HomeMy WebLinkAboutStaff Report 6490
City of Palo Alto (ID # 6490)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 2/16/2016
City of Palo Alto Page 1
Summary Title: Residential/Commercial Impact Fee Studies
Title: Commercial and Residential Impact Fee Nexus Studies and Recommend
Affordable Housing Impact Fees
From: City Manager
Lead Department: Planning and Community Environment
Recommendation
Staff recommends that the Finance Committee review the Residential and Commercial Impact
Fee Nexus Studies and forward the Studies to the City Council with a recommendation for
adoption of the affordable housing impact fees shown in Table 1, below.
Executive Summary
Staff recommends that the Finance Committee review the Residential and Commercial Impact
Fee Nexus Studies and recommend adoption of new affordable housing impact fees as follows:
Table 1. Existing and Proposed Affordable Housing Fees
Existing Fees Proposed Fees
Office/R&D $19.85/sf $35/sf
Hotel $19.85/sf $30/sf
Retail/Restaurant/Other $19.85/sf $19.85/sf
Market Rate Single Family Detached* 7.5 to 10% of sales price $95/sf
Market Rate Single Family Attached* 7.5 to 10% of sales price $50/sf
Market Rate Condo* 7.5 to 10% of sales price $50/sf
Market Rate Rental Housing None $50/sf
*Market rate ownership housing projects are currently subject to City’s Affordable housing in lieu
fees. Market rate rental projects are exempt from this requirement.
Source: Department of Planning & Community Development, January 2016
In April of 2014, the City entered into contract with Strategic Economics and Vernazza Wolfe
Associates, Inc, (Consultant) to develop two nexus studies for commercial and residential
impact fees to mitigate the impact of new development on the demand for affordable housing.
City policy requires that impact fees be periodically reviewed to determine whether they are
set at appropriate levels.
City of Palo Alto Page 2
Final drafts of the two studies were provided to City staff in late November 2015. The Draft
Commercial Linkage Fee Nexus Study (Attachment A) and the Draft Residential Impact Fee
Nexus Study (Attachment B) are attached to this report.
Background
An impact fee is a monetary exaction that is charged by a local governmental agency to an
applicant in connection with approval of a development project for the purpose of mitigating
impacts of the project. There must be a “nexus” or connection between the fee and the actual
impacts of the project, and the fee must be “roughly proportional” to the impact the project is
creating. In order to establish a reasonable relationship between the development project and
the fee it is charged, cities typically commission “nexus studies.”
If a city has already established an impact fee through a nexus study, it is typical for a
municipality to periodically commission a new study to determine whether the fee level is
appropriately set.
City’s Affordable Housing Fund
Since 1974, the City of Palo Alto has recognized the need for programming and funding to
support affordable housing goals. In that year, the City began receiving Community
Development Block Grant (CDBG) funding, and created a below market rate (BMR) program
that required market-rate housing developers to include BMR units in their developments, or
collect in-lieu fees if including such units was impractical.
The City’s affordable housing programming expanded in 1977 with the creation of the
Commercial Housing Fund, which requires non-residential developments to pay an impact fee
based on the new net square footage of the project. Today, the City collects $19.85/square foot
of new net space for the fund. Along with the Home Investment Partnership Fund and the
Below Market Rate Emergency Fund, these five sub-funds make up the City’s Affordable
Housing Fund.
Palmer Decision
In 2009, the California Court of Appeal, in Palmer/Sixth Street Properties L.P. v. City of Los
Angeles, held that requiring inclusionary housing in new rental housing projects violates the
Costa Hawkins Act. The Costa Hawkins Act allows developers of new rental housing to set the
initial rental rate and provides that owners of existing housing may set the rental rate
whenever the units are vacated (“vacancy decontrol”). The Court found that limiting rents in
new rental housing to make them affordable violated the Costa Hawkins Act. It also found that
in-lieu fees were “inextricably intertwined” with the prohibited rent control and so also
prohibited. To date, legislative fixes exempting BMR programs from the Costa Hawkins Act have
not been successful.
City of Palo Alto Page 3
The City may still impose inclusionary requirements on for-sale housing, which is not affected
by Palmer. Rents can also be restricted if the developer agrees by contract to restrict rents in
exchange for a subsidy (i.e. loan) or a regulatory incentive, such as a density bonus. However,
the City has not been able to enforce the City’s current BMR ordinance on rental housing
projects receiving no subsidy or other incentive.
In response to Palmer, communities have completed nexus studies to determine the impact of
market rate rental housing on the need for affordable housing and then have imposed a
housing impact fee (as opposed to an in lieu fee) to mitigate the impact. Nexus studies also
usually examine the impact of market rate for-sale housing on the need for affordable housing
to provide additional justification for cities’ BMR requirements.
Housing Costs in Palo Alto
At about the same time as Palmer was decided, the economy began its slow recovery from the
Great Recession. This recovery started sooner and has come more quickly in Palo Alto than in
neighboring cities, and the costs associated with this recovery in the housing sector are
extreme.
Since 2010 the purchase price of an average priced home in Palo Alto has increased 259% from
$900,785 to $2,337,500.1 Rental costs have also skyrocketed from an average of $1,695 in 2010
to $3,105 in 2015.2 This rapid increase in housing costs has resulted in fewer people being able
to afford to either live or continue to live in Palo Alto, resulting in longer commute times,
heavier traffic, increased parking demand, and an overall decrease in the quality of life of all
affected.
The improved economy has also brought increased pressure on the non-residential market to
produce more office and commercial space and less residential space, further eroding the
potential for an improved housing stock. Land values have skyrocketed, but the pace of this
growth in value has not been matched with an up-to-date mitigation fee structure.
Twenty-One Elements
As early as 2008, the County of San Mateo and its twenty cities began discussing collaborative
options for the region to better plan for and share increased housing needs as part of the
housing element process. These conversations led to the creation of a housing element toolkit
called “Twenty-One Elements” that not only emphasizes shared responsibility in developing
housing elements, but took into account broader housing creation needs. Individual members
of the Twenty-One Element working group, joined by Palo Alto, hired a consultant to prepare
up-to-date nexus studies showing the impact of commercial and residential construction on the
need for affordable housing and to determine justified housing impact fees. Although the City
of Palo Alto is not a member of Twenty-One Elements, the City has continued to work with the
same consultant group, led by Strategic Economics, to produce two impact fee nexus studies.
1 Source: Trulia.com, January 4, 2016
2 Source: Rentjungle.com, January 4, 2016
City of Palo Alto Page 4
Discussion
In conjunction with staff input and management, Strategic Economics and Vernazza Wolfe
Associates, Inc. (the consultants) prepared two nexus studies: one for residential construction,
and one for commercial construction. Each used a similar methodology to generate data and
conclusions as shown in Table 2. More detail is provided in the nexus studies.
Table 2. Affordable Housing Nexus Studies -- Methodology Overview
Residential Commercial
1. Develop a prototype Single Family Detached Hotel
Single Family Attached Office/R&D/Medical Office3
Condominiums (sale)
Apartments (rental)
2. Determine Household
Income of Residents and
Disposable Income
X
3. Determine Employee
Density4 X
4. Number of New Worker
Households Created X X
5. Worker Household Incomes;
% Needing Affordable
Housing
X X
6. Affordability Gap between
cost to purchase/rent
housing and the cost to build
X X
7. Maximum Fee Calculation
X X
8. Feasibility Analysis X X
9. Recommended Fees X X
Source: Department of Planning & Community Development, January 2016
This is a standard methodology that is used in creating nexus studies of this nature and resulted
in the recommendations discussed below.
Commercial
3 A third commercial prototype was initially considered for a retail/restaurant/personal services but such a
prototype has only rarely been constructed in Palo Alto in recent years, and the staff’s recommendation is to
maintain the current fee of $19.85/new net square footage for retail/other based on the prior nexus study.
4 For each building prototype, an average employment density was defined based on a review of national survey
data for existing buildings and a review of recently completed linkage fees nexus studies in the Bay Area. A more
refined local assumption could be incorporated into the analysis based on business registry data if desired.
City of Palo Alto Page 5
The nexus study shows that the City could significantly raise its impact fees on hotels and
office/R&D/medical office space construction and recommends that the current fee of $19.85
be raised to $30 dollars/square foot for hotel, and to $35 for office/R&D/medical office.
The recommendations were developed based on the methodology summarized in Table 2, and
the consultant’s conclusion (in Step 7) that the maximum justifiable fees for each prototype are
$177 and $264/square foot, respectively. Then the feasibility analysis (in Step 8) concluded
that the maximum feasible fees for each prototype are $30 and $60 per square foot
respectively. The final recommendation (Step 9) of $35 per square foot for office/R&D/medical
office, which is more than 80% less than the possible maximum, and about 40% below the
feasible maximum, is based on a comparison of fees in neighboring jurisdictions and a
consideration of other relevant policy considerations including total development costs,
comparison to existing City fees, the role of the fee in the City’s overall housing strategy and the
overlap with residential impact fees. One additional factor to consider is that some percentage
of new workers may already be housed in Palo Alto or nearby communities.
The drivers for the recommended increases are the high level of returns for each prototype (the
project’s profitability). Revenues from office lease rates or hotel room rates are the basis for
calculating annual income from new commercial development. The total operational costs are
subtracted from the total revenues to calculate the annual net operating income. The return on
cost is then estimated by dividing the annual net operating income by the total development
costs. The fee levels were then added as an additional development cost to measure the
resulting change in the developer’s return on cost.
The key revenue and cost inputs to the financial pro forma analysis are based on market
research and published resources. The data inputs are explained in more detail below.
Revenues
To estimate income from commercial development, the pro forma analysis used rental
data from Costar for the Palo Alto market for existing retail and office buildings. A 10
percent revenue increase was applied to account for the value premium of new retail
and office/R&D space. To calculate hotel revenues, the Consultant Team interviewed
hotel managers of hotel properties in Palo Alto to determine average daily rates and
occupancy rates.5 The surveyed managers reported average rates of between $150 and
$400 for weekend, off-peak stays, and between $289 and $800 for peak, weekday stays.
Occupancy rates were reported at between 78 percent and 95 percent. Based on these
findings, the analysis estimated average daily rate at $240 per night, and occupancy
rates at 83 percent.
Direct and Indirect Costs
5 Properties surveyed include Hilton Garden Inn, Homewood Suites, The Epiphany, Hotel Keen, Dinah’s Garden
Hotel, Sheraton Palo Alto, and Garden Court Hotel.
City of Palo Alto Page 6
Cost estimates for the commercial prototypes include direct construction costs (site
work, building costs, and parking), indirect costs, financing costs, and developer
overhead and profit. Direct building construction cost estimates for office/ R&D/
medical office and retail/ restaurants/ services are based on RS Means, which is a data
source for construction cost data. Hotel construction costs were estimated based on
recent data from HVS Consulting and Smith Travel Research, and include costs for
Furniture, Fixtures, and Equipment (FF&E).
Land Costs
One of the critical cost factors for a commercial development project is land cost. To
determine the land value of sites zoned for commercial uses, the Consultant Team
analyzed recent sales transactions in Santa Clara County and reviewed third-party
property appraisals. The high average value of land per square foot in Palo Alto,
illustrated in Figure VI-5, is partly due to the relatively smaller average size of the sold
parcels. As a result, the Consultant Team estimated a commercial land value of $160 per
square foot, closer to the sub-market average.6 This approximate land cost is an
estimate for the purposes of this analysis; the value of any particular site is likely to vary
based on its location, amenities, and property owner expectations, among other factors.
Return on Cost Thresholds
In order to understand how the different fee levels impact financial feasibility, the
return on cost results can be compared to an investor’s expectations for each type of
development. The thresholds for this analysis were pegged to investor expectations
regarding overall capitalization rates (cap rate) for each product type in the Bay Area.
The cap rate, which is measured by dividing net income generated by a property by the
total project value, is a commonly used metric to estimate potential returns. Lower cap
rates signify high performing markets. In this analysis, the total project value is
equivalent to the total development cost. PWC Real Estate Investor Survey (Fourth
Quarter 2014) was the primary data source for determining cap rates for office/ R&D/
medical office and retail/ restaurant/ services uses. For hotel, cap rate data was
obtained from HVS, a consulting firm that tracks hotel markets. To ensure that the
financial analysis is conservative and does not reflect peak market conditions, the
thresholds selected for determining project feasibility are slightly higher than the
published cap rates. It was determined that the threshold for the return on cost is
between 6.75 percent and 7.0 percent for office/R&D/ medical office and retail/
restaurants/ services prototypes, and between 7.0 percent and 7.25 percent for hotel.
The financial feasibility analysis concluded that a fee of $30 per square foot or less is
feasible for hotel development. A fee of $60 per square foot or less is feasible for office
development. For hotel development, the recommended fee of $30 per square foot is
the maximum feasible fee based on the feasibility analysis. Even though the maximum
6 The commercial land value used in the proforma analysis is different from the calculated land value for the
affordability gap analysis because it is for commercially zoned land rather than multi-family zoned land.
City of Palo Alto Page 7
feasible fee is $60 per square foot for office/R&D, the recommended fee is $35per
square foot in order for the fee to be more compatible with the existing fees in other
local jurisdictions.
Neighboring Jurisdictions
Table 3, below (Figure VI-9 from the Commercial Linkage Fee Nexus Study) compares Palo Alto’s
existing commercial linkage fee and proposed fee scenarios with the linkage fees adopted by
nearby cities. As outlined in Table 1, at present, Palo Alto maintains a fee of $19.85 per square
foot for all commercial prototypes. This existing fee is similar to the linkage fees adopted by San
Francisco and Cupertino, which range from $16 to $24 per square foot, depending on the land
use. In most cases, cities have adopted higher fee levels for office/ R&D/ medical office uses
than for retail and hotel uses. For example, in Cupertino, the commercial linkage fee for hotel
and retail/ restaurants/ services is $10 per square foot, compared to $20 per square foot for
office/ R&D/ medical office uses. The maximum linkage fees calculated for all the commercial
prototypes, ranging from $177 to $295 per square foot are significantly higher than existing
linkage fees in neighboring Bay Area jurisdictions. Other cities in the Bay Area also have
commercial linkage fees that can be compared to the potential fee scenarios for Palo Alto
(Figure VI-10 in the Commercial Linkage Fee Nexus Study). The fee amounts vary significantly by
jurisdiction.
Table 3. Comparison to Neighboring Cities (Commercial)
Hotel Office/R&D Date Fee Adopted
Cupertino $10 $20 2015
Menlo Park (a) $8 $15 2014
Mountain View (b) $2.50 $25 2015
San Francisco (c) $18 $16-$24 2015
Sunnyvale (d) $7.50 $15 (e) 2015
Notes:
(a) Buildings 10,000 SF and under are exempt from fees. A new nexus study is currently
underway that may result in an updated fee.
(b) New gross floor area under 25,000 SF pays 50 percent of full fee.
(c) The fee for R&D is $16.01 and the fee for office is $24.03. The fee for a small enterprise is
$18.89.
(d) Approval of the proposed fees is pending a community process.
(e) The fee on the first 25,000 SF is discounted by 50 percent.
Sources: City staff and websites; Nonprofit Housing Association of Northern California, 2015;
Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
As noted earlier in this report, the nexus study identifies maximum justified fees for the hotel
prototype to be $177 per square foot and $264/square foot for the office/medical/R&D
prototype. However the recommended fees are $30 and $35 per square foot respectively. The
study not only looked at maximum justifiable fees, but also factored in the findings of the
City of Palo Alto Page 8
financial feasibility analysis, and a comparison of fees in neighboring jurisdictions. Other
relevant policy considerations referenced include: total development costs, comparison to
existing City fees, the role of the fee in the City’s overall housing strategy and the overlap with
residential impact fees. For hotel development, the recommended fee of $30 per square foot is
the maximum feasible fee based on the feasibility analysis. For office/medical/R&D, the
recommended fee of $35per square is approximately 40% less than the maximum feasible fee
of $60 per square foot, and was recommended to be more compatible with the existing fees in
other local jurisdictions.
Residential
The nexus study shows that the City could adopt significant impact fees on all four studied
prototypes (single family detached, single family attached, condominiums and apartments).
Maximum justified fees are $111/square foot for single family detached, $75/square foot for
single family detached, $90/square foot for condominiums, and $105/square foot for
apartments. The maximum feasible fees are somewhat less, as described further below.
The study recommends establishing a fee of $95/square foot for single family detached, a fee of
$50/square foot for single family attached, a fee of $50/square foot for condominiums, and a
fee of $50/square foot for apartments. The recommended fees are based on the results of the
financial feasibility analysis, a comparison with fees adopted in other Bay Area communities
and policy considerations including: comparison to existing City fees, role of the fee in City’s
overall housing strategy and potential overlap with the commercial linkage fee.
Similar to the commercial nexus findings, the driver for these fees is based on the high levels of
return expected on each prototype (the prototype’s profitability). Financial feasibility of the fee
options was tested using a pro forma model that measures the residual land value of a given
development project. Many pro forma models are structured to solve for the financial return
for the developer or investors (internal rate of return). In contrast, the residual land value
method of analysis solves for the value of the land. This method recognizes that the value of
land is inextricably linked to what can be built on it, and that development potential is heavily
influenced by zoning, lot size/configuration, neighborhood context, and other factors. The pro
forma model tallies all development costs (minus land) including direct construction costs,
indirect costs (including financing), and developer fees. Revenues from unit sales or rental
leases are then summed. The total project costs are then subtracted from the total project
revenues. The balance is the residual value, representing the price a developer would pay for
the land if pursuing that project. The fee levels were then added as an additional development
cost to measure the effect on the residual land value. Key inputs are described below.
Revenues
To estimate income from residential development, the analysis uses the sales prices and
monthly rents presented in Section III of the nexus study. These revenue assumptions
were based on a review of local and regional market data, including information on the
type of development that has been recently constructed or is planned or proposed in
Palo Alto; and current sales prices and rental rates of recently built residential
City of Palo Alto Page 9
development in Palo Alto and neighboring cities. For ownership projects (single-family
detached, single-family attached, and condominiums), the revenues are calculated by
multiplying the unit count by the sales price. For rental projects, the revenues were
estimated using an income capitalization approach. This valuation approach first
estimates the annual net operating income (NOI) of the apartment prototype, which is
the difference between total project income (annual rents) and project expenses,
including operating costs and vacancies. The NOI is then divided by the capitalization
rate (cap rate) to derive total project value.
Development Costs
Cost estimates for the residential prototypes include direct construction costs (site
work, building costs, and parking), indirect costs, financing costs, and developer
overhead and profit. Development cost estimates for the pro forma analysis are based
on RS Means and project proformas for recent projects in the region. Soft costs and
developer overhead/profit were calculated based on a review of similar project
proformas in the Bay Area. City fee calculations were provided by City staff.
Land Value
In order to understand what the different fee levels indicate regarding financial
feasibility, the residual land values for each fee scenario can be compared with the
market value of residential land in Palo Alto. If the residual value is higher than the
market value, the project is feasible. If the residual value is lower than the market price,
then the project is infeasible.
To determine the land value of sites zoned for lower density uses (single-family
detached and single family attached) and higher density multi-family residential uses
(condominiums and rental apartments), the Consultant Team analyzed recent sales
transactions in Southern San Mateo County and Northern Santa Clara County, and
reviewed third-party property appraisals. Figure VII-7 in the Residential Impact Fee
Nexus Study illustrates the results of the land value analysis for lower density single-
family detached and single family attached residential uses, while Figure VII-8 in the
Residential Impact Fee Nexus Study shows the value of properties zoned for higher
density multi-family residential uses. For lower density residential uses, values range
considerably depending on location and size, from $50 per square foot for the lower
quartile, to $172 per square foot for the upper quartile. For higher-density multi-family
housing, the range is between $96 and $228 per square foot, with a weighted average
(accounting for lot size) of $167. The majority of the sales shown in Figures VII-7 and VII-
8 were transactions that occurred earlier than 2014; today’s land values are likely to be
higher. Therefore, for this analysis, the estimated land value is estimated at between
$150 and $250 per square foot for higher density multi-family development, including
condominiums and apartments. For all prototypes, the market value of land is
presented as a range because the land value of properties is likely to vary depending on
location, size, and other conditions.
City of Palo Alto Page 10
The financial feasibility analysis concluded that a fee of $111 per square foot or less is feasible
for single-family detached development; a fee of $75 per square foot or less is feasible for
single-family detached development; a fee of $90 per square foot or less is feasible for
condominium development; and a fee of $85 per square foot or less is feasible for apartment
development. Although the financial feasibility analysis concluded that higher fees were
justified, the recommended fees are $95, $50, and $50 per square foot respectively. The
recommended fees are lower than the maximum justifiable fees in order to be more
comparable to surrounding jurisdictions. Even at the recommended fees, the fees will be higher
than other local jurisdictions with the exception of San Francisco, whose fees range from
$199,000 to $522,000 per unit, based on unit size.
Neighboring Jurisdictions
Table 4 below (and Figure VII-12 in the Residential Impact Fee Nexus Study), compares the fee
scenarios for Palo Alto with the current housing impact fees and in lieu fees in other nearby
cities. If either the maximum housing impact fee levels (Scenario 1) or the second-highest fee
levels (Scenario 2) were adopted in Palo Alto, they would significantly exceed the residential
impact fees charged in the neighboring jurisdictions in San Mateo and Santa Clara Counties.
However, San Francisco has adopted fees ranging from $199,000 to $522,000 per unit,
depending on the unit size, which are somewhat similar to the maximum fee levels calculated
for Palo Alto. If Palo Alto were to adopt the recommended fee levels its fees would be higher
than most other cities in San Mateo and Santa Clara Counties, but lower than the housing
impact fees in San Francisco.
The potential fee scenarios can also be compared with existing housing impact fees in other Bay
Area cities for regional context. This list is not an exhaustive inventory of all Bay Area cities with
housing impact fees, but it provides information about many cities that have fees on rental,
ownership or both types of housing. As shown in Figure VII-13 in the nexus study, housing fees
in other Bay Area cities vary significantly from city to city. None of the fees presented in Figure
VII-13 are as high as the maximum justified fee in Palo Alto. However, some of the cities, such
as Berkeley and Fremont, have impact fees that are similar to the lowest fee scenario evaluated
for Palo Alto.
Table 4. Comparison to Neighboring Cities (Residential)
Comparison with Impact Fees and In-Lieu Fees in Neighboring Jurisdictions
Palo Alto Fee Scenarios
Scenario 1 (Maximum) Per SF $111 $90 $75 $105 N/A
Per Unit $333,501 $189,037 $158,519 $101,906 Scenario 2 Per SF $95 $70 $50 $85 N/A
Per Unit $285,000 $147,000 $105,000 $82,571 Scenario 3 Per SF $75 $50 $40 $50 N/A
Per Unit $225,000 $105,000 $84,000 $48,571 Scenario 4
City of Palo Alto Page 11
Per SF $50 $30 $25 $30 N/A
Per Unit $150,000 $63,000 $52,500 $29,143
Impact Fees
Cupertino $15/SF $16.50/SF (a) $20/SF $25/SF 2015
Daly City $14/SF $18/SF (b) $22/SF $25/SF 2014
East Palo Alto $22/SF $22/SF $22-$44/SF (c) $22/SF 2014
Mountain View N/A N/A N/A $15/SF 2015
San Carlos (d) $23.54-$43.54/SF $20.59-$42.20/SF $20.59-$42.20/SF $23.54-$43.54/SF 2010
San Francisco (e) $199,698-$522,545/unit $199,698-$522,545/unit $199,698-$522,545/unit $199,698-$522,545/unit 2015
San Jose N/A N/A N/A $17/SF (f) 2014
Sunnyvale N/A N/A N/A $17/SF (g) 2015
Inclusionary Policies and In-Lieu Fees
Palo Alto 15%-20% 15%-20% 15%-20% N/A Mountain View 3% of Sales Price 3% of Sales Price 3% of Sales Price N/A 2015
San Jose (h) 15% or $17/SF in-lieu fee 15% or $17/SF in-lieu fee 15% or $17/SF in-lieu fee N/A 2014
Sunnyvale 7% of Sales Price 7% of Sales Price 7% of Sales Price N/A 2015
(a) This fee applies to small lot single family and townhomes.
(b) This fee applies to townhomes.
(c) Fee ranges from $22 per square foot for for-sale housing without structured parking to $44 per square foot for housing with structured parking.
(d) Fees shown as ranges. Actual fees charged depends on project size.
(e) Fee charged depends on unit size (number of bedrooms).
(f) Fee goes into effect in 2016. Developments approved by July 2016 are exempt with a longer exemption for downtown
development.
(g) Fees for projects that are between 4 and 7 units pay 50 percent of this fee.
(h) Inclusionary policy and in-lieu fee apply to for-sale developments of more than 20 units.
Sources: The Non-Profit Housing Association of Northern California; City of San Carlos Municipal Code; Vernazza Wolfe
Associates, Inc; Strategic Economics, 2015.
As noted earlier in this report, the residential nexus study identifies maximum justified fees for
the single-family detached prototype to be $111 per square foot, $90 per square foot for the
single-family attached prototype, $75 per square foot for the condominium prototype and
$105/square foot for the apartment prototype. However the recommended fees are $95, $50,
and $50 per square foot respectively. The study not only looked at the maximum justifiable
fees, but also factored in the findings of the financial feasibility analysis, a comparison of fees in
neighboring jurisdictions, and other policy considerations such as: total development costs,
comparison to existing City fees, the role of the fee in the City’s overall housing strategy and the
overlap with residential impact fees. The recommended fees were selected in order for the fee
to be more compatible with the existing fees in other local jurisdictions. Even at the
recommended fee levels, the City’s fees will be higher than all of the neighboring jurisdictions,
with the exception of San Francisco, whose fees range from $199,000 for a studio apartment to
$522,000 for a four-bedroom unit.
Comparison with Existing In-Lieu Fees for For-Sale Housing
The City has an inclusionary housing program that requires that 15 percent of the units in
market-rate developments consisting of five or more housing units must be sold at affordable
sales prices. This percentage increases to 20 percent on parcels larger than five acres. In some
cases, developers have the option of paying an in-lieu fee of between 7.5 and 10 percent of the
sales price or fair market value, whichever is greater. The developer must also pay a fee for
fractional units. Using the prototypes in Figure I-2 in the Draft Residential Impact Fee Nexus
Study, the fees collected under the existing method would be $228,225 for a 3,000 square foot
single family detached home, while the fee would be $285,000 if the fee were assessed at the
City of Palo Alto Page 12
recommended $95 per square foot. For the single-family detached prototype of 2,100 square
feet, the fee would be $124,950 under the existing inclusionary program and $105,000 if the
recommended fee were to be assessed at $50 per square feet. For the 2,100 condominium
prototype, the fee would be $104,250 under the existing program and $105,000 at the
recommended fee of $50 per square foot. The fees are comparable in most of the three
categories. The benefit of adopting the per square foot fees for the for-sale housing units would
be simplification, both in terms of calculating the fee, and in terms of administering the fee
program.
Conclusion
While fee levels can be assessed up to the maximum amount justified in the Nexus Study, in
practice, it is rare to assess fees at the maximum level and determining the appropriate level is
based on a variety of factors. Since studies are based largely on projections, cities recognize
there should be some allowance for market fluctuations and incorrect assumptions. Fee levels
may also be adjusted to incentivize certain land uses, so long as the fees of other uses are not
raised above the justified level. Thus in many neighboring cities, it is common to see lower level
fees applied to retail and hotel uses and higher fees applied to office. When setting fees, it is
also helpful to compare both the subject fee as well as the entire package of impact fees to
neighboring communities.
Timeline
The Finance Committee’s input will be used to inform preparation of an implementing
ordinance for consideration by the City Council. Staff is also preparing a companion ordinance
to reflect the Palmer decision and to update some administrative procedures. The Planning and
Transportation Commission will also have an opportunity to provide a recommendation (on the
ordinance) to the City Council.
If the City Council chooses to adopt new housing impact fees, the fees would become effective
after approval of the implementing ordinance. Under State law, ordinances implementing new
or higher impact fees go into effect 60 days (rather than the normal 30 days) following
adoption. The implementing ordinance would determine applicability to pending (pipeline)
projects.
Resource Impact
Adjusting affordable housing impact fees are anticipated to increase revenues to the City
making additional funding available for the preservation and construction of affordable housing
in Palo Alto.
Between fiscal year 2013 to 2015, the City received an average of $1.65 million for the
commercial housing fund. Based on the recommended fee adjustments for commercial
development, the commercial housing fund contributions could potentially increase by
approximately 85%.
City of Palo Alto Page 13
It is more difficult to project residential development and the City has not experienced a great
deal of housing development in the past few years. Adoption of the reports’ recommendations
would not only increase the amount of funding from newly constructed for-sale housing units,
but also create a new funding source from the construction of rental units. Budgetary actions
depend on the timing of City Council approval of an implementing ordinance.
Policy Implications
Adoption of a new housing impact fee structure for commercial and residential development
projects would support the City’s stated policy goals under the Affordable Housing Fund
program and the adopted Housing Element.
Affordable Housing Fund
As described earlier in this staff report, the City’s Affordable Housing Fund has provided
financial assistance for the development, acquisition and rehabiltiation of housing affordable to
less fortunate populations in the City. Since 1974, the City has committed resources to funding
this programming, and updating housing impact fees supported by nexus studies supports this
policy.
Housing Element
The City adopted its 2015-2025 Housing Element in November 2014. A housing element
contains a municipality’s vision and implementation concepts for providing housing for a
diverse population. The adopted Housing Element contains the following programs that support
the adoption of increased housing impact fees:
H3.1.2j) Conduct a nexus study to identify the impacts of market rate housing
and the need for affordable housing, and develop BMR rental policies based on
the results of the study.
H3.1.6 Require developers of employment-generating commercial and industrial
developments to contribute to the supply of low- and moderate-income housing
through the payment of commercial in-lieu fees as set forth in a nexus impact
fee study and implementing ordinances, thru a continuing program of updating
the commercial fee.
H3.4.3 Periodically review the housing nexus formula required under Chapter
16.47 of the Municipal Code to fully reflect the impact of new jobs on housing
demand and cost.
Environmental Review
Staff is seeking the Committee’s direction, which is not a project requiring analysis under the
California Environmental Quality Act (CEQA).
Attachments:
A: Draft Comercial Linkage Fee Nexus Study (PDF)
B: Draft Residential LInkage Fee Nexus Study (PDF)
Draft Report
Commercial Linkage Fee
Nexus Study
November 2015
prepared for:
City of Palo Alto
Vernazza Wolfe Associates, Inc.
VWA
Attachment A
Table of Contents
I. EXECUTIVE SUMMARY .................................................................................................. 4
Introduction ...................................................................................................................................... 4
Background ...................................................................................................................................... 4
Report Organization ......................................................................................................................... 4
Implementation Options ................................................................................................................... 5
Nexus Analysis Results .................................................................................................................... 5
Policy Considerations ....................................................................................................................... 8
II. INTRODUCTION AND METHODOLOGY ...................................................................... 12
The Nexus Concept ....................................................................................................................... 12
Methodology ................................................................................................................................... 12
III. COMMERCIAL LINKAGE FEE NEXUS ANALYSIS ...................................................... 15
Nexus Analysis Steps .................................................................................................................... 15
IV. HOUSING AFFORDABILITY GAP ................................................................................. 53
Methodology ................................................................................................................................... 53
Estimating Affordable Rents and Sales Prices .............................................................................. 53
Estimating Housing Development Costs ........................................................................................ 60
Calculating the Housing Affordability Gap ..................................................................................... 64
V. MAXIMUM LINKAGE FEES ........................................................................................... 68
Maximum Fee Calculation ............................................................................................................. 68
VI. FEASIBILITY AND POLICY CONSIDERATIONS .......................................................... 69
Prototypes and Fee Levels ............................................................................................................ 69
Methodology ................................................................................................................................... 70
Key Inputs ...................................................................................................................................... 70
Results ........................................................................................................................................... 75
Policy Considerations ..................................................................................................................... 78
VII. GLOSSARY OF TERMS AND ACRONYMS .................................................................. 85
Glossary of terms ........................................................................................................................... 85
Definition of Acronyms ................................................................................................................... 88
List of Figures
Figure I-1. Maximum and Recommended Fee Levels by Prototype ............................................................ 5
Figure I-2. Commercial Prototypes ............................................................................................................... 6
Figure I-3. Calculation of Worker Household Income by Prototype ............................................................ 7
Figure I-4. Affordable Housing Gap ............................................................................................................. 7
Figure I-5. Maximum Commercial Linkage Fee by Prototype ..................................................................... 8
Figure I-6. Comparison of Commercial Linkage Fees in Palo Alto and Neighboring Jurisdictions ............ 8
Figure I-7. Comparison of Existing, Maximum, and Feasible Fee Levels by Prototype .............................. 9
Figure I-8. Commercial Linkage Fee Scenarios as Percent of Total Development Costs .......................... 11
Figure I-9. Total Fees and Permits per Square Foot ................................................................................... 11
Figure III-1. Description of Commercial Prototypes .................................................................................. 16
Figure III-2. Employment Density Data and Sources ................................................................................. 18
Figure III-3. Employment Density by Prototype ........................................................................................ 19
Figure III-4. Number of Worker Households by Prototype ........................................................................ 19
Figure III-5. Definition of Industries for Hotel Prototype .......................................................................... 19
Figure III-6. Definition of Industries for Office/ R&D/ Medical Office Prototype .................................... 20
Figure III-7. Average Annual Wage by Prototype ...................................................................................... 21
Figure III-8. Occupational Mix and Average Wages for Hotel Industry .................................................... 22
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office ............................ 31
Figure III-10. Household Income Categories ............................................................................................. 51
Figure III-11. Number of Worker Households by Income Category .......................................................... 52
Figure IV-1. Calculation of Affordable Rents in Santa Clara County by Household Size, 2014 ............... 56
Figure IV-2. Calculation of Affordable Rents in Santa Clara County by Unit Type, 2014 ........................ 57
Figure IV-3. Calculation of Affordable Sales Prices in Santa Clara County by Household Size, 2014 ..... 58
Figure IV-4. Calculation of Affordable Sales Prices in Santa Clara County by Unit Type, 2014 .............. 59
Figure IV-5. Affordable Housing Project Pro Forma Data ......................................................................... 61
Figure IV-6. Sales of Vacant Lands in San Mateo County and Northern Santa Clara County, 2014 ........ 62
Figure IV-7. Estimate of Development Costs of Hypothetical Condominium Project ............................... 63
Figure IV-8. Rental Housing Unit Sizes and Development Costs .............................................................. 64
Figure IV-9. For-Sale Housing Unit Sizes and Development Costs ........................................................... 64
Figure IV-10. Housing Affordability Gap Calculation for Rental Housing ............................................... 66
Figure IV-11. Housing Affordability Gap Calculation for For-Sale Condominium Housing .................... 67
Figure IV-12. Average Housing Affordability Gap by Income Group ....................................................... 67
Figure V-1. Maximum Commercial Linkage Fees ..................................................................................... 68
Figure VI-1. Description of Commercial Prototypes .................................................................................. 69
Figure VI-2. Linkage Fee Scenarios by Prototype (per SF) ........................................................................ 70
Figure VI-3. Pro Forma Revenue Inputs by Prototype ............................................................................... 72
Figure VI-4. Direct and Indirect Cost Inputs .............................................................................................. 73
Figure VI-5. Recent Commercial Vacant Land Transactions in Santa Clara County (2011-2014) ............ 74
Figure VI-6. Feasibility Thresholds for Return on Cost ............................................................................. 75
Figure VI-7. Pro Forma Analysis Results ................................................................................................... 77
Figure VI-8. Existing City Permits and Fees on Commercial Development by Prototype ......................... 79
Figure VI-9. Comparison to Linkage Fees in Neighboring Cities .............................................................. 80
Figure VI-10. Existing Linkage Fees in Bay Area Cities ........................................................................... 81
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INTRODUCTION
In April 2014, the City of Palo Alto hired Strategic Economics and Vernazza Wolfe Associates, Inc. to
develop nexus studies for commercial linkage fees and housing impact fees to mitigate the impacts of new
development on the demand for affordable housing. This draft report presents the findings of the
commercial linkage fee study. In addition, the report describes the methodology, data sources, and
analytical steps required for the nexus analysis.
BACKGROUND
Palo Alto is considering updating its existing commercial linkage fee for office/R&D/medical office and
hotel uses. The City intends to maintain its current linkage fee for retail development. Palo Alto’s
commercial linkage fee is currently set at $19.85 per square foot for all types of new non-residential
development (except for retail spaces of less than 1,500 square feet and nonprofit uses). The purpose of
the linkage fee is to mitigate the impacts of an increase in affordable housing demand from the new
worker households related to the new commercial space. When a city or county adopts impact fees on
new development, it must establish a reasonable relationship or connection between the development
project and the fee that is charged. Studies undertaken to demonstrate this connection are called nexus
studies. This nexus study quantifies the connection between the development of commercial space and the
demand for affordable housing units. The funds raised by the linkage fees are deposited into a housing
fund specifically reserved for use by a local jurisdiction to increase the supply of affordable housing for
the workforce. Commercial linkage fees are one of several funding sources that jurisdictions can use to
help meet the affordable housing needs of new workers.
REPORT ORGANIZATION
This executive summary provides an overview of the commercial linkage fee nexus analysis
methodology, results, and policy considerations. The subsequent chapters of the report contain more
detailed information regarding the methodology, data sources and analysis. The report is organized into
six sections. Following this executive summary, Section II provides an introduction to the purpose of the
study, and an overview of the methodology. Section III presents each of the steps of the commercial
linkage fee analysis in detail. Section IV covers the housing affordability gap analysis. Section V presents
the maximum fee calculation based on the nexus analysis and affordability gap results. The final section,
Section VI, discusses financial feasibility and other policy considerations that jurisdictions typically
weigh before selecting and implementing an impact fee policy.
I. EXECUTIVE SUMMARY
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IMPLEMENTATION OPTIONS
The per-square-foot maximum linkage fees are $177 for the hotel prototype and $264 for the
office/medical office/R&D prototype. If Palo Alto elects to update its linkage fees on these uses, the
recommended fee levels are as follows: $30 per square foot for hotels and $35 per square foot for
office/R&D/medical office. These recommendations are based on the findings of the financial feasibility
analysis, a comparison of fees in neighboring jurisdictions, and other factors as explained in the Policy
Considerations section, below. The maximum, existing, and recommended fees for each prototype are
shown in Figure I-1.
