable to use this to focus on smaller units, even though the development that’s
being constructed for whatever reason is larger. Is that your question?
Council Member Holman: Yeah.
Ms. Stump: I think, just to highlight for you, I think there would be a fair housing issue there, so I would like us to look at that and take a look.
Council Member Holman: I’m not wedded to it, I can see how it could be… So that’s maybe a clarification. Then also, how square footage is counted for both commercial, hotel and residential
projects. In other words, specifically if basements are counted in all those situations or not, even if they don’t count for a ratio. If they count when you’re calculating Impact Fees?
And then, how do I bring up this issue about lost units. Do we go ahead and act on this Motion and then…
Council Member Wolbach: Colleagues memo.
Council Member Holman: Well, it’s, maybe…
Chair Filseth: Ask the City Attorney.
Council Member Holman: Yeah, that’s what I’m looking to. How do I bring up this thing about lost units?
Ms. Stump: Well, I am…
Council Member Holman: Not to debate it, but just to bring it up.
Ms. Stump: No, no, I understand. I am concerned that is potentially another interesting, fruitful, but significant complex topic for your small Staff to have to take on, so I don’t think
we can just kind of, I think there needs to be a process in order to honor what we did at the recent Committee as a whole.
Ms. Gitelman: I actually think that’s going to come up in the Comp Plan land use settlement, which will provide a policy foundation again, for that, to pursue that as an Ordinance of
some kind in the future. It is significant, I mean, it is different than the issue we’re discussing this evening.
Council Member Holman: I understand that. I was just saying, how do we get it forwarded and this Committee can’t direct Staff to go do a lot of that homework either, but I was trying
to get, like how do we get this in front of the Council? Does it have to be a colleague’s memo? It sounds like you’re saying it’s going to come up during the com plan discussion?
Ms. Stump: I’d be shocked if it doesn’t and land-use element will come to the Council. If you don’t see it there in sufficient clarity when you see that land-use element, that would
be a time for you to add that.
Council Member Holman: Okay. I think given that only one other thing, which is for the maker, do we want to put in front of the Council a consideration of an increase from 15 percent
for something, you know, incremental between 15 and 25 for inclusionary?
Council Member Wolbach: I don’t think that is appropriate for this Motion, this agenda item tonight. I would put that in the same category as the loss, the concern about the loss of
units, both of them. I’m very interested in having that discussion, but I don’t think this is the right venue for that discussion.
Council Member Holman: I look to Molly. Is that something that could be put in front of the Council to look at?
Ms. Stump: To increase the percentage of BMR?
Ms. Gitelman: We specifically identify that in the Staff Report as something we could take up as a separate matter in a later Ordinance. I mean, that would be itself, quite a discussion
and an effort to move forward with.
Chair Filseth: Just because they had a little discussion on it in San Francisco we’d have some too?
Ms. Gitelman: And a controversial election with the competing ballot measures and further discussion to follow.
Council Member Holman: Okay, given that and the clarification around what counts towards the calculation of the Impact Fees, are you good with that?
Council Member Wolbach: Were those amendments?
Council Member Holman: Yeah, the clarification of what counts towards…
Council Member Wolbach: Did Staff see that to be in the Motion?
Ms. Gitelman: Well, I mean, I think we’ll have to draft an Ordinance that says how the fees are calculated, so we’ll have to specify and get the Commission’s review and the Council’s
acceptance of how that’s…
Council Member Holman: Clarification of how, what square footage is counted towards calculating Impact Fees and In-lieu Fees.
Chair Filseth: Make it clear, is there a specific amendment, or is it simply a direction to Staff?
Council Member Holman: Direction to Staff because they have to do the work anyway.
Council Member Wolbach: And actually I wanted, if I might, just one thing I forgot to mention in the Motion. I just wanted to ask, this question of further defining infeasible. It sounds
like there is always some interest in exploring that. Does that need to be in the Motion or is Staff already going to be looking at that very carefully?
Ms. Gitelman: We’re already committed to do that as part of this Ordinance.
Council Member Wolbach: Okay, thanks.
Chair Filseth: Council Member Schmid.
Council Member Schmid: Yeah, Amendment that the ratio between the fee on Office/R&D and market rate rental housing be at least 2:1.
Council Member Wolbach: I don’t accept it as a friendly amendment.
Chair Filseth: Is there a second?
Ms. Gitelman: Do I understand that what you’re suggesting is that the housing fee would be $30 instead of $50?