Figure I-1. Maximum and Recommended Fee Levels by Prototype
Prototype
Maximum
Justified Fee
Existing
Linkage Fee
Recommended
Linkage Fee
Hotel $177 $19.85 $30
Office/ Medical Office/ R&D $264 $19.85 $35
Sources: Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
NEXUS ANALYSIS RESULTS
The principal findings of the nexus analysis are presented below. More detail on each step can be found in
subsequent sections of this report.
Prototypes
The first step in this nexus analysis is to define the types of new commercial developments in Palo Alto.
These typical developments are called prototypes. This study identified two commercial development
prototypes:
1. Hotel - includes full-service hotels, limited-service hotels, motels, and other lodging.
2. Office/ R&D/ Medical Office - covers a range of office and research and development (R&D)
uses, including traditional office buildings, medical offices, and specialized spaces for highly
advanced manufacturing and research.
The definition of these commercial prototypes, summarized in Figure I-2, was informed by a review of
recently completed and proposed development projects in Palo Alto, as well as discussions with City
staff. A retail/ restaurant development prototype was considered, but as there are few examples of
recently built or proposed standalone retail projects of this type, the nexus analysis for this prototype has
not been updated. The City intends to maintain its current commercial linkage fee of $19.85 on retail and
restaurant development.
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Figure I-2. Commercial Prototypes
Hotel
Office/R&D/
Medical Office
Prototype Description
Gross Building Area (GBA). excl. Parking (SF) 100,000 100,000
Efficiency Ratio (a) N/A 0.90
Net Leasable Sq. Ft. (NSF) N/A 90,000
Hotel Rooms 133
Parking Spaces 133 300
Podium Parking 33 240
Surface Parking 100 60
GBA Including Structured Parking 109,975 163,000
Floor Area Ratio (b) 1.1 2.0
Land Area (Acres) 2.3 1.9
Land Area (SF) 99,977 81,500
Notes:
(a) Refers to ratio of gross building area to net leasable area. An efficiency ratio of 0.9 means that 90% of the gross
building area is leasable.
(b) The floor-area-ratio (FAR) is often used as a measure of density. In this analysis, it is calculated as the gross
building area (including structured podium parking) divided by the total land area.
Sources: Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
Employment Density
The next step is to determine how many employees will work in the two prototypes. While these numbers
will vary from building to building, there are sources of information that help researchers define
employment “densities.” The employment density measures the number of employees who work in a
given amount of space. For each building prototype, an average employment density was defined based
on a review of national survey data for existing commercial buildings and a review of recently completed
linkage fee nexus studies in the Bay Area. The densities selected were at the lower end of each range. By
using slightly lower employment estimates, the study assumes a slightly lower number of future
employees in calculating affordable housing needs. Therefore, the conclusions from this study are more
conservative in estimating affordable housing impacts.
Worker Household Incomes
Using these prototypes, the nexus analysis estimates the wages of future workers based on industry and
occupation data. After the average wage of workers is calculated, the next step is to compute the average
household income of worker households. Assuming that there are multiple wage-earners per household,
the household income of worker-households is estimated. Each worker-household is then classified into
area median income (AMI) categories to determine the number of households that would require
affordable housing. Figure I-3 summarizes the estimated worker-household incomes for each prototype.
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Figure I-3. Calculation of Worker Household Income by Prototype
Prototype
Number of
Employee
Households
Hotel
Very Low Income (<=50% AMI) 30.05
Low Income (51-80% AMI) 24.13
Moderate Income (81-120% AMI) 9.58
Above Moderate (>=120%) 3.36
Total 67.12
Office, R&D and Medical Office Land Use
Very Low Income (<=50% AMI) 14.40
Low Income (51-80% AMI) 51.43
Moderate Income (81-120% AMI) 36.32
Above Moderate (>=120%) 99.39
Total 201.54
Sources: Vernazza Wolfe Associates, Inc; Strategic Economics, 2015.
Affordability Gap
Many of the new worker households will be unable to afford market-rate housing. In order to measure this
shortfall, this study has calculated the housing affordability gap, shown in Figure I-4. The housing
affordability gap measures the difference between what very low, low, and moderate income households
can afford to pay for housing and the cost of building new, modest rental and for-sale housing units.
Figure I-4. Affordable Housing Gap
Income Level
Average
Affordability
Gap
Very Low-Income (<50% AMI) $306,164
Low-Income (50-80% AMI) $252,258
Moderate-Income (80-120% AMI) $249,596
Notes:
(a) Low income households are defined at 70 percent of AMI for renters and 80 percent of AMI for owners.
(b) Moderate income households are defined at 90 percent of AMI for renters and 110 percent AMI for owners.
Acronyms: AMI: Area median income.
Sources: Vernazza Wolfe Associates, Inc.; Strategic Economics, 2015.
Maximum Nexus-Based Fee
To calculate the maximum commercial impact fee, the Consultant Team began by calculating the total
affordability gap by prototype, which is obtained by multiplying the average affordability gap at each
income level by the number of very low, low and moderate income households for each prototype. The
total affordability gap by prototype is then divided by the size of the prototype to obtain the maximum
nexus-based fee per square foot (Figure I-5).
The maximum per-square-foot linkage fees are $177 for hotel and $264 for office/R&D/medical
office. The maximum fees are not the recommended fees for adoption. They are the nexus-justified
fees that represent the maximum that Palo Alto could charge to mitigate affordable housing
demand related to commercial development.
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Figure I-5. Maximum Commercial Linkage Fee by Prototype
Prototype Hotel
Office/ R&D/ Medical
Office
Square Footage 100,000 100,000
Total Affordability Gap $17,678,344 $26,447,718
Maximum Fee per SF $177 $264
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
POLICY CONSIDERATIONS
There are a number of policy considerations that can be taken into account when Palo Alto considers
whether to update its commercial linkage fees on new hotel and office/ R&D/ medical office
development. These may include factors such as: the likely financial impact of the proposed linkage fees
on development; the additional cost of the new fees on the existing City fee structure; a comparison of the
fee scenarios to existing linkage fees in nearby cities; the role of the fee in the City’s overall strategy for
affordable housing implementation; and the potential overlap with a residential linkage fee. This section
provides a discussion of each of these policy questions for Palo Alto.
Comparison to Neighboring Jurisdictions – A comparison of the nexus fee scenarios to current
commercial linkage fees charged in nearby cities is an important element of the policy analysis (Figure I-
6). At present, Palo Alto has fees of $19.85 per square foot for all commercial prototypes. Palo Alto’s
existing fees are similar to the linkage fees adopted in San Francisco and Cupertino, which range from
$10 to $24 per square foot, depending on the land use. In most cases, cities have adopted higher fee levels
for office/ R&D/ medical office uses than for hotel uses. For example, in Cupertino, the commercial
linkage fee for hotel is $10 per square foot, compared to $20 per square foot for office/ R&D/ medical
office uses. Palo Alto’s recommended linkage fees for the commercial prototypes would be higher than
the existing linkage fees in San Mateo County and Santa Clara County. The recommended per-square foot
hotel fee ($30) and office/R&D/medical office fee ($35) would be the highest in the region, exceeding the
fees in all of the comparison cities, including San Francisco.
Figure I-6. Comparison of Commercial Linkage Fees in Palo Alto and Neighboring Jurisdictions
Jurisdiction Hotel
Office/R&D/ Medical
Office
Date Fee Was
Adopted
Palo Alto $19.85 $19.85 2002
Cupertino $10 $20 2015
Menlo Park (a) $8 $15 2014
Mountain View (b) $2.50 $25 2015
San Francisco (c) $18 $16-$24 2015
Sunnyvale (d) $7.50 $15 2015
Notes:
(a) Buildings 10,000 SF and under are exempt from fees. A new nexus study is currently underway that may result in an updated
fee.
(b) New gross floor area under 25,000 SF pays 50 percent of full fee.
(c) The fee for R&D is $16.01 and the fee for office is $24.03. The fee for a small enterprise is $18.89.
(d) The fee on the first 25,000 SF, for all three commercial uses, is discounted by 50 percent.
Sources: City staff and websites; Nonprofit Housing Association of Northern California, 2015; Vernazza Wolfe Associates, Inc. &
Strategic Economics, 2015.
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Financial Feasibility – Financial feasibility is just one of several factors to consider in making a decision
regarding updating an existing fee. In order to provide Palo Alto with guidance on how different fee
levels could influence development, the Consultant Team conducted a pro forma feasibility analysis that
tested the impact of the maximum fee and three reduced fee scenarios on developer profit for the
commercial prototypes. The analysis showed that establishing a fee at the maximum fee levels was not
financially feasible at this time for the prototypes. However, reduced fee scenarios (including the existing
linkage fee level of $19.85 per square foot) are financially feasible for the hotel and office/ R&D/ medical
office prototypes (Figure I-7). The hotel prototype can support a commercial linkage fee of up to $30 per
square foot. Fee levels of up to $60 per square foot were found to be financially feasible for the office/
R&D/ medical office prototype.
Figure I-7. Comparison of Existing, Maximum, and Feasible Fee Levels by Prototype
Prototype
Existing Linkage
Fee per SF
Maximum Justified
Fee per SF
Maximum Feasible
Fee
Level per SF
Hotel $19.85 $177 $30
Office/Medical Office/R&D $19.85 $264 $60
Sources: City of Palo Alto; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
Total Development Costs – Currently, the total development costs (including land, building and onsite
improvements, parking, indirect costs, financing costs, and developer profit) are $443 per net square foot
for the hotel prototype and $530 per net square foot for the office/ R&D/ medical office prototype. The
maximum nexus-based linkage fee represents close to 30 percent of total development cost for the hotel
and 50 percent of total development costs for the office/ R&D/ medical office prototype (Figure I-8). The
existing linkage fee of $19.85 per square foot makes up three to four percent of development costs for the
prototypes. A fee of $30 per square foot for the hotel prototype, which is the highest financially feasible
fee level, represents six percent of total development costs. A fee of $60 per square foot for the
office/R&D/medical office prototype, which is the highest feasible fee level, would represent 11 percent
of total development costs.
Comparison to Existing City Fees – In addition to the existing commercial linkage fee, the City of Palo
Alto has other permits and fees on new development. The City may wish to consider the amount that total
fees would increase with an updated commercial linkage fee. Existing permits and fees in Palo Alto for
the commercial prototypes (including the existing linkage fees of $19.85 per square foot) are estimated to
be $34 per square foot for the hotel prototype and $57 per square foot for the office/ R&D/ medical office
prototype.1 If the maximum linkage fees were adopted, the total development fees and permits would be
$192 per square foot for hotel and $302 for office, as shown in Figure I-9. The recommended fee of $30
per square foot for hotels and would increase total fees to $45. The recommended fee of $35 per square
foot for office/R&D/medical office would result in total city fees of $73 per square foot for this prototype.
Role of Fee in Palo Alto’s Overall Housing Strategy – Palo Alto currently charges a commercial
linkage fee of $19.85 per square foot on all new non-residential development. These fees are payable at
the time that the building permit is issued. Fee revenues are used to provide financial assistance for
affordable housing developments and preservation. The City also has an inclusionary housing program
that requires that 15 percent of the units in market-rate developments consisting of five or more housing
units must be sold at affordable sales prices. This percentage increases to 20 percent on parcels larger than
1 The hotel calculations were estimated based on the permits and fees paid by new hotel projects in the city; the
office/R&D/medical office fees are estimates by City staff. These fee estimates are the best approximations available,
and do not represent the actual cost of a proposed new development project.
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five acres. In some cases, developers have the option of paying an in-lieu fee of 7.5 to 10 percent of the
sales price or fair market value, whichever is greater. The developer must also pay a fee for fractional
units. Revenues from the commercial linkage fee (and from residential impact fees, if they are adopted)
would continue to support the City’s existing affordable housing programs. It should be noted that
revenues from a commercial linkage fee need to be spent on housing that benefits the workforce since the
funds stem from affordable housing impacts related to new employment.
Overlap with Residential Impact Fees - In addition to the commercial linkage fee update described in
this report, the City of Palo Alto is also considering implementing new residential impact fees on housing
development. There may be a small share of jobs counted in the residential nexus analysis that are also
included in this commercial linkage fee analysis. Thus, the two programs may have some overlap in
mitigating the affordable housing demand from the same worker households. In order to reduce the
potential for overlap between the two programs, it is advisable to set both the commercial linkage fees
and housing impact fees at below 100 percent of the nexus-based maximum. In this way, when combined,
the programs would mitigate less than 100 percent of the impact even if there were overlap in the jobs
counted in the two nexus analyses.
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Figure I-8. Commercial Linkage Fee Scenarios as Percent of Total Development Costs
Hotel Office/R&D/Medical Office
Fee Scenario Fee Amount Fee as % of TDC Fee Amount Fee as % of TDC
Existing Linkage Fee $19.85 4.29% $19.85 3.74%
Scenario 1: Max Fee $177 28.55% $264 49.77%
Scenario 2 $35 7.32% $60 11.31%
Scenario 3 $30 6.34% $50 9.43%
Scenario 4 $20 4.32% $35 6.60%
Figure I-9. Total Fees and Permits per Square Foot
Hotel Office/R&D/Medical Office
Fee Scenario
Linkage Fee
per SF
Total Permits
and Fees
Linkage Fee
per SF
Total Permits
and Fees
Existing Permits and Fees $19.85 $35 $19.85 $57
Scenario 1 (Maximum Fee) $177 $192 $264 $301
Scenario 2 $35 $50 $60 $97
Scenario 3 $30 $45 $50 $87
Scenario 4 $20 $35 $35 $72
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
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According to the City of Palo Alto’s Housing Element, home values in the City have been increasing
steadily since 2010. The median home price in 2013 was $1.7 million, more than twice the median price
in Santa Clara County. Rental rates have also escalated rapidly, with median rents ranging from $1,900
for studios to more than $8,500 for four-bedroom homes. Given the high prices and rents in the City, most
of the new market-rate housing units built in Palo Alto are only affordable to high income households.
Consequently, very low, low, and moderate income worker households have limited affordable housing
options in the City. As one of its strategies to address the demand for affordable housing in the City, Palo
Alto is considering updating its existing commercial linkage fees for hotel and office/R&D/medical office
uses.
A commercial linkage fee is an impact fee that is charged on new, non-residential development to address
the affordable housing demand from new workers. Palo Alto currently has a commercial linkage fee of
$19.85 per square foot on new, non-residential development. The purpose of this study is to provide a
new nexus analysis in the event the Palo Alto decides to adopt an updated commercial linkage fee for
hotel and office/R&D/medical office uses. The funds raised by the linkage fees are deposited into a
housing fund specifically reserved for use by a local jurisdiction to increase the supply of affordable
housing for the workforce. Linkage fees are one of several funding sources that jurisdictions can use to
help meet the affordable housing needs of new workers. For more than thirty years, California cities and
counties have imposed commercial linkage fees on new, non-residential developments.
THE NEXUS CONCEPT
In order to adopt a commercial linkage fee, a nexus study is required to determine the reasonable
relationship between the fee's use and the impact of the development project on which the fee is imposed.
This commercial linkage fee nexus study establishes and quantifies the linkages or “nexus” between new
commercial development and the need for additional housing affordable to new workers. Some of the new
workers will have household incomes that qualify them for income-restricted affordable housing. This
study quantifies the demand for very low income, low income, and moderate income housing that is
created by new development of commercial buildings.
METHODOLOGY
When a city or county adopts a development impact fee, it must establish a reasonable relationship
between the development project and the fee being charged. Studies undertaken to demonstrate this
connection are called nexus studies. Nexus studies for school impact fees, traffic mitigation fees, and
parks are common. For commercial linkage fees, a methodology exists that establishes a connection
between the development of commercial space and the need to expand the supply of affordable housing.
This study is based on this established methodology.
The purpose of a commercial linkage fee nexus analysis is to quantify the increase in demand for
affordable housing that accompanies new non-residential development. There will be a net gain in
employment when new commercial space is built. The ability of new workers to pay for housing costs is
linked to their occupations (and hence salaries). Given anticipated incomes, there may be an affordability
"gap" between what worker households can afford to pay (to rent or to buy) and the actual costs of new
housing.
II. INTRODUCTION AND METHODOLOGY
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A nexus analysis calculates the relationship between new commercial development and household
incomes of employees and then determines the employees' need for affordable housing. These steps
provide the rationale for calculating the maximum justified commercial linkage fee that could be levied
on non-residential development. These steps are presented in more detail below, and the subsequent
sections of this report present the results of each of these steps.
Step 1. Define the commercial prototypes that represent new commercial development in Santa
Clara County.
The prototypes are defined based on recently completed and proposed development projects in Santa
Clara County. The purpose of defining prototypes is to estimate future employment linked to the new
commercial space. Two prototypes were selected and include Hotels (133 rooms or 100,000 SF) and
Office/ R&D/ Medical Office (100,000 SF). The prototype definitions include information on gross and
leasable area, number of rooms (for hotel only), parking, and floor-area-ratio.
Step 2. Estimate the number of workers that will work in the new commercial space.
Based on a national survey data on employment density for commercial land uses, as well as recently
completed linkage fee nexus studies in the Bay Area, the estimated employment density in hotels is
approximately 0.75 workers per room (average room size of 750 SF) and one worker per 333 SF for
office/ R&D/ medical office. By dividing the prototype developments by employment density figures, the
number of workers for each prototype is estimated.
Step 3. Estimate the number of new households represented by these new workers.
Since there are multiple wage earners in a household, the number of new workers will be higher than the
number of new households moving into Palo Alto. Therefore, it is necessary to go from projected growth
in the number of workers to household growth. This adjustment is based on the average number of wage-
earners per worker household for the Palo Alto (1.49) according to the U.S. Census Bureau American
Community Survey 3-Year Estimates, 2010-2012.
Step 4. Estimate wages of new workers.
The first step in calculating employee wages is to establish a list of the industries that can be associated
with each prototype. Using industry data from QCEW, industries (defined by NAICS Codes) were
identified that are associated with each prototype, or land use. The next step is to identify all the
occupations that are associated with each industry based on data provided by the U.S. Bureau of Labor
Statistics (BLS). The national BLS occupational matrix is then calibrated to match the county’s
employment mix by weighting the national employment distribution to reflect the distribution of
employment by industry within Santa Clara County. Finally, the average wage by worker is calculated
using data on average annual wages by occupation in the San Jose – Sunnyvale – Santa Clara
Metropolitan Statistical Area from the California Employment Development Department.
Step 5. Estimate household income of worker households.
Worker wage estimates from the previous step are then converted to household incomes. This step
assumes that the income of the second wage-earner is similar to the wage of the first wage-earner.
According to the U.S. Census Bureau American Community Survey 3-Year Estimates, 2010-2012, there
are 1.49 wage-earners per worker household in Palo Alto. Individual worker wages are multiplied by 1.49
to represent household incomes.
Step 6. Calculate the number of households that would be eligible for affordable housing divided
into three categories: very low, low, and moderate income.
The average household size in Palo Alto is estimated to be three, based on the US Census, American
Community Survey 5-Year Estimates, 2008-2012. Thus, the income groups are defined for a household
size of three persons based on the income categories established by California Department of Housing
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and Community Development (HCD) for Santa Clara County. Households with above-moderate income
are removed to determine the number that would require below market rate affordable housing.
Step 7. Estimate the affordability gap of new households requiring affordable housing.
The affordability gap represents the difference between what households can afford to pay for housing
and the development cost of a modest housing unit. For very low and low income households, a rental
housing gap is used. For moderate income households, the housing affordability gap is calculated
separately for renter and owner households, and then the two gaps are combined to derive an average
affordability gap for moderate income households.
Step 8. Estimate the total housing affordability gap of new households requiring affordable
housing.
The total number of very low, low, and moderate income new worker households for the each land use
prototype is multiplied by the corresponding affordable housing gap figure.
Step 9. Calculate maximum commercial linkage fees for each prototype.
The total affordability gap is then divided by 100,000 SF, the size of each commercial prototype to
generate a maximum fee per square foot.
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This section discusses each step of the commercial linkage analysis calculations and the maximum nexus-
based fees. The analysis presented in this section should be interpreted within the context of the previous
sections establishing the overall methodology for this study.
NEXUS ANALYSIS STEPS
Using the methodology described in Section II, the following describes each of the steps to calculate the
linkage fees in more detail.
Commercial Prototypes
This study examined the jobs-housing linkage for two commercial development prototypes, which are
described below.
1. Hotel – This building prototype includes full-service hotels, limited-service hotels, motels, and
other lodging.
2. Office/ R&D/ Medical Office – This category includes a wide range of office and R&D users,
including traditional office buildings, open floor-plan offices, medical offices, and specialized
spaces for highly advanced manufacturing and research commonly found in Santa Clara County.
The prototypes defined above represent the types of new commercial buildings recently constructed or
proposed in Santa Clara County. Each prototype was assumed to be 100,000 square feet in size. The
building size is not prescriptive; it is only averaged to illustrate the overall numbers of workers and
households associated with new development projects. Many linkage fee nexus studies use the 100,000
square foot number because it can easily be converted into per-square-foot calculations. The per-square-
foot linkage fee can be applied to a project of any size.
Figure III-1 below describes the building characteristics of each prototype, including factors like floor-
area-ratios (FARs) and parking ratios, which were established based on a review of recent commercial
development projects in the county.
III. COMMERCIAL LINKAGE FEE NEXUS ANALYSIS
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Figure III-1. Description of Commercial Prototypes
Hotel
Office/R&D/
Medical Office
Prototype Description
Gross Building Area (GBA). excl. Parking (SF) 100,000 100,000
Efficiency Ratio (a) N/A 0.90
Net Leasable Sq. Ft. (NSF) N/A 90,000
Hotel Rooms 133
Parking Spaces 133 300
Podium Parking 33 240
Surface Parking 100 60
GBA Including Structured Parking 109,975 163,000
Floor Area Ratio (b) 1.1 2.0
Land Area (Acres) 2.3 1.9
Land Area (sq. ft.) 99,977 81,500
Notes:
(a) Refers to ratio of gross building area to net leasable area. An efficiency ratio of 0.9 means that 90% of the gross building
area is leasable.
(b) The floor-area-ratio (FAR) is often used as a measure of density. In this analysis, it is calculated as the gross building area
(including structured podium parking) divided by the total land area.
Sources: Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
Average Employment Density and Number of Workers
For each building prototype, an average employment density was applied based on a combination of
national survey data for existing commercial buildings and a review of recently completed linkage fee
nexus studies in the Bay Area. Figure III-2 summarizes the building density data that formed the basis for
establishing average employment density for each prototype. In order to create conservative assumptions
about the number of jobs associated with new commercial development, the lower range of the density
figures were selected for this analysis.
Figure III-3 describes the density for each prototype, measured by the average number of square feet per
worker for each prototype. This factor is multiplied by the size of the building (100,000 square feet) to
calculate the total number of workers in each commercial prototype. The density factors represent the
average density for the prototypes; individual projects and buildings may actually be more or less dense.
The hotel prototype is assumed to be of lower density than office/ R&D/ medical office. The density
assumption generates the total number of direct workers occupying the commercial space in each
prototype.
Hotel – The hotel employment density assumption is 1,000 square feet per worker (or 0.75
workers per room). This density is at the mid-range of the densities shown in Figure III-2, and
consistent with the Vallen and Vallen estimate for limited service mid-scale hotels, which are in
between full-service “luxury” properties and economy properties. Given that many of the recently
constructed and proposed hotel projects in Santa Clara County are limited service mid-scale
hotels, this density is aligned with market trends. For a 100,000-square-foot hotel (roughly
equivalent to 133 rooms), this density assumption results in a total number of 100 workers.
Office/ R&D/ Medical Office – The average density assumption for office/R&D/medical office is
estimated at 333 square feet per worker. This density estimate is slightly lower than some recent
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linkage fee nexus studies, but higher than the national Energy Information Administration survey.
The resulting number of total workers in this prototype is estimated at 300.
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Figure III-2. Employment Density Data and Sources
Employee Density Figure Source
Hotel
1.5 workers per full-service (luxury) hotel room Vallen and Vallen, "Chapter 1: The Traditional Hotel Industry," Check-In, Check-Out, 2012
0.5 to 1.0 workers per room for "in-between" hotels Vallen and Vallen, "Chapter 1: The Traditional Hotel Industry," Check-In, Check-Out, 2012
As few as 0.25 workers per room for "budget" hotels Vallen and Vallen, "Chapter 1: The Traditional Hotel Industry," Check-In, Check-Out, 2012
2,074 square feet per worker
Energy Information Administration, 2003 Commercial Buildings Energy Consumption Survey, Rev.
2006
720 square feet per worker A.C. Nelson, "Reshaping Metropolitan America" (based on calculations from EIA survey)
450 square feet per worker Jobs Housing Impact Fee Draft Nexus Study: City of Napa, CA, Vernazza Wolfe Associates Inc., 2011
2,000 square feet per worker Housing Impact Fee Nexus Study: Mountain View, CA, KMA, 2012
Office/ R&D/ Medical Office
185-340 square feet per employee
Norm Miller, "Estimating Office Space per Worker: Implications for Future Office Space Demand,"
2012
306 square feet per worker Building Owners and Managers Association Survey, 2012
434 square feet per worker
Energy Information Administration, 2003 Commercial Buildings Energy Consumption Survey, Rev.
2006
300 square feet per worker A.C. Nelson, "Reshaping Metropolitan America," 2013
250-350 square feet per worker San Mateo County Housing Needs Study, Economic & Planning Systems, 2006
300 square feet per worker Jobs Housing Impact Fee Draft Nexus Study: City of Napa, CA, Vernazza Wolfe Associates Inc., 2011
312.5 square feet per worker Housing Impact Fee Nexus Study: Mountain View, CA, KMA, 2012
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Figure III-3. Employment Density by Prototype
Commercial Prototype Prototype Size (SF) Average Density
Number of Workers in
Prototype
Hotel 100,000 SF
133 rooms
1,000 SF per worker
0.75 workers per room
100 workers
Office/ R&D/ Medical Office 100,000 SF 333 square feet per worker 300 workers
Sources: Vernazza Wolfe Associates, Inc.; Strategic Economics, 2015.
Number of Worker Households
Based on the total number of workers directly employed in the prototypes, the total number of worker
households is estimated. The number of worker households is calculated by dividing the number of
workers by the average number of wage-earners per household in the Palo Alto. Based on data from the
U.S. Census American Community Survey 3-Year Estimates, 2010-2012, there is an average of 1.49
workers per household in Palo Alto. The calculation of total new worker households is demonstrated in
Figure III-4 below. The number of worker households associated with the prototypes is 67 for hotels and
202 for office/R&D/medical office.
Figure III-4. Number of Worker Households by Prototype
Commercial Prototype
Number of New
Workers
Workers per
Household
Number of New
Worker Households
Hotel 100 1.49 67.11
Office/R&D/Medical Office 300 1.49 201.54
Sources: US Census, American Community Survey 3-Year Estimates, 2010-2012; Vernazza Wolfe Associates, Inc.; Strategic
Economics, 2015.
Calculate Worker Wages and Household Income
The first step in calculating employee wages is to establish a list of the industries that can be associated
with each prototype. Using industry data from Quarterly Census of Employment and Wages (QCEW),
industries (defined by NAICS Codes) were identified that are associated with each prototype, or land use.
Figure III-5 and III-6 below describe the industries that are associated with the hotel and office/ R&D/
medical office prototypes. The hotel category shown in Figure III-5 has only one industry attached to it,
while the office/ R&D/ medical office uses are associated with a larger number of industries, as shown in
Figure III-6.
Figure III-5. Definition of Industries for Hotel Prototype
Hotels
721 Accommodation 100%
Total 100%
Note; Unlike other prototypes, the hotel prototype only includes one NAICS industry
category.
Source: United States Bureau of Labor Statistics, Quarterly Census of Employment and
Wages (QCEW), 2013.
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Figure III-6. Definition of Industries for Office/ R&D/ Medical Office Prototype
NAICS Code Description
Percent Total Workers
in Prototype
5415 Computer systems design and related services 13.5%
3344 Semiconductor and electronic component mfg. 10.2%
3341 Computer and peripheral equipment mfg. 9.3%
5191 Other information services 6.6%
5417 Scientific research and development services 5.2%
5613 Employment services 4.9%
5617 Services to buildings and dwellings 3.7%
5112 Software publishers 3.6%
5413 Architectural and engineering services 3.0%
5511 Management of companies and enterprises 2.8%
3345 Electronic instrument manufacturing 2.7%
6211 Offices of physicians 2.6%
5416 Management and technical consulting services 2.6%
6212 Offices of dentists 2.0%
3342 Communications equipment manufacturing 2.0%
6214 Outpatient care centers 1.9%
5412 Accounting and bookkeeping services 1.9%
5616 Investigation and security services 1.7%
5411 Legal services 1.7%
5221 Depository credit intermediation 1.6%
5182 Data processing, hosting and related services 1.6%
7223 Special food services 1.3%
517 Telecommunications 1.3%
5611 Office administrative services 1.1%
3391 Medical equipment and supplies manufacturing 1.1%
5313 Activities related to real estate 1.0%
523 Securities, commodity contracts, investments 0.9%
5311 Lessors of real estate 0.9%
5223 Activities related to credit intermediation 0.8%
6213 Offices of other health practitioners 0.8%
5419 Other professional and technical services 0.8%
5242 Insurance agencies and brokerages 0.6%
5312 Offices of real estate agents and brokers 0.5%
5222 Nondepository credit intermediation 0.5%
5121 Motion picture and video industries 0.4%
5418 Advertising, pr, and related services 0.4%
5614 Business support services 0.4%
6215 Medical and diagnostic laboratories 0.3%
5241 Insurance carriers 0.3%
5111 Newspaper, book, and directory publishers 0.3%
5414 Specialized design services 0.3%
515 Broadcasting, except internet 0.3%
5619 Other support services 0.3%
5612 Facilities support services 0.1%
3353 Electrical equipment manufacturing 0.1%
5331 Lessors of nonfinancial intangible assets 0.1%
5122 Sound recording industries 0.0%
5259 Other investment pools and funds 0.0%
Total 100.0%
Sources: United States Bureau of Labor Statistics, Quarterly Census of Employment and Wages (QCEW), 2013; Vernazza Wolfe
Associates, Inc.; Strategic Economics, 2015
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The next step is to identify all the occupations that are associated with each industry based on data
provided by the U.S. Bureau of Labor Statistics (BLS). National level data on occupations are the best
available; state level industry-occupation data exist but do not include all relevant industries. The national
BLS occupational matrix is then calibrated to match the county’s employment mix by weighting the
national employment distribution to reflect the distribution of employment by industry within Santa Clara
County. Finally, the average wage by worker is calculated using data on average annual wages by
occupation in the San Jose – Sunnyvale – Santa Clara Metropolitan Statistical Area (the smallest
geographic level at which wage data are available) from the California Employment Development
Department.
Figure III-7 below summarizes the results of these calculations, computing the average weighted wages2
for each prototype. As shown, office/R&D/medical office employees have highest higher average wage of
the three prototypes, due to a larger percentage of occupations in higher wage categories.
Figure III-7. Average Annual Wage by Prototype
Commercial Prototype
Weighted Average
Annual Wage (a)
Hotel $35,157
Office, R&D and Medical Office $78,598
Notes:
(a) Average wages are weighted to take into account the proportion of jobs in each occupational wage category.
Sources: Bureau of Labor Statistics, Occupational Employment Statistics, 2013 and Quarterly Census of Employment and Wages
(QCEW), 2013; California Economic Development Department, OES Employment and Wages by Occupation, 2013; Vernazza
Wolfe Associates, Inc.; Strategic Economics, 2015.
The complete occupational mix, and wage data tables for each prototype are presented in Figure III-8 and
Figure III-9.
2 The weighted average wage takes into account the proportion of jobs in each occupational category.
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Figure III-8. Occupational Mix and Average Wages for Hotel Industry
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total
Hotel
Workers (c)
11-0000 Management Occupations
11-9081 Lodging Managers $55,616 1.624%
11-1021 General and Operations Managers $150,054 0.988%
11-9051 Food Service Managers $55,929 0.499%
11-2022 Sales Managers $173,358 0.385%
11-3031 Financial Managers $162,295 0.205%
11-3011 Administrative Services Managers $116,009 0.169%
11-9199 Managers, All Other $164,693 0.128%
11-3121 Human Resources Managers $163,111 0.094%
11-1011 Chief Executives $218,577 0.066%
11-9141 Property, Real Estate, and Community Association Managers $75,727 0.057%
11-2021 Marketing Managers $185,177 0.056%
11-2011 Advertising and Promotions Managers $113,379 0.040%
11-3061 Purchasing Managers $149,288 0.026%
11-3021 Computer and Information Systems Managers $185,257 0.026%
11-2031 Public Relations and Fundraising Managers $129,248 0.008%
11-3111 Compensation and Benefits Managers $164,189 0.007%
11-9151 Social and Community Service Managers $80,170 0.006%
11-3131 Training and Development Managers $161,761 0.003%
11-9041 Architectural and Engineering Managers $186,557 0.003%
11-3071 Transportation, Storage, and Distribution Managers $110,880 0.003%
11-9021 Construction Managers $115,374 0.002%
Weighted Mean Annual Wage $106,756 4.396%
13-0000 Business and Financial Operations Occupations
13-1121 Meeting, Convention, and Event Planners $58,851 0.487%
13-2011 Accountants and Auditors $87,797 0.468%
13-1071 Human Resources Specialists $84,352 0.201%
13-1199 Business Operations Specialists, All Other $95,424 0.096%
13-1023 Purchasing Agents, Except Wholesale, Retail, and Farm Products $79,868 0.083%
13-1161 Market Research Analysts and Marketing Specialists $103,979 0.069%
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Figure III-8. Occupational Mix and Average Wages for Hotel Industry, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total
Hotel
Workers (c)
13-1151 Training and Development Specialists $83,797 0.027%
13-1141 Compensation, Benefits, and Job Analysis Specialists $90,004 0.019%
13-2051 Financial Analysts $112,220 0.018%
13-2099 Financial Specialists, All Other $63,667 0.013%
13-1041 Compliance Officers $84,523 0.012%
13-1131 Fundraisers $70,296 0.011%
13-1075 Labor Relations Specialists $61,652 0.009%
13-1111 Management Analysts $104,573 0.006%
13-1022 Wholesale and Retail Buyers, Except Farm Products $58,770 0.005%
13-2031 Budget Analysts $85,923 0.002%
13-2041 Credit Analysts $74,760 0.002%
Weighted Mean Annual Wage $78,604 1.528%
15-0000 Computer and Mathematical Occupations
15-1151 Computer User Support Specialists $71,022 0.037%
15-1199 Computer Occupations, All Other $95,708 0.026%
15-1142 Network and Computer Systems Administrators $94,342 0.024%
15-1152 Computer Network Support Specialists $91,823 0.015%
15-1121 Computer Systems Analysts $105,259 0.009%
15-1134 Web Developers $101,961 0.005%
15-1141 Database Administrators $102,689 0.005%
15-1131 Computer Programmers $95,000 0.003%
15-1132 Software Developers, Applications $132,808 0.002%
Weighted Mean Annual Wage $89,651 0.127%
17-0000 Architecture and Engineering Occupations
17-3023 Electrical and Electronics Engineering Technicians $66,014 0.004%
17-2051 Civil Engineers $101,748 0.003%
17-2141 Mechanical Engineers $110,763 0.003%
Weighted Mean Annual Wage $91,430 0.011%
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Figure III-8. Occupational Mix and Average Wages for Hotel Industry, Continued
Occupation
Code Occupation Name (a)
Average Annual
Wage (b)
% of Total
Hotel Workers
(c)
19-0000 Life, Physical, and Social Science Occupations $93,341 0.006%
Weighted Mean Annual Wage $93,341 0.006%
21-0000 Community and Social Service Occupations
21-1099 Community and Social Service Specialists, All Other $45,821 0.003%
Weighted Mean Annual Wage $45,821 0.003%
23-0000 Legal Occupations
23-1011 Lawyers $197,821 0.002%
23-2011 Paralegals and Legal Assistants $66,207 0.002%
Weighted Mean Annual Wage $141,415 0.004%
25-0000 Education, Training, and Library Occupations
25-3021 Self-Enrichment Education Teachers $45,214 0.035%
25-3099 Teachers and Instructors, All Other, Except Substitute Teachers $61,887 0.005%
25-2011 Preschool Teachers, Except Special Education $39,943 0.003%
25-9031 Instructional Coordinators $72,975 0.002%
Weighted Mean Annual Wage $48,010 0.044%
27-0000 Arts, Design, Entertainment, Sports, and Media Occupations
27-4011 Audio and Video Equipment Technicians $44,404 0.153%
27-2022 Coaches and Scouts $44,647 0.076%
27-3031 Public Relations Specialists $73,572 0.055%
27-3099 Media and Communication Workers, All Other $52,447 0.021%
27-4099 Media and Communication Equipment Workers, All Other $69,576 0.014%
27-1024 Graphic Designers $64,588 0.009%
27-1023 Floral Designers $33,640 0.008%
27-1025 Interior Designers $65,478 0.002%
Weighted Mean Annual Wage $51,110 0.337%
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Figure III-8. Occupational Mix and Average Wages for Hotel Industry, Continued
Occupation
Code Occupation Name (a)
Average Annual
Wage (b)
% of Total
Hotel Workers
(c)
29-0000 Healthcare Practitioners and Technical Occupations
29-1141 Registered Nurses $124,633 0.006%
29-9011 Occupational Health and Safety Specialists $91,672 0.005%
Weighted Mean Annual Wage $110,755 0.011%
31-0000 Healthcare Support Occupations
31-9011 Massage Therapists $33,182 0.435%
Weighted Mean Annual Wage $33,182 0.435%
33-0000 Protective Service Occupations
33-9032 Security Guards $31,791 1.595%
33-9092 Lifeguards, Ski Patrol, and Other Recreational Protective Service Workers $23,660 0.402%
33-1099 First-Line Supervisors of Protective Service Workers, All Other $55,471 0.140%
33-9099 Protective Service Workers, All Other $44,649 0.064%
33-9021 Private Detectives and Investigators $81,056 0.003%
Weighted Mean Annual Wage $32,248 2.204%
35-0000 Food Preparation and Serving Related Occupations
35-3031 Waiters and Waitresses $22,964 7.606%
35-2014 Cooks, Restaurant $25,887 3.415%
35-9011 Dining Room and Cafeteria Attendants and Bartender Helpers $19,871 2.696%
35-3011 Bartenders $25,181 2.156%
35-3041 Food Servers, Nonrestaurant $29,514 1.857%
35-9021 Dishwashers $20,516 1.776%
35-1012 First-Line Supervisors of Food Preparation and Serving Workers $35,399 1.298%
35-2021 Food Preparation Workers $23,005 1.039%
35-9031 Hosts and Hostesses, Restaurant, Lounge, and Coffee Shop $20,153 0.922%
35-3021 Combined Food Preparation and Serving Workers, Including Fast Food $22,199 0.839%
35-1011 Chefs and Head Cooks $45,637 0.750%
35-3022 Counter Attendants, Cafeteria, Food Concession, and Coffee Shop $21,020 0.554%
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Figure III-8. Occupational Mix and Average Wages for Hotel Industry, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total
Hotel
Workers (c)
35-2012 Cooks, Institution and Cafeteria $31,489 0.330%
35-2015 Cooks, Short Order $24,546 0.322%
35-9099 Food Preparation and Serving Related Workers, All Other $22,148 0.283%
35-2019 Cooks, All Other $25,413 0.097%
35-2011 Cooks, Fast Food $20,496 0.088%
Weighted Mean Annual Wage $24,740 26.028%
37-0000 Building and Grounds Cleaning and Maintenance Occupations
37-2012 Maids and Housekeeping Cleaners $28,799 24.645%
37-2011 Janitors and Cleaners, Except Maids and Housekeeping Cleaners $27,549 2.606%
37-1011 First-Line Supervisors of Housekeeping and Janitorial Workers $50,352 1.778%
37-3011 Landscaping and Groundskeeping Workers $31,560 1.061%
37-1012 First-Line Supervisors of Landscaping, Lawn Service, and Groundskeeping Workers $52,297 0.120%
37-3019 Grounds Maintenance Workers, All Other $45,818 0.048%
Weighted Mean Annual Wage $30,175 30.258%
39-0000 Personal Care and Service Occupations
39-5092 Manicurists and Pedicurists $19,327 0.059%
39-3031 Ushers, Lobby Attendants, and Ticket Takers $20,113 0.089%
39-7011 Tour Guides and Escorts $21,110 0.048%
39-9099 Personal Care and Service Workers, All Other $21,120 0.215%
39-6011 Baggage Porters and Bellhops $22,894 1.366%
39-5012 Hairdressers, Hairstylists, and Cosmetologists $23,942 0.060%
39-3091 Amusement and Recreation Attendants $24,637 0.681%
39-3093 Locker Room, Coatroom, and Dressing Room Attendants $25,685 0.137%
39-9021 Personal Care Aides $26,572 0.018%
39-9032 Recreation Workers $28,093 0.614%
39-2021 Nonfarm Animal Caretakers $28,990 0.023%
39-9011 Childcare Workers $29,565 0.040%
39-6012 Concierges $32,043 0.700%
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Figure III-8. Occupational Mix and Average Wages for Hotel Industry, Continued
Occupation
Code Occupation Name (a)
Average Annual
Wage (b)
% of Total
Hotel Workers
(c)
39-9041 Residential Advisors $35,308 0.061%
39-2011 Animal Trainers $43,682 0.003%
39-1021 First-Line Supervisors of Personal Service Workers $45,485 0.238%
Weighted Mean Annual Wage $26,795 4.350%
41-0000 Sales and Related Occupations
41-3099 Sales Representatives, Services, All Other $90,918 0.911%
41-2011 Cashiers $25,771 0.809%
41-2031 Retail Salespersons $27,121 0.316%
41-2012 Gaming Change Persons and Booth Cashiers $21,931 0.197%
41-1011 First-Line Supervisors of Retail Sales Workers $48,448 0.133%
41-2021 Counter and Rental Clerks $34,428 0.077%
41-1012 First-Line Supervisors of Non-Retail Sales Workers $111,025 0.072%
41-3041 Travel Agents $41,745 0.034%
41-9099 Sales and Related Workers, All Other $42,552 0.034%
41-9041 Telemarketers $29,631 0.030%
41-4012 Sales Representatives, Wholesale and Manufacturing, Except Technical and Scientific Products $68,867 0.020%
41-9022 Real Estate Sales Agents $70,439 0.007%
41-3011 Advertising Sales Agents $63,001 0.005%
Weighted Mean Annual Wage $52,775 2.645%
43-0000 Office and Administrative Support Occupations
43-4081 Hotel, Motel, and Resort Desk Clerks $24,788 12.825%
43-1011 First-Line Supervisors of Office and Administrative Support Workers $67,296 1.502%
43-3031 Bookkeeping, Accounting, and Auditing Clerks $49,252 1.111%
43-9061 Office Clerks, General $39,450 0.564%
43-6014 Secretaries and Administrative Assistants, Except Legal, Medical, and Executive $43,308 0.497%
43-4051 Customer Service Representatives $46,518 0.454%
43-4181 Reservation and Transportation Ticket Agents and Travel Clerks $37,617 0.453%
43-2011 Switchboard Operators, Including Answering Service $35,683 0.369%
43-4171 Receptionists and Information Clerks $34,590 0.250%
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Figure III-8. Occupational Mix and Average Wages for Hotel Industry, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total
Hotel Workers
(c)
43-3041 Gaming Cage Workers $31,137 0.247%
43-5081 Stock Clerks and Order Fillers $28,312 0.220%
43-6011 Executive Secretaries and Executive Administrative Assistants $65,402 0.195%
43-5071 Shipping, Receiving, and Traffic Clerks $35,207 0.126%
43-3051 Payroll and Timekeeping Clerks $51,773 0.094%
43-9199 Office and Administrative Support Workers, All Other $38,731 0.093%
43-4161 Human Resources Assistants, Except Payroll and Timekeeping $51,044 0.082%
43-5032 Dispatchers, Except Police, Fire, and Ambulance $53,920 0.076%
43-3021 Billing and Posting Clerks $45,890 0.065%
43-3061 Procurement Clerks $47,955 0.031%
43-5061 Production, Planning, and Expediting Clerks $58,689 0.020%
43-5021 Couriers and Messengers $36,189 0.016%
43-4041 Credit Authorizers, Checkers, and Clerks $41,981 0.011%
43-4151 Order Clerks $42,315 0.011%
43-3011 Bill and Account Collectors $49,434 0.010%
43-9051 Mail Clerks and Mail Machine Operators, Except Postal Service $34,691 0.008%
43-4199 Information and Record Clerks, All Other $46,467 0.007%
43-4071 File Clerks $34,012 0.005%
43-5111 Weighers, Measurers, Checkers, and Samplers, Recordkeeping $30,539 0.005%
43-9011 Computer Operators $46,204 0.005%
43-9071 Office Machine Operators, Except Computer $33,131 0.005%
43-3099 Financial Clerks, All Other $45,444 0.003%
Weighted Mean Annual Wage $32,767 19.359%
45-0000 Farming, Fishing, and Forestry Occupations
45-2093 Farmworkers, Farm, Ranch, and Aquacultural Animals $28,101 0.032%
45-2092 Farmworkers and Laborers, Crop, Nursery, and Greenhouse $21,473 0.003%
45-1011 First-Line Supervisors of Farming, Fishing, and Forestry Workers $61,161 0.002%
Weighted Mean Annual Wage $29,481 0.038%
Draft Palo Alto Linkage Fee Nexus Study
-29-
Figure III-8. Occupational Mix and Average Wages for Hotel Industry, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total
Hotel
Workers (c)
47-0000 Construction and Extraction Occupations
47-2141 Painters, Construction and Maintenance $52,934 0.079%
47-2031 Carpenters $62,042 0.059%
47-2111 Electricians $64,835 0.031%
47-1011 First-Line Supervisors of Construction Trades and Extraction Workers $83,728 0.011%
47-2152 Plumbers, Pipefitters, and Steamfitters $80,317 0.010%
47-2061 Construction Laborers $44,910 0.010%
47-2073 Operating Engineers and Other Construction Equipment Operators $69,510 0.008%
47-2041 Carpet Installers $56,709 0.003%
47-4051 Highway Maintenance Workers $60,564 0.002%
Weighted Mean Annual Wage $60,513 0.213%
49-0000 Installation, Maintenance, and Repair Occupations
49-9071 Maintenance and Repair Workers, General $48,997 4.553%
49-1011 First-Line Supervisors of Mechanics, Installers, and Repairers $77,658 0.400%
49-9091 Coin, Vending, and Amusement Machine Servicers and Repairers $36,977 0.094%
49-9099 Installation, Maintenance, and Repair Workers, All Other $49,058 0.044%
49-9021 Heating, Air Conditioning, and Refrigeration Mechanics and Installers $65,190 0.028%
49-9098 Helpers--Installation, Maintenance, and Repair Workers $34,330 0.023%
49-3053 Outdoor Power Equipment and Other Small Engine Mechanics $46,768 0.011%
49-9041 Industrial Machinery Mechanics $55,938 0.010%
49-3023 Automotive Service Technicians and Mechanics $51,582 0.009%
49-9094 Locksmiths and Safe Repairers $59,969 0.008%
49-3042 Mobile Heavy Equipment Mechanics, Except Engines $55,470 0.007%
49-9043 Maintenance Workers, Machinery $43,226 0.007%
49-2022 Telecommunications Equipment Installers and Repairers, Except Line Installers $65,495 0.002%
49-2094 Electrical and Electronics Repairers, Commercial and Industrial Equipment $51,745 0.002%
Weighted Mean Annual Wage $51,047 5.199%
51-0000 Production Occupations
51-6011 Laundry and Dry-Cleaning Workers $25,879 1.611%
Draft Palo Alto Linkage Fee Nexus Study
-30-
Figure III-8. Occupational Mix and Average Wages for Hotel Industry, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Hotel
Workers (c)
51-3011 Bakers $27,048 0.179%
51-8021 Stationary Engineers and Boiler Operators $78,511 0.054%
51-1011 First-Line Supervisors of Production and Operating Workers $63,406 0.051%
51-6052 Tailors, Dressmakers, and Custom Sewers $41,613 0.018%
51-9061 Inspectors, Testers, Sorters, Samplers, and Weighers $46,350 0.011%
51-3021 Butchers and Meat Cutters $34,021 0.008%
51-6031 Sewing Machine Operators $24,629 0.006%
51-6021 Pressers, Textile, Garment, and Related Materials $24,425 0.006%
51-9012 Separating, Filtering, Clarifying, Precipitating, and Still Machine Setters, Operators, and Tenders $40,373 0.003%
51-3092 Food Batchmakers $25,310 0.002%
51-9198 Helpers--Production Workers $27,546 0.002%
Weighted Mean Annual Wage $28,730 1.950%
53-0000 Transportation and Material Moving Occupations
53-6021 Parking Lot Attendants $21,595 0.464%
53-7062 Laborers and Freight, Stock, and Material Movers, Hand $31,188 0.297%
53-1031 First-Line Supervisors of Transportation and Material-Moving Machine and Vehicle Operators $61,604 0.034%
53-1021 First-Line Supervisors of Helpers, Laborers, and Material Movers, Hand $52,489 0.018%
53-3033 Light Truck or Delivery Services Drivers $36,503 0.018%
53-7061 Cleaners of Vehicles and Equipment $25,762 0.008%
53-7199 Material Moving Workers, All Other $39,857 0.005%
53-6031 Automotive and Watercraft Service Attendants $27,042 0.004%
53-7051 Industrial Truck and Tractor Operators $37,469 0.003%
53-3031 Driver/Sales Workers $35,192 0.002%
53-3032 Heavy and Tractor-Trailer Truck Drivers $46,564 0.002%
Weighted Mean Annual Wage $27,778 0.854%
Total, Land Use $35,157 100.000%
Notes:
(a) Occupational mix by industry was obtained from US Bureau of Labor Statistics, Occupational Employment Statistics, 2013.
(b) Wage data for the San Jose – Sunnyvale – Santa Clara MSA obtained from California Economic Development Department, OES Employment and Wages by Occupation, 2013.
(c) Distribution of workers is calculated based on the existing distribution of employment by industry in Santa Clara County, provided by Quarterly Census of Employment and
Wages (QCEW), 2013.
Sources: Vernazza Wolfe Associates, Inc.; Strategic Economics, 2015.
Draft Palo Alto Linkage Fee Nexus Study
-31-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office
Occupation
Code Occupation Name (a)
Average Annual
Wage (b)
% of Total Office/
R&D/ Medical Office
Workers (c)
11-0000 Management Occupations
11-1021 General and Operations Managers $150,054 2.009%
11-3021 Computer and Information Systems Managers $185,257 1.370%
11-3031 Financial Managers $162,295 0.706%
11-9041 Architectural and Engineering Managers $186,557 0.475%
11-2022 Sales Managers $173,358 0.421%
11-2021 Marketing Managers $185,177 0.409%
11-9199 Managers, All Other $164,693 0.398%
11-1011 Chief Executives $218,577 0.290%
11-3011 Administrative Services Managers $116,009 0.273%
11-9111 Medical and Health Services Managers $139,807 0.184%
11-3121 Human Resources Managers $163,111 0.181%
11-9141 Property, Real Estate, and Community Association Managers $75,727 0.151%
11-3051 Industrial Production Managers $129,691 0.118%
11-9121 Natural Sciences Managers $189,368 0.107%
11-3061 Purchasing Managers $149,288 0.091%
11-9021 Construction Managers $115,374 0.059%
11-3131 Training and Development Managers $161,761 0.045%
11-2031 Public Relations and Fundraising Managers $129,248 0.044%
11-9051 Food Service Managers $55,929 0.042%
11-3071 Transportation, Storage, and Distribution Managers $110,880 0.039%
11-3111 Compensation and Benefits Managers $164,189 0.029%
11-2011 Advertising and Promotions Managers $113,379 0.022%
11-9151 Social and Community Service Managers $80,170 0.021%
11-9161 Emergency Management Directors $115,203 0.003%
11-9039 Education Administrators, All Other $85,561 0.003%
11-9081 Lodging Managers $55,616 0.002%
11-9013 Farmers, Ranchers, and Other Agricultural Managers $104,976 0.002%
11-9031 Education Administrators, Preschool and Childcare Center/Program $64,614 0.002%
11-9033 Education Administrators, Postsecondary $110,266 0.001%
11-9032 Education Administrators, Elementary and Secondary School $110,588 0.000%
Weighted Mean Annual Wage $162,745 7.500%
Draft Palo Alto Linkage Fee Nexus Study
-32-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average Annual
Wage (b)
% of Total Office/
R&D/ Medical Office
Workers (c)
13-0000 Business and Financial Operations Occupations
13-2011 Accountants and Auditors $87,797 1.738%
13-1111 Management Analysts $104,573 1.252%
13-1199 Business Operations Specialists, All Other $95,424 1.164%
13-1161 Market Research Analysts and Marketing Specialists $103,979 0.902%
13-1071 Human Resources Specialists $84,352 0.876%
13-2051 Financial Analysts $112,220 0.466%
13-1151 Training and Development Specialists $83,797 0.384%
13-2072 Loan Officers $82,709 0.359%
13-1023 Purchasing Agents, Except Wholesale, Retail, and Farm Products $79,868 0.335%
13-2052 Personal Financial Advisors $90,346 0.208%
13-1081 Logisticians $97,520 0.194%
13-1041 Compliance Officers $84,523 0.183%
13-2099 Financial Specialists, All Other $63,667 0.163%
13-1031 Claims Adjusters, Examiners, and Investigators $71,737 0.140%
13-2082 Tax Preparers $51,506 0.135%
13-1141 Compensation, Benefits, and Job Analysis Specialists $90,004 0.116%
13-2041 Credit Analysts $74,760 0.101%
13-1022 Wholesale and Retail Buyers, Except Farm Products $58,770 0.085%
13-1051 Cost Estimators $78,709 0.061%
13-2031 Budget Analysts $85,923 0.061%
13-1121 Meeting, Convention, and Event Planners $58,851 0.043%
13-2021 Appraisers and Assessors of Real Estate $75,586 0.036%
13-2061 Financial Examiners $92,603 0.024%
13-2071 Credit Counselors $53,299 0.017%
13-1075 Labor Relations Specialists $61,652 0.014%
13-1131 Fundraisers $70,296 0.012%
13-1021 Buyers and Purchasing Agents, Farm Products $66,679 0.004%
13-1011 Agents and Business Managers of Artists, Performers, and Athletes $111,797 0.000%
Weighted Mean Annual Wage $91,169 9.073%
Draft Palo Alto Linkage Fee Nexus Study
-33-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
15-0000 Computer and Mathematical Occupations
15-1132 Software Developers, Applications $132,808 4.184%
15-1121 Computer Systems Analysts $105,259 2.702%
15-1133 Software Developers, Systems Software $133,577 2.548%
15-1151 Computer User Support Specialists $71,022 2.162%
15-1131 Computer Programmers $95,000 2.144%
15-1142 Network and Computer Systems Administrators $94,342 1.282%
15-1143 Computer Network Architects $137,806 0.708%
15-1152 Computer Network Support Specialists $91,823 0.667%
15-1134 Web Developers $101,961 0.519%
15-1199 Computer Occupations, All Other $95,708 0.475%
15-1141 Database Administrators $102,689 0.409%
15-1122 Information Security Analysts $106,331 0.392%
15-2031 Operations Research Analysts $118,553 0.188%
15-1111 Computer and Information Research Scientists $134,649 0.099%
15-2041 Statisticians $151,990 0.049%
Weighted Mean Annual Wage $110,240 18.527%
17-0000 Architecture and Engineering Occupations
17-2061 Computer Hardware Engineers $135,975 0.598%
17-2071 Electrical Engineers $122,822 0.484%
17-2051 Civil Engineers $101,748 0.481%
17-3023 Electrical and Electronics Engineering Technicians $66,014 0.468%
17-2141 Mechanical Engineers $110,763 0.460%
17-2072 Electronics Engineers, Except Computer $127,436 0.434%
17-2112 Industrial Engineers $110,914 0.432%
17-2199 Engineers, All Other $114,931 0.242%
17-1011 Architects, Except Landscape and Naval $87,584 0.239%
17-3011 Architectural and Civil Drafters $60,227 0.227%
17-3026 Industrial Engineering Technicians $59,570 0.178%
17-2011 Aerospace Engineers $109,569 0.126%
Draft Palo Alto Linkage Fee Nexus Study
-34-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average Annual
Wage (b)
% of Total Office/
R&D/ Medical Office
Workers (c)
17-3029 Engineering Technicians, Except Drafters, All Other $60,430 0.113%
17-3027 Mechanical Engineering Technicians $53,712 0.105%
17-3022 Civil Engineering Technicians $59,600 0.103%
17-3031 Surveying and Mapping Technicians $61,684 0.099%
17-1022 Surveyors $82,141 0.096%
17-2081 Environmental Engineers $81,595 0.094%
17-3013 Mechanical Drafters $66,197 0.084%
17-3012 Electrical and Electronics Drafters $72,773 0.075%
17-2041 Chemical Engineers $100,575 0.051%
17-2131 Materials Engineers $106,068 0.047%
17-1012 Landscape Architects $79,349 0.045%
17-2031 Biomedical Engineers $116,701 0.042%
17-3024 Electro-Mechanical Technicians $52,852 0.041%
17-3025 Environmental Engineering Technicians $70,456 0.031%
17-3019 Drafters, All Other $46,498 0.025%
17-2111 Health and Safety Engineers, Except Mining Safety Engineers and Inspectors $99,077 0.023%
17-1021 Cartographers and Photogrammetrists $73,380 0.022%
Weighted Mean Annual Wage $98,983 5.459%
19-0000 Life, Physical, and Social Science Occupations
19-1042 Medical Scientists, Except Epidemiologists $124,745 0.239%
19-2031 Chemists $78,337 0.159%
19-4021 Biological Technicians $51,638 0.126%
19-2041 Environmental Scientists and Specialists, Including Health $92,946 0.120%
19-4031 Chemical Technicians $46,266 0.111%
19-4099 Life, Physical, and Social Science Technicians, All Other $55,968 0.101%
19-1021 Biochemists and Biophysicists $110,044 0.091%
19-4061 Social Science Research Assistants $50,191 0.060%
19-4091 Environmental Science and Protection Technicians, Including Health $51,365 0.050%
19-2042 Geoscientists, Except Hydrologists and Geographers $79,339 0.049%
19-2012 Physicists $127,871 0.039%
19-3031 Clinical, Counseling, and School Psychologists $87,979 0.038%
19-1029 Biological Scientists, All Other $86,836 0.037%
19-1022 Microbiologists $88,980 0.035%
Draft Palo Alto Linkage Fee Nexus Study
-35-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
19-3099 Social Scientists and Related Workers, All Other $90,447 0.032%
19-3011 Economists $52,377 0.030%
19-1013 Soil and Plant Scientists $58,255 0.025%
19-3051 Urban and Regional Planners $92,997 0.020%
19-4011 Agricultural and Food Science Technicians $31,444 0.020%
19-1012 Food Scientists and Technologists $70,689 0.019%
19-2032 Materials Scientists $111,916 0.019%
19-1023 Zoologists and Wildlife Biologists $66,925 0.016%
19-1099 Life Scientists, All Other $95,840 0.012%
19-3094 Political Scientists $82,718 0.005%
19-1031 Conservation Scientists $95,759 0.004%
19-3039 Psychologists, All Other $85,834 0.003%
19-4092 Forensic Science Technicians $76,587 0.002%
Weighted Mean Annual Wage $82,195 1.461%
21-0000 Community and Social Service Occupations
21-1014 Mental Health Counselors $55,918 0.074%
21-1093 Social and Human Service Assistants $41,501 0.068%
21-1023 Mental Health and Substance Abuse Social Workers $61,148 0.067%
21-1011 Substance Abuse and Behavioral Disorder Counselors $44,070 0.048%
21-1022 Healthcare Social Workers $69,930 0.042%
21-1021 Child, Family, and School Social Workers $50,990 0.032%
21-1091 Health Educators $61,381 0.026%
21-1094 Community Health Workers $46,822 0.022%
21-1099 Community and Social Service Specialists, All Other $45,821 0.020%
21-1015 Rehabilitation Counselors $44,475 0.016%
21-1013 Marriage and Family Therapists $62,140 0.014%
21-1012 Educational, Guidance, School, and Vocational Counselors $63,546 0.014%
21-1019 Counselors, All Other $74,199 0.008%
21-1029 Social Workers, All Other $81,221 0.007%
21-2011 Clergy $55,058 0.002%
21-2021 Directors, Religious Activities and Education $61,067 0.000%
Weighted Mean Annual Wage $54,459 0.462%
Draft Palo Alto Linkage Fee Nexus Study
-36-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average Annual
Wage (b)
% of Total Office/
R&D/ Medical Office
Workers (c)
23-0000 Legal Occupations
23-1011 Lawyers $197,821 0.881%
23-2011 Paralegals and Legal Assistants $66,207 0.433%
23-2093 Title Examiners, Abstractors, and Searchers $83,375 0.066%
23-2099 Legal Support Workers, All Other $74,493 0.032%
23-1022 Arbitrators, Mediators, and Conciliators $81,726 0.004%
23-2091 Court Reporters $73,188 0.002%
Weighted Mean Annual Wage $148,985 1.419%
25-0000 Education, Training, and Library Occupations
25-3098 Substitute Teachers $40,206 0.175%
25-4021 Librarians $73,531 0.058%
25-4031 Library Technicians $52,447 0.045%
25-9041 Teacher Assistants $30,220 0.041%
25-2021 Elementary School Teachers, Except Special Education $70,132 0.025%
25-9031 Instructional Coordinators $72,975 0.022%
25-3099 Teachers and Instructors, All Other, Except Substitute Teachers $61,887 0.019%
25-9099 Education, Training, and Library Workers, All Other $38,617 0.018%
25-2022 Middle School Teachers, Except Special and Career/Technical Education $67,977 0.017%
25-2031 Secondary School Teachers, Except Special and Career/Technical Education $73,451 0.016%
25-3021 Self-Enrichment Education Teachers $45,214 0.008%
25-2011 Preschool Teachers, Except Special Education $39,943 0.008%
25-2059 Special Education Teachers, All Other $62,898 0.002%
25-2052 Special Education Teachers, Kindergarten and Elementary School $66,591 0.002%
25-1194 Vocational Education Teachers, Postsecondary $63,101 0.002%
25-4012 Curators $65,033 0.001%
25-3011 Adult Basic and Secondary Education and Literacy Teachers and Instructors $76,587 0.001%
25-1071 Health Specialties Teachers, Postsecondary $76,202 0.001%
25-4013 Museum Technicians and Conservators $44,819 0.001%
25-2054 Special Education Teachers, Secondary School $74,837 0.001%
25-2051 Special Education Teachers, Preschool $65,751 0.001%
Weighted Mean Annual Wage $51,545 0.463%
Draft Palo Alto Linkage Fee Nexus Study
-37-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
27-0000 Arts, Design, Entertainment, Sports, and Media Occupations
27-1024 Graphic Designers $64,588 0.236%
27-3042 Technical Writers $102,446 0.203%
27-3031 Public Relations Specialists $73,572 0.157%
27-3041 Editors $77,538 0.116%
27-1014 Multimedia Artists and Animators $79,399 0.090%
27-3043 Writers and Authors $72,833 0.043%
27-4021 Photographers $41,066 0.041%
27-3022 Reporters and Correspondents $50,727 0.041%
27-1025 Interior Designers $65,478 0.038%
27-1011 Art Directors $125,109 0.034%
27-1021 Commercial and Industrial Designers $89,992 0.025%
27-4011 Audio and Video Equipment Technicians $44,404 0.023%
27-3091 Interpreters and Translators $55,604 0.022%
27-3099 Media and Communication Workers, All Other $52,447 0.017%
27-1026 Merchandise Displayers and Window Trimmers $34,247 0.015%
27-4032 Film and Video Editors $43,564 0.013%
27-2022 Coaches and Scouts $44,647 0.012%
27-1022 Fashion Designers $53,236 0.011%
27-4012 Broadcast Technicians $40,560 0.010%
27-3011 Radio and Television Announcers $31,191 0.009%
27-4099 Media and Communication Equipment Workers, All Other $69,576 0.005%
27-1027 Set and Exhibit Designers $66,804 0.003%
27-1023 Floral Designers $33,640 0.002%
27-3012 Public Address System and Other Announcers $40,914 0.000%
27-1012 Craft Artists $43,696 0.000%
27-2041 Music Directors and Composers $69,576 0.000%
Weighted Mean Annual Wage $74,013 1.163%
29-0000 Healthcare Practitioners and Technical Occupations
29-1141 Registered Nurses $124,633 1.072%
29-2061 Licensed Practical and Licensed Vocational Nurses $58,801 0.469%
29-1069 Physicians and Surgeons, All Other $147,650 0.426%
Draft Palo Alto Linkage Fee Nexus Study
-38-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average Annual
Wage (b)
% of Total Office/
R&D/ Medical Office
Workers (c)
29-2021 Dental Hygienists $96,750 0.401%
29-1062 Family and General Practitioners $193,329 0.240%
29-1021 Dentists, General $148,348 0.195%
29-2071 Medical Records and Health Information Technicians $51,233 0.178%
29-1171 Nurse Practitioners $135,499 0.174%
29-1071 Physician Assistants $106,938 0.164%
29-2034 Radiologic Technologists $86,552 0.148%
29-2012 Medical and Clinical Laboratory Technicians $55,209 0.121%
29-1123 Physical Therapists $95,587 0.115%
29-1063 Internists, General $185,589 0.089%
29-1067 Surgeons $241,668 0.086%
29-2099 Health Technologists and Technicians, All Other $59,115 0.076%
29-2057 Ophthalmic Medical Technicians $42,118 0.072%
29-2056 Veterinary Technologists and Technicians $44,161 0.071%
29-1061 Anesthesiologists $248,872 0.070%
29-2055 Surgical Technologists $64,790 0.066%
29-2011 Medical and Clinical Laboratory Technologists $87,938 0.066%
29-1065 Pediatricians, General $188,493 0.066%
29-2052 Pharmacy Technicians $46,256 0.048%
29-1064 Obstetricians and Gynecologists $237,622 0.048%
29-2032 Diagnostic Medical Sonographers $111,440 0.047%
29-1131 Veterinarians $115,073 0.047%
29-1122 Occupational Therapists $90,407 0.046%
29-2081 Opticians, Dispensing $45,527 0.044%
29-1051 Pharmacists $135,408 0.044%
29-9011 Occupational Health and Safety Specialists $91,672 0.039%
29-1041 Optometrists $119,251 0.035%
29-1127 Speech-Language Pathologists $94,686 0.033%
29-1031 Dietitians and Nutritionists $71,083 0.029%
29-1066 Psychiatrists $195,909 0.027%
29-1126 Respiratory Therapists $87,635 0.026%
29-2031 Cardiovascular Technologists and Technicians $60,774 0.026%
29-9099 Healthcare Practitioners and Technical Workers, All Other $69,879 0.021%
29-1199 Health Diagnosing and Treating Practitioners, All Other $78,459 0.020%
Draft Palo Alto Linkage Fee Nexus Study
-39-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
29-2035 Magnetic Resonance Imaging Technologists $98,227 0.020%
29-1124 Radiation Therapists $115,649 0.014%
29-2033 Nuclear Medicine Technologists $117,025 0.013%
29-9012 Occupational Health and Safety Technicians $43,109 0.009%
29-9091 Athletic Trainers $63,263 0.009%
29-1081 Podiatrists $132,656 0.009%
29-2053 Psychiatric Technicians $49,787 0.006%
29-1129 Therapists, All Other $82,232 0.006%
29-2051 Dietetic Technicians $40,327 0.003%
29-2092 Hearing Aid Specialists $55,240 0.002%
29-1128 Exercise Physiologists $84,934 0.002%
29-1125 Recreational Therapists $52,963 0.002%
Weighted Mean Annual Wage $114,459 5.039%
31-0000 Healthcare Support Occupations
31-9092 Medical Assistants $39,127 1.106%
31-9091 Dental Assistants $41,525 0.633%
31-1014 Nursing Assistants $34,421 0.263%
31-1011 Home Health Aides $25,141 0.119%
31-9094 Medical Transcriptionists $46,654 0.074%
31-9096 Veterinary Assistants and Laboratory Animal Caretakers $35,127 0.063%
31-9097 Phlebotomists $41,314 0.059%
31-2021 Physical Therapist Assistants $62,888 0.044%
31-2022 Physical Therapist Aides $35,651 0.035%
31-9099 Healthcare Support Workers, All Other $45,042 0.035%
31-9093 Medical Equipment Preparers $45,506 0.025%
31-9011 Massage Therapists $33,182 0.021%
31-2011 Occupational Therapy Assistants $45,798 0.014%
31-1015 Orderlies $45,576 0.007%
31-9095 Pharmacy Aides $31,136 0.005%
31-2012 Occupational Therapy Aides $42,563 0.003%
Weighted Mean Annual Wage $39,262 2.506%
Draft Palo Alto Linkage Fee Nexus Study
-40-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
33-0000 Protective Service Occupations
33-9032 Security Guards $31,791 1.389%
33-1099 First-Line Supervisors of Protective Service Workers, All Other $55,471 0.060%
33-9021 Private Detectives and Investigators $81,056 0.030%
33-9099 Protective Service Workers, All Other $44,649 0.020%
33-9092 Lifeguards, Ski Patrol, and Other Recreational Protective Service Workers $23,660 0.010%
33-9091 Crossing Guards $35,711 0.010%
33-2011 Firefighters $88,371 0.005%
33-3012 Correctional Officers and Jailers $74,193 0.003%
33-3041 Parking Enforcement Workers $45,455 0.001%
33-2021 Fire Inspectors and Investigators $91,626 0.001%
33-1021 First-Line Supervisors of Fire Fighting and Prevention Workers $133,564 0.000%
Weighted Mean Annual Wage $34,146 1.529%
35-0000 Food Preparation and Serving Related Occupations
35-3021 Combined Food Preparation and Serving Workers, Including Fast Food $22,199 0.205%
35-3031 Waiters and Waitresses $22,964 0.182%
35-2021 Food Preparation Workers $23,005 0.104%
35-2012 Cooks, Institution and Cafeteria $31,489 0.085%
35-3022 Counter Attendants, Cafeteria, Food Concession, and Coffee Shop $21,020 0.082%
35-1012 First-Line Supervisors of Food Preparation and Serving Workers $35,399 0.079%
35-3041 Food Servers, Nonrestaurant $29,514 0.071%
35-9021 Dishwashers $20,516 0.062%
35-9011 Dining Room and Cafeteria Attendants and Bartender Helpers $19,871 0.061%
35-2014 Cooks, Restaurant $25,887 0.040%
35-3011 Bartenders $25,181 0.035%
35-1011 Chefs and Head Cooks $45,637 0.023%
35-9031 Hosts and Hostesses, Restaurant, Lounge, and Coffee Shop $20,153 0.019%
35-2019 Cooks, All Other $25,413 0.017%
35-9099 Food Preparation and Serving Related Workers, All Other $22,148 0.013%
35-2015 Cooks, Short Order $24,546 0.009%
35-2011 Cooks, Fast Food $20,496 0.006%
Weighted Mean Annual Wage $24,987 1.092%
Draft Palo Alto Linkage Fee Nexus Study
-41-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
37-0000 Building and Grounds Cleaning and Maintenance Occupations
37-2011 Janitors and Cleaners, Except Maids and Housekeeping Cleaners $27,549 3.532%
37-3011 Landscaping and Groundskeeping Workers $31,560 1.945%
37-2012 Maids and Housekeeping Cleaners $28,799 0.584%
37-2021 Pest Control Workers $37,354 0.238%
37-1011 First-Line Supervisors of Housekeeping and Janitorial Workers $50,352 0.232%
37-1012
First-Line Supervisors of Landscaping, Lawn Service, and Groundskeeping
Workers $52,297 0.230%
37-3013 Tree Trimmers and Pruners $28,547 0.136%
37-3012 Pesticide Handlers, Sprayers, and Applicators, Vegetation $33,807 0.049%
37-3019 Grounds Maintenance Workers, All Other $45,818 0.031%
Weighted Mean Annual Wage $30,824 6.978%
39-0000 Personal Care and Service Occupations
39-9021 Personal Care Aides $26,572 0.194%
39-3031 Ushers, Lobby Attendants, and Ticket Takers $20,113 0.058%
39-9011 Childcare Workers $29,565 0.026%
39-2021 Nonfarm Animal Caretakers $28,990 0.024%
39-9032 Recreation Workers $28,093 0.016%
39-1021 First-Line Supervisors of Personal Service Workers $45,485 0.015%
39-3091 Amusement and Recreation Attendants $24,637 0.012%
39-6012 Concierges $32,043 0.012%
39-9099 Personal Care and Service Workers, All Other $21,120 0.009%
39-9041 Residential Advisors $35,308 0.007%
39-9031 Fitness Trainers and Aerobics Instructors $53,265 0.007%
39-7011 Tour Guides and Escorts $21,110 0.006%
39-5012 Hairdressers, Hairstylists, and Cosmetologists $23,942 0.005%
39-6011 Baggage Porters and Bellhops $22,894 0.003%
39-3093 Locker Room, Coatroom, and Dressing Room Attendants $25,685 0.001%
39-2011 Animal Trainers $43,682 0.000%
39-5092 Manicurists and Pedicurists $19,327 0.000%
Weighted Mean Annual Wage $27,171 0.395%
Draft Palo Alto Linkage Fee Nexus Study
-42-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
41-0000 Sales and Related Occupations
41-3099 Sales Representatives, Services, All Other $90,918 1.480%
41-4011
Sales Representatives, Wholesale and Manufacturing, Technical and Scientific
Products $122,303 0.645%
41-3031 Securities, Commodities, and Financial Services Sales Agents $94,597 0.412%
41-4012
Sales Representatives, Wholesale and Manufacturing, Except Technical and
Scientific Products $68,867 0.334%
41-9031 Sales Engineers $121,759 0.235%
41-1012 First-Line Supervisors of Non-Retail Sales Workers $111,025 0.222%
41-3021 Insurance Sales Agents $73,372 0.213%
41-2031 Retail Salespersons $27,121 0.206%
41-9041 Telemarketers $29,631 0.184%
41-2011 Cashiers $25,771 0.150%
41-9022 Real Estate Sales Agents $70,439 0.121%
41-3011 Advertising Sales Agents $63,001 0.110%
41-2021 Counter and Rental Clerks $34,428 0.105%
41-9099 Sales and Related Workers, All Other $42,552 0.060%
41-9011 Demonstrators and Product Promoters $26,396 0.058%
41-1011 First-Line Supervisors of Retail Sales Workers $48,448 0.049%
41-9021 Real Estate Brokers $104,837 0.028%
41-2022 Parts Salespersons $36,575 0.005%
41-3041 Travel Agents $41,745 0.004%
Weighted Mean Annual Wage $83,961 4.621%
43-0000 Office and Administrative Support Occupations
43-9061 Office Clerks, General $39,450 2.848%
43-4051 Customer Service Representatives $46,518 2.571%
43-6014 Secretaries and Administrative Assistants, Except Legal, Medical, and Executive $43,308 2.003%
43-3031 Bookkeeping, Accounting, and Auditing Clerks $49,252 1.528%
43-4171 Receptionists and Information Clerks $34,590 1.285%
43-1011 First-Line Supervisors of Office and Administrative Support Workers $67,296 1.261%
43-6011 Executive Secretaries and Executive Administrative Assistants $65,402 0.904%
43-3071 Tellers $31,886 0.879%
43-6013 Medical Secretaries $44,938 0.773%
43-3021 Billing and Posting Clerks $45,890 0.657%
Draft Palo Alto Linkage Fee Nexus Study
-43-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
43-9021 Data Entry Keyers $33,820 0.411%
43-5081 Stock Clerks and Order Fillers $28,312 0.391%
43-3011 Bill and Account Collectors $49,434 0.379%
43-6012 Legal Secretaries $62,648 0.365%
43-5071 Shipping, Receiving, and Traffic Clerks $35,207 0.346%
43-5061 Production, Planning, and Expediting Clerks $58,689 0.307%
43-4131 Loan Interviewers and Clerks $47,712 0.275%
43-4071 File Clerks $34,012 0.229%
43-9199 Office and Administrative Support Workers, All Other $38,731 0.186%
43-3051 Payroll and Timekeeping Clerks $51,773 0.172%
43-9011 Computer Operators $46,204 0.144%
43-4161 Human Resources Assistants, Except Payroll and Timekeeping $51,044 0.144%
43-9041 Insurance Claims and Policy Processing Clerks $41,779 0.135%
43-4111 Interviewers, Except Eligibility and Loan $48,452 0.134%
43-4141 New Accounts Clerks $41,475 0.095%
43-9051 Mail Clerks and Mail Machine Operators, Except Postal Service $34,691 0.093%
43-2011 Switchboard Operators, Including Answering Service $35,683 0.086%
43-4199 Information and Record Clerks, All Other $46,467 0.082%
43-9071 Office Machine Operators, Except Computer $33,131 0.081%
43-4151 Order Clerks $42,315 0.072%
43-4011 Brokerage Clerks $57,261 0.066%
43-5032 Dispatchers, Except Police, Fire, and Ambulance $53,920 0.062%
43-4041 Credit Authorizers, Checkers, and Clerks $41,981 0.060%
43-5021 Couriers and Messengers $36,189 0.058%
43-4121 Library Assistants, Clerical $34,488 0.055%
43-9022 Word Processors and Typists $51,013 0.046%
43-3061 Procurement Clerks $47,955 0.040%
43-3099 Financial Clerks, All Other $45,444 0.040%
43-5111 Weighers, Measurers, Checkers, and Samplers, Recordkeeping $30,539 0.023%
43-9031 Desktop Publishers $58,750 0.018%
43-5011 Cargo and Freight Agents $38,650 0.013%
43-9081 Proofreaders and Copy Markers $48,371 0.013%
43-9111 Statistical Assistants $54,203 0.010%
Draft Palo Alto Linkage Fee Nexus Study
-44-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
43-4181 Reservation and Transportation Ticket Agents and Travel Clerks $37,617 0.009%
43-4081 Hotel, Motel, and Resort Desk Clerks $24,788 0.008%
43-5041 Meter Readers, Utilities $52,330 0.006%
43-5031 Police, Fire, and Ambulance Dispatchers $71,660 0.004%
43-4061 Eligibility Interviewers, Government Programs $58,831 0.003%
43-4031 Court, Municipal, and License Clerks $42,184 0.001%
Weighted Mean Annual Wage $45,403 19.372%
45-0000 Farming, Fishing, and Forestry Occupations
45-2092 Farmworkers and Laborers, Crop, Nursery, and Greenhouse $21,473 0.013%
45-2093 Farmworkers, Farm, Ranch, and Aquacultural Animals $28,101 0.006%
45-1011 First-Line Supervisors of Farming, Fishing, and Forestry Workers $61,161 0.002%
45-2091 Agricultural Equipment Operators $54,786 0.002%
45-2011 Agricultural Inspectors $55,849 0.002%
45-4011 Forest and Conservation Workers $19,510 0.001%
45-2041 Graders and Sorters, Agricultural Products $20,370 0.000%
Weighted Mean Annual Wage $31,456 0.026%
47-0000 Construction and Extraction Occupations
47-2061 Construction Laborers $44,910 0.350%
47-4011 Construction and Building Inspectors $82,189 0.097%
47-2111 Electricians $64,835 0.089%
47-2031 Carpenters $62,042 0.088%
47-1011 First-Line Supervisors of Construction Trades and Extraction Workers $83,728 0.036%
47-2073 Operating Engineers and Other Construction Equipment Operators $69,510 0.033%
47-2152 Plumbers, Pipefitters, and Steamfitters $80,317 0.032%
47-2141 Painters, Construction and Maintenance $52,934 0.031%
47-2051 Cement Masons and Concrete Finishers $50,759 0.009%
47-4099 Construction and Related Workers, All Other $60,645 0.007%
47-2081 Drywall and Ceiling Tile Installers $62,062 0.006%
47-2221 Structural Iron and Steel Workers $83,677 0.004%
47-4071 Septic Tank Servicers and Sewer Pipe Cleaners $42,704 0.004%
47-3012 Helpers--Carpenters $49,079 0.004%
Draft Palo Alto Linkage Fee Nexus Study
-45-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
47-2022 Stonemasons $46,306 0.004%
47-4041 Hazardous Materials Removal Workers $42,127 0.003%
47-2181 Roofers $51,558 0.003%
47-2151 Pipelayers $62,285 0.002%
47-2041 Carpet Installers $56,709 0.002%
47-4051 Highway Maintenance Workers $60,564 0.002%
47-2161 Plasterers and Stucco Masons $54,270 0.001%
47-2021 Brickmasons and Blockmasons $59,947 0.001%
47-2044 Tile and Marble Setters $44,141 0.001%
47-3019 Helpers, Construction Trades, All Other $28,061 0.001%
47-3014 Helpers--Painters, Paperhangers, Plasterers, and Stucco Masons $29,650 0.001%
47-2082 Tapers $63,074 0.001%
47-4021 Elevator Installers and Repairers $87,219 0.001%
47-2211 Sheet Metal Workers $69,014 0.001%
47-2071 Paving, Surfacing, and Tamping Equipment Operators $49,221 0.001%
47-2121 Glaziers $71,402 0.000%
47-3011 Helpers--Brickmasons, Blockmasons, Stonemasons, and Tile and Marble Setters $38,929 0.000%
47-2042 Floor Layers, Except Carpet, Wood, and Hard Tiles $64,045 0.000%
Weighted Mean Annual Wage $58,523 0.813%
49-0000 Installation, Maintenance, and Repair Occupations
49-9071 Maintenance and Repair Workers, General $48,997 0.675%
49-2022 Telecommunications Equipment Installers and Repairers, Except Line Installers $65,495 0.243%
49-2011 Computer, Automated Teller, and Office Machine Repairers $46,697 0.184%
49-1011 First-Line Supervisors of Mechanics, Installers, and Repairers $77,658 0.127%
49-9052 Telecommunications Line Installers and Repairers $63,724 0.122%
49-9099 Installation, Maintenance, and Repair Workers, All Other $49,058 0.114%
49-2098 Security and Fire Alarm Systems Installers $64,885 0.068%
49-9041 Industrial Machinery Mechanics $55,938 0.066%
49-2094 Electrical and Electronics Repairers, Commercial and Industrial Equipment $51,745 0.046%
49-9098 Helpers--Installation, Maintenance, and Repair Workers $34,330 0.030%
49-3011 Aircraft Mechanics and Service Technicians $63,317 0.024%
49-3023 Automotive Service Technicians and Mechanics $51,582 0.023%
Draft Palo Alto Linkage Fee Nexus Study
-46-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
49-9094 Locksmiths and Safe Repairers $59,969 0.023%
49-9021 Heating, Air Conditioning, and Refrigeration Mechanics and Installers $65,190 0.017%
49-3031 Bus and Truck Mechanics and Diesel Engine Specialists $55,745 0.015%
49-9043 Maintenance Workers, Machinery $43,226 0.015%
49-9062 Medical Equipment Repairers $56,416 0.011%
49-3053 Outdoor Power Equipment and Other Small Engine Mechanics $46,768 0.011%
49-3042 Mobile Heavy Equipment Mechanics, Except Engines $55,470 0.009%
49-9051 Electrical Power-Line Installers and Repairers $91,072 0.008%
49-9012 Control and Valve Installers and Repairers, Except Mechanical Door $62,330 0.006%
49-3093 Tire Repairers and Changers $30,300 0.004%
49-9069 Precision Instrument and Equipment Repairers, All Other $54,798 0.004%
49-3021 Automotive Body and Related Repairers $47,826 0.004%
49-2097 Electronic Home Entertainment Equipment Installers and Repairers $41,719 0.004%
49-2091 Avionics Technicians $65,780 0.003%
49-3041 Farm Equipment Mechanics and Service Technicians $43,847 0.001%
49-9031 Home Appliance Repairers $42,004 0.001%
49-9091 Coin, Vending, and Amusement Machine Servicers and Repairers $36,977 0.001%
49-2093 Electrical and Electronics Installers and Repairers, Transportation Equipment $65,251 0.000%
49-3091 Bicycle Repairers $26,890 0.000%
49-2096 Electronic Equipment Installers and Repairers, Motor Vehicles $37,638 0.000%
Weighted Mean Annual Wage $55,278 1.862%
51-0000 Production Occupations
51-2092 Team Assemblers $34,315 1.193%
51-2022 Electrical and Electronic Equipment Assemblers $37,365 0.820%
51-9198 Helpers--Production Workers $27,546 0.702%
51-9061 Inspectors, Testers, Sorters, Samplers, and Weighers $46,350 0.532%
51-2099 Assemblers and Fabricators, All Other $38,137 0.473%
51-9199 Production Workers, All Other $36,491 0.387%
51-9111 Packaging and Filling Machine Operators and Tenders $29,762 0.339%
51-4041 Machinists $49,918 0.238%
51-1011 First-Line Supervisors of Production and Operating Workers $63,406 0.228%
51-9141 Semiconductor Processors $37,050 0.226%
Draft Palo Alto Linkage Fee Nexus Study
-47-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual
Wage (b)
% of Total Office/
R&D/ Medical Office
Workers (c)
51-4031 Cutting, Punching, and Press Machine Setters, Operators, and Tenders, Metal and Plastic $35,860 0.140%
51-4121 Welders, Cutters, Solderers, and Brazers $43,484 0.126%
51-2023 Electromechanical Equipment Assemblers $36,531 0.100%
51-4011 Computer-Controlled Machine Tool Operators, Metal and Plastic $42,335 0.059%
51-9081 Dental Laboratory Technicians $41,827 0.045%
51-4072
Molding, Coremaking, and Casting Machine Setters, Operators, and Tenders, Metal and
Plastic $31,632 0.045%
51-4193 Plating and Coating Machine Setters, Operators, and Tenders, Metal and Plastic $36,145 0.036%
51-5112 Printing Press Operators $37,416 0.034%
51-4199 Metal Workers and Plastic Workers, All Other $43,097 0.034%
51-2021 Coil Winders, Tapers, and Finishers $55,529 0.032%
51-6011 Laundry and Dry-Cleaning Workers $25,879 0.028%
51-9151 Photographic Process Workers and Processing Machine Operators $35,047 0.019%
51-4081 Multiple Machine Tool Setters, Operators, and Tenders, Metal and Plastic $42,477 0.017%
51-6021 Pressers, Textile, Garment, and Related Materials $24,425 0.017%
51-6031 Sewing Machine Operators $24,629 0.013%
51-9121 Coating, Painting, and Spraying Machine Setters, Operators, and Tenders $33,817 0.013%
51-3011 Bakers $27,048 0.012%
51-4111 Tool and Die Makers $51,310 0.011%
51-3099 Food Processing Workers, All Other $28,694 0.011%
51-4122 Welding, Soldering, and Brazing Machine Setters, Operators, and Tenders $44,744 0.011%
51-4012 Computer Numerically Controlled Machine Tool Programmers, Metal and Plastic $64,290 0.010%
51-3092 Food Batchmakers $25,310 0.010%
51-5113 Print Binding and Finishing Workers $31,795 0.010%
51-4033
Grinding, Lapping, Polishing, and Buffing Machine Tool Setters, Operators, and Tenders,
Metal and Plastic $31,053 0.010%
51-2041 Structural Metal Fabricators and Fitters $43,504 0.009%
51-5111 Prepress Technicians and Workers $46,035 0.009%
51-9196 Paper Goods Machine Setters, Operators, and Tenders $42,264 0.009%
51-3022 Meat, Poultry, and Fish Cutters and Trimmers $24,923 0.008%
51-9011 Chemical Equipment Operators and Tenders $46,828 0.007%
51-8031 Water and Wastewater Treatment Plant and System Operators $76,488 0.007%
51-8012 Power Distributors and Dispatchers $118,172 0.006%
51-7011 Cabinetmakers and Bench Carpenters $38,086 0.006%
51-9032 Cutting and Slicing Machine Setters, Operators, and Tenders $29,569 0.006%
Draft Palo Alto Linkage Fee Nexus Study
-48-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual
Wage (b)
% of Total Office/
R&D/ Medical Office
Workers (c)
51-8021 Stationary Engineers and Boiler Operators $78,511 0.005%
51-4061 Model Makers, Metal and Plastic $50,701 0.005%
51-9023 Mixing and Blending Machine Setters, Operators, and Tenders $42,508 0.005%
51-4034 Lathe and Turning Machine Tool Setters, Operators, and Tenders, Metal and Plastic $42,742 0.005%
51-9194 Etchers and Engravers $26,763 0.005%
51-9021 Crushing, Grinding, and Polishing Machine Setters, Operators, and Tenders $37,751 0.004%
51-9012
Separating, Filtering, Clarifying, Precipitating, and Still Machine Setters, Operators, and
Tenders $40,373 0.004%
51-4022 Forging Machine Setters, Operators, and Tenders, Metal and Plastic $41,105 0.003%
51-9041 Extruding, Forming, Pressing, and Compacting Machine Setters, Operators, and Tenders $33,756 0.003%
51-9195 Molders, Shapers, and Casters, Except Metal and Plastic $38,971 0.003%
51-7099 Woodworkers, All Other $36,155 0.003%
51-9122 Painters, Transportation Equipment $51,656 0.003%
51-3091 Food and Tobacco Roasting, Baking, and Drying Machine Operators and Tenders $32,750 0.002%
51-4032 Drilling and Boring Machine Tool Setters, Operators, and Tenders, Metal and Plastic $37,741 0.002%
51-8091 Chemical Plant and System Operators $53,252 0.002%
51-4035 Milling and Planing Machine Setters, Operators, and Tenders, Metal and Plastic $37,324 0.002%
51-8099 Plant and System Operators, All Other $74,231 0.002%
51-9191 Adhesive Bonding Machine Operators and Tenders $31,784 0.002%
51-9123 Painting, Coating, and Decorating Workers $38,269 0.002%
51-9022 Grinding and Polishing Workers, Hand $29,680 0.002%
51-6052 Tailors, Dressmakers, and Custom Sewers $41,613 0.002%
51-9051 Furnace, Kiln, Oven, Drier, and Kettle Operators and Tenders $52,256 0.001%
51-9192 Cleaning, Washing, and Metal Pickling Equipment Operators and Tenders $23,551 0.001%
51-8013 Power Plant Operators $84,833 0.001%
51-4191 Heat Treating Equipment Setters, Operators, and Tenders, Metal and Plastic $50,609 0.001%
51-3093 Food Cooking Machine Operators and Tenders $28,593 0.001%
51-4194 Tool Grinders, Filers, and Sharpeners $50,131 0.001%
51-8093 Petroleum Pump System Operators, Refinery Operators, and Gaugers $77,972 0.001%
51-9031 Cutters and Trimmers, Hand $24,446 0.001%
51-6062 Textile Cutting Machine Setters, Operators, and Tenders $27,109 0.000%
51-3021 Butchers and Meat Cutters $34,021 0.000%
51-7021 Furniture Finishers $29,630 0.000%
Draft Palo Alto Linkage Fee Nexus Study
-49-
Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
51-7041 Sawing Machine Setters, Operators, and Tenders, Wood $33,543 0.000%
Weighted Mean Annual Wage $37,809 6.124%
53-0000 Transportation and Material Moving Occupations
53-7062 Laborers and Freight, Stock, and Material Movers, Hand $31,188 2.554%
53-7064 Packers and Packagers, Hand $23,607 0.672%
53-7051 Industrial Truck and Tractor Operators $37,469 0.285%
53-3032 Heavy and Tractor-Trailer Truck Drivers $46,564 0.199%
53-3033 Light Truck or Delivery Services Drivers $36,503 0.137%
53-7063 Machine Feeders and Offbearers $33,475 0.052%
53-1021 First-Line Supervisors of Helpers, Laborers, and Material Movers, Hand $52,489 0.037%
53-3099 Motor Vehicle Operators, All Other $48,302 0.030%
53-3041 Taxi Drivers and Chauffeurs $31,493 0.026%
53-7061 Cleaners of Vehicles and Equipment $25,762 0.023%
53-1031
First-Line Supervisors of Transportation and Material-Moving Machine and
Vehicle Operators $61,604 0.021%
53-7081 Refuse and Recyclable Material Collectors $46,188 0.017%
53-3031 Driver/Sales Workers $35,192 0.016%
53-6021 Parking Lot Attendants $21,595 0.014%
53-2012 Commercial Pilots $69,308 0.010%
53-3021 Bus Drivers, Transit and Intercity $56,828 0.004%
53-6031 Automotive and Watercraft Service Attendants $27,042 0.004%
53-3022 Bus Drivers, School or Special Client $36,117 0.004%
53-6051 Transportation Inspectors $87,640 0.003%
53-7032 Excavating and Loading Machine and Dragline Operators $62,966 0.003%
53-6099 Transportation Workers, All Other $33,607 0.001%
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Figure III-9. Occupational Mix and Average Wages for Office/ R&D/ Medical Office, Continued
Occupation
Code Occupation Name (a)
Average
Annual Wage
(b)
% of Total Office/
R&D/ Medical Office
Workers (c)
53-7199 Material Moving Workers, All Other $39,857 0.001%
53-1011 Aircraft Cargo Handling Supervisors $54,846 0.000%
53-2022 Airfield Operations Specialists $67,925 0.000%
Weighted Mean Annual Wage $32,020 4.116%
Total, Land Use $78,597.78 100.000%
Notes:
(a) Occupational mix by industry was obtained from US Bureau of Labor Statistics, Occupational Employment Statistics, 2013.
(b) Wage data for the San Jose – Sunnyvale – Santa Clara Metropolitan Statistical Area obtained from California Economic Development Department, OES Employment and Wages
by Occupation, 2013. (c) Distribution of workers is calculated based on the existing distribution of employment by industry in Santa Clara County, provided by Quarterly Census of Employment and
Wages (QCEW), 2013.
Sources: Vernazza Wolfe Associates, Inc.; Strategic Economics, 2015.
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Household Incomes
Based on the employee wage calculations discussed above, household incomes are estimated for each
prototype. This step assumes that the income of the second wage-earner is similar to the wage of the first
wage-earner. In order to calculate the annual household income, the average worker wage is multiplied by
the number of wage-earners per household. According to the U.S. Census Bureau American Community
Survey 3-Year Estimates, 2010-2012, there is an average of 1.49 wage-earners per household in Palo
Alto. The average annual wage per employee within each occupation was multiplied by 1.49 in order to
determine annual average household income.
Employee households are then categorized as very low, low, moderate, and above moderate income based
on the income definitions and cut-offs established by the California Housing and Community
Development Department (HCD). According to the U.S. Census Bureau American Community Survey 5-
Year Estimates, 2008-2012, the average household size in the City of Palo Alto is 2.41. This has been
rounded to 2, the nearest whole number. The income categories for very low, low, moderate, and above
moderate income households are therefore based on the household size of two persons, using the
California Department of Housing and Community Development’s definitions of income thresholds for
area median income, as shown in Figure III-10.
Figure III-10. Household Income Categories
Income Category 2-Person Household
Very Low Income (<=50% AMI) $42,450
Low Income (51-80% AMI) $67,900
Moderate Income (81-120% AMI) $101,300
Above Moderate Income (>=120%) >$101,300
Source: California Department of Housing and Community Development,
"State Income Limits for 2014", February 28, 2014.
Using the income categories described above, the new worker households were sorted into income
groups. As shown in Figure III-11 below, most hotel worker households are in very low and low income
categories, and about half of office/ R&D/ medical office workers are in very low, low, and moderate
income categories. Above moderate income households were removed from the subsequent steps of the
nexus analysis, as it is determined that these income groups would be able to afford market-rate housing.
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Figure III-11. Number of Worker Households by Income Category
Prototype
Number of Worker
Households
Hotel
Very Low Income (<=50% AMI) 30.05
Low Income (51-80% AMI) 24.13
Moderate Income (81-120% AMI) 9.58
Above Moderate (>=120%) 3.36
Total 67.12
Office, R&D and Medical Office Land Use
Very Low Income (<=50% AMI) 14.40
Low Income (51-80% AMI) 51.43
Moderate Income (81-120% AMI) 36.32
Above Moderate (>=120%) 99.39
Total 201.54
Sources: Vernazza Wolfe Associates, Inc; Strategic Economics, 2015.
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Estimating the housing affordability gap is necessary to calculate the maximum housing impact fee. This
section summarizes the approach to calculating the housing affordability gap and the results of the
analysis.
METHODOLOGY
The housing affordability gap is defined as the difference between what very low, low, and moderate
income households can afford to pay for housing and the development cost of new, modest housing units.
Calculating the housing affordability gap involves the following three steps:
1. Estimating affordable rents and housing prices for households in target income groups.
2. Estimating development costs of building new, modest housing units, based on current cost and
market data.
3. Calculating the different between what renters and owners can afford to pay for housing and the
cost of development of rental and ownership units.
The housing affordability gap is estimated at a countywide level because the California Department of
Housing and Community Development Department (HCD) and U.S. Housing and Urban Development
Department (HUD) define the ability to pay for housing at the county (rather than the city) level. This
analysis uses 2014 income limits published by California Department of Housing and Community
Development (HCD).
ESTIMATING AFFORDABLE RENTS AND SALES PRICES
The first step in calculating the housing affordability gap is to determine the maximum amount that
households at the targeted income levels can afford to pay for housing. For eligibility purposes, most
affordable housing programs define very low income households as those earning approximately 50
percent or less of area median income (AMI), low income households as those earning between 51 and 80
percent of AMI, and moderate income households as those earning between 81 and 120 percent of AMI.
In order to ensure that the affordability of housing does not use the top incomes in each category, the
analysis uses a point within the income ranges for the low and moderate income groups.3
Figure IV-1 and Figure IV-2 show the calculations for rental housing. The maximum affordable monthly
rent is calculated as 30 percent of gross monthly household income, minus a deduction for utilities. For
example, a very low income, three-person household could afford to spend $1,194 on total monthly
housing costs. After deducting for utilities, $1,145 a month is available to pay for rent (Figure IV-1).
Figure IV-3 and Figure IV-4 demonstrate housing affordability for homeowners. Homeowners are
assumed to pay a maximum of 35 percent of gross monthly income on total housing costs, depending on
income level. The maximum affordable price for for-sale housing is then calculated based on the total
monthly mortgage payment that a homeowner could afford, using standard loan terms used by CalHFA
3 For rental housing, 70 percent of AMI is used to represent low income households and 90 percent of AMI is used to
represent moderate income households. For ownership housing, it is assumed that moderate income homebuyers
may earn slightly less than the maximum for that income category (110 percent of AMI). Higher income limits are
used for ownership than for rental housing because ownership housing is more expensive to purchase and maintain.
IV. HOUSING AFFORDABILITY GAP
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programs and many private lenders for first-time homebuyers, including a five percent down payment
(Figure IV-3). For example, a moderate income, three-person household could afford to spend $3,046 a
month on total housing costs, allowing for the purchase of a $359,897 home.
Key assumptions used to calculate the maximum affordable rents and housing prices are discussed below.
Unit types: For rental housing, the analysis included studios, one-, two-, and three-bedroom
units. For for-sale housing, one-, two-, and three-bedroom units were included. These unit types
represent the affordable and modest market-rate apartment and condominium units available in
Palo Alto. Condominiums were used to represent modest for-sale housing because single-family
homes in Palo Alto tend to be significantly more expensive than condominiums.
Occupancy and household size assumptions. Because income levels for affordable housing
programs vary by household size, calculating affordable unit prices requires defining household
sizes for each unit type. Consistent with California Health and Safety Code Section 50052.5(h),
unit occupancy was generally estimated as the number of bedrooms plus one. For example, a
studio unit is assumed to be occupied by one person, a one bedroom unit is assumed to be
occupied by two people, and so on. Several adjustments to this general assumption were made in
order to capture the full range of household sizes. In particular, it is assumed that one-bedroom
condominiums could be occupied by one- or two-person households, and three-bedroom
apartments and condominiums could be occupied by four- or five-person households.4
Targeted income levels for rental housing: For rental housing, affordable rents were calculated
for very low income, low income, and moderate income households (see Figure IV-1 and Figure
IV-2). For eligibility purposes, most affordable housing programs define very low income
households as those earning 50 percent or less of area median income (AMI), low income
households as those earning between 51 and 80 percent of AMI, and moderate income
households as those earning between 81 and 120 percent of AMI. However, defining affordable
housing expenses based at the top of each income range would result in prices that are not
affordable to most of the households in each category. Thus, this analysis does not use the
maximum income level for all of the income categories. Instead, for rental housing, 70 percent of
AMI is used to represent low income households and 90 percent of AMI is used to represent
moderate income households.
Targeted income levels for ownership housing For ownership housing, affordable home prices
were calculated only for moderate income households, because very low and low income
households are unlikely to be homebuyers. Higher income limits are used for ownership than for
rental housing because ownership housing is more expensive to purchase and maintain. It is
assumed that moderate income homebuyers may earn slightly less than the maximum for that
income category (110 percent of AMI).
Maximum monthly housing costs.5 For all renters, maximum monthly housing costs are
assumed to be 30 percent of gross household income. For homebuyers, 35 percent of gross
income is assumed to be available for monthly housing costs, reflecting the higher incomes of this
4 For these unit types, the maximum affordable home price (or rent) is calculated as the average price (or rent) that
the relevant household sizes can afford to pay. For example, the maximum affordable home price for a one-bedroom
condominium is calculated as the average of the maximum affordable home price for one- and two-person
households.
5 The calculation of homeowner affordability is conservative in that the model accounts for additional costs for buyers
(such as utility costs) that might not be considered by all lenders.
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group.6 These standards are based on California’s Health & Safety Code Sections 50052.5 and
50053.
Utilities. The monthly utility cost assumptions are based on Santa Clara County’s “2013 Utility
Allowance Schedule.”7 Both renters and owners are assumed to pay for heating, cooking, other
electric, and water heating. In addition, owners are assumed to pay for water and trash collection.8
Mortgage terms & costs included for ownership housing. For ownership housing, the
mortgage calculations are based on the terms typically offered to first-time homebuyers (such as
the terms offered by the California Housing Finance Authority), which is a 30-year mortgage
with a five percent down payment. A five percent down payment standard is also used by many
private lenders for first-time homebuyers. Based on recent interest rates to first-time buyers, the
analysis assumes a 5.375 percent annual interest rate.9 In addition to mortgage payments and
utilities, monthly ownership housing costs include homeowner association (HOA) dues,10
property taxes,11 private mortgage insurance,12 and hazard and casualty insurance.13
6 The assumption that homebuyers spend 35 percent of gross household income on housing results in a reduced
affordability gap than if 30 percent of gross household income were used instead.
7 Santa Clara County, “Utility Allowance Schedule”, 2013.
8 Based on the most common types of fuel for owner and rental units in Palo Alto, all units are assumed to have
natural gas heating and water heating systems; for-sale units are also assumed to have natural gas stoves, while
rental units are assumed to use electric stoves. Sources: U.S. Census Bureau, 2008-2012 American Community
Survey, “Table B25117: Tenure by House Heating Fuel,” City of Palo Alto; U.S. Census Bureau, 2011 American
Housing Survey, “Table C-03-AH-M, San Jose-Sunnyvale-Santa Clara: Heating, Air Conditioning, and Appliances –
All Housing Units.”
9 Sources: CalHFA Mortgage Calculator, accessed March 2014; Zillow.com, “Current Mortgage Rates and Home
Loans,” accessed March 2014; interviews with California Housing Finance Agency (CalHFA) Preferred Loan Officers,
March 2014.
10 HOA fees are estimated at $300 per unit per month, based on common HOA fees in Santa Clara County as
reported in: Polaris Pacific, “Silicon Valley Condominium Market,” February 2014.
11 The annual property tax rate is estimated at 1.16, based on the total direct and overlapping property tax rate for
Palo Alto reported in the City’s 2012-13 Comprehensive Annual Financial Report (page 144).
12 The annual private mortgage insurance premium rate is estimated at 0.89 percent of the total mortgage amount,
consistent with standard requirements for conventional loans with a five percent down payment. Sources: Genworth,
February 2014; MGIC, December 2013; Radian, April 2014.
13 The annual hazard and casualty insurance rate is assumed to be 0.35 percent of the sales price, consistent with
standard industry practice.
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Figure IV-1. Calculation of Affordable Rents in Santa Clara County by Household Size, 2014
Persons per Household (HH) 1 2 3 4 5
Very Low Income (50% AMI)
Maximum Household Income at 50% AMI $37,150 $42,450 $47,750 $53,050 $57,300
Maximum Monthly Housing Cost (a) $929 $1,061 $1,194 $1,326 $1,433
Utility Deduction $29 $40 $49 $60 $60
Maximum Available for Rent (HH Size) (b) $900 $1,021 $1,145 $1,266 $1,373
Low Income (70% AMI)
Maximum Household Income at 70% AMI $51,695 $59,080 $66,465 $73,850 $79,765
Maximum Monthly Housing Cost (a) $1,292 $1,477 $1,662 $1,846 $1,994
Utility Deduction $29 $40 $49 $60 $60
Maximum Available for Rent (HH Size) (b) $1,263 $1,437 $1,613 $1,786 $1,934
Moderate Income (90% AMI)
Maximum Household Income at 90% AMI $66,465 $75,960 $85,455 $94,950 $102,555
Maximum Monthly Housing Cost (a) $1,662 $1,899 $2,136 $2,374 $2,564
Utility Deduction $29 $40 $49 $60 $60
Maximum Available for Rent (HH Size) (b) $1,633 $1,859 $2,087 $2,314 $2,504
Notes:
(a) 30 percent of maximum monthly household income.
(b) Maximum monthly housing cost minus utility deduction.
Acronyms:
AMI: Area median income
HH: Household
Sources: California Department of Housing and Community Development, "State Income Limits for 2014," February 28, 2014 and “Overpayment and Overcrowding,” 2010; Housing
Authority of Santa Clara County, "2013 Utility Allowances Schedule," Santa Clara County, October 2013; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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Figure IV-2. Calculation of Affordable Rents in Santa Clara County by Unit Type, 2014
Affordable Rents by Unit Type (a) Studio 1 Bedroom 2 Bedroom 3 Bedroom
Very Low Income (50% AMI) $900 $1,021 $1,145 $1,319
Low Income (70% AMI) $1,263 $1,437 $1,613 $1,860
Moderate Income (90% AMI) $1,633 $1,859 $2,087 $2,409
(a) Affordable rents are calculated as follows: Studios are calculated as one-person households; One-bedroom units are
calculated as two-person households; Two-bedroom units are calculated as three-person households; Three-bedroom
units are calculated as an average of four and five person households.
Sources: California Department of Housing and Community Development, "State Income Limits for 2014," February 28,
2014 and “Overpayment and Overcrowding,” 2010; Housing Authority of Santa Clara County, "2013 Utility Allowances
Schedule," Santa Clara County, October 2013; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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Figure IV-3. Calculation of Affordable Sales Prices in Santa Clara County by Household Size, 2014
Household Size (Persons per HH) 1 2 3 4 5
Moderate Income (110% AMI) (g)
Maximum Household Income at 110% AMI $81,235 $92,840 $104,445 $116,050 $125,345
Maximum Monthly Housing Cost (a) $2,369 $2,708 $3,046 $3,385 $3,656
Monthly Deductions
Utilities $113 $113 $125 $174 $174
HOA Dues $300 $300 $300 $300 $300
Property Taxes and Insurance (b) $527 $619 $706 $785 $858
Monthly Income Available for Mortgage Payment (c) $1,429 $1,676 $1,915 $2,126 $2,324
Maximum Mortgage Amount (d) $255,155 $299,376 $341,902 $379,732 $415,083
Maximum Affordable Sales Price - HH Size (e) $268,584 $315,133 $359,897 $399,717 $436,929
Notes:
(a) 30 percent of monthly household income for very low and low income households; 35 percent of monthly household income for moderate-income households
(b) Assumes annual property tax rate of 1.16 percent of sales price; annual private mortgage insurance premium rate of 0.89 percent of mortgage amount; annual hazard and casualty insurance rate of 0.35 percent of sales price
(c) Maximum monthly housing cost minus deductions
(d) Assumes 5.375 percent interest rate and 30 year loan term. Assumes CalHFA first-time homebuyer program.
(e) Assumes 5 percent down payment (95 percent loan-to-value ratio). Assumes CalHFA first-time homebuyer program.
(f) Calculated as an average of household sizes occupying unit type. 1-bedroom units are assumed to accommodate 1- and 2-person households; 3-bedroom units are
assumed to accommodate 4- and 5-person households.
(g) Calculated as 110 percent of the median household income reported by HCD for each household size.
Acronyms:
AMI: Area median income HH: Household
HOA: Homeowners association
Sources: California Department of Housing and Community Development, "State Income Limits for 2014," February 28, 2014 and “Overpayment and Overcrowding,” 2010; Housing
Authority of Santa Clara County, "2013 Utility Allowances Schedule," Santa Clara County, October 2013; Mortgage insurance provider websites; Interviews with California Housing
Finance Agency (CalHFA) Preferred Loan Officers, March 2014; CalHFA Mortgage Calculator, March 2014; Zillow.com, March 2014; Vernazza Wolfe Associates, Inc. & Strategic
Economics, 2014.
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Figure IV-4. Calculation of Affordable Sales Prices in Santa Clara County by Unit Type, 2014
Affordable Sales Price by Unit Type (a) 1 Bedroom 2 Bedroom 3 Bedroom
Moderate Income (110% AMI) $291,858 $359,897 $418,323
(a) One-bedroom units are calculated as an average of one- and two-person households; Two-bedroom units are calculated
as three-person households; and three-bedroom units are calculated as an average of four and five person households.
Sources: California Department of Housing and Community Development, "State Income Limits for 2014," February 28, 2014
and “Overpayment and Overcrowding,” 2010; Housing Authority of Santa Clara County, "2013 Utility Allowances Schedule,"
Santa Clara County, October 2013; Mortgage insurance provider websites; Interviews with California Housing Finance
Agency (CalHFA) Preferred Loan Officers, March 2014; CalHFA Mortgage Calculator, March 2014; Zillow.com, March 2014;
Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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ESTIMATING HOUSING DEVELOPMENT COSTS
The second step in calculating the housing affordability gap is to estimate the cost of developing new,
modest housing units. Modest housing is defined slightly differently for rental and ownership housing.
For rental housing, the costs and characteristics of modest housing are similar to recent projects
developed in Palo Alto by the affordable rental housing sector. However, there are no examples of new
modest ownership housing units built in Palo Alto by the private or nonprofit sectors. The new for-sale
homes in Palo Alto are typically luxury custom-built single family homes and large upscale condominium
units, which are too costly to meet the standard for modest housing. For the purposes of this affordability
gap analysis, modest for-sale housing units are defined as compact, non-luxury multifamily condominium
units.
The calculation of housing development costs used in the housing affordability gap requires several steps.
Because the gap covers both rental housing and for-sale housing, it is necessary to estimate costs for each.
The following describes the data sources used to calculate rental and for-sale housing development costs.
Rental Housing
Rental housing development costs were based on pro forma data obtained from recent affordable housing
projects in Palo Alto. Figure IV-5 shows the description of these projects and summarizes the information
that was used to generate a per-square-foot cost of $446 used in the cost analysis. These costs include site
acquisition costs, hard costs (on- and off-site improvements), soft costs (such as design, city permits and
fees, construction interest, and contingencies), and developer fees. The costs from the rental housing pro
formas were also cross-referenced against proprietary pro formas available to the consultant team from
other private development projects in order to ensure accuracy.
Since these projects assumed state and federal funding, the labor costs included in the original pro formas
reflect the prevailing wage requirement imposed by state and local governments. The costs shown in
Figure IV-5 have been adjusted to subtract out the prevailing wage requirement because the development
cost model used in the housing affordability gap analysis does not assume receipt of government
subsidies. A rule of thumb used by local economists who assist affordable housing developers in
obtaining public financing, is to estimate that, under the prevailing wage requirement, labor costs are 25
percent higher than would otherwise be the case. Therefore, on-site and off-site improvement costs
obtained from the original pro formas are reduced by 25 percent to reflect actual labor costs that would
apply to construction projects that do not have these requirements.14 Finally, on average, land acquisition
costs accounted for 20 percent or less of these total adjusted costs.
14 These prevailing wage requirements refer only to labor cost requirements on construction projects that receive
funding from the state or federal government. These are not the same as minimum wage requirements that individual
cities may adopt.
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Figure IV-5. Affordable Housing Project Pro Forma Data
Project Description Maybelle Alma Garden Apts
Location Palo Alto Palo Alto
Date of Pro Forma 2013 2013
Land Area (acres) 1.03 0.6
Gross Building Area (SF) 56,192 63,885
Number of Units 60 50
Parking Type Uncovered Underground
Parking Spaces/ Unit 0.8 1.0
Land Acquisition Costs
$7,498,524
($167 per SF of
land)
$7,480,000
($286 per SF of
land)
Project Costs per SF of Gross Building Area
Land Cost (a) $133 $117
Hard Costs (b) $160 $153
Soft Costs (c) $91 $192
Developer Fees $25 $22
Total Project Costs (d) $409 $484
Notes:
(a) Calculated per square foot of gross building area.
(b) Excludes prevailing wage requirements for on-site and off-site hard
costs.
(c) Includes design, engineering, city permits and fees, construction interest, contingencies, legal, etc.
(d) Total costs include developer fees.
Acronyms:
SF: Square feet
Source: Pro Forma Data provided by City of Palo Alto; Vernazza Wolfe Associates, Inc; Strategic
Economics, 2014.
To ensure that the land value assumptions used in the rental development cost estimates (ranging from
$167 to $286 per square foot of land) were reasonable, the consultant team analyzed recent sales of vacant
properties in Santa Clara County using DataQuick, a commercial vendor that tracks real estate
transactions. As shown below in Figure IV-6, land values in Southern San Mateo County and Northern
Santa Clara County are highly variable from city to city, ranging from $96 to $228 per square foot. The
analysis demonstrates that the land costs for the affordable rental housing projects shown in Figure IV-5
are generally consistent with the land values in the market area.
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Figure IV-6. Sales of Vacant Lands in San Mateo County and Northern Santa Clara County, 2014
Property Location
Sales
Date Sales Price
Site
Size
(SF)
Average
Sales
Price/ SF
Page Mill Palo Alto 2012 $3,959,000 26,926 $147
389 El Camino Real Menlo Park 2012 $12,200,000 53,579 $228
1300 El Camino Real Menlo Park 2012 $24,500,000 148,165 $165
E. side of Tilton Avenue, N. of El Camino Real San Mateo 2012 $4,505,000 33,572 $134
1275 El Camino Real Menlo Park 2014 $3,600,000 17,960 $200
3877 El Camino Real Palo Alto 2013 $4,450,000 32,825 $136
536 N Wishman Rd Mountain View 2014 $1,050,000 7,000 $150
1958 Latham St Mountain View 2014 $1,600,000 16,600 $96
Value Range per SF of Land $96 - $228
Source: City of Palo Alto; Independent appraisals; Loopnet, 2015; Strategic Economics, 2015.
For-Sale Housing
Market-rate for-sale housing units in Palo Alto are priced at over $1 million; these units are too upscale to
be considered “modest” units. Because of the lack of examples of built modest units in the City, the cost
of developing new, modest for-sale housing was estimated using published industry data sources, recent
financial feasibility studies, and data from other projects in Santa Clara County. The Consultant Team
estimated the development costs of a hypothetical condominium project, as described in Figure IV-7.15
Land costs were estimated based on recent DataQuick sales of multi-family zoned properties in Southern
San Mateo County and Northern Santa Clara County. As shown in Figure IV-6, land values vary
depending on location and lot size, ranging from $96 to $228 per square foot. Because most transactions
occurred in 2012 and 2013 in other lower cost jurisdictions, the current land value for multi-family land
for condominium development in Palo Alto was estimated at $200 per square foot.
RS Means cost data, adjusted for the Bay Area’s construction costs, was used to calculate hard costs.
Based on a review of recent financial feasibility analyses in the Bay Area, soft costs were estimated at 30
percent of hard costs, and developer fees and profits were estimated at 12 percent of hard and soft costs.
Using this method, the development costs are estimated at approximately $500 per net square foot of
building area.
15 The hypothetical condominium building type is a Type V building with underground parking and floor-area ratio of
1.7.
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Figure IV-7. Estimate of Development Costs of Hypothetical Condominium Project
Building Characteristics
Land Area (SF) 110,727
Gross Building Area (SF) 188,235
Net Building Area (SF) 160,000
Number of Units 100
Parking Type Underground
Parking Spaces/ Unit 2
Floor-area ratio (FAR) 1.7
Density (units per acre) 39
Average Unit Size 1,600
Land Acquisition Costs per Square Foot (a) $200
Development Cost Cost per Net SF
Land Cost (b) $138
Hard Costs $250
Soft Costs (c) $75
Developer Fees (d) $39
Total Development Costs $502
Notes:
(a) Land value is estimated at $200 per square foot based on recent transactions in market area.
(b) Calculated based on RS Means cost estimates per square foot of net building area.
(c) Estimated at 30 percent of hard costs. Includes design, engineering, city permits and fees,
construction interest, contingencies, legal, etc.
(d) Estimated at 12 percent of hard costs and soft costs.
Sources: RS Means, 2014; DataQuick 2014; Recent financial feasibility studies; Vernazza Wolfe
Associates, Inc. & Strategic Economics, 2014.
Cost Estimates by Unit Size
The data sources described above also provided information on estimated unit sizes. Unit size information
is needed to translate costs/sales prices per square foot to unit costs. Unit sizes are estimated separately
for rental and for-sale units. For the rental units, the recent inventory of projects developed by MidPen
Housing was analyzed. For ownership units, the average sizes of recently built condominium units
(Figure IV-7) were analyzed.
Figure IV-8 provides the unit sizes and development cost estimates for rental units. Per-unit development
costs were calculated by multiplying average unit sizes by the per-square foot development costs of $446.
Rental unit costs range from $223,000 for studio units to $499,520 for three-bedroom units.
Figure IV-9 summarizes the costs of condominium units. The per-unit costs were derived by multiplying
the average unit size by the development cost, estimated at $500 per square foot. On a per unit basis,
condominium development costs are $450,000 for one-bedroom units, $650,000 for two-bedroom units,
and $875,000 for three-bedroom units.
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Figure IV-8. Rental Housing Unit Sizes and Development Costs
Unit Type
Estimated Cost
per Net SF
Unit Size
(net SF)
Development
Costs
Studio $446 500 $223,000
One bedroom $446 700 $312,200
Two bedroom $446 900 $401,400
Three bedroom $446 1,120 $499,520
Acronyms:
SF: Square feet
Sources: Confidential Pro Forma Data; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
Figure IV-9. For-Sale Housing Unit Sizes and Development Costs
Unit Type
Estimated Cost
per Net SF
Unit Size
(net SF)
Development
Costs
One bedroom $500 900 $450,000
Two bedroom $500 1,300 $650,000
Three bedroom $500 1,750 $875,000
Acronyms:
SF: Square feet
Sources: DataQuick, 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
CALCULATING THE HOUSING AFFORDABILITY GAP
The final step in the analysis is to calculate the housing affordability gap, or the difference between what
renters and owners can afford to pay and the total cost of developing new units. The purpose of the
housing affordability gap calculation is to help determine the fee amount that would be necessary to cover
the cost of developing housing for very low, low, and moderate income households. The calculation does
not assume the availability of any other source of housing subsidy because not all "modest" housing is
built with public subsidies, and tax credits and tax-exempt bond financing are highly competitive
programs that will not always be available to developers of modest housing units.
Figure IV-10 shows the housing affordability gap calculation for rental units. For each rental housing unit
type and income level, the gap is defined as the difference between the per-unit cost of development and
the supportable debt per unit. The supportable debt is calculated based on the net operating income
generated by an affordable monthly rent, incorporating assumptions about operating expenses (including
property taxes, insurance, etc.), reserves, vacancy and collection loss, and mortgage terms based on
discussions with local affordable housing developers. Because household sizes are not uniform and the
types of units each household may occupy is variable, the average housing affordability gap is calculated
by averaging the housing affordability gaps for the various unit sizes.
Figure IV-11 shows the housing affordability gap calculation for ownership units. For each unit type, the
gap is calculated as the difference between the per-unit cost of development and the affordable sales price
for each income level. As with rental housing, the average housing affordability gap is calculated by
averaging the housing affordability gaps across unit sizes in order to reflect that households in each
income group vary in size, and may occupy any of these unit types.
Finally, the tenure-neutral estimates of the housing affordability gap were estimated for very low, low,
and moderate income households (Figure IV-12). Because very low and low income households that are
looking for housing in today’s market are much more likely to be renters, an ownership gap was not
calculated for these income groups. The rental gap represents the overall affordability gap for these two
income groups. On the other hand, moderate income households could be either renters or owners.
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Therefore, the rental and ownership gaps are averaged for this income group to calculate the overall
affordability gap for moderate income households. The calculated average affordability gap per unit is
$306,164 for very low income households; $252,258 for low income households, and $249,596 for
moderate income households. The housing affordability gap is highest for very low income households
because they can afford to pay the least amount for housing.
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Figure IV-10. Housing Affordability Gap Calculation for Rental Housing
Income Level and Unit Type
Unit Size
(SF)
Maximum Monthly
Rent (a)
Annual
Rental
Revenue
Net
Operating
Income (b)
Available
for Debt
Service (c)
Supportable
Debt (d)
Development
Costs (e)
Affordability
Gap (f)
Very-Low Income (50% AMI)
Studio 500 $900 $10,797 $2,757 $2,206 $29,166 $223,000 $193,834
1 Bedroom 700 $1,021 $12,255 $4,142 $3,314 $43,818 $312,200 $268,382
2 Bedroom 900 $1,145 $13,737 $5,550 $4,440 $58,711 $401,400 $342,689
3 Bedroom 1,120 $1,319 $15,833 $7,541 $6,033 $79,769 $499,520 $419,751
Average Affordability Gap $306,164
Low Income (70% AMI)
Studio 500 $1,263 $15,161 $6,902 $5,522 $73,016 $223,000 $149,984
1 Bedroom 700 $1,437 $17,244 $8,882 $7,105 $93,954 $312,200 $218,246
2 Bedroom 900 $1,613 $19,352 $10,884 $8,707 $115,133 $401,400 $286,267
3 Bedroom 1,120 $1,860 $22,322 $13,706 $10,965 $144,987 $499,520 $354,533
Average Affordability Gap $252,258
Moderate Income (90% AMI)
Studio 500 $1,633 $19,592 $11,112 $8,890 $117,544 $223,000 $105,456
1 Bedroom 700 $1,859 $22,308 $13,693 $10,954 $144,843 $312,200 $167,357
2 Bedroom 900 $2,087 $25,049 $16,296 $13,037 $172,383 $401,400 $229,017
3 Bedroom 1,120 $2,409 $28,906 $19,960 $15,968 $211,146 $499,520 $288,374
Average Affordability Gap $197,551
Notes:
(a) Affordable Rents are based on HCD FY 2014 Income Limits for Santa Clara County. See Figure 2, above.
(b) Amount available for debt. Assumes 5% vacancy and collection loss and $7,500 per unit for operating expenses and reserves, based on pro formas for affordable housing projects
recently proposed in Palo Alto.
(c) Assumes 1.25 Debt Coverage Ratio.
(d) Assumes 6.38%, 30 year loan. Calculations based on annual payments.
(e) Assumes development cost of $446 per net square foot on rental units.
(f) Calculated as the difference between development costs and supportable debt. Rounded to nearest whole number.
Acronyms:
SF: Square feet
AMI: Area median income
Sources: Selected Palo Alto Rental Housing Pro Formas; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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Figure IV-11. Housing Affordability Gap Calculation for For-Sale Condominium Housing
Income Level and Unit Type
Unit Size
(SF)
Affordable
Sales Price
(a)
Development
Costs (b)
Affordability
Gap (c)
Moderate Income (110% of AMI)
1 Bedroom 900 $291,858 $450,000 $158,142
2 Bedroom 1,300 $359,897 $650,000 $290,103
3 Bedroom 1,750 $418,323 $875,000 $456,677
Average Affordability Gap $301,641
(a) See calculation in Figure IV-9, above.
(b) Assumes $500/SF for development costs, based on recent condominium sales.
(c) Calculated as the difference between affordable sales price and development cost; rounded to nearest whole number.
Acronyms:
SF: Square feet
AMI: Area median income
Sources: DataQuick Sales Data, 2008-2012; Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
Figure IV-12. Average Housing Affordability Gap by Income Group
Income Level Rental Gap Ownership Gap
Average
Affordability Gap
Very Low-Income (50% AMI) (a) $306,164 N/A $306,164
Low-Income (70% - 80% AMI) (b) $252,258 N/A $252,258
Moderate-Income (90% - 110% AMI) (c) $197,551 $301,641 $249,596
Notes:
(a) Based on rental housing only; very-low-income gap was not calculated for ownership housing.
(b) Low-income households are assumed to earn 70 percent of AMI for rental housing and 80 percent of AMI for ownership housing.
(c) Moderate-income households are assumed to earn 90 percent of AMI for rental housing and 110 percent of AMI for ownership housing.
Acronyms:
AMI: Area median income
Source: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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This section builds on the findings of the previous analytical steps to calculate the maximum justified
linkage fees for each commercial prototype.
MAXIMUM FEE CALCULATION
To derive the maximum nexus-based fee, the housing affordability gap (see Section IV) is applied to the
number of lower-income worker households linked to the prototypes. This is the basis for developing an
estimate of the total affordability gap for each prototype. The total gap for each prototype is then divided
by the size of each development prototype to calculate a single maximum fee per square foot.
Figure V-1 presents the results of the linkage fee calculations for each prototype. The calculations shown
below assume that 100 percent of the very low, low, and moderate income households linked to the new
commercial space would be accommodated in Palo Alto. The maximum fee results (rounded to the
nearest dollar) are $177 per square foot for hotel and $264 per square foot for office/ R&D/ medical
office.
The calculated linkage fees are high for two reasons: 1) the cost of housing development in Palo Alto is
high, creating a large affordability gap for very low, low, and moderate income households; 2) many of
the workers associated with new commercial development, especially those in the hotel industry, earn low
wages and fall into very low and low income household categories. Although average wages for hotel
workers are lower than for office workers, the density of workers in hotels is lower than in office/ R&D/
medical office space; therefore maximum linkage fees for hotels are lower than for offices. .
The maximum fees shown in Figure V-1 are not the recommended fees for adoption. They are the
nexus-justified fees that represent the maximum that Palo Alto could charge to mitigate affordable
housing demand related to commercial development.
Figure V-1. Maximum Commercial Linkage Fees
Very Low, Low, and
Moderate Income Worker
Households
Total
Affordability
Gap
Size of
Prototype (SF)
Maximum
Fee (per SF)
Hotel 64 $17,678,344 100,000 $177
Office, R&D and Medical Office 102 $26,447,718 100,000 $264
Note: Maximum fee per square foot has been rounded to the nearest dollar.
Sources: Vernazza Wolfe Associates, Inc; Strategic Economics, 2015.
V. MAXIMUM LINKAGE FEES
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There are a number of policy considerations that can be taken into account when a jurisdiction considers
an update to its commercial linkage fee. These policy factors include the financial impact of fee scenarios
on future development, the potential increase to the city’s existing fees on commercial development, a
comparison of proposed linkage fees with those fees already charged in adjacent jurisdictions, and how
potential revenues from new linkage fees can benefit the City’s overall affordable housing goals. This
section provides a discussion of some of the key financial and policy questions for Palo Alto.
PROTOTYPES AND FEE LEVELS
Commercial Prototypes
As described in Section III, the analysis estimates linkage fees for two commercial prototypes: hotel and
office/ R&D/ medical office. The building characteristics, including size, density (floor-area-ratio), and
parking assumptions are based on a review of recently built and proposed projects in Palo Alto (Figure
VI-1). The financial feasibility of potential fee levels is tested for each of these prototypes.
Figure VI-1. Description of Commercial Prototypes
Hotel
Office/R&D/
Medical Office
Prototype Description
Gross Building Area (GBA). excl. Parking (SF) 100,000 100,000
Efficiency Ratio (a) N/A 0.90
Net Leasable Sq. Ft. (NSF) N/A 90,000
Hotel Rooms 133
Parking Spaces 133 300
Podium Parking 33 240
Surface Parking 100 60
GBA Including Structured Parking 109,975 163,000
Floor Area Ratio (b) 1.1 2.0
Land Area (Acres) 2.3 1.9
Land Area (sq. ft.) 99,977 81,500
Notes:
(a) Refers to ratio of gross building area to net leasable area. An efficiency ratio of 0.9 means that 90% of the gross
building area is leasable.
(b) The floor-area-ratio (FAR) is often used as a measure of density. In this analysis, it is calculated as the gross
building area (including structured podium parking) divided by the total land area.
Sources: Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
VI. FEASIBILITY AND POLICY CONSIDERATIONS
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Fee Levels
In order to provide Palo Alto with some guidance on how proposed fees could impact development
decisions, the Consultant Team conducted a financial feasibility analysis that tested the impact of the
maximum linkage fee, the existing fee, and other potential fee levels, on developer profit. Figure VI-2
illustrates the different per-square-foot fee scenarios, by prototype.
Figure VI-2. Linkage Fee Scenarios by Prototype (per SF)
Fee Scenarios Hotel
Office/ R&D/
Medical Office
Existing Fee (rounded) $19.85 $19.85
Scenario 1: Maximum Fee $177 $264
Scenario 2 $35 $60
Scenario 3 $30 $50
Scenario 4 $20 $35
Sources: Vernazza Wolfe Associates, Inc; Strategic Economics, 2015.
METHODOLOGY
Financial feasibility was tested using a pro forma model that measures the return on cost of the
commercial prototypes. Return on cost is a commonly used metric indicating the profitability of a project.
The pro forma model tallies all development costs, including land, direct construction costs, indirect costs
(including financing), and developer fees. Revenues from lease rates or hotel room rates are the basis for
calculating annual income from the new commercial development. The total operating costs are
subtracted from the total revenues to calculate the annual net operating income. The return on cost is then
estimated by dividing the annual net operating income by the total development costs. The fee levels were
then added as an additional development cost to measure the resulting change in the developer’s return on
cost.
KEY INPUTS
The key revenue and cost inputs to the financial pro forma analysis are based on market research and
published resources. The data inputs are explained in more detail below.
Revenues
To estimate income from commercial development, the pro forma analysis used rental data from Costar
for the Palo Alto market for existing office buildings. A 10 percent revenue increase was applied to
account for the value premium of new office/R&D space. To calculate hotel revenues, the Consultant
Team interviewed hotel managers of hotel properties in Palo Alto to determine average daily rates and
occupancy rates. 16 The surveyed managers reported average rates of between $150 and $400 for
weekend, off-peak stays, and between $289 and $800 for peak, weekday stays. Occupancy rates were
reported at between 78 percent and 95 percent. Based on these findings, the analysis estimated average
daily rate at $240 per night, and occupancy rates at 83 percent. The revenue inputs for each land use
prototype are shown in Figure VI-3.
16 Properties surveyed include Hilton Garden Inn, Homewood Suites, The Epiphany, Hotel Keen, Dinah’s Garden
Hotel, Sheraton Palo Alto, and Garden Court Hotel.
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Direct and Indirect Costs
Cost estimates for the commercial prototypes include direct construction costs (site work, building costs,
and parking), indirect costs, financing costs, and developer overhead and profit. Direct building
construction cost estimates for office/ R&D/ medical office are based on RS Means. Hotel construction
costs were estimated based on recent data from HVS Consulting and Smith Travel Research, and include
costs for Furniture, Fixtures, and Equipment (FF&E). Direct and indirect cost inputs for the pro forma
analysis are shown in Figure VI-4.
Land Costs
One of the critical cost factors for a commercial development project is land cost. To determine the land
value of sites zoned for commercial uses, the Consultant Team analyzed recent sales transactions in Santa
Clara County and reviewed third-party property appraisals. The high average value of land per square foot
in Palo Alto, illustrated in Figure VI-5, is partly due to the relatively smaller average size of the sold
parcels. As a result, the Consultant Team estimated a commercial land value of $160 per square foot,
closer to the sub-market average.17 This approximate land cost is an estimate for the purposes of this
analysis; the value of any particular site is likely to vary based on its location, amenities, and property
owner expectations, among other factors.
Return on Cost Thresholds
In order to understand how the different fee levels impact financial feasibility, the return on cost results
can be compared to an investor’s expectations for each type of development. The thresholds for this
analysis were pegged to investor expectations regarding overall capitalization rates (cap rate) for each
product type in the Bay Area. The cap rate, which is measured by dividing net income generated by a
property by the total project value, is a commonly used metric to estimate potential returns. Lower cap
rates signify high performing markets. In this analysis, the total project value is equivalent to the total
development cost. PWC Real Estate Investor Survey (Fourth Quarter 2014) was the primary data source
for determining cap rates for office/ R&D/ medical office uses. For hotel, cap rate data was obtained from
HVS, a consulting firm that tracks hotel markets.
To ensure that the financial analysis is conservative and does not reflect peak market conditions, the
thresholds selected for determining project feasibility are slightly higher than the published cap rates. It
was determined that the threshold for the return on cost is between 6.75 percent and 7.0 percent for office/
R&D/ medical office and between 7.0 percent and 7.25 percent for hotel (see Figure VI-6).
17 The commercial land value used in the pro forma analysis is different from the calculated land value for the
affordability gap analysis because it is for commercially zoned land rather than multifamily zoned land.
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Figure VI-3. Pro Forma Revenue Inputs by Prototype
Prototypes Metric Input
Hotel
Average Daily Rate (a) Daily per Room $240
Occupancy Rate (a) Annual 83%
RevPAR (b) Daily per Room $198
Gross Annual Room Income Annual per Room $72,270
Gross Annual Other Revenue Annual per Room $10,950
Less: Vacancy (c) $0
Less: Operating Expenses (d) 70% ($58,254)
Annual Net Operating Income $24,966
Office/R&D
Revenues and Expenses (d)
Monthly Rent - Gross per NSF $68
Operating Expenses % of Gross 28%
Vacancy Rate % of Gross 5%
Estimates
Net Square Footage 90,000
Annual Gross Revenues $6,120,000
Operating Expenses ($1,713,600)
Vacancy Rate ($306,000)
Net Operating Income $4,100,400
Notes:
(a) Based on a survey of Palo Alto hotel managers, including Hilton Garden Inn, Homewood Suites, The Epiphany,
Hotel Keen, Dinah’s Garden Hotel, Sheraton Palo Alto, and Garden Court Hotel. Hotel property managers reported
average rates of between $150 and $400 for weekend and off-peak days, and between $289 and $800 for peak,
weekday stays. Occupancy rates were reported at between 78 percent and 95 percent. RevPAR (revenue per
available room) is calculated as occupancy percentage times average daily rate.
(b) RevPAR, a measure of revenue per room, is calculated by multiplying the occupancy rate by the average daily rate.
(c) Vacancy is already reflected in RevPAR estimate.
(d) Costar Group average rents in the Palo Alto market. A premium of 10% is applied to account for newer product.
Sources: Palo Alto hotel property managers; HVS and STR Consulting, 2014; Costar, 2015; Vernazza Wolfe Associates,
Inc. and Strategic Economics, 2015.
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Figure VI-4. Direct and Indirect Cost Inputs
Development Assumptions Metric Hotel
Office/R&D/
Medical Office
Direct Costs (a)
Building & On-Site Improvements (b) per sq. ft. of GBA $200 $200
Parking Costs - Podium per space $25,000 $25,000
Parking Costs - Surface per space $2,500 $2,500
Indirect Costs (c)
A&E & Consulting % of Direct Costs 8.0% 8.0%
Tenant Improvements per NSF N/A $40
Permits & Fees (d) total $1,490,679 $3,745,450
Taxes, Insurance, Legal & Accounting % of Direct Costs 3.0% 3.0%
Financing Costs % of Direct Costs 6.0% 6.0%
Developer Overhead &Fee % of Direct Costs 8.5% 8.5%
Contingency % of Indirect Costs 5.0% 5.0%
Notes:
(a) Review of pro formas for similar projects in Silicon Valley region; RS Means, 2014.
(b) Hotel costs include Furniture, Fixtures & Equipment (FF&E).
(c) Review of pro formas for similar projects in Bay Area.
(d) For the hotel prototype, permit and fee calculations are based on recently developed hotel projects in the City. For the office/R&D/medical office
prototype, permits & fee calculations were provided by the City of Palo Alto. These are estimates for the prototypes created in this analysis and do
not represent actual costs for specific development projects.
Sources: Project pro formas; RS Means, 2014; HVS and STR Consulting; City of Palo Alto; Strategic Economics, 2015.
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Figure VI-5. Recent Commercial Vacant Land Transactions in Santa Clara County (2011-2014)
Property City Site Area Sale Price
Sale Price/ SF of
Land
1236 College Avenue Palo Alto 5,750 $2,795,000 $486.09
3502 Emma Court Palo Alto 7,369 $2,150,000 $291.76
382 Curtner Avenue Palo Alto 8,525 $1,384,000 $162.35
4220 El Camino Real Palo Alto 55,609 $3,775,000 $67.88
370 Lowell Avenue Palo Alto 12,474 $4,450,000 $356.74
3500 South Court Palo Alto 6,250 $2,700,000 $432.00
3333 Bryant Street Palo Alto 6,125 $2,700,000 $440.82
405 Curtner Avenue Palo Alto 12,375 $1,800,000 $145.45
363 Garden Street Palo Alto 5,000 $195,000 $39.00
897 Marshall Drive Palo Alto 2,801 $49,000 $17.49
3265 El Camino Real Palo Alto 7,490 $975,000 $130.17
1130 Middlefield Road Palo Alto 5,600 $2,800,000 $500.00
El Camino Real Palo Alto 55,609 $3,775,000 $67.88
N San Antonio Rd Los Altos 11,960 $1,200,000 $100.33
N San Antonio Rd Los Altos 11,600 $1,030,000 $88.79
Los Gatos Blvd Los Gatos 20,038 $5,800,000 $47.38
Los Gatos Blvd Los Gatos 102,366 $5,800,000 $47.38
Placer Oaks Rd Los Gatos 2,351 $266,000 $113.14
Placer Oaks Rd Los Gatos 2,262 $266,000 $117.60
S Main St Milpitas 9,148 $775,000 $84.72
Dempsey Rd Milpitas 52,392 $1,250,000 $23.86
Milpitas 15,000 $530,000 $35.33
Milpitas 44,431 $14,563,500 $327.78
Dixon Rd Milpitas 14,810 $812,500 $54.86
Old Middlefield Way Mountain View 11,175 $1,600,000 $143.18
Church St Mountain View 11,250 $2,270,000 $201.78
Moffett Blvd Mountain View 79,715 $10,100,000 $126.70
El Camino Real Santa Clara 63,162 $6,100,000 $96.58
Saratoga Ave Santa Clara 16,700 $1,075,000 $64.37
El Camino Real Santa Clara 4,960 $275,000 $55.44
Big Basin Way Saratoga 17,187 $1,398,000 $81.34
Average Palo Alto Sales 14,691 $2,272,923 $241
Average All Sales 21,983 $2,730,935 $160
Sources: CoreLogic, 2015; Loopnet, 2015; Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
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Figure VI-6. Feasibility Thresholds for Return on Cost
Prototype Capitalization Rates
Selected Threshold for
Return on Cost
Hotel (a)
6.75% - 7.25%
7.0% - 7.25%
Office/ R&D/ Medical Office(b)
5.88% - 6.71%
6.75% - 7.0%
Notes:
(a) HVS Consulting, January 2015. Cap rate data was only available at the national level. However,
the Bay Area market generally outperforms the rest of the country, so this estimate is likely lower
than cap rates Santa Clara County.
(b) PWC Real Estate Investor Survey, San Francisco Office Market, 4th Quarter 2014. Because
capitalization rates for office may be peaking in the Bay Area market, and R&D and medical office
uses have higher cap rates, the financial analysis set the threshold at a higher rate.
Sources: HVS Consulting, January 2015; PWC Real Estate Investor Survey, 4Q2014; Vernazza Wolfe
Associates, Inc. and Strategic Economics, 2015.
RESULTS
Hotel
The pro forma analysis shows that under current economic conditions, without the addition of a
commercial linkage fee, the hotel prototype generates a healthy return on cost of 7.5 percent, which is
financially feasible (Figure VI-7). The annual net operating income is estimated at $3.3 million ($24,966
per room). The total development costs, including land, direct, and indirect costs total $44.3 million. The
following describes the financial implications of adding new commercial linkage fees at various fee
levels:
The existing fee level of $19.85 per square foot increases development costs to $46.3 million.
The current fee is approximately four percent of total development costs for a hotel prototype. A
hotel prototype that is charged the existing fee can generate a strong return on cost of 7.2 percent.
Fee scenario 1, the maximum fee level of $177 per square foot, increases total development costs
to almost $62 million. The maximum fee accounts for 28.6 percent of total development costs.
This fee scenario generates a calculated return on cost of 5.4 percent, which is not financially
feasible.
Fee scenario 2, a lower nexus fee of $35 per square foot is equivalent to 7.3 percent of total
development costs and generates a potential return of 6.95 percent. This return is not financially
feasible.
Scenario 3, a fee of $30 per square foot, would account for 6.3 percent of total development
costs. At this fee level, the return on cost is estimated at 7 percent, which is financially feasible.
Fee scenario 4 is a nexus fee of $20 per square foot, which represents 4.3 percent of the project’s
total development costs. The return on cost is estimated at 7.2 percent, which is also financially
feasible.
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Office/R&D/Medical Office
Under a base scenario with no commercial linkage fees on office/R&D/medical office development, a
prototypical project generates an estimated net operating income of $4.1 million, with total development
costs estimated at $53.0 million. The net operating income divided by the total development costs results
in an estimated return on cost of 7.7 percent, a higher percentage than the minimum threshold for
financial feasibility for office/ R&D/ medical office development, which is 6.75 to 7.0 percent (see Figure
VI-7). The high return on cost indicates that this prototype would offer attractive returns under current
market conditions. The following describes the financial implications of adding new commercial linkage
fees at various fee levels:
The City’s existing linkage fee of $19.85 per square foot is approximately 3.7 percent of total
development costs. An office prototype charged the existing fee level can generate a healthy
return on costs of 7.5 percent.
Scenario 1, a fee set at the maximum level of $264 per square foot, would account for about half
of total development costs for the office/R&D/medical office prototype. The return on cost with
this fee is estimated at 5.2 percent, which would not be financially feasible.
Scenario 2, a fee level of $60 per square foot, would make up 11.3 percent of total development
costs. The calculated return on cost is 6.9 percent, which is financially feasible.
Scenario 3, a fee level of $50 per square foot, is equivalent to 9.4 percent of total project
development costs. Under this scenario, the office/R&D/medical office project generates a return
on cost of 7.1 percent, which is feasible.
The fee scenario 4 of $35 per square foot would be equivalent to 6.6 percent of total project costs.
The estimated return on costs is 7.3 percent, which is financially feasible.
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Figure VI-7. Pro Forma Analysis Results
Hotel Office/R&D/Medical Office
Development Costs (a) per Room Total Per Gross SF Total
Land $120,273 $15,996,364 $130 $13,040,000
Direct Costs
Building & On-Site Improvements $150,376 $20,000,000 $200 $20,000,000
Parking $8,125 $1,080,625 $55 $5,475,000
Total Direct Costs $158,501 $21,080,625 $255 $25,475,000
Indirect Costs
A&E & Consulting $12,680 $1,686,450 $20 $2,038,000
Tenant Improvements $36 $3,600,000
FF&E (b) $0 $0
Permits & Fees (c) $11,208 $1,490,679 $37 $3,745,450
Taxes, Insurance, Legal, Acctg $4,755 $632,419 $8 $764,250
Financing Costs $9,510 $1,264,838 $15 $1,528,500
Developer Overhead & fee $13,473 $1,791,853 $22 $2,165,375
Contingency $2,581 $343,312 $7 $692,079
Total Indirect Costs $54,207 $7,209,551 $145 $14,533,654
Total Development Costs (TDC)
without Nexus Fees $44,286,539 $53,048,654
TDC with Nexus Fees by Fee
Scenario
Linkage Fee
per SF
TDC incl. Nexus
Fee
Linkage Fee
per SF
TDC incl. Nexus
Fee
No Fee $0.00 $44,286,539 $0.00 $53,048,654
Existing Fee $19.85 $46,271,539 $19.85 $55,033,654
Fee Scenario 1: Maximum Fee $177 $61,986,539 $264 $79,448,654
Fee Scenario 2 $35 $47,786,539 $60 $59,048,654
Fee Scenario 3 $30 $47,286,539 $50 $58,048,654
Fee Scenario 4 $20 $46,286,539 $35 $56,548,654
Revenues per SF Total per SF Total
Annual Net Operating Income (d) $24,966 $3,320,478 $41 $4,100,400
Return on Cost by Fee Scenario:
Nexus Fee
per SF Return on Costs
Nexus Fee
per SF Return on Costs
No Fee $0.00 7.50% $0.00 7.73%
Existing Fee $19.85 7.18% $19.85 7.45%
Scenario 1: Maximum Fee $177 5.36% $264 5.16%
Fee Scenario 2 $35 6.95% $60 6.94%
Fee Scenario 3 $30 7.02% $50 7.06%
Fee Scenario 4 $20 7.17% $35 7.25%
Fees as % of TDC
Nexus Fee
per SF
Nexus Fee as % of
TDC
Nexus Fee
per SF
Nexus Fee as %
of TDC
No Fee $0.00 0.00% $0.00 0.00%
Existing Fee $19.85 4.29% $19.85 3.74%
Scenario 1: Maximum Fee $177 28.55% $264 49.77%
Fee Scenario 2 $35 7.32% $60 11.31%
Fee Scenario 3 $30 6.34% $50 9.43%
Fee Scenario 4 $20 4.32% $35 6.60%
Return on Cost - Threshold for Feasibility 7.0-7.25% 6.75-7.0%
Notes:
(a) See Figure VI-4.
(b) Furniture Fixtures & Equipment for hotel is included in the direct costs.
(c) Permit & fee calculations, excluding linkage fees, as provided by City of Palo Alto. These are estimates for the prototypes created in this analysis; specific development projects may have different results.
(d) See Figure VI-3.
Sources: Vernazza Wolfe Associates, Inc; Strategic Economics, 2015.
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POLICY CONSIDERATIONS
While the nexus study provides the necessary economic analysis for the updated linkage fees, it is up to
policymakers to decide which fee level is appropriate to charge to new development. Financial feasibility
is one important factor to examine. In addition, there are a number of other policy issues to consider, such
as:
How much the City’s development fees would increase with an updated commercial linkage fee;
How an updated linkage fee in Palo Alto would compare with those recently adopted in
neighboring jurisdictions;
What options exist for establishing alternatives to the payment of fees; and
How the updated commercial linkage fee fits into the City’s overall affordable housing strategy.
Existing City Permits and Fees on Commercial Development
In addition to its existing commercial linkage fee of $19.85 per square foot, the City of Palo Alto has
other permits and fees on new development. 18 The City may wish to consider the amount that total fees
would increase with an updated commercial linkage fee. Based on the current schedule of fees in Palo
Alto, existing fees (including the existing linkage fees) for the commercial prototypes are estimated to be
$35 per square foot for the hotel prototype and $57 per square foot for the office/R&D/medical office
prototype.19 If the maximum linkage fees were adopted, the total development fees and permits would be
$192 per square foot for hotel and $301 for office, as shown in Figure VI-8.
18 New non-profit development, including churches, educational facilities, and hospitals, is exempt from the current
fee. New retail space smaller than 1,500 square feet is also exempted.
19 The hotel fees were estimated based on the fees paid by new hotel projects in the city; the
retail/restaurant/services fees and office/R&D/medical office fees are estimates by City staff. These fee estimates are
the best approximations available, and do not represent the actual cost of a proposed new development project.
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Figure VI-8. Existing City Permits and Fees on Commercial Development by Prototype
Hotel
Office/R&D/
Medical Office
Existing Fees/ Permits per SF (excl. linkage fee) $15 $37
Current Linkage Fee $20 $20
Total Existing Fees Per SF $35 $57
Fee Scenario 1 (Maximum Fees)
Nexus Fee Per SF $177 $264
Combined Fees Per SF $192 $301
Fee Scenario 2
Nexus Fee Per SF $35 $60
Combined Fees Per SF $50 $97
Fee Scenario 3
Nexus Fee Per SF $30 $50
Combined Fees Per SF $45 $87
Fee Scenario 4
Nexus Fee Per SF $20 $35
Combined Fees Per SF $35 $72
Sources: Palo Alto, Department of Planning and Building, 2014; Vernazza Wolfe Associates, Inc; Strategic Economics, 2015.
Comparison with Fees Charged in Other Jurisdictions
Figure VI-9 compares Palo Alto’s existing commercial linkage fee and proposed fee scenarios with the
linkage fees adopted by nearby cities. At present, Palo Alto has fees of $19.85 per square foot for all
commercial uses. Palo Alto’s existing fees are similar to the linkage fees adopted San Francisco and
Cupertino, which range from $16 to $24 per square foot, depending on the land use. In most cases, cities
have adopted higher fee levels for office/ R&D/ medical office uses than for hotel uses. For example, in
Cupertino, the commercial linkage fee for hotel is $10 per square foot, compared to $20 per square foot
for office/ R&D/ medical office uses. The maximum linkage fees calculated for all the commercial
prototypes, ranging from $177 to $295 per square foot in this study are much higher than existing linkage
fees in Bay Area jurisdictions.
Other cities in the Bay Area also have commercial linkage fees that can be compared to the potential fee
scenarios for Palo Alto. A summary of some of these existing fees is shown in Figure VI-10, based on the
most current information available. The fee amounts vary significantly by jurisdiction.
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Figure VI-9. Comparison to Linkage Fees in Neighboring Cities
Hotel
Office/ R&D/
Medical Office
Date Fee Was
Adopted
Palo Alto Fee Scenarios (per SF)
Existing Linkage Fee $19.85 $19.85 2002
Scenario 1 (Maximum) $177 $264
Scenario 2 $35 $60
Scenario 3 $30 $50
Scenario 4 $20 $35
Fees in Nearby Cities (per SF)
Cupertino $10 $20 2015
Menlo Park (a) $8 $15 2014
Mountain View (b) $2.50 $25 2015
San Francisco (c) $18 $16-$24 2015
Sunnyvale (d) $7.50 $15 (e) 2015
Notes:
(a) Buildings 10,000 SF and under are exempt from fees. A new nexus study is currently underway that may result in an
updated fee.
(b) New gross floor area under 25,000 SF pays 50 percent of full fee.
(c) The fee for R&D is $16.01 and the fee for office is $24.03. The fee for a small enterprise is $18.89.
(d) Approval of the proposed fees is pending a community process.
(e) The fee on the first 25,000 SF is discounted by 50 percent. Sources: City staff and websites; Nonprofit Housing Association of Northern California, 2015; Vernazza Wolfe Associates, Inc. &
Strategic Economics, 2015.
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Figure VI-10. Existing Linkage Fees in Bay Area Cities
City
Commercial Development
Subject to Fees Fee Amount
Walnut Creek
All development commercially classified i.e.
R&D, for-profit medical offices/hospitals, etc.
$5.00 per SF
Oakland
Office and Warehouse/Distribution
$5.24 per SF used for office of warehouse
/distribution needs
beyond 25,000 SF
Dublin
Industrial, Office, R&D, Retail, Services &
Accommodations
Industrial: $.048 per SF
Office: $1.24 per SF
R&D: $0.81 per SF
Retail: $1.00 per SF
Services & Acc.: $0.42 per SF
* Buildings less than 20,000 SF are exempt.
Pleasanton
All commercial office or industrial
development projects
$2.87 per SF
Adjusted annually based on CPI
Alameda
Retail, Office, Warehousing, Manufacturing,
Hotel//Motel
Retail: $2.24 per SF
Office: $4.42 per SF
Warehouse & Manufacturing: $0.77 per SF
Hotel/Motel: $1,108 per room/suite
May be adjusted annually based on CPI
Napa
Office, Hotel, Retail, Industrial (Industrial,
Warehouse, Wine Production)
Office: $1.00 per SF
Hotel: $3.00 per SF
Retail: $0.80 per SF
Industrial: $0.50 per SF
San Rafael
Office or R&D, Retail, Restaurant, Personal
Service, Manufacturing, Light Industrial,
Warehouse, Hotel/Motel
5,000 SF or more to provide affordable
housing units
or pay a fee * $254,599 per unit
Office & R&D: 0.03 units
Retail, Restaurant or Personal Service:
0.0225 units
Manufacturing or Light Industrial: 0.01625
units
Warehouse: 0.00875 units
Hotel/Motel: 0.0075 units
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Figure VI-10. Summary of Existing Linkage Fees in Other Bay Area Cities (Continued)
City
Commercial Development
Subject to Fees Fee Amount
Petaluma Commercial, Retail, Industrial Commercial: $2.14 per SF
Retail: $3.69 per SF
Industrial: $2.21 per SF
Emeryville Any development of non residential uses for
which a discretionary permit or building permit is
required
$4.00 per SF
Berkeley Developments in non-residential and R-4 Zones,
except in South Berkeley IX Target Area, over
7,500 SF
Office/Retail/Restaurant/Hotel/Lodging/R&D:
$4.50 per SF
Industrial/Manufacturing/Warehouse/Storage:
$2.25 per sq. ft
Sources: The Non-Profit Housing Association of Northern California, Strategic Economics, and Vernazza Wolfe Associates, Inc,
2015.
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Benefit to Palo Alto’s Overall Affordable Housing Strategy
The City currently charges a commercial linkage fee of $19.85 per square foot on all new non-residential
development. These fees are payable at the time that the building permit is issued. The city also has an
inclusionary housing program that requires that 15 percent of the units in market-rate developments
consisting of five or more housing units must be sold at below-market rate (BMR) prices. The
inclusionary requirement increases to 20 percent for larger projects on five-acre and larger parcels. Two-
thirds of the BMR units are to be affordable at the 90 percent AMI level households and the remaining
one-third is to be affordable at the 110 percent AMI level. City policy generally requires that the BMR
units be provided in the project. In some cases, developers have the option of paying an in-lieu fee of 7.5
to 10 percent of the sales price or fair market value, whichever is greater. The developer must also pay a
fee for fractional units.
Revenues from the BMR in-lieu fee and commercial linkage fee programs are deposited into the City’s
Affordable Housing Fund. The Affordable Housing Fund is a local housing trust fund established by the
City Council of Palo Alto to provide financial assistance for the development of housing affordable to
very low-, low- and moderate-income households that live or work within the City. It is largely made up
of two sub-funds: the Commercial Housing Fund and the Residential Housing Fund. While both rental
and ownership units are eligible for assistance, in practice all units assisted thus far have been rental units
and almost all have been affordable to very low- or low-income households.
The revenues to be collected from the commercial linkage fee provide an important source of local
funding; however, local fee revenues do not generally cover the entire funding gap encountered by
sponsors of new affordable housing. Additional funding from a variety of sources will remain critical.
These funding sources typically include public subsidies from Santa Clara County, equity from the Low
Income Housing Tax Credits, and financing from conventional lenders.
Potential for Overlap between Residential and Commercial Fees
The City is also undertaking a housing impact nexus study simultaneously, and may soon adopt a housing
impact fee in a parallel process to the commercial linkage fee considered in this report. One issue that
may arise if a City considers the adoption of both fees is whether there is any overlap between the two
impact fees, resulting in potential “double-counting” of impacts.
The commercial linkage fee study examined jobs located in new commercial buildings including office/
R&D/ medical office buildings and hotels. The nexus analysis then calculated the average wages of the
workers associated with each commercial building to derive the annual income of the new worker
households. The analysis determines the area median income (AMI) level of the new worker-households
to identify the number of worker-households that would require affordable housing.
The housing impact fee nexus analysis examined households buying or renting new market rate units in
the jurisdiction. The household expenditures by these new residents have an economic impact in the
county, which can be linked to new jobs. The nexus analysis quantified the jobs linked to new household
spending, and then calculated the wages of new workers and the household income of new worker
households. Each worker household was then categorized by area median income (AMI) to determine the
number of households that require affordable housing.
There may be a share of jobs counted in the commercial linkage fee analysis that are also included in
the residential nexus analysis, particularly those in the service sector. Other types of jobs counted in the
residential nexus analysis are unique to that analysis, and are not included in the commercial linkage
fee analysis (for example, public sector employees). The commercial linkage fee analysis is limited to
new development in private sector office/ R&D/ medical office buildings and hotels space.
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There is potential that some jobs could be counted in both analyses, and that the two programs may
overlap in mitigating the affordable housing demand from the same worker households. Each of the
proposed fees is required to mitigate no more than 100 percent of the demand for affordable units by new
worker households. In order to reduce the potential for overlap between the two programs, it is advisable
to set both the commercial linkage fees and housing impact fees at below 100 percent of the nexus-based
maximum. In this way, when combined, the programs would mitigate less than 100 percent of the impact
even if there were overlap in the jobs counted in the two nexus analyses.
Administrative Issues
Similar to any impact fee, the fee should be adjusted annually for inflation and increases in construction
costs. Adjustments are also needed due to possible changes in the housing affordability gap. However, the
connection between new commercial construction and growth in employment derived from employment
densities is unlikely to change in the short run.
It is advisable that the City adjusts its commercial linkage fee annually by using an annual adjustment
mechanism. An adjustment mechanism updates the fees to compensate for inflation in development costs.
To simplify annual adjustments, it is recommended that the City selects a cost index that is routinely
published. While there is no index that tracks changes in Palo Alto’s development costs, including land,
there are a few other options to consider.
The first option is the Consumer Price Index (Shelter Only). The shelter component of the index
covers costs for rent of primary residence, lodging away from home, owner’s equivalent rent of
primary residence, and household insurance. Of the total shelter index, costs associated with the
owner’s equivalent rent of primary residence constitute 70% of total costs entered into the index.
A second option to adjust the fee for annual inflation is the construction cost index published in
the Engineering News Record (ENR). This index is routinely used to update other types of impact
fees. Cost index information for the San Francisco area, the closest geographical area to Palo
Alto, is available on an annual basis. While this index measures inflation in construction costs, it
does not incorporate changes in land costs and public fees charged on new development.
While both indices measure changes in housing costs, both understate the magnitude of inflation for the
reasons presented above. However, since these indices are readily available and relatively simple to use, it
is recommended, that City uses these indices for annual adjustments. It is further recommended that the
City base its annual adjustment mechanism on the higher of the two indices (CPI or ENR), using a five-
year moving average as the inflation factor.
In addition to revising the fee annually for inflation, the City is encouraged to update the commercial
linkage fee study every five years, or at the very least, update the housing affordability gap used in the
basic model. The purpose of these updates is to insure that the fee is still based on a cost/revenue structure
that remains applicable in the Palo Alto housing market. In this way, the fee will more accurately reflect
any structural changes between affordable prices/rents and market rate sales prices/development costs.
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GLOSSARY OF TERMS
Affordable Housing: Under state and federal statutes, housing is defined as affordable if housing costs
do not exceed 30 to 35 percent of gross household income.
Annual Adjustment Mechanism: Due to inflation in housing construction costs, it is frequently
necessary to adjust impact fees. An index, such as the Consumer Price Index (CPI) or a published
construction cost index (for example, from the Engineering News Record) is used to revise housing fees
to reflect inflation in housing construction costs.
Assisted Housing: Housing that has received public subsidies (such as low interest loans, density
bonuses, direct financial assistance, etc.) from federal, state, or local housing programs in exchange for
restrictions requiring a certain number of housing units to be affordable to very low, low, and moderate-
income households.
Boomerang Funds: Monies returned to the City by the State of California, after dissolution of
redevelopment agencies in the State.
Consumer price index (CPI): Index that measures changes in the price level of a market basket of
consumer goods and services purchased by households.
Employment Densities: The amount of square feet per employee is calculated for each property use that
is subject to a commercial development housing linkage fee. Employment densities are used to estimate
the number of employees that will work in a new commercial development.
Household: The US Census Bureau defines a household as all persons living in a housing unit whether or
not they are related. A single person living in an apartment as well as a family living in a house is
considered a household. Households do not include individuals living in dormitories, prisons,
convalescent homes, or other group quarters.
Household Income: The total income of all the persons living in a household. Household income is
commonly grouped into income categories based upon household size and income, relative to the regional
median family income.
VII. GLOSSARY OF TERMS AND ACRONYMS
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Housing Affordability Gap: The affordability gap is defined as the difference between what a household
can afford to spend on housing and the market rate cost of housing. Affordable rents and sales prices are
defined as a percentage of gross household income, generally between 30 percent and 35 percent of
income.
For renters, rental costs are assumed to include the contract rent as well as the cost of utilities,
excluding cable and telephone service. The difference between these gross rents and affordable
rents is the housing affordability gap for renters. This calculation assumes that 30% of income is
paid for gross rent.
For owners, costs include mortgage payments, mortgage insurance, property taxes, property
insurance, and homeowner association dues.20 The difference between these housing expenses
and affordable ownership costs is the housing affordability gap for owners. This calculation
assumes that 35% of income is paid for housing costs.
Housing Subsidy: Housing subsidies refer to government assistance aimed at reducing housing sales
prices or rents to more affordable levels.
Housing Unit: A housing unit can be a room or group of rooms used by one or more individuals living
separately from others in the structure, with direct access to the outside or to a public hall and containing
separate toilet and kitchen facilities.
Inclusionary Zoning: Inclusionary zoning, also known as inclusionary housing, refers to a planning
ordinance that requires that a given percentage of new construction be affordable to households with very
low, low, moderate, or workforce incomes.
In-Lieu Fee: A literal definition for an in-lieu fee for inclusionary units would be a fee adopted “in place
of” providing affordable units. For the purposes of operating an inclusionary housing program, a public
jurisdiction may adopt a fee option for developers that prefer paying fees over providing housing units on-
or off-site. A fee study is frequently undertaken to establish the maximum fee that can be charged as an
in-lieu fee. This fee study must show that there is a reasonable relationship between the fee and the cost of
providing affordable housing.
Market-Rate Housing: Housing which is available on the open market without any public subsidy. The
price for housing is determined by the market forces of supply and demand and varies by location.
Nexus Study: In order to adopt a residential housing impact fee or a commercial linkage fee, a nexus
study is required. A nexus requires local agencies proposing a fee on a development project to identify the
purpose of the fee, the use of the fee, and to determine that there is “a reasonable relationship between the
fee’s use and the type of development project on which the fee is imposed.” A Nexus Study establishes
20 Mortgage terms for first-time homebuyers typically allow down payment of five percent; these terms require private mortgage
insurance.
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and quantifies a causal link or “nexus” between new residential and commercial development and the
need for additional housing affordable to new employees.
Non-Residential Development Housing Impact Fee (or Linkage Fee): A fee or charge imposed on
commercial developers to pay for a development’s impact on the need for affordable housing. The fee is
based on projected household incomes of new employees that will work in newly created space. The fee
varies according to the type of property use.
Palmer Case: This civil suit affects rental housing only. It affirmed that the Costa Hawkins Rental Act,
passed in 1995 by the California State Legislature, applies to inclusionary rental units. The implication of
this finding is that cities or counties cannot require rental property owners to rent inclusionary units that
become vacant at below market rents, unless the developer accepted financial assistance (including fee
waivers) or received other incentives that lowered development costs.
Property Prototypes: Property prototypes are used for residential and commercial developments in order
to define housing impact fees. The prototypes generally represent new development projects built in a
community and are used to estimate affordable housing impacts associated with new market rate
commercial and residential developments. While the prototypes should be “typical” of what is built, for
ease of mathematical computation, they are often expressed as larger developments in order to avoid
awkward fractions.
Residential Housing Impact Fee: A fee imposed on residential development to pay for a development’s
impact on the need for affordable housing. The fee is based on projected incomes of new employees
associated with the expansion of market rate developments. Two steps are needed to define the fees. The
first step is the completion of a nexus study, and the second step entails selection of the actual fee amount,
which can be below the amount justified by the fee study, but not above that amount.
RS Means: Data source of information for construction cost data.
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DEFINITION OF ACRONYMS
AMI: Area Median Income
CBIA: California Building Industry Association
EDD: State of California Employment Development Department
FAR: Floor-area-ratio
FF&E: Furniture, Fixtures, and Equipment
GBA: Gross Building Area
HCD: Department of Housing and Community Development (State of California)
NAICS: North American Industry Classification System
NSF: Net Square Feet
QCEW: Quarterly Census of Employment and Wages
R&D: Research and development
SF: Square Feet
DRAFT REPORT
Residential Impact Fee
Nexus Study
October 2015
prepared for:
City of Palo Alto
Vernazza Wolfe Associates, Inc.
VWA
Attachment B
Table of Contents
I. EXECUTIVE SUMMARY .................................................................................................. 5
Introduction ...................................................................................................................................... 5
Background ...................................................................................................................................... 5
Report Organization ......................................................................................................................... 5
Fee Implementation Options ............................................................................................................ 5
Nexus Analysis Methodology and Results ....................................................................................... 6
Policy Considerations ..................................................................................................................... 12
II. INTRODUCTION AND METHODOLOGY ...................................................................... 14
Background .................................................................................................................................... 14
The Nexus Concept ....................................................................................................................... 15
Methodology ................................................................................................................................... 15
III. RESIDENTIAL PROTOTYPES ....................................................................................... 17
Recent Housing Development Trends ........................................................................................... 17
Residential Prototypes ................................................................................................................... 18
Household Incomes of Buyers and Renters .................................................................................. 23
IV. ECONOMIC IMPACT ANALYSIS (IMPLAN3) ............................................................... 29
The IMPLAN3 Model ...................................................................................................................... 29
Household Income Impacts ........................................................................................................... 30
Employment and Wage Impacts .................................................................................................... 30
Estimating Worker-Households ..................................................................................................... 30
Estimating Demand for Affordable Housing ................................................................................... 31
V. AFFORDABILITY GAP ANALYSIS ............................................................................... 36
Methodology ................................................................................................................................... 36
Estimating Affordable Rents and Sales Prices .............................................................................. 36
Estimating Housing Development Costs ........................................................................................ 43
Calculating the Housing Affordability Gap ..................................................................................... 47
VI. MAXIMUM FEE AND REQUIREMENTS ........................................................................ 51
Maximum Fee Calculation ............................................................................................................. 51
Inclusionary Housing Requirements .............................................................................................. 55
VII. FEASIBILITY AND POLICY CONSIDERATIONS .......................................................... 56
Financial Feasibility Analysis ......................................................................................................... 56
Additional Policy Considerations .................................................................................................... 68
VIII. GLOSSARY OF TERMS AND ACRONYMS .................................................................. 76
Glossary of terms ........................................................................................................................... 76
Definition of Acronyms ................................................................................................................... 79
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List of Figures
Figure I-2. Sales Prices and Rental Rates of Residential Prototypes ............................................................ 7
Figure I-3. Estimated Annual Household Incomes of Buyers of Single-Family Detached Units ................. 7
Figure I-4. Estimated Annual Household Incomes of Buyers of Single-Family Attached Units ................. 8
Figure I-5. Estimated Annual Household Incomes of Buyers of Condominium Units ................................ 8
Figure I-6. Estimated Annual Household Incomes of Renters of Apartment Units ..................................... 8
Figure I-7. New Worker Households by Income Group for Prototypes ....................................................... 9
Figure I-8. Number of Worker Households Associated with 100-Unit Prototypes, by Income Level ......... 9
Figure I-9. Total Affordability Gap for Single-Family Detached Units (30 Units) .................................... 10
Figure I-10. Total Affordability Gap for Single-Family Attached Units (10 Units) ................................... 10
Figure I-11. Total Affordability Gap for Condominiums (35 Units) .......................................................... 10
Figure I-12. Total Affordability Gap for Apartments (70 Units) ................................................................ 10
Figure I-13. Maximum Housing Impact Fee by Prototype ......................................................................... 11
Figure III-1. Single-Family Detached Home Sales in Palo Alto, Units Built 2012-2013 ........................... 19
Figure III-2. New Market-Rate Single-Family Attached Development in Palo Alto ................................. 19
Figure III-3. New Market-Rate Apartment Projects in Mountain View and Redwood City ...................... 20
Figure III-4. New Condominium Unit Sales in Palo Alto, Sold 2009 - 2011 ............................................. 21
Figure III-5. Recent Condominium Sales in Palo Alto and Surrounding Communities: Sold July 2014-
July 2015 ..................................................................................................................................................... 22
Figure III-6. Average Net Residential SF per Unit ..................................................................................... 23
Figure III-7. Estimated Annual Household Incomes of Buyers of Single-Family Detached Units ............ 25
Figure III-8. Estimated Annual Household Incomes of Buyers of Single-Family Attached Units ............. 26
Figure III-9. Estimated Annual Household Incomes of Buyers of Condominium Units ............................ 27
Figure III-10. Estimated Annual Household Incomes of Renters of Apartment Units ............................... 28
Figure IV-1. Estimated Incomes by Income Categories for Buyers and Renters of New Units ................. 32
Figure IV-2. Estimated Job and Wage Impacts of Prototypes by Industry ................................................. 33
Figure IV-3. Estimated Job and Wage Impacts of Prototypes by Occupation ............................................ 34
Figure IV-4. Induced Employment Impacts, Palo Alto .............................................................................. 35
Figure IV-5. New Worker Households by Income Group for Prototypes .................................................. 35
Figure V-1. Calculation of Affordable Rents in Santa Clara County by Household Size, 2014 ................ 39
Figure V-2. Calculation of Affordable Rents in Santa Clara County by Unit Type, 2014 ......................... 40
Figure V-3. Calculation of Affordable Sales Prices in Santa Clara County by Household Size, 2014 ...... 41
Figure V-4. Calculation of Affordable Sales Prices in Santa Clara County by Unit Type, 2014 ............... 42
Figure V-5. Affordable Housing Project Pro Forma Data .......................................................................... 44
Figure V-6. Sales of Vacant Lands in San Mateo County and Northern Santa Clara County, 2014 .......... 45
Figure V-7. Estimate of Development Costs of Hypothetical Condominium Project ................................ 46
Figure V-8. Rental Housing Unit Sizes and Development Costs ............................................................... 47
Figure V-9. For-Sale Housing Unit Sizes and Development Costs ............................................................ 47
Figure V-10. Housing Affordability Gap Calculation for Rental Housing ................................................. 49
Figure V-11. Housing Affordability Gap Calculation for For-Sale Condominium Housing ..................... 50
Figure V-12. Average Housing Affordability Gap by Income Group ........................................................ 50
Figure VI-1. Maximum Per-Unit Fee for Single-Family Detached Prototype ........................................... 52
Figure VI-2. Maximum Per-Unit Fee for Single-Family Attached Prototype ............................................ 52
Figure VI-3. Maximum Per-Unit Fee for Condominium Prototype ........................................................... 52
Figure VI-4. Maximum Per-Unit Fee for Apartment Prototype ................................................................. 53
Figure VI-5. Maximum Fee per SF for Single-Family Detached Prototype ............................................... 53
Figure VI-6. Maximum Fee per SF for Single-Family Attached Prototype ............................................... 53
Figure VI-7. Maximum Fee per SF for Condominium Prototype .............................................................. 54
Figure VI-8. Maximum Fee per SF for Apartment Prototype .................................................................... 54
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Figure VII-1. Residential Prototypes .......................................................................................................... 56
Figure VII-2. Fee Levels per Unit for Prototypes ....................................................................................... 57
Figure VII-3. Fee Levels per Square Foot for Prototypes ........................................................................... 58
Figure VII-4. Sales Prices and Rents for Prototypes ................................................................................... 59
Figure VII-5. Apartment Revenue Calculations ......................................................................................... 59
Figure VII-6. Development Cost Factors .................................................................................................... 60
Figure VII-7. Recent Single-Family Land Sales Transactions in Palo Alto and Neighboring Cities ......... 62
Figure VII-8. Recent Multi-Family Land Sales Transactions in Palo Alto and Neighboring Cities .......... 63
Figure VII-9. Pro Forma Model Results for Single-Family Detached and Attached Prototypes .............. 66
Figure VII-10. Pro Forma Model Results for Condominium and Apartment Prototypes ........................... 66
Figure VII-11. Palo Alto Total Residential Fees under Selected Fee Scenarios ......................................... 69
Figure VII-12. Comparison with Impact Fees and In-Lieu Fees in Neighboring Jurisdictions .................. 70
Figure VII-13. Existing Housing Impact Fees in Bay Area Cities ............................................................. 72
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INTRODUCTION
In April 2014, the City of Palo Alto hired Strategic Economics and Vernazza Wolfe Associates, Inc.
to develop nexus studies for commercial linkage fees and residential impact fees to mitigate the
impacts of new development on the demand for affordable housing. This draft report presents the
findings of the residential impact fee study. In addition, the report describes the methodology, data
sources, and analytical steps required for the nexus analysis.
BACKGROUND
Palo Alto is interested in adopting an affordable housing impact fee on new residential development.
The purpose of this fee would be to mitigate the impact of an increase in affordable housing demand
from new worker households associated with new market-rate residential units. When a city or county
adopts a development impact fee, it must establish a reasonable relationship or connection between
the development project and the fee that is charged. Studies undertaken to demonstrate this
connection are called nexus studies. This nexus study quantifies the connection between the
development of market rate housing and the need for affordable housing units.
This residential impact fee nexus study measures the income and spending generated by the
households renting or buying new market rate units in Palo Alto. The increase in consumption is then
translated into new “induced” job growth. These induced jobs will be at various wage rates; many
will be at lower wages, for example in the retail and personal services sectors. Since low-wage
households cannot reasonably afford to pay for market rate rental and for-sale housing in Palo Alto, a
housing impact fee can be justified to bridge the difference between what these new households can
afford to pay and the cost of developing modest housing units to accommodate them.
REPORT ORGANIZATION
This executive summary provides an overview of the housing nexus analysis methodology and
results. The subsequent chapters of the report contain more detailed information regarding the
methodology, data sources, and the steps of the analysis. The report is organized into seven sections
and provides a glossary of terms at its conclusion. Following this executive summary, Section II
provides an introduction to the purpose of the study, and an overview of the methodology. Section III
presents the residential prototypes used in the analysis. Section IV describes the methodology and
results of the IMPLAN economic impact analysis. Section V covers the housing affordability gap
analysis. Section VI presents the maximum fee calculation based on the nexus analysis and
affordability gap results. The final section, Section VII, discusses financial feasibility and other policy
considerations that jurisdictions typically assess before implementing a nexus fee.
FEE IMPLEMENTATION OPTIONS
The maximum single-family detached impact fee per unit is $333,501, the maximum townhouse fee
per unit is $189,037, the maximum condominium impact fee per unit is $158,519, and the maximum
apartment fee per unit is $101,906. The fees are also calculated on a per-square-foot basis by dividing
the unit fee by the average size of the unit. On a per-square-foot basis, the maximum impact fee is
$111 for single-family detached, $90 for townhouses, $75 for condominiums and $105 for
apartments.
I. EXECUTIVE SUMMARY
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If the City of Palo Alto decides to adopt a housing impact fee, the recommended fee levels are: $95
per square foot for single-family detached housing ($285,000 per unit), $50 per square foot for single-
family attached housing ($105,000 per unit), $50 per square foot for condominiums ($105,000 per
unit), and $50 per square foot for apartments ($48,571 per unit). These recommendations are based on
the results of the financial feasibility analysis, a comparison with fees adopted in other Bay Area
communities, and other policy issues. The maximum and recommended fee levels are shown in
Figure I-1.
Figure I-1. Recommended Housing Impact Fees by Residential Prototype
Prototype
Maximum
Justified
Fee per
Unit
Maximum
Justified Fee
per SF
Recommended
Fee per Unit
Recommended
Fee per SF
Recommended
Fee as % of
Sales Price
Single-Family Detached $333,501 $111 $285,000 $95 9%
Single-Family Attached $189,037 $90 $105,000 $50 6%
Condominium $158,519 $75 $105,000 $50 8%
Apartments $101,906 $105 $48,571 $50 n/a
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015
NEXUS ANALYSIS METHODOLOGY AND RESULTS
Prototypes
The first step in the nexus analysis is developing residential housing prototypes. The prototypes
establish the types of market rate housing development that are occurring or are expected to occur in
the city that could potentially be subject to the affordable housing impact fee. The fees calculated in
this nexus study are only applicable to the housing prototypes defined in this analysis.
Based on historical development trends, market data, broker interviews, and input from city staff, the
Consultant Team constructed four housing prototypes that represent the type of development that is
likely to occur in Palo Alto: single-family detached housing (for-sale), single-family attached units
(for-sale), condominiums (for-sale) and rental apartments. These development prototypes are not
intended to represent specific development projects; rather, they are designed to illustrate the type of
projects that are likely to be built in Palo Alto in the near future. Figure I-2 provides information on
the unit type and size, as well as estimated sales prices and average monthly rents for each prototype.
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Figure I-2. Sales Prices and Rental Rates of Residential Prototypes
Prototype Unit Type
Number
of Units
Net Area
(SF)
Unit Sales
Price/
Monthly
Rent
Price or
Rent per
SF
Single-Family Detached (For-Sale)
Type V wood frame 5 BD/4 BA 30 3,000 $3,043,000 $1,015
6 units per acre
Attached garage
Net Residential Area (Net SF) 90,000
Single-Family Attached (For-Sale)
Type V wood frame 3 BD/ 4 BA 10 2,100 $1,666,000 $793
11 units per acre
Tuck-under garage
Net Residential Area 21,000
Condominiums (For-Sale)
Type V wood frame 4 BD/3 BA 35 2,100 $1,390,000 $662
30 units per acre
Underground parking
Net Residential Area (Net SF) 73,500
Apartments (Rental)
Type V wood frame 1 BD/ 1 BA 20 795 $3,247 $4.09
41 units per acre 2 BD/2 BA 50 1,114 $4,191 $3.76
Podium parking
Net Residential Area 68,000
Average Net SF per Unit 1,063
Sources: Sources: DataQuick, 2014; Carmel the Village, 2014; CoStar, 2014; Individual Project Websites, 2014; City of Palo Alto,
2014; Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
Household Income
The next step is to calculate the annual household incomes of the buyers of new for-sale units and the
renters occupying new apartment units by using the sales prices and rents shown in Figure I-1.
Threshold incomes needed to purchase or rent units are based on standards used in the housing
industry1. Figures I-3 through I-6 summarize the estimated household incomes of for-sale home
buyers, by housing type, and Figure I-5 presents the calculated household incomes of apartment
renters. Household incomes are a key input to the IMPLAN3 economic impact analysis described in
Section IV of this report.
Figure I-3. Estimated Annual Household Incomes of Buyers of Single-Family Detached Units
Single-Family Detached Unit Type
5 BR/ 4 BA
Number of Households 30
Sales Price $3,043,000
Household Income $546,783
Sources: California Health & Safety Code; Freddie Mac, 2014; Strategic Economics & Vernazza Wolfe Associates, Inc., 2015.
1 These standards are presented in greater detail in Section III of this report.
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Figure I-4. Estimated Annual Household Incomes of Buyers of Single-Family Attached Units
Single-Family Attached Unit Type
3 BR/ 4 BA
Number of Households 10
Sales Price $1,666,000
Household Income $309,642
Sources: California Health & Safety Code; Freddie Mac, 2014; Strategic Economics & Vernazza Wolfe Associates, Inc., 2015
Figure I-5. Estimated Annual Household Incomes of Buyers of Condominium Units
Condominium Unit Type
4 BR/ 3 BA
Number of Households 35
Sales Price $1,390,000
Household Income $260,049
Sources: California Health & Safety Code; Freddie Mac, 2014; Strategic Economics & Vernazza Wolfe Associates, Inc., 2015
Figure I-6. Estimated Annual Household Incomes of Renters of Apartment Units
Apartment Unit Type
1 BR/ 1 BA 2 BR/ 2 BA
Number of Households 20 50
Monthly Rent $3,247 $4,191
Household Income $129,894 $167,654
Sources: California Health & Safety Code; Freddie Mac, 2014; Strategic Economics & Vernazza Wolfe Associates, Inc., 2015
Economic Impact Analysis (IMPLAN)
The next step is to determine employment and wage impacts of each prototype based on the incomes
of the occupants of new housing units. The buyers and renters of the new market-rate units create
new spending in the local economy. These new expenditures can be linked to new jobs, many of
which pay low wages. The job and wage impacts related to new market-rate housing units are
measured using IMPLAN3, an economic impact analysis tool. An economics consulting firm,
Applied Development Economics (ADE) undertook the IMPLAN3 analysis for this study.
The results of the IMPLAN analysis indicate that many of the induced jobs generated within Santa
Clara County are in low-wage sectors like retail and food services (restaurants). However, a
significant proportion of induced jobs are also in higher-paying resident-serving categories such as
health care and government.
Demand for Affordable Housing
Since the focus of this study is on households, the next step is to calculate the number of new worker
households by dividing the total number of new workers by the average number of wage-earners per
household in Palo Alto. However, not all of the worker households require affordable housing. To
estimate the affordable housing demand, the average annual household income of worker households
is sorted into income categories that are consistent with area median income (AMI) levels defined for
Santa Clara County. Figure I-7 indicates that of the 48.54 new worker households associated with
single-family detached development, there are 38.32 households that need affordable housing. The
comparable figures for single-family attached, condominium and apartment development are 7.23,
21.26, and 27.31 households, respectively. In order to directly compare the impact of market rate
residential development by prototype, Figure I-8 displays the number of worker households, at
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various income levels, associated with a 100-unit development project. As shown, a 100-unit single-
family detached subdivision, which has the highest sales values of all the prototypes, is linked to
161.8 worker households. Townhouse, condominium, and apartment developments of the same size
are linked to 91.63 worker households, 76.95 worker households, and 49.39 worker households,
respectively.
Figure I-7. New Worker Households by Income Group for Prototypes
Worker Households by Income Category
Single-
Family
Detached
(30 Units)
Single-
Family
Attached
(10 Units)
Condominium
(35 Units)
Apartment
(70 Units)
Households Requiring Affordable Housing
Very Low Income (<=50% AMI) 6.98 1.32 3.87 5.07
Low Income (51-80% AMI) 17.15 3.24 9.51 12.26
Moderate Income (81-120% AMI) 14.19 2.68 7.87 9.98
Subtotal Very Low, Low, Moderate Income 38.32 7.23 21.26 27.31
Above Moderate Income Households 10.22 1.93 5.67 7.26
Total All Worker Households 48.54 9.16 26.93 34.57
Note: For each prototype and income category, the number of households requiring affordable housing has been rounded to
nearest one-hundredth.
Sources: IMPLAN 3 via Applied Development Economics, 2015; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015
Figure I-8. Number of Worker Households Associated with 100-Unit Prototypes, by Income Level
Worker Households by Income Category
Single-
Family
Detached
Single-
Family
Attached
Condominium Apartment
Households Requiring Affordable Housing
Very Low Income (<=50% AMI) 23.25 13.17 11.06 7.25
Low Income (51-80% AMI) 57.16 32.37 27.19 17.51
Moderate Income (81-120% AMI) 47.31 26.79 22.50 14.25
Subtotal Very Low, Low, Moderate Income 127.73 72.30 60.74 39.01
Above Moderate Income Households 34.07 19.33 16.21 10.37
Total All Worker Households 161.80 91.63 76.95 49.39
Note: For each prototype and income category, the number of households requiring affordable housing has been rounded to
nearest one-hundredth.
Source: Applied Development Economics, Inc., 2015; Strategic Economics & Vernazza Wolfe Associates, Inc 2015.
Affordability Gap
The next step is to quantify the total gap between what very low, low, and moderate income
households can afford to pay for housing expenses and the cost of building new, modest rental and
for-sale housing units. This housing “affordability gap” number per household is then multiplied by
the number of income-qualified households in each income category for each housing type separately
in order to estimate the total housing affordability gap for each prototype. Figure I-9 through I-12
present these totals by housing type.
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Figure I-9. Total Affordability Gap for Single-Family Detached Units (30 Units)
Income Level
Households
Requiring Affordable
Housing
Average Affordability
Gap per Household
Affordability Gap for
All Households
Very Low-Income (<50% AMI) 6.98 $306,164 $2,137,025
Low-Income (50-80% AMI) 17.15 $252,258 $4,326,225
Moderate-Income (80-120% AMI) 14.19 $249,596 $3,541,767
Total 38.32 $10,005,017
Sources: California Housing and Community Development; Individual lenders; Affordable and market-rate project pro formas;
DataQuick, 2014; RS Means, 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
Figure I-10. Total Affordability Gap for Single-Family Attached Units (10 Units)
Income Level
Households
Requiring Affordable
Housing
Average Affordability
Gap per Household
Affordability Gap for
All Households
Very Low-Income (<50% AMI) 1.32 $306,164 $404,136
Low-Income (50-80% AMI) 3.24 $252,258 $817,316
Moderate-Income (80-120% AMI) 2.68 $249,596 $668,917
Total 7.23 $1,890,370
Sources: California Housing and Community Development; Individual lenders; Affordable and market-rate project pro formas;
DataQuick, 2014; RS Means, 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
Figure I-11. Total Affordability Gap for Condominiums (35 Units)
Income Level
Households
Requiring Affordable
Housing
Average Affordability
Gap per Household
Affordability Gap for
All Households
Very Low-Income (<50% AMI) 3.87 $306,164 $1,184,855
Low-Income (50-80% AMI) 9.51 $252,258 $2,398,974
Moderate-Income (80-120% AMI) 7.87 $249,596 $1,964,321
Total 21.26 $5,548,149
Sources: California Housing and Community Development; Individual lenders; Affordable and market-rate project pro formas;
DataQuick, 2014; RS Means, 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
Figure I-12. Total Affordability Gap for Apartments (70 Units)
Income Level
Households
Requiring Subsidy
Average Affordability
Gap per Household
Affordability Gap for
All Households
Very Low-Income (<50% AMI) 5.07 $306,164 $1,552,251
Low-Income (50-80% AMI) 12.26 $252,258 $3,092,683
Moderate-Income (80-120% AMI) 9.97 $249,596 $2,488,472
Total 27.30 $7,133,407
Sources: California Housing and Community Development; Individual lenders; Affordable and market-rate project pro formas;
DataQuick, 2014; RS Means, 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
Maximum Nexus-Based Fee
The final step in calculating the maximum housing impact fee by prototype is to divide the total gap
at each income level by the number of units in each prototype (Figure I-13). This maximum fee
amount represents the ceiling on the fee that could be charged to mitigate affordable housing impacts
from new residential development.
The maximum single-family detached impact fee per unit is $333,501, the maximum townhouse
fee per unit is $189,037, the maximum condominium impact fee per unit is $158,519, and the
maximum apartment fee per unit is $101,906. The fees are also calculated on a per-square-foot
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basis by dividing the unit fee by the average size of the unit. On a per-square-foot basis, the
maximum impact fee is $111 for single-family detached, $90 for townhouses, $75 for
condominiums and $105 for apartments.
Figure I-13. Maximum Housing Impact Fee by Prototype
Prototype Single-Family
Detached
Single-Family
Attached Condominiums Apartments
Total Number of Units 30 10 35 70
Average Unit Size 3,000 2,100 2,100 971
Total Affordability Gap $10,005,017 $1,890,370 $5,548,149 $7,133,407
Maximum Fee per Unit $333,501 $189,037 $158,519 $101,906
Maximum Fee per SF $111.17 $90.02 $75.49 $104.90
Note: The affordability gap by prototype and maximum fee per unit numbers have been rounded to the nearest whole number.
The maximum fee per SF has been rounded to the nearest one hundredth.
Sources: California Housing and Community Development; Individual lenders; Affordable and market-rate project pro formas;
DataQuick, 2014; RS Means, 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
DRAFT Palo Alto Housing Impact Fee Nexus Study -12-
POLICY CONSIDERATIONS
There are a number of policy considerations that can be taken into account when jurisdictions
consider adopting an affordable housing impact fee on new market-rate development. These may
include factors such as: the likely financial impact of the proposed housing impact fees on
development; the additional cost of the new fees on the existing city fee structure; a comparison of the
fee scenarios to existing housing impact fees in nearby cities; the role of the fee in the City’s overall
strategy for affordable housing implementation; and the potential overlap with a commercial linkage
fee. This section provides a discussion of each of these policy questions for Palo Alto.
Financial Feasibility – Financial feasibility is just one of several factors to consider in making a
decision regarding a potential nexus fee. In order to provide Palo Alto with guidance on how
proposed fees could impact development decisions, the Consultant Team conducted a pro forma
analysis that tested the impact of potential fee scenarios on developer profit for each prototype. The
impact fees were tested at various levels, including the maximum fee level and lower fee levels.
Single-Family Detached - According to the results of the pro forma analysis, the maximum
and reduced fee levels for single-family detached prototype are financially feasible.
Single-Family Attached – The maximum fee and reduced fee levels for the single-family
attached prototype are financially feasible to implement.
Condominiums – All of the fee levels tested, including the maximum nexus fee, are
financially feasible for condominium development.
Apartment - While the maximum nexus fee is not supportable for the apartment prototype,
reduced fee levels of $50 per square foot and lower are financially feasible.
Comparison to Existing City Fees – Palo Alto has existing city permits and fees on new
development that would increase with the adoption of a new housing impact fee. The City may wish
to consider the amount that total city fees would increase with the additional housing impact fee.
Based on the current schedule of fees in Palo Alto, existing permits and fees (excluding the nexus fee)
for the residential prototypes are estimated at $53 per square foot ($158,808 per unit) for single-
family detached units, $66 per square foot ($138,777 per unit) for single-family attached units, $30
per square foot ($63,247 per unit) for condominiums, and $32 per square foot ($30,617 per unit) for
apartments.2 Once the nexus-based residential impact fees at various levels are added to existing fees,
the total fees increase significantly. The maximum fee scenario increases total per-square-foot fees to
$164 for detached single-family homes, $156 for attached single-family homes, $106 for
condominiums, and $136 for apartments.
Comparison to Nearby Jurisdictions – Palo Alto’s maximum fee level, if adopted, would be
considerably higher than what has been adopted in other San Mateo County and Santa Clara County
cities to date. However, San Francisco has adopted fees ranging from $199,000 to $522,000 per unit,
amounts that are similar to the maximum fee levels calculated for Palo Alto’s single-family detached
and single-family attached prototypes. The recommended fee levels for single-family detached and
single-family attached prototypes are lower than the adopted fees in San Francisco. The
recommended fee level for condominiums of $40 per square foot is higher than the adopted fees in
many other Peninsula cities, but similar to the fees established in East Palo Alto and San Carlos. The
2 The fee estimates presented above represent the best approximations available from the City of Palo Alto for
these prototypes. Actual fees will vary depending on the specifics of the project.
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recommended apartment fee level of $50 per square foot is higher than fees adopted in Cupertino,
Daly City, San Jose, Mountain View, and Sunnyvale, but significantly lower than the fees adopted in
San Francisco.
Role of Fee in Palo Alto’s Overall Housing Strategy – Palo Alto currently charges a commercial
linkage fee of $19.31 per square foot on all new non-residential development, but does not have a
housing impact fee. The City also has an inclusionary housing program that requires that 15 percent
of the units in market-rate developments consisting of five or more housing units must be sold at
affordable sales prices. This percentage increases to 20 percent on parcels larger than five acres. In
some cases, developers have the option of paying an in-lieu fee of between 7.5 and 10 percent of the
sales price or fair market value, whichever is greater. The developer must also pay a fee for fractional
units. Revenues from the residential impact fees, if they are adopted, would continue to support the
City’s existing affordable housing programs. It should be noted that revenues from a housing nexus
fee need to be spent on housing that benefits the workforce since the funds stem from affordable
housing impacts related to new employment.
Overlap with Commercial Linkage Fee – In addition to the residential impact fee described in this
report, Palo Alto has existing commercial linkage fees on non-residential development. There may be
a small share of jobs counted in the commercial nexus analysis that supports its commercial linkage
fee program that are also included in this residential impact fee analysis. Thus, the two programs may
have some overlap in mitigating the affordable housing demand from the same worker households. In
order to reduce the potential for overlap between the two programs, it is advisable to set both the
commercial linkage fees and housing impact fees at below 100 percent of the nexus-based maximum.
In this way, when combined, the programs would mitigate less than 100 percent of the impact even if
there were overlap in the jobs counted in the two nexus analyses.
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According to the City of Palo Alto’s Housing Element, home values in the City have been increasing
steadily since 2010. The median home price in 2013 was $1.7 million, more than twice the median
price in Santa Clara County. Rental rates have also escalated rapidly, with median rents ranging from
$1,900 for studios to more than $8,500 for four-bedroom homes. Given the high prices and rents in
the City, most of the new market-rate housing units built in Palo Alto are only affordable to high-
income households. Consequently, very low, low, and moderate income households have limited
affordable housing options in the City.
As one of its strategies to address the demand for affordable housing in the City, Palo Alto is
considering a housing impact fee on new residential development. The purpose of this fee would be to
mitigate the impact of an increase in demand for affordable housing due to employment growth
associated with potential new residential development. When a city or county adopts a development
impact fee, it must establish a reasonable relationship or connection between the development project
and the impacts for which the fee is charged. Studies undertaken to demonstrate this connection are
called nexus studies. Nexus studies for school impact fees, traffic mitigation fees, and park fees are
common. For housing impact fees, a methodology exists that establishes a connection between the
development of market rate housing and the need to expand the supply of affordable housing. This
study is based on this methodology.
The approach for this nexus study is to estimate the number of new workers that will be required to
provide goods and services to the market rate households that are occupying new units in Palo Alto.
Although growth in employment will provide jobs at various wage rates, many of the new jobs will
be at low-wage rates in retail trade and services, consistent with job patterns in the County. Since
low-wage households cannot reasonably afford to pay for market rate rental and for-sale housing in
Palo Alto, a housing impact fee can bridge the difference between what these new households can
afford to pay and the costs of developing new housing units for them.
New market rate housing units in Palo Alto create a need for low-wage employees to provide goods
and services to residents of the new units. If new market rate housing were not built, there would not
be an increase in employment nor the accompanying demand for affordable housing from these new
workers. Because housing impact fees are directed related to employment growth, the revenues
collected from these fees needs to be spent on workforce housing and not on housing for households
that do not participate in the labor force, such as retired seniors, unemployed homeless, and full-time
student populations.
BACKGROUND
Cities and counties in California have operated inclusionary zoning programs to increase the supply
of affordable housing since the 1970s. An inclusionary program requires that builders of new
residential projects provide a specified percentage of units, either on-site or off-site, at affordable
prices. Some programs have also allowed developers the option of paying fees “in lieu” of providing
inclusionary units.
Inclusionary zoning policies were usually established based on the police power of cities and counties
to enact legislation benefitting public health, safety, and welfare. However, in 2009, the Court of
Appeal held in Palmer/Sixth Street Properties, L.P. v. City of Los Angeles that inclusionary rental
requirements based on the police power violates the Costa Hawkins Rental Housing Act, which
allows landlords to determine the rents of all new units. Affordable rental housing may still be
required if a developer agrees by contract to do so, in exchange for financial assistance or regulatory
II. INTRODUCTION AND METHODOLOGY
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incentives. However, in the absence of these incentives, restricted rents cannot be required of a
developer. Consequently, communities have completed nexus studies and imposed rental housing
impact fees to mitigate the impact of market-rate rental housing on the need for affordable housing.
Recently, the California Supreme Court’s decision on the California Building Industry Association
(CBIA) Versus the City of San Jose upheld the use of local inclusionary housing programs for
ownership units.
The nexus analyses presented in this study are designed to define an upper limit for a housing impact
fee to be charged on new rental and for-sale housing to mitigate impacts on affordable housing needs.
The maximum fee is not necessarily the recommended fee. Subsequent sections of this report address
additional policy considerations to consider when adopting housing impact fees.
THE NEXUS CONCEPT
In a balanced housing market, the development of new market rate housing results in population
growth. Residents purchasing and renting these new units now spend money in the city. For example,
they go out to eat in local restaurants, shop for food and clothing in local stores, and patronize other
local businesses, such as hair salons, dry cleaners, and dental offices. This local spending results in
the need to hire new workers to respond to the increased demand for goods and services. A nexus
study establishes the connection between the households that purchase new housing units (or rent
newly constructed rental units) and the number of new workers that will be hired by local businesses
to serve the needs of new residents.
Growth in employment will provide jobs at various wage rates. While some jobs will pay salaries that
will allow new workers to rent or purchase market rate housing, many new jobs will also be at lower
wages. Since low-wage households cannot reasonably afford to pay for market rate rental and for-sale
housing in Palo Alto, a housing impact fee addresses the demand for affordable housing.
METHODOLOGY
The first step of the nexus analysis is to estimate the market prices or rents of new housing units.
Based on these prices or rents, gross household incomes of buyers and renters are calculated. The
gross household incomes of buyers and renters are then translated into direct economic impacts (new
spending on retail goods and personal services), and induced impacts (new jobs and wage income)
using the IMPLAN3 model. The IMPLAN3 analysis provides information on likely incomes of new
workers. These incomes can then be used to estimate the demand for affordable housing from new
worker households, and the costs of providing these affordable units.
Each step of the nexus analysis is described in greater detail below.
Step 1. Define the residential prototypes that represent new market rate housing development.
Based on a review of recent development trends, pipeline projects, and market data for the city and
county, the residential prototypes are defined. The prototypes represent typical new market-rate
development projects likely to occur in the city. The prototype definitions include information on the
building characteristics, net residential area, unit mix and sizes, and sales prices or rents.
Step 2. Estimate household income of buyers and renters of new market rate units.
The average gross household income required to purchase or rent new market rate units is estimated
based on the market value or rents of new units. For ownership units, the calculation assumes typical
mortgage terms and assumes that buyers spend 35 percent of their gross incomes on housing costs.
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For rental units, is assumed that renter households spend 30 percent of their gross incomes on
housing.
Step 3. Estimate economic impacts of new buyers and renters using IMPLAN3.
The IMPLAN3 model uses Bureau of Labor Statistics Consumer Expenditure Survey data to model
the spending patterns of different income groups. The model estimates the increase in expenditures
from new households, the number of new (induced) workers related to new households, and the
occupations and wages of these new workers.
Step 4. Estimate the number of new worker households and annual household incomes.
The number of new induced workers from the IMPLAN3 analysis is divided by the average number
of workers per household in the city (defined by the U.S. Census Bureau) to calculate the total
number of worker households associated with each housing prototype. The average worker’s wage
calculated in the IMPLAN3 analysis is multiplied by the number of workers per household in the city
to derive gross household income. This step assumes that the all wage-earners in a household have the
same income.
Step 5. Estimate the demand for affordable housing from new worker households.
Based on the calculation of new worker household income, the worker households are categorized by
target income group (very low income, low income, moderate income, and above moderate income).
Worker households with above-moderate incomes are removed from the nexus analysis, because they
would not require affordable housing.
Step 6. Estimate the affordability gap of new households requiring affordable housing.
The affordability gap represents the difference between what households can afford to pay for
housing and the development cost of a modest housing unit. For very low and low income
households, a rental housing gap is used. For moderate income households, the housing affordability
gap is calculated separately for renter and owner households, and then the two gaps are combined to
derive an average affordability gap for moderate income households.
Step 7. Estimate nexus-based fees for each prototype.
The number of new households requiring affordable housing is multiplied by the average affordability
gap per household to estimate the total affordability gap for each prototype. The maximum per-unit
and per-square foot fees are then calculated by dividing the aggregate affordability gap by the number
of units or net residential area in each prototype.
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The first step in the nexus analysis is developing residential housing prototypes. The residential
prototypes establish the types of residential development that are occurring or are expected to occur in
the city and could potentially be subject to the affordable housing impact fee. The housing prototypes
are not intended to represent specific development projects; rather, they are designed to illustrate the
type of projects that are likely to be built in Palo Alto in the near future. The fees calculated in this
nexus study are only applicable to the housing prototypes defined in this analysis.
Based on estimated sales prices and rents of new market-rate units, the household incomes of buyers
and renters of new units are estimated. This section of the report describes the methodology for
establishing the prototypes and calculating the household incomes of buyers and renters of new
market-rate units in Palo Alto. The estimated household incomes are then used as inputs to the
IMPLAN3 analysis to estimate the employment impacts of the market-rate households, which is
described in more detail in Section IV of this report.
RECENT HOUSING DEVELOPMENT TRENDS
In order to ensure that the prototypes accurately reflect current market conditions, the Consultant
Team analyzed recently built market rate housing development projects, as well as planned and
proposed projects in Palo Alto. In the last years, Palo Alto has seen the development of new for-sale
market rate housing including single-family detached, single-family attached and condominium units.
As the City is anticipating new apartment development in the near future, this report examined
proposed projects in Palo Alto and recently built apartments in nearby cities to establish an apartment
prototype.
Figure III-1 summarized recent sales of single-family detached units in Palo Alto built between 2012
and 2013. The weighted average sale price (accounting for the size of the unit) is $1,015 per square
foot. Similarly, Figure III-2 presents a recent single-family attached development built in Palo Alto in
2013. According to recent sales data, the single-family attached units sold at an average price of $803
per square foot.
Because Palo Alto has not experienced new apartment development, market data from recently built
apartment projects in nearby cities was analyzed for this prototype. Figure III-3 contains the market
data for recently built market-rate apartment projects in Mountain View and Redwood City. As
shown, the average asking monthly rents are approximately $3,200 for one bedroom units, $4,200 for
two bedroom units, and $4,000 for three bedroom units.
Palo Alto has seen the development of several condominium projects between 2008 and 2011 , with
no new completions since then. According to the data shown in Figure III-4, the average price for
newer units sold between 2009 and 2013 is $1.3 million per unit ($660 per square foot), and the
average size is 2,121 square feet. An updated list showing 2014 and 2015 condominium sales in Palo
Alto and in other nearby communities in Santa Clara County is shown in Figure III-5. As shown, Palo
Alto commands a price premium over other cities, with average condominium units selling for $1.3
million square feet per unit ($874 per square foot), compared to $1.1 million per unit in other nearby
communities ($739 per square foot). Based on this information, the condominium prototype is a
$1.39 million unit with an average size of 2,100 square feet.
III. RESIDENTIAL PROTOTYPES
DRAFT Palo Alto Housing Impact Fee Nexus Study -18-
RESIDENTIAL PROTOTYPES
Based on historical development trends, market data, broker interviews, and input from city staff, the
Consultant Team constructed four housing prototypes that represent the type of development that is
likely to occur in Palo Alto. These development prototypes are not intended to represent specific
development projects; rather, they are designed to illustrate the type of projects that are likely to be
built in Palo Alto in the near future. The prototypes, as shown in Figure III-5, provide information on
the building type, number of units, average size by unit type, and average monthly rents or sales
prices by unit type.
Single-Family Detached
The single-family prototype is a 30-unit subdivision of detached homes with an average net density of
six units per acre. This development type is representative of recently built and proposed single-
family projects in Palo Alto and the immediate area. The single-family homes are five-bedroom units
with a total net area of 3,000 square feet. The average estimated price of newly built single-family
detached units is $3,043,000.
Single-Family Attached
The single-family attached prototype is a 10-unit single-family attached development with tuck-under
garage. The estimated average net density is 11 units per acre. The units are three-bedroom units
with an average size of 2,100 square feet. The estimated price of a new single-family attached unit s
$1,666,000.The single-family attached prototype represents typical new market-rate single-family
attached homes proposed or recently built in Palo Alto and nearby cities.
For-Sale Condominiums
The for-sale condominium prototype is a 35-unit Type V wood-frame building with an underground
parking garage. The estimated average density is 30 units per acre. This building type is
representative of recently built condominium projects in Palo Alto. The condominium prototype is a
four-bedroom unit with a size of 2,100 square feet. The average estimated price of newly built
condominiums is $1,390,000.
Rental Apartments
The rental apartment prototype is a Type V wood-frame building with podium parking and net
residential area of 214,900 square feet. The estimated density is 41 units per acre. Because new
market-rate apartment development has not occurred in Palo Alto, the prototype is based on trends in
rental apartment development in nearby cities including Mountain View and Redwood City.
Consistent with market trends, the apartment unit mix consists of one- and two-bedroom units.
Estimated monthly rents range from $3,200 to $4,200 per unit, depending on unit size and number of
bedrooms.
DRAFT Palo Alto Housing Impact Fee Nexus Study
-19-
Figure III-1. Single-Family Detached Home Sales in Palo Alto, Units Built 2012-2013
Address Year Built Number of Bedrooms Number of Bathrooms Unit Size (SF) Sale Price Price/SF
3466 RAMBOW DR 2012 4 3.5 2,318 $2,690,000 $1,160
928 ADDISON AVE 2012 6 5.5 4,084 $4,650,000 $1,139
4008 EL CERRITO RD 2012 5 4.5 3,746 $3,780,000 $1,009
130 IRIS WAY 2013 4 3 2,502 $3,060,000 $1,223
3500 EMMA CT 2012 4 3.5 2,523 $2,250,000 $892
740 SEALE AVE 2012 7 6 5,598 $6,000,000 $1,072
849 NORTHAMPTON DR 2012 5 4.5 3,533 $4,700,000 $1,330
3872 CORINA WAY 2012 5 3.5 2,675 $2,150,000 $804
387 ELY PL 2012 3 3.5 2,588 $2,452,000 $947
747 ROSEWOOD DR 2012 5 4.5 2,954 $3,300,000 $1,117
3501 EMMA CT 2012 4 3 2,431 $2,350,000 $967
3503 EMMA CT 2012 5 3 2,653 $2,650,000 $999
886 CHIMALUS DR 2012 4 3.5 2,504 $2,751,000 $1,099
3342 SOUTH CT 2012 4 3.5 2,384 $2,300,000 $965
1091 EMERSON ST 2013 5 5 5,043 $3,800,000 $754
1112 HIGH ST 2012 4 3 2,208 $2,250,000 $1,019
434 FULTON ST 2012 3 2 1,558 $2,157,000 $1,384
525 GUINDA ST 2012 4 3 2,251 $2,445,000 $1,086
1135 WEBSTER ST 2013 4 3.5 3,300 $3,450,000 $1,046
Weighted Average $1,015
Sources: DataQuick, 2014; Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
Figure III-2. New Market-Rate Single-Family Attached Development in Palo Alto
Project Year Built Building Type Unit Types
Number
Units
Unit Size
(SF)
Average Sale
Price
Average
Price/SF
Classics at Monroe Place 2013
3-story single-family
attached 3 BR/ 3.5 BA 10 2,075 $1,665,888 $803
Attached garage
Sources: Classic Communities, 2014; City of Palo Alto, 2014; Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
DRAFT Palo Alto Housing Impact Fee Nexus Study -20-
Figure III-3. New Market-Rate Apartment Projects in Mountain View and Redwood City
Project Building Type Year Built Unit Type
Number
Units Unit Size
Avg.
Monthly
Rent
Avg. Rent/
SF
Carmel the Village 5 stories 2013 Studio 41 537 $2,795 $5.20
555 San Antonio Rd Underground parking 1 BR/ 1 BA 192 693 $3,350 $4.83
Mountain View 2 BR/ 2 BA 97 1054 $4,820 $4.57
201 Marshall Apartments 7 stories 2014 Studio 10 634 $2,495 $3.94
201 Marshall Underground parking 1 BR/ 1 BA 64 1,030 $3,378 $3.28
Redwood City 2 BR/ 2 BA 39 1,129 $4,260 $3.77
Radius 5-6 stories 2014 1 BR/ 1 BA 150 840 $3,100 $3.69
640 Veteran's Dr Underground parking 2 BR/ 2 BA 100 1,132 $3,845 $3.40
Redwood City 3 BR/ 2 BA 14 1,289 $4,093 $3.18
Township Apartments 4 stories 2013 1 BR/ 1 BA 41 725 $3,063 $4.22
333 Main St Podium garage 2 BR/ 2 BA 88 1,080 $3,600 $3.33
Redwood City 3 BR/ 2 BA 3 1,224 $3,300 $2.70
Woodside 4-5 stories 2011 1 BR/ 1 BA 14 840 $3,365 $4.01
885 Woodside Rd Podium and underground 2 BR/ 2 BA 21 1,424 $5,290 $3.72
Redwood City
Average All Projects Studio 6% 556 $2,736
1 BR/ 1 BA 53% 795 $3,247 $4.09
2 BR/ 2 BA 39% 1,114 $4,191 $3.76
3 BR/ 2 BA 2% 1,277 $3,953 $3.10
Sources: Carmel the Village, 2014; CoStar, 2014; 201marshall.com, 2014; Apartments.com, 2014.
Calculations by Vernazza Wolfe Associates, Inc. and Strategic Economics, 2014.
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Figure III-4. New Condominium Unit Sales in Palo Alto, Sold 2009 - 2011
Year Built Unit Size (SF) Number of Bedrooms Number of Bathrooms Sale Price Price/SF
2009 2,122 4 3.5 $1,240,000 $584
2009 2,423 4 3.5 $1,440,000 $594
2009 2,122 4 3.5 $1,259,500 $594
2009 2,407 4 3.5 $1,412,500 $587
2009 1,769 3 2.5 $1,060,000 $599
2009 2,330 4 3.5 $1,415,000 $607
2009 2,368 4 3.5 $1,419,500 $599
2009 2,363 4 3.5 $1,396,000 $591
2009 2,368 4 3.5 $1,889,000 $798
2009 2,330 4 3.5 $1,430,000 $614
2009 1,811 3 2.5 $1,450,000 $801
2010 1,846 4 2.5 $1,330,000 $720
2010 1,769 3 2.5 $1,139,500 $644
2010 2,423 4 3.5 $1,400,000 $578
2010 2,122 4 3.5 $1,336,500 $630
2010 2,122 4 3.5 $1,341,500 $632
2010 2,407 4 3.5 $1,399,000 $581
2010 2,407 4 3.5 $1,520,000 $631
2010 2,330 4 3.5 $1,425,000 $612
2010 2,122 4 3.5 $1,387,500 $654
2010 2,368 4 3.5 $1,446,500 $611
2010 1,838 4 2.5 $1,259,000 $685
2010 1,948 4 2.5 $1,434,000 $736
2010 1,948 4 2.5 $1,480,000 $760
2011 1,846 4 2.5 $1,400,000 $758
2011 1,838 4 2.5 $1,330,000 $724
2011 1,838 4 2.5 $1,380,000 $751
2011 1,948 4 2.5 $1,710,000 $878
2011 1,935 4 2.5 $1,350,000 $698
2011 1,838 4 2.5 $1,330,000 $724
2011 1,935 4 2.5 $1,300,000 $672
2011 2,330 4 3.5 $1,382,500 $593
2011 2,122 4 3.5 $1,345,000 $634
2011 2,423 4 3.5 $1,408,500 $581
Average 2,121 $1,389,588 $660
Source: DataQuick, 2014, Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
DRAFT Palo Alto Housing Impact Fee Nexus Study -22-
Figure III-5. Recent Condominium Sales in Palo Alto and Surrounding Communities: Sold July 2014-July 2015
City Project Address
Building
Type
Year
Built
Number
Units
Unit
Type
Unit
Size Sold Price
Sold
PSF
Palo Alto Arbor Real El Camino Real and W. Charleston Rd 3 stories 2007 129 2 BR 1,636 $1,237,000 $756
3 BR 1,913 $1,580,000 $826
Palo Alto Sterling Park Loma Verde Ave & Fallen Leaf St 3 stories 2011 120 3 BR 1,715 $1,460,000 $851
Palo Alto Echolon 1101 E. Meadow Dr 3 stories 2009 70 3 BR 1,300 $1,320,000 $1,015
Palo Alto Vantage E. Meadow Dr & Quail Dr 2 stories 2008 76 2 BR 1,197 $1,102,000 $921
Average Palo Alto $1,339,800 $874
Mountain View Mondrian E. Evelyn Ave & Moorpark Wy 3 stories 2007 151 2 BR 1,410 $1,310,000 $929
3 BR 1,602 $1,192,333 $744
Mountain View Gables End Plymouth St & Amherst Wy 2-3 stories 2008 108 2 BR 1,490 $1,100,000 $738
Mountain View Bedford Square Bedford Dr & Ferguson Dr 3 stories 2007 106 2 BR 1,374 $977,500 $711
3 BR 1,843 $1,480,000 $803
Los Altos 100 First 100 First St 3 stories 2015 46 1 BR 1,156 $910,000 $787
2 BR 1,621 $1,450,000 $895
3 BR 2,281 $2,383,500 $1,045
Los Altos 396 First 396 First St 3 stories 2013 20 1 BR 891 $861,000 $966
2 BR 1,557 $1,172,688 $753
Sunnyvale Evelyn Glen E. Evelyn Ave & Peppermint Tree Ter 3 stories 2008 130 2 BR 1,251 $816,888 $653
3 BR 1,426 $865,643 $607
4 BR 1,586 $1,100,000 $694
Sunnyvale
Verona at
Sunnyvale Tasman Dr & Morse Ave 3 stories 2009 72 2 BR 1,392 $821,000 $590
3 BR 1,555 $895,000 $576
Sunnyvale Fusion Deguine Dr & Glen Valley Ter 3 stories 2012 228 4 BR 1,882 $1,060,000 $563
Average Other Cities $1,149,722 $739
Source: Polaris Pacific, 2015; Strategic Economics, 2015.
DRAFT Palo Alto Housing Impact Fee Nexus Study -23-
Figure III-6. Average Net Residential SF per Unit
Prototype Unit Type
Number
of Units
Net Area
(SF)
Unit Sales Price/
Monthly Rent
Price or
Rent per
SF
Single-Family Detached (For-Sale)
Type V wood frame 5 BD/4 BA 30 3,000 $3,043,000 $1,015
6 units per acre
Attached garage
Net Residential Area (Net SF) 90,000
Single-Family Attached (For-Sale)
Type V wood frame 3 BD/ 4 BA 10 2,100 $1,666,000 $793
11 units per acre
Tuck-under parking
Net Residential Area 21,000
Condominiums (For-Sale)
Type V wood frame 4 BD/3 BA 35 2,100 $1,390,000 $662
30 units per acre
Underground parking
Net Residential Area (Net SF) 73,500
Apartments (Rental)
Type V wood frame 1 BD/ 1 BA 20 795 $3,247 $4.09
41 units per acre 2 BD/2 BA 50 1,114 $4,191 $3.76
Podium parking
Net Residential Area 68,000
Average Net SF per Unit 1,063
Sources: DataQuick, 2014; Carmel the Village, 2014; CoStar, 2014; 201marshall.com, 2014; Apartments.com, 2014; Classic
Communities, 2014; City of Palo Alto, 2014; Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
HOUSEHOLD INCOMES OF BUYERS AND RENTERS
Using the sales prices and rents shown in Figure III-5, the next step is to calculate the annual
household incomes of the buyers of new for-sale condominium units and the renters occupying new
apartment units. The household income is a key input to the IMPLAN3 economic impact analysis
described in Section IV of this report. The calculations demonstrate that the estimated annual
household income of buyers of new market-rate units in Palo Alto is between $260,000 and $550,000,
depending on the unit prototype. For renters of new market-rate apartment units, the annual
household income is estimated between approximately $130,000 and $170,000. This shows that new
housing units developed in the City are priced for high-income households, and cannot be accessed
by very low, low, and moderate income households.
Income of Single-Family Detached Buyers
To calculate the household income of single-family detached buyers, the analysis applied typical
mortgage terms for Santa Clara County: 20 percent down payment, 30 year fixed rate mortgage, and
4.35 percent interest rate. Palo Alto property tax rates were estimated from recent budget documents.
Total housing costs, including monthly payments for mortgage payments, property taxes and
insurance, are assumed to be 35 percent of available monthly income. The result of the income
estimates for households buying new single-family detached units is shown in Figure III-6. As shown
DRAFT Palo Alto Housing Impact Fee Nexus Study -24-
in the calculations, for single-family detached units, household incomes are estimated to be almost
$550,000.
Income of Single-Family Attached Buyers
For buyers of single-family attached units, the analysis applied the same typical mortgage terms as
those used for single-family detached units, and Palo Alto’s property tax rates. Homeowner
association (HOA) fees were based on a review of HOA fees at similar new single-family attached
developments in Santa Clara County. As in the previous case, households are expected to spend 35
percent of available monthly income on total housing costs, including monthly payments for
mortgage payments, property taxes, insurance and HOA fees. Figure III-7 shows the result of the
income estimates for households buying new single-family detached units. As shown in the
calculations, for single-family attached units, household incomes are estimated to be approximately
$310,000.
Incomes of Condominium Buyers
To calculate the household income of buyers of new condominium units, the analysis applied
mortgage terms typical for Santa Clara County: 20 percent down payment, 30 year fixed rate
mortgage, and 4.35 percent interest rate. Property tax rates were estimated from recent budget
documents, and homeowner association (HOA) fees were based on a review of HOA fees at similar
new condominium developments in Santa Clara County. Total housing costs, including monthly
payments for mortgage payments, property taxes, insurance, and HOA fees, are assumed to be 35
percent of available monthly income. The result of the income estimates for households buying new
condominium units is shown in Figure III-8. As shown in the calculations, for condominium units,
household incomes are estimated at over $260,000.
Incomes of Apartment Renters
For renter households, maximum annual housing costs are assumed to be 30 percent of gross
household income, a standard established in California’s Health and Safety Code Sections 50052.5
and 50053. The estimated household income of renters varies by unit type, as indicated in Figure III-
9. One-bedroom renter households have an estimated annual income of nearly $130,000, while
renters of two-bedroom units have estimated household incomes of about $170,000.
DRAFT Palo Alto Housing Impact Fee Nexus Study -25-
Figure III-7. Estimated Annual Household Incomes of Buyers of Single-Family Detached Units
Single-Family Detached Unit Type
5 BR/ 4 BA
Number of Households 30
Sales Price $3,043,000
Down Payment (a) $608,600
Loan Amount $2,434,400
Monthly Debt Service (b) $12,119
Annual Debt Service $145,425
Annual Property Taxes (c) $35,299
Fire and Hazard Insurance (d) $10,651
Annual Housing Costs (e) $191,374
Household Income $546,783
Notes:
(a) Down payment is estimated at 20% of sales price, based on Freddie Mac data for Santa Clara County.
(b) Interest rate is estimated at 4.35% for a 30-year term, based on Freddie Mac data.
http://www.freddiemac.com/pmms/pmms30.htm.
(c) Property tax rate is 1.16% based Palo Alto CAFR, 2013.
(d) Industry standard
(e) Homeownership housing burden is estimated at 35%, based on California Health & Safety Code
Sections 50052.5 and 50053.
Sources: Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
DRAFT Palo Alto Housing Impact Fee Nexus Study -26-
Figure III-8. Estimated Annual Household Incomes of Buyers of Single-Family Attached Units
Single-Family Attached Unit Type
3 BR/ 4 BA
Number of Households 10
Sales Price $1,666,000
Down Payment (a) $333,200
Loan Amount $1,332,800
Monthly Debt Service (b) $6,635
Annual Debt Service $79,618
Annual Property Taxes (c) $19,326
Annual HOA Fees (d) $3,600
Fire and Hazard Insurance (e) $5,831
Annual Housing Costs (f) $108,375
Household Income $309,642
Notes:
(a) Down payment is estimated at 20% of sales price, based on Freddie Mac data for Santa Clara County.
(b) Interest rate is estimated at 4.35% for a 30-year term, based on Freddie Mac data.
http://www.freddiemac.com/pmms/pmms30.htm.
(c) Property tax rate is 1.16% based Palo Alto CAFR, 2013.
(d) Homeownership association (HOA) fees are estimated at $300 per month, based on review of recently
built projects.
(e) Industry standard
(f) Homeownership housing burden is estimated at 35%, based on California Health & Safety Code
Sections 50052.5 and 50053.
Sources: Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
DRAFT Palo Alto Housing Impact Fee Nexus Study -27-
Figure III-9. Estimated Annual Household Incomes of Buyers of Condominium Units
Condominium Unit Type
4 BR/ 3 BA
Number of Households 35
Sales Price $1,390,000
Down Payment (a) $278,000
Loan Amount $1,112,000
Monthly Debt Service (b) $5,536
Annual Debt Service $66,428
Annual Property Taxes (c) $16,124
Annual HOA Fees (d) $3,600
Fire and Hazard Insurance (e) $4,865
Annual Housing Costs (f) $91,017
Household Income $260,049
Notes:
(a) Down payment is estimated at 20% of sales price, based on Freddie Mac data for Santa Clara County.
(b) Interest rate is estimated at 4.35% for a 30-year term, based on Freddie Mac data.
http://www.freddiemac.com/pmms/pmms30.htm.
(c) Property tax rate is 1.16% based Palo Alto CAFR, 2013.
(d) Homeownership association (HOA) fees are estimated at $300 per month, based on review of recently
built projects.
(e) Industry standard
(f) Homeownership housing burden is estimated at 35%, based on California Health & Safety Code
Sections 50052.5 and 50053.
Sources: Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
DRAFT Palo Alto Housing Impact Fee Nexus Study -28-
Figure III-10. Estimated Annual Household Incomes of Renters of Apartment Units
Apartment Unit Type
1 BR/ 1 BA 2 BR/ 2 BA
Number of Households 20 50
Monthly Rent $3,247 $4,191
Annual Housing Costs $38,968.31 $50,296.35
Housing Costs as % of Income (a) 30% 30%
Household Income $129,894 $167,655
Notes:
(a) Renter housing burden is estimated at 30%, based on California Health & Safety Code Sections 50052.5 and 50053.
Sources: Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
DRAFT Palo Alto Housing Impact Fee Nexus Study -29-
The buyers and renters of the new market-rate condominiums and apartments create new spending in
the local economy. These new expenditures can be linked to new jobs, many of which pay low wages.
The job and wage impacts related to new market-rate housing units are measured using IMPLAN3, an
economic impact analysis tool. An economics consulting firm, Applied Development Economics
(ADE) undertook the IMPLAN3 analysis with the information on residential prototypes and
associated buyers’ and renters incomes provided by Strategic Economics and Vernazza Wolfe
Associates Inc. In this section of the report, the methodology and results of the IMPLAN3 analysis
are described in detail.
THE IMPLAN3 MODEL
The IMPLAN model is an economic dataset that has been used for over 35 years to measure the
economic impacts of new investments and spending using the industrial relationships defined through
an Input-Output Model. The IMPLAN model can estimate economic impacts resulting from changes
in industry output, employment, income, and other measures. The latest version of this model is
referred to as IMPLAN3.
For this analysis, the input-output model used data specific to Santa Clara County in order to estimate
the multiplier effects resulting from the households that could potentially rent or buy new housing
units in Palo Alto. In this case, all of the multiplier effects derive from new demand for goods and
local services (including government) that new households would generate within Santa Clara
County. It does not account for economic impacts generated during the construction period, or
any economic impacts that would occur outside of the county.
The economic impacts estimated by the model generally fall into one of three categories - direct,
indirect, or induced. For this analysis, the direct impacts represent the household income brought
into the community by new residents. Indirect impacts would normally result from demand for
commodities and services provided by suppliers for business operations. (Because the direct impacts
come only from household spending, and not from business activity, the indirect effects were not
calculated.) Induced impacts represent the potential effects resulting from household spending at local
establishments by the new workers hired as a result of increased household expenditures. These
impacts affect all sectors of the economy, but primarily affect retail businesses, health services,
personal services providers, and government services. The employment estimates provided by the
IMPLAN3 model cover all types of jobs, including full and part time jobs.
The first analysis undertaken by the IMPLAN3 model estimated the household demand for retail
goods and personal services. It is assumed that buyers and renters of new housing units in Palo
Alto increase demand for goods and services within Santa Clara County. This demand is based on
the projected incomes of renters and owners for each prototype. The IMPLAN3 model’s calculations
are based on changes in household income, which adjusts the gross income to account for the
payment of income taxes and savings.3
The second analysis estimated the induced impacts, or multiplier effects of new household spending
in terms of jobs and wage income. The jobs and income calculations are focused on the induced jobs
that would be created through local spending by the new households. The input-output model
estimates the job impacts by detailed industry sector. The analysis took the detailed industry impact
3 According to IMPLAN Group LLC, when the economic impact is modeled based on household income change,
IMPLAN3 will adjust the input for income taxes and savings.
IV. ECONOMIC IMPACT ANALYSIS (IMPLAN3)
DRAFT Palo Alto Housing Impact Fee Nexus Study -30-
estimates and distributed them by occupational category. The occupational employment data used in
the analysis came from the California Employment Development Department (EDD) Labor Market
Information Division, and aggregates together data for all of California. After converting the
industry level data into occupational employment, the income distribution was calculated using the
occupational wage data for the San Jose-Santa Clara-Sunnyvale Metropolitan Statistical Area
(MSA).. The average wage by occupation was used to make this calculation. The 2014 (first quarter)
occupational wage data used in the analysis comes from California’s EDD.
It should be noted that the figures used in the IMPLAN3 analysis reflect the demand for retail goods
and services by net, new Santa Clara County households. The multiplier impacts assume that all of
this spending will remain in Santa Clara County.4
HOUSEHOLD INCOME IMPACTS
Since the IMPLAN3 Model bases its household income impacts on Consumer Expenditure Survey
data, income categories are used in the model instead of continuous income information. Because of
this feature, the analysis sorted the renters and buyers of new market rate units into income groups,
and then calculated the economic impacts based on the total income calculated for each income
group.
Figure IV-1 below summarizes the household income data for single-family detached, single-family
attached, condominium and apartment households. As shown, all 30 single-family detached
households are in the income category of $150,000 or higher, with a total combined household
income of $16.40 million. The ten single-family attached households are also all in the over
$150,000 income category, reaching a combined household income of $3.1 million. Likewise, all 35
condominium households belong to the income category of $150,000 or higher, with an aggregate
income of $9.1 million. Figure IV-1 also demonstrates the same calculation for renter households.
The rental prototype has 20 households in the $100,000-$150,000 income category, and 50
households in the over $150,000 income category. The combined total household income for renter
households is $10.98 million. These total income figures, adjusted to account for taxes and savings,
were used as inputs for the IMPLAN3 analysis.
EMPLOYMENT AND WAGE IMPACTS
Based on the incomes of the new buyers and renters, the next step is to determine employment and
wage impacts from each prototype. Estimated employment and wages are shown in Figure IV-2 for
each IMPLAN3 industry sector, indicating the number of induced jobs, the industry’s share of total
employment growth by prototype, and the average wage by industry. Figure IV-3 provides the same
IMPLAN3 output data, organized by occupation rather than industry, for each prototype. As shown in
both figures, many of the induced jobs generated within Santa Clara County are in low-wage sectors
and occupations related to retail and food services (restaurants). For example, workers in the food
preparation and services earn annual wages of approximately $24,000. In addition to the very low
paying occupations, a smaller share of induced jobs are in higher-paying resident-serving categories
such as health care and government.
ESTIMATING WORKER-HOUSEHOLDS
Recognizing that many households have more than one wage-earner, the next step is to calculate the
number of worker–households by dividing the total number of new workers by the average number of
4 Estimating the retail leakage would require a detailed analysis of retail sales totals for existing businesses in
Santa Clara County and is beyond the scope of this study.
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wage-earners per household in Palo Alto. According to the U. S. Census Bureau 2008-2012 American
Community Survey 3-Year Estimate, Palo Alto has an average of 1.51 workers per household. The
number of induced jobs is divided by 1.51 to calculate the total number of worker households. Figure
IV-4 illustrates this calculation.
ESTIMATING DEMAND FOR AFFORDABLE HOUSING
To estimate the demand for affordable housing, it is first necessary to determine the incomes of the
new households. Once the average annual household income of worker households is calculated, the
next step is to categorize households into area median income (AMI) levels based on the thresholds
set by California Department of Housing and Community Development for Santa Clara County. The
average household size in Palo Alto is 2.41 (rounded to 2.0), according to the US Census American
Community Survey 5-Year Estimates 2008-2012. The income threshold for a two-person household
in Santa Clara County was therefore used to determine the AMI categories of each new worker
household. Figure IV-5 indicates that of the 48.5 new worker households associated with single-
family detached development, there will be 38.3 households that need affordable housing. The
comparable figures for single-family attached, condominium and apartment development are,
respectively, 7.2, 21.3 and 27.3 households.
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Figure IV-1. Estimated Incomes by Income Categories for Buyers and Renters of New Units
Single-Family Detached Prototype Single-Family Attached Prototype Condominium Prototype Apartment Prototype
Income Category
New
Households
Aggregate
Household
Incomes
Average
Household
Income
New
Households
Aggregate
Household
Incomes
Average
Household
Income
New
Households
Aggregate
Household
Incomes
Average
Household
Income
New
Households
Aggregate
Household
Incomes
Average
Household
Income
Less than $10,000 0 $0 n/a 0 $0 n/a 0 $0 n/a 0 $0 n/a
$10,000-$15,000 0 $0 n/a 0 $0 n/a 0 $0 n/a 0 $0 n/a
$15,000-$25,000 0 $0 n/a 0 $0 n/a 0 $0 n/a 0 $0 n/a
$25,000-$35,000 0 $0 n/a 0 $0 n/a 0 $0 n/a 0 $0 n/a
$35,000-$50,000 0 $0 n/a 0 $0 n/a 0 $0 n/a 0 $0 n/a
$50,000-$75,000 0 $0 n/a 0 $0 n/a 0 $0 n/a 0 $0 n/a
$75,000-$100,000 0 $0 n/a 0 $0 n/a 0 $0 n/a 0 $0 n/a
$100,000-$150,000 0 $0 n/a 0 $0 n/a 0 $0 n/a 20 $2,597,887 $129,894
Over $150,000 30 $16,403,491 $546,783 10 $3,096,418 $309,642 35 $9,101,701 $260,049 50 $8,382,725 $167,655
Total 30 $16,403,491 $546,783 10 $3,096,418 $309,642 35 $9,101,701 $260,049 70 $10,980,612 $156,866
Sources: Applied Development Economics, Inc., 2015; Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
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Figure IV-2. Estimated Job and Wage Impacts of Prototypes by Industry
Single-Family
Detached Prototype
Single-Family
Attached Prototype
Condominium
Prototype
Apartment
Prototype
Industry (NAICS code)
Average
Wage Jobs % Of Jobs Jobs % Of Jobs Jobs % Of Jobs Jobs % Of Jobs
11 Forestry, fishing, hunting, and agriculture $30,270 0.02 0% 0.005 0% 0.01 0% 0.02 0%
21 Mining $68,709 0.005 0% 0.001 0% 0.003 0% 0.004 0%
22 Utilities $73,885 0.09 0% 0.02 0% 0.05 0% 0.06 0%
23 Construction $65,942 1.52 2% 0.29 2% 0.84 2% 1.04 2%
31 Manufacturing $68,114 0.18 0% 0.03 0% 0.10 0% 0.13 0%
42 Wholesale trade $61,865 1.27 2% 0.24 2% 0.71 2% 0.91 2%
44 Retail trade $53,534 10.24 14% 1.93 14% 5.68 14% 7.36 14%
48 Transportation & warehousing $44,980 0.94 1% 0.18 1% 0.52 1% 0.66 1%
51 Information $77,807 0.99 1% 0.19 1% 0.55 1% 0.72 1%
52 Finance & insurance $71,401 3.97 5% 0.75 5% 2.20 5% 2.84 5%
53 Real estate & rental & leasing $65,766 3.30 5% 0.62 5% 1.83 5% 2.40 5%
54 Professional, scientific & technical services $93,985 2.50 3% 0.47 3% 1.39 3% 1.75 3%
55 Management of companies & enterprises $90,580 0.22 0% 0.04 0% 0.12 0% 0.16 0%
56 Admin, support, waste mgt, remediation
services $51,482 2.73 4% 0.52 4% 1.51 4% 1.95 4%
61 Educational services $61,806 4.97 7% 0.94 7% 2.76 7% 3.30 6%
62 Health care and social assistance $66,334 13.91 19% 2.63 19% 7.72 19% 10.25 20%
71 Arts, entertainment & recreation $46,623 2.27 3% 0.43 3% 1.26 3% 1.60 3%
72 Accommodation & food services $28,709 9.90 14% 1.87 14% 5.49 14% 7.23 14%
81 Other services (except public administration) $50,865 6.34 9% 1.20 9% 3.52 9% 4.59 9%
91 Government $69,032 7.92 11% 1.49 11% 4.39 11% 5.23 10%
Total 73.30 100% 13.84 100% 40.67 100% 52.20 100%
Note: Average wage is calculated based on the mean occupational wages, and the average statewide distribution of occupations for each industry.
Sources: Applied Development Economics, Inc, 2015; Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
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Figure IV-3. Estimated Job and Wage Impacts of Prototypes by Occupation
SOC
Code Occupational Title
Average
Annual Wage
Single-Family
Detached Jobs
Single-Family
Attached Jobs
Condominium
Jobs
Apartment
Jobs
11-0000 Management Occupations $157,147 3.48 0.66 1.93 2.48
13-0000 Business and Financial Operations Occupations $91,243 3.74 0.71 2.07 2.62
15-0000 Computer and Mathematical Occupations $117,227 1.36 0.26 0.75 0.95
17-0000 Architecture and Engineering Occupations $109,326 0.71 0.13 0.39 0.48
19-0000 Life, Physical, and Social Science Occupations $93,341 0.69 0.13 0.38 0.47
21-0000 Community and Social Services Occupations $58,932 1.71 0.32 0.95 1.22
23-0000 Legal Occupations $138,848 0.50 0.09 0.28 0.34
25-0000 Education, Training, and Library Occupations $58,305 3.79 0.72 2.10 2.56
27-0000 Arts, Design, Entertainment, Sports, Media Occupations $67,471 1.11 0.21 0.62 0.79
29-0000 Healthcare Practitioners and Technical Occupations $108,395 4.97 0.94 2.76 3.62
31-0000 Healthcare Support Occupations $37,001 2.34 0.44 1.30 1.71
33-0000 Protective Service Occupations $53,668 1.96 0.37 1.09 1.32
35-0000 Food Preparation and Serving-Related Occupations $23,861 10.53 1.99 5.84 7.66
37-0000 Building and Grounds Cleaning and Maintenance $29,998 2.22 0.42 1.23 1.58
39-0000 Personal Care and Service Occupations $28,970 5.19 0.98 2.88 3.75
41-0000 Sales and Related Occupations $54,182 9.06 1.71 5.03 6.51
43-0000 Office and Administrative Support Occupations $45,414 11.49 2.17 6.38 8.15
45-0000 Farming, Fishing, and Forestry Occupations $25,561 0.06 0.01 0.03 0.04
47-0000 Construction and Extraction Occupations $59,340 1.35 0.25 0.75 0.92
49-0000 Installation, Maintenance, and Repair Occupations $54,737 2.45 0.46 1.36 1.75
51-0000 Production Occupations $40,099 1.29 0.24 0.71 0.92
53-0000 Transportation and Material Moving Occupations $35,640 3.31 0.63 1.84 2.35
Total all occupations 73.30 13.84 40.67 52.20
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Figure IV-4. Induced Employment Impacts, Palo Alto
Project Prototype
Single-Family
Detached
Single-Family
Attached Condominium Apartment
Number of Units 30 10 35 70
Induced Employment (Workers) 73.30 13.84 40.67 52.20
Average Number of Workers per Household 1.51 1.51 1.51 1.51
New Worker Households 48.54 9.16 26.93 34.57
Source: ADE, 2015; Strategic Economics & Vernazza Wolfe Associates, Inc. 2015.
Figure IV-5. New Worker Households by Income Group for Prototypes
Worker Households by Income Category
Income Thresholds
(2-Person Household)
Single-Family
Detached
Single Family
Attached Condominium Apartment
Households Requiring Affordable Housing
Very Low Income (<=50% AMI) $42,450 6.98 1.32 3.87 5.074
Low Income (51-80% AMI) $67,900 17.15 3.24 9.51 12.259
Moderate Income (81-120% AMI) $101,300 14.19 2.68 7.87 9.975
Subtotal 38.32 7.23 21.26 27.310
Above Moderate Income Households >$101,300 10.22 1.93 5.67 7.26
Total All Worker Households 48.54 9.16 26.93 34.57
Note: For each prototype and income category, the number of households requiring affordable housing has been rounded to nearest one-hundredth.
Sources: Applied Development Economics, 2015; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015
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Estimating the housing affordability gap is necessary to calculate the maximum housing impact fee. This
section summarizes the approach to calculating the housing affordability gap and the results of the
analysis.
METHODOLOGY
The housing affordability gap is defined as the difference between what very low, low, and moderate
income households can afford to pay for housing and the development cost of new, modest housing units.
Calculating the housing affordability gap involves the following three steps:
1. Estimating affordable rents and housing prices for households in target income groups.
2. Estimating development costs of building new, modest housing units, based on current cost and
market data.
3. Calculating the different between what renters and owners can afford to pay for housing and the
cost of development of rental and ownership units.
The housing affordability gap is estimated at a countywide level because the California Department of
Housing and Community Development Department (HCD) and U.S. Housing and Urban Development
Department (HUD) define the ability to pay for housing at the county (rather than the city) level. This
analysis uses 2014 income limits published by California Department of Housing and Community
Development (HCD).
ESTIMATING AFFORDABLE RENTS AND SALES PRICES
The first step in calculating the housing affordability gap is to determine the maximum amount that
households at the targeted income levels can afford to pay for housing. For eligibility purposes, most
affordable housing programs define very low income households as those earning approximately 50
percent or less of area median income (AMI), low income households as those earning between 51 and 80
percent of AMI, and moderate income households as those earning between 81 and 120 percent of AMI.
In order to ensure that the affordability of housing does not use the top incomes in each category, the
analysis uses a point within the income ranges for the low and moderate income groups.5
Figure V-1 and Figure V-2 show the calculations for rental housing. The maximum affordable monthly
rent is calculated as 30 percent of gross monthly household income, minus a deduction for utilities. For
example, a very low income, three-person household could afford to spend $1,194 on total monthly
housing costs. After deducting for utilities, $1,145 a month is available to pay for rent (Figure V-1).
Figure V-3 and Figure V-4 demonstrate housing affordability for homeowners. Homeowners are assumed
to pay a maximum of 35 percent of gross monthly income on total housing costs, depending on income
level. The maximum affordable price for for-sale housing is then calculated based on the total monthly
mortgage payment that a homeowner could afford, using standard loan terms used by CalHFA programs
and many private lenders for first-time homebuyers, including a five percent down payment (Figure V-3).
5 For rental housing, 70 percent of AMI is used to represent low income households and 90 percent of AMI is used to
represent moderate income households. For ownership housing, it is assumed that moderate income homebuyers
may earn slightly less than the maximum for that income category (110 percent of AMI). Higher income limits are
used for ownership than for rental housing because ownership housing is more expensive to purchase and maintain.
V. AFFORDABILITY GAP ANALYSIS
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For example, a moderate income, three-person household could afford to spend $3,046 a month on total
housing costs, allowing for the purchase of a $359,897 home.
Key assumptions used to calculate the maximum affordable rents and housing prices are discussed below.
Unit types: For rental housing, the analysis included studios, one-, two-, and three-bedroom
units. For for-sale housing, one-, two-, and three-bedroom units were included. These unit types
represent the affordable and modest market-rate apartment and condominium units available in
Palo Alto. Condominiums were used to represent modest for-sale housing because single-family
homes in Palo Alto tend to be significantly more expensive than condominiums.
Occupancy and household size assumptions. Because income levels for affordable housing
programs vary by household size, calculating affordable unit prices requires defining household
sizes for each unit type. Consistent with California Health and Safety Code Section 50052.5(h),
unit occupancy was generally estimated as the number of bedrooms plus one. For example, a
studio unit is assumed to be occupied by one person, a one bedroom unit is assumed to be
occupied by two people, and so on. Several adjustments to this general assumption were made in
order to capture the full range of household sizes. In particular, it is assumed that one-bedroom
condominiums could be occupied by one- or two-person households, and three-bedroom
apartments and condominiums could be occupied by four- or five-person households.6
Targeted income levels for rental housing: For rental housing, affordable rents were calculated
for very low income, low income, and moderate income households (see Figure V-1 and Figure
V-2). For eligibility purposes, most affordable housing programs define very low income
households as those earning 50 percent or less of area median income (AMI), low income
households as those earning between 51 and 80 percent of AMI, and moderate income
households as those earning between 81 and 120 percent of AMI. However, defining affordable
housing expenses based at the top of each income range would result in prices that are not
affordable to most of the households in each category. Thus, this analysis does not use the
maximum income level for all of the income categories. Instead, for rental housing, 70 percent of
AMI is used to represent moderate income households and 90 percent of AMI is used to represent
moderate income households.
Targeted income levels for ownership housing For ownership housing, affordable home prices
were calculated only for moderate income households, because very low and low income
households are unlikely to be homebuyers. Higher income limits are used for ownership than for
rental housing because ownership housing is more expensive to purchase and maintain. It is
assumed that moderate income homebuyers may earn slightly less than the maximum for that
income category (110 percent of AMI).
Maximum monthly housing costs.7 For all renters, maximum monthly housing costs are
assumed to be 30 percent of gross household income. For homebuyers, 35 percent of gross
income is assumed to be available for monthly housing costs, reflecting the higher incomes of this
group.8 These standards are based on California’s Health & Safety Code Sections 50052.5 and
50053.
6 For these unit types, the maximum affordable home price (or rent) is calculated as the average price (or rent) that
the relevant household sizes can afford to pay. For example, the maximum affordable home price for a one-bedroom
condominium is calculated as the average of the maximum affordable home price for one- and two-person
households.
7 The calculation of homeowner affordability is conservative in that the model accounts for additional costs for buyers
(such as utility costs) that might not be considered by all lenders.
8 The assumption that homebuyers spend 35 percent of gross household income on housing results in a reduced
affordability gap than if 30 percent of gross household income were used instead.
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Utilities. The monthly utility cost assumptions are based on Santa Clara County’s “2013 Utility
Allowance Schedule.”9 Both renters and owners are assumed to pay for heating, cooking, other
electric, and water heating. In addition, owners are assumed to pay for water and trash
collection.10
Mortgage terms & costs included for ownership housing. For ownership housing, the
mortgage calculations are based on the terms typically offered to first-time homebuyers (such as
the terms offered by the California Housing Finance Authority), which is a 30-year mortgage
with a five percent down payment. A five percent down payment standard is also used by many
private lenders for first-time homebuyers. Based on recent interest rates to first-time buyers, the
analysis assumes a 5.375 percent annual interest rate.11 In addition to mortgage payments and
utilities, monthly ownership housing costs include homeowner association (HOA) dues,12
property taxes,13 private mortgage insurance,14 and hazard and casualty insurance.15
9 Santa Clara County, “Utility Allowance Schedule”, 2013.
10 Based on the most common types of fuel for owner and rental units in Palo Alto, all units are assumed to have
natural gas heating and water heating systems; for-sale units are also assumed to have natural gas stoves, while
rental units are assumed to use electric stoves. Sources: U.S. Census Bureau, 2008-2012 American Community
Survey, “Table B25117: Tenure by House Heating Fuel,” City of Palo Alto; U.S. Census Bureau, 2011 American
Housing Survey, “Table C-03-AH-M, San Jose-Sunnyvale-Santa Clara: Heating, Air Conditioning, and Appliances –
All Housing Units.”
11 Sources: CalHFA Mortgage Calculator, accessed March 2014; Zillow.com, “Current Mortgage Rates and Home
Loans,” accessed March 2014; interviews with California Housing Finance Agency (CalHFA) Preferred Loan Officers,
March 2014.
12 HOA fees are estimated at $300 per unit per month, based on common HOA fees in Santa Clara County as
reported in: Polaris Pacific, “Silicon Valley Condominium Market,” February 2014.
13 The annual property tax rate is estimated at 1.16, based on the total direct and overlapping property tax rate for
Palo Alto reported in the City’s 2012-13 Comprehensive Annual Financial Report (page 144).
14 The annual private mortgage insurance premium rate is estimated at 0.89 percent of the total mortgage amount,
consistent with standard requirements for conventional loans with a five percent down payment. Sources: Genworth,
February 2014; MGIC, December 2013; Radian, April 2014.
15 The annual hazard and casualty insurance rate is assumed to be 0.35 percent of the sales price, consistent with
standard industry practice.
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Figure V-1. Calculation of Affordable Rents in Santa Clara County by Household Size, 2014
Persons per Household (HH) 1 2 3 4 5
Very Low Income (50% AMI)
Maximum Household Income at 50% AMI $37,150 $42,450 $47,750 $53,050 $57,300
Maximum Monthly Housing Cost (a) $929 $1,061 $1,194 $1,326 $1,433
Utility Deduction $29 $40 $49 $60 $60
Maximum Available for Rent (HH Size) (b) $900 $1,021 $1,145 $1,266 $1,373
Low Income (70% AMI)
Maximum Household Income at 70% AMI $51,695 $59,080 $66,465 $73,850 $79,765
Maximum Monthly Housing Cost (a) $1,292 $1,477 $1,662 $1,846 $1,994
Utility Deduction $29 $40 $49 $60 $60
Maximum Available for Rent (HH Size) (b) $1,263 $1,437 $1,613 $1,786 $1,934
Moderate Income (90% AMI)
Maximum Household Income at 90% AMI $66,465 $75,960 $85,455 $94,950 $102,555
Maximum Monthly Housing Cost (a) $1,662 $1,899 $2,136 $2,374 $2,564
Utility Deduction $29 $40 $49 $60 $60
Maximum Available for Rent (HH Size) (b) $1,633 $1,859 $2,087 $2,314 $2,504
Notes:
(a) 30 percent of maximum monthly household income.
(b) Maximum monthly housing cost minus utility deduction.
Acronyms:
AMI: Area median income
HH: Household
Sources: California Department of Housing and Community Development, "State Income Limits for 2014," February 28, 2014 and “Overpayment and Overcrowding,” 2010; Housing
Authority of Santa Clara County, "2013 Utility Allowances Schedule," Santa Clara County, October 2013; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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Figure V-2. Calculation of Affordable Rents in Santa Clara County by Unit Type, 2014
Affordable Rents by Unit Type (a) Studio 1 Bedroom 2 Bedroom 3 Bedroom
Very Low Income (50% AMI) $900 $1,021 $1,145 $1,319
Low Income (70% AMI) $1,263 $1,437 $1,613 $1,860
Moderate Income (90% AMI) $1,633 $1,859 $2,087 $2,409
(a) Affordable rents are calculated as follows: Studios are calculated as one-person households; One-bedroom units are
calculated as two-person households; Two-bedroom units are calculated as three-person households; Three-bedroom
units are calculated as an average of four and five person households.
Sources: California Department of Housing and Community Development, "State Income Limits for 2014," February 28,
2014 and “Overpayment and Overcrowding,” 2010; Housing Authority of Santa Clara County, "2013 Utility Allowances
Schedule," Santa Clara County, October 2013; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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Figure V-3. Calculation of Affordable Sales Prices in Santa Clara County by Household Size, 2014
Household Size (Persons per HH) 1 2 3 4 5
Moderate Income (110% AMI) (g)
Maximum Household Income at 110% AMI $81,235 $92,840 $104,445 $116,050 $125,345
Maximum Monthly Housing Cost (a) $2,369 $2,708 $3,046 $3,385 $3,656
Monthly Deductions
Utilities $113 $113 $125 $174 $174
HOA Dues $300 $300 $300 $300 $300
Property Taxes and Insurance (b) $527 $619 $706 $785 $858
Monthly Income Available for Mortgage Payment (c) $1,429 $1,676 $1,915 $2,126 $2,324
Maximum Mortgage Amount (d) $255,155 $299,376 $341,902 $379,732 $415,083
Maximum Affordable Sales Price - HH Size (e) $268,584 $315,133 $359,897 $399,717 $436,929
Notes:
(a) 30 percent of monthly household income for very low and low income households; 35 percent of monthly household income for moderate-income households
(b) Assumes annual property tax rate of 1.16 percent of sales price; annual private mortgage insurance premium rate of 0.89 percent of mortgage amount; annual hazard and casualty insurance rate of 0.35 percent of sales price
(c) Maximum monthly housing cost minus deductions
(d) Assumes 5.375 percent interest rate and 30 year loan term. Assumes CalHFA first-time homebuyer program.
(e) Assumes 5 percent down payment (95 percent loan-to-value ratio). Assumes CalHFA first-time homebuyer program.
(f) Calculated as an average of household sizes occupying unit type. 1-bedroom units are assumed to accommodate 1- and 2-person households; 3-bedroom units are
assumed to accommodate 4- and 5-person households.
(g) Calculated as 110 percent of the median household income reported by HCD for each household size.
Acronyms:
AMI: Area median income HH: Household
HOA: Homeowners association
Sources: California Department of Housing and Community Development, "State Income Limits for 2014," February 28, 2014 and “Overpayment and Overcrowding,” 2010; Housing
Authority of Santa Clara County, "2013 Utility Allowances Schedule," Santa Clara County, October 2013; Mortgage insurance provider websites; Interviews with California Housing
Finance Agency (CalHFA) Preferred Loan Officers, March 2014; CalHFA Mortgage Calculator, March 2014; Zillow.com, March 2014; Vernazza Wolfe Associates, Inc. & Strategic
Economics, 2014.
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Figure V-4. Calculation of Affordable Sales Prices in Santa Clara County by Unit Type, 2014
Affordable Sales Price by Unit Type (a) 1 Bedroom 2 Bedroom 3 Bedroom
Moderate Income (110% AMI) $291,858 $359,897 $418,323
(a) One-bedroom units are calculated as an average of one- and two-person households; Two-bedroom units are calculated
as three-person households; and three-bedroom units are calculated as an average of four and five person households.
Sources: California Department of Housing and Community Development, "State Income Limits for 2014," February 28, 2014
and “Overpayment and Overcrowding,” 2010; Housing Authority of Santa Clara County, "2013 Utility Allowances Schedule,"
Santa Clara County, October 2013; Mortgage insurance provider websites; Interviews with California Housing Finance
Agency (CalHFA) Preferred Loan Officers, March 2014; CalHFA Mortgage Calculator, March 2014; Zillow.com, March 2014;
Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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ESTIMATING HOUSING DEVELOPMENT COSTS
The second step in calculating the housing affordability gap is to estimate the cost of developing new,
modest housing units. Modest housing is defined slightly differently for rental and ownership housing.
For rental housing, the costs and characteristics of modest housing are similar to recent projects
developed in Palo Alto by the affordable rental housing sector. However, there are no examples of new
modest ownership housing units built in Palo Alto by the private or nonprofit sectors. The new for-sale
homes in Palo Alto are typically luxury custom-built single family homes and large upscale condominium
units, which are too costly to meet the standard for modest housing. For the purposes of this affordability
gap analysis, modest for-sale housing units are defined as a compact, non-luxury multifamily
condominium units.
The calculation of housing development costs used in the housing affordability gap requires several steps.
Because the gap covers both rental housing and for-sale housing, it is necessary to estimate costs for each.
The following describes the data sources used to calculate rental and for-sale housing development costs.
Rental Housing
Rental housing development costs were based on pro forma data obtained from recent affordable housing
projects in Palo Alto. Figure V-5 shows the description of these projects and summarizes the information
that was used to generate a per-square-foot cost of $446 used in the cost analysis. These costs include site
acquisition costs, hard costs (on- and off-site improvements), soft costs (such as design, city permits and
fees, construction interest, and contingencies), and developer fees. The costs from the rental housing pro
formas were also cross-referenced against proprietary pro formas available to the consultant team from
other private development projects in order to ensure accuracy.
Since these projects assumed state and federal funding, the labor costs included in the original pro formas
reflect the prevailing wage requirement imposed by state and local governments. The costs shown in
Figure V-5 have been adjusted to subtract out the prevailing wage requirement because the development
cost model used in the housing affordability gap analysis does not assume receipt of government
subsidies. A rule of thumb used by local economists who assist affordable housing developers in
obtaining public financing, is to estimate that, under the prevailing wage requirement, labor costs are 25
percent higher than would otherwise be the case. Therefore, on-site and off-site improvement costs
obtained from the original pro formas are reduced by 25 percent to reflect actual labor costs that would
apply to construction projects that do not have these requirements.16 Finally, on average, land acquisition
costs accounted for 20 percent or less of these total adjusted costs.
16 These prevailing wage requirements refer only to labor cost requirements on construction projects that receive
funding from the state or federal government. These are not the same as minimum wage requirements that individual
cities may adopt.
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Figure V-5. Affordable Housing Project Pro Forma Data
Project Description Maybelle Alma Garden Apts
Location Palo Alto Palo Alto
Date of Pro Forma 2013 2013
Land Area (acres) 1.03 0.6
Gross Building Area (SF) 56,192 63,885
Number of Units 60 50
Parking Type Uncovered Underground
Parking Spaces/ Unit 0.8 1.0
Land Acquisition Costs
$7,498,524
($167 per SF of
land)
$7,480,000
($286 per SF of
land)
Project Costs per SF of Gross Building Area
Land Cost (a) $133 $117
Hard Costs (b) $160 $153
Soft Costs (c) $91 $192
Developer Fees $25 $22
Total Project Costs (d) $409 $484
Notes:
(a) Calculated per square foot of gross building area.
(b) Excludes prevailing wage requirements for on-site and off-site hard
costs.
(c) Includes design, engineering, city permits and fees, construction interest, contingencies, legal, etc.
(d) Total costs include developer fees.
Acronyms:
SF: Square feet
Source: Pro Forma Data provided by City of Palo Alto; Vernazza Wolfe Associates, Inc; Strategic
Economics, 2014.
To ensure that the land value assumptions used in the rental development cost estimates (ranging from
$167 to $286 per square foot of land) were reasonable, the consultant team analyzed recent sales of vacant
properties in Santa Clara County using DataQuick, a commercial vendor that tracks real estate
transactions. As shown below in Figure IV-6, land values in Southern San Mateo County and Northern
Santa Clara County are highly variable from city to city, ranging from $96 to $228 per square foot. The
analysis demonstrates that the land costs for the affordable rental housing projects shown in Figure V-5
are generally consistent with the land values in the market area.
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Figure V-6. Sales of Vacant Lands in San Mateo County and Northern Santa Clara County, 2014
Property Location
Sales
Date Sales Price
Site
Size
(SF)
Average
Sales
Price/ SF
Page Mill Palo Alto 2012 $3,959,000 26,926 $147
389 El Camino Real Menlo Park 2012 $12,200,000 53,579 $228
1300 El Camino Real Menlo Park 2012 $24,500,000 148,165 $165
E. side of Tilton Avenue, N. of El Camino Real San Mateo 2012 $4,505,000 33,572 $134
1275 El Camino Real Menlo Park 2014 $3,600,000 17,960 $200
3877 El Camino Real Palo Alto 2013 $4,450,000 32,825 $136
536 N Wishman Rd Mountain View 2014 $1,050,000 7,000 $150
1958 Latham St Mountain View 2014 $1,600,000 16,600 $96
Value Range per SF of Land $96 - $228
Source: City of Palo Alto; Independent appraisals; Loopnet, 2015; Strategic Economics, 2015.
For-Sale Housing
Market-rate for-sale housing units in Palo Alto are priced at over $1 million; these units are too upscale to
be considered “modest” units. Because of the lack of examples of built modest units in the City,the cost of
developing new, modest for-sale housing was estimated using using published industry data sources,
recent financial feasibility studies, and data from other projects in Santa Clara County. The Consultant
Team estimated the development costs of a hypothetical condominium project, as described in Figure V-
7.17 Land costs were estimated based on recent DataQuick sales of multi-family zoned properties in
Southern San Mateo County and Northern Santa Clara County. As shown in Figure V-6, land values vary
depending on location and lot size, ranging from $96 to $228 per square foot. Because most transactions
occurred in 2012 and 2013 in other lower cost jurisdictions, the current land value for multi-family land
for condominium development in Palo Alto was estimated at $200 per square foot.
RS Means cost data, adjusted for the Bay Area’s construction costs, was used to calculate hard costs.
Based on a review of recent financial feasibility analyses in the Bay Area, soft costs were estimated at 30
percent of hard costs, and developer fees and profits were estimated at 12 percent of hard and soft costs.
Using this method, the development costs are estimated at approximately $500 per net square foot of
building area.
17 The hypothetical condominium building type is a Type V building with underground parking and floor-area ratio of
1.7.
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Figure V-7. Estimate of Development Costs of Hypothetical Condominium Project
Building Characteristics
Land Area (SF) 110,727
Gross Building Area (SF) 188,235
Net Building Area (SF) 160,000
Number of Units 100
Parking Type Underground
Parking Spaces/ Unit 2
Floor-area ratio (FAR) 1.7
Density (units per acre) 39
Average Unit Size 1,600
Land Acquisition Costs per Square Foot (a) $200
Development Cost Cost per Net SF
Land Cost (b) $138
Hard Costs $250
Soft Costs (c) $75
Developer Fees (d) $39
Total Development Costs $502
Notes:
(a) Land value is estimated at $200 per square foot based on recent transactions in market area.
(b) Calculated based on RS Means cost estimates per square foot of net building area.
(c) Estimated at 30 percent of hard costs. Includes design, engineering, city permits and fees,
construction interest, contingencies, legal, etc.
(d) Estimated at 12 percent of hard costs and soft costs.
Sources: RS Means, 2014; DataQuick 2014; Recent financial feasibility studies; Vernazza Wolfe
Associates, Inc. & Strategic Economics, 2014.
Cost Estimates by Unit Size
The data sources described above also provided information on estimated unit sizes. Unit size information
is needed to translate costs/sales prices per square foot to unit costs. Unit sizes are estimated separately
for rental and for-sale units. For the rental units, the recent inventory of projects developed by MidPen
Housing was analyzed. For ownership units, the average sizes of recently built condominium units
(Figure V-7) were analyzed.
Figure V-8 provides the unit sizes and development cost estimates for rental units. Per-unit development
costs were calculated by multiplying average unit sizes by the per-square foot development costs of $446.
Rental unit costs range from $223,000 for studio units to $499,520 for three-bedroom units.
Figure V-9 summarizes the costs of condominium units. The per-unit costs were derived by multiplying
the average unit size by the development cost, estimated at $500 per square foot. On a per unit basis,
condominium development costs are $450,000 for one-bedroom units, $650,000 for two-bedroom units,
and $875,000 for three-bedroom units.
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Figure V-8. Rental Housing Unit Sizes and Development Costs
Unit Type
Estimated Cost
per Net SF
Unit Size
(net SF)
Development
Costs
Studio $446 500 $223,000
One bedroom $446 700 $312,200
Two bedroom $446 900 $401,400
Three bedroom $446 1,120 $499,520
Acronyms:
SF: Square feet
Sources: Confidential Pro Forma Data; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
Figure V-9. For-Sale Housing Unit Sizes and Development Costs
Unit Type
Estimated Cost
per Net SF
Unit Size
(net SF)
Development
Costs
One bedroom $500 900 $450,000
Two bedroom $500 1,300 $650,000
Three bedroom $500 1,750 $875,000
Acronyms:
SF: Square feet
Sources: DataQuick, 2014; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
CALCULATING THE HOUSING AFFORDABILITY GAP
The final step in the analysis is to calculate the housing affordability gap, or the difference between what
renters and owners can afford to pay and the total cost of developing new units. The purpose of the
housing affordability gap calculation is to help determine the fee amount that would be necessary to cover
the cost of developing housing for very low, low, and moderate income households. The calculation does
not assume the availability of any other source of housing subsidy because not all "modest" housing is
built with public subsidies, and tax credits and tax-exempt bond financing are highly competitive
programs that will not always be available to developers of modest housing units.
Figure V-10 shows the housing affordability gap calculation for rental units. For each rental housing unit
type and income level, the gap is defined as the difference between the per-unit cost of development and
the supportable debt per unit. The supportable debt is calculated based on the net operating income
generated by an affordable monthly rent, incorporating assumptions about operating expenses (including
property taxes, insurance, etc.), reserves, vacancy and collection loss, and mortgage terms based on
discussions with local affordable housing developers. Because household sizes are not uniform and the
types of units each household may occupy is variable, the average housing affordability gap is calculated
by averaging the housing affordability gaps for the various unit sizes.
Figure V-11 shows the housing affordability gap calculation for ownership units. For each unit type, the
gap is calculated as the difference between the per-unit cost of development and the affordable sales price
for each income level. As with rental housing, the average housing affordability gap is calculated by
averaging the housing affordability gaps across unit sizes in order to reflect that households in each
income group vary in size, and may occupy any of these unit types.
Finally, the tenure-neutral estimates of the housing affordability gap were estimated for very low, low,
and moderate income households (Figure V-12). Because very low and low income households that are
looking for housing in today’s market are much more likely to be renters, an ownership gap was not
calculated for these income groups. The rental gap represents the overall affordability gap for these two
income groups. On the other hand, moderate income households could be either renters or owners.
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Therefore, the rental and ownership gaps are averaged for this income group to calculate the overall
affordability gap for moderate income households. The calculated average affordability gap per unit is
$306,164 for very low income households; $252,258 for low income households, and $249,596 for
moderate income households. The housing affordability gap is highest for very low income households
because they can afford to pay the least amount for housing.
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Figure V-10. Housing Affordability Gap Calculation for Rental Housing
Income Level and Unit Type
Unit Size
(SF)
Maximum Monthly
Rent (a)
Annual
Rental
Revenu
e
Net
Operating
Income (b)
Available
for Debt
Service (c)
Supportable
Debt (d)
Development
Costs (e)
Affordability
Gap (f)
Very-Low Income (50% AMI)
Studio 500 $900 $10,797 $2,757 $2,206 $29,166 $223,000 $193,834
1 Bedroom 700 $1,021 $12,255 $4,142 $3,314 $43,818 $312,200 $268,382
2 Bedroom 900 $1,145 $13,737 $5,550 $4,440 $58,711 $401,400 $342,689
3 Bedroom 1,120 $1,319 $15,833 $7,541 $6,033 $79,769 $499,520 $419,751
Average Affordability Gap $306,164
Low Income (70% AMI)
Studio 500 $1,263 $15,161 $6,902 $5,522 $73,016 $223,000 $149,984
1 Bedroom 700 $1,437 $17,244 $8,882 $7,105 $93,954 $312,200 $218,246
2 Bedroom 900 $1,613 $19,352 $10,884 $8,707 $115,133 $401,400 $286,267
3 Bedroom 1,120 $1,860 $22,322 $13,706 $10,965 $144,987 $499,520 $354,533
Average Affordability Gap $252,258
Moderate Income (90% AMI)
Studio 500 $1,633 $19,592 $11,112 $8,890 $117,544 $223,000 $105,456
1 Bedroom 700 $1,859 $22,308 $13,693 $10,954 $144,843 $312,200 $167,357
2 Bedroom 900 $2,087 $25,049 $16,296 $13,037 $172,383 $401,400 $229,017
3 Bedroom 1,120 $2,409 $28,906 $19,960 $15,968 $211,146 $499,520 $288,374
Average Affordability Gap $197,551
Notes:
(a) Affordable Rents are based on HCD FY 2014 Income Limits for Santa Clara County. See Figure 2, above.
(b) Amount available for debt. Assumes 5% vacancy and collection loss and $7,500 per unit for operating expenses and reserves, based on pro formas for affordable housing projects recently proposed in Palo Alto.
(c) Assumes 1.25 Debt Coverage Ratio.
(d) Assumes 6.38%, 30 year loan. Calculations based on annual payments.
(e) Assumes development cost of $446 per net square foot on rental units.
(f) Calculated as the difference between development costs and supportable debt. Rounded to nearest whole number.
Acronyms:
SF: Square feet
AMI: Area median income
Sources: Selected Palo Alto Rental Housing Pro Formas; Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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Figure V-11. Housing Affordability Gap Calculation for For-Sale Condominium Housing
Income Level and Unit Type
Unit Size
(SF)
Affordable
Sales Price
(a)
Development
Costs (b)
Affordability
Gap (c)
Moderate Income (110% of AMI)
1 Bedroom 900 $291,858 $450,000 $158,142
2 Bedroom 1,300 $359,897 $650,000 $290,103
3 Bedroom 1,750 $418,323 $875,000 $456,677
Average Affordability Gap $301,641
(a) See calculation in Figure V-9, above.
(b) Assumes $500/SF for development costs, based on recent condominium sales.
(c) Calculated as the difference between affordable sales price and development cost; rounded to nearest whole number.
Acronyms:
SF: Square feet
AMI: Area median income
Sources: DataQuick Sales Data, 2008-2012; Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
Figure V-12. Average Housing Affordability Gap by Income Group
Income Level Rental Gap Ownership Gap
Average
Affordability Gap
Very Low-Income (50% AMI) (a) $306,164 N/A $306,164
Low-Income (70% - 80% AMI) (b) $252,258 N/A $252,258
Moderate-Income (90% - 110% AMI) (c) $197,551 $301,641 $249,596
Notes:
(a) Based on rental housing only; very-low-income gap was not calculated for ownership housing.
(b) Low-income households are assumed to earn 70 percent of AMI for rental housing and 80 percent of AMI for ownership housing.
(c) Moderate-income households are assumed to earn 90 percent of AMI for rental housing and 110 percent of AMI for ownership
housing.
Acronyms:
AMI: Area median income
Source: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2014.
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This section builds on the findings of the previous analytical steps to calculate maximum justified
housing impact fees for each prototype.
MAXIMUM FEE CALCULATION
To derive the maximum nexus-based fee, the housing affordability gap is applied to the number of
lower-income worker households linked to the prototypes. This is the basis for developing an estimate
of the total affordability gap for each prototype. The total gap for each prototype is then divided by
the number of units in the development prototype to calculate a single maximum fee per unit.
Figure VI-1 presents the results of the nexus fee calculation for the single-family detached prototype.
The per unit housing affordability gap number is multiplied by the number of income-qualified
worker households linked to the prototype to estimate the total gap. The total affordability gap is then
divided by the number of units in the prototype to derive the maximum fee per unit, estimated at
$333,501 per unit. The same steps are taken for the single-family attached, condominium and rental
apartment prototypes to estimate the maximum fee per unit, as shown in Figures VI-2, VI-3 and VI-4.
The calculated maximum fees are $189,037 per single-family attached unit, $158,519 per
condominium unit and $101,906 per apartment unit.
The fees can also be calculated on per-square-foot basis by dividing the total gap by the net
residential area for each prototype. The maximum fee per square foot is $111 for the 90,000-square-
feet single-family detached prototype (Figure V-5), $90 for the 21,000-square-foot single-family
attached prototype (Figure V-6), $75 for the 73,500-square-foot condominium prototype (Figure VI-
7) and $105 for the 67,970-square-foot apartment prototype (Figure VI-8).
The per-unit and per-square-foot fees shown in the tables below express the total nexus-based fees for
the four housing prototypes in Palo Alto. They represent the maximum justified fees based on the
nexus analysis that could be imposed on new development. The City may adopt fees or require
mitigations at a lower level than these justified fees, depending on financial feasibility and other
policy considerations.
VI. MAXIMUM FEE AND REQUIREMENTS
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Figure VI-1. Maximum Per-Unit Fee for Single-Family Detached Prototype
Income Category
Average
Affordability Gap
(per Household)
Number
Worker
Households
Total
Affordability
Gap
Number Units
in Prototype
Total Fee Per
Unit
Very Low Income (<=50% AMI) $306,164 6.98 $2,137,025
Low Income (51-80% AMI) $252,258 17.15 $4,326,225
Moderate Income (81-120% AMI) $249,596 14.19 $3,541,767
Total $10,005,017 30 $333,501
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
Figure VI-2. Maximum Per-Unit Fee for Single-Family Attached Prototype
Income Category
Average
Affordability Gap
(per Household)
Number
Worker
Households
Total
Affordability
Gap
Number Units
in Prototype
Total Fee Per
Unit
Very Low Income (<=50% AMI) $306,164 1.32 $404,136
Low Income (51-80% AMI) $252,258 3.24 $817,316
Moderate Income (81-120% AMI) $249,596 2.68 $668,917
Total $1,890,370 10 $189,037
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
Figure VI-3. Maximum Per-Unit Fee for Condominium Prototype
Income Category
Average
Affordability Gap
(per Household)
Number
Worker
Households
Total
Affordability
Gap
Number Units
in Prototype
Total Fee Per
Unit
Very Low Income (<=50% AMI) $306,164 3.87 $1,184,855
Low Income (51-80% AMI) $252,258 9.51 $2,398,974
Moderate Income (81-120% AMI) $249,596 7.87 $1,964,321
Total $5,548,149 35 $158,519
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
DRAFT Palo Alto Housing Impact Fee Nexus Study -53-
Figure VI-4. Maximum Per-Unit Fee for Apartment Prototype
Income Category
Average
Affordability Gap
(per Household)
Number
Worker
Households
Total
Affordability
Gap
Number Units
in Prototype