Council Member Schmid: For market rate rental housing.
Chair Filseth: He’s proposing changing…
Ms. Stump: I just want to make sure I understood.
Council Member Schmid: At Staff’s option you could raise the rate on Office/R&D.
Chair Filseth: I think at this point, rather than giving Staff a direction to move the numbers around, I think we should fix on some numbers here.
Ms. Stump: And again, just to recall to the Committee’s attention that the current material that’s before you does support the $60 fee. If there was a substantial interest in something
different from that, then we really will need to do some additional work.
Council Member Schmid: Okay, I’m willing to make market rate $30 a square foot.
Chair Filseth: And by the way, this is going to come in front of the Council, which is the Council could change these numbers too. Sorry. Is there a second for Council Member Schmid’s
Motion?
AMENDMENT: Council Member Schmid moved, seconded by Council Member xx that the market rate rental housing fee be set at $30 per square foot.
AMENDMENT FAILS DUE TO LACK OF A SECOND
Chair Filseth: Motion fails for lack of a second. You still have the floor.
Council Member Schmid: No, that’s good.
Chair Filseth: Is there any further discussion on this point? Going once. All in favor? All opposed.
MOTION PASSED: 3-1 Schmid no
Chair Filseth: Motion carries. Three in favor. Council Member Schmid no.
Ms. Gitelman: Thank you. We will endeavor to write this Ordinance and get it moving to the Commission and the Council.
Chair Filseth: Thank you very much for all your diligence on this and putting up with us and staying late and a complicated area that a lot of people have a lot of passion about.
Future Meetings and Agendas
Lalo Perez, Chief Financial Officer: Let me go over the future agendas, if you don’t mind, Chair Filseth. So this is the last meeting before your break. (crosstalk) Behind today’s agenda.
So the next scheduled meeting is August 16, but I do not have any agenda items at the moment, so…
Council Member Holman: August 16 or August 6?
Mr. Perez: August 16. Your break goes through August 12.
Council Member Holman: This says 9/6?
Mr. Perez: Right, so I’m just saying the items that are listed here are the items that have agendas, so what’s not listed here is 8/16, but that’s because it doesn’t have an agenda.
So the next scheduled meeting with an agenda is September 6, and that’s the policy on use of low-carbon fuel standard credits. Depending on what the Council does, this meeting may get
moved because that’s the day before Labor Day, and sometimes the Council tends to want to meet on the following day after the holiday, so that could bump us from a Finance Committee
meeting. But we do have 9/20 and it has no agenda, so it could work if we end up getting bumped. There are no agendas for October at this moment, but that doesn’t mean there won’t be
any. And then, as you can see here, no agenda for the first of November, but there is on the 15th of November and that’s our year-end financials and then the Comprehensive Annual Financial
Report (CAFR). There’s only one meeting in December because the third Tuesday lands on your winter break, so we will have to get in to see you to talk about the balancing of the fiscal
year ’18 proposed budget. As Suzanne is leaving, I want to thank her and her leadership, because this is her last meeting of Finance. (crosstalk)
Suzanne Mason, Assistant City Manager: It’s been a pleasure. Lalo has it well under control.
Chair Filseth: Thank you Suzanne.
Mr. Perez: So the 6th is going to be an important meeting and we’ll probably have jammed with agenda items.
Chair Filseth: I was going to ask that. You know, I know we’re all so excited about going over budget stuff after having such a refreshing May doing it, right, but I assume that there’s
going to be a bunch of content in that in the second half of the year.
Council Member Schmid: Yeah, Jim has mentioned to us to do something earlier.
Mr. Perez: Yes, that’s right. So we will work on that. We’re posting our positions so we can rebuild the bench and the budget team and then…
Chair Filseth: Just let Kiley do it all.
Mr. Perez: You know, we do have some news for you, she has accepted the position of Office of Management and Budget (OMB) Director, so she is officially…
Council Member Holman: Congratulations.
Mr. Perez: So we’re very happy to keep somebody talented and energetic that can keep up with the work.
Council Member Holman: She did a great job.
Mr. Perez: I agree. That’s why we were very fortunate… Yes, the whole team, you’re right, what’s left of them. So that’s all I have.
Chair Filseth: Thank you very much. And with that we are adjourned.
Adjournment: The meeting was adjourned at 9:23 P.M.
TRANSCRIPT
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Finance Committee Transcript
June 21, 2016
FINANCE COMMITTEE
TRANSCRIPT
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Finance Committee Transcript
June 21, 2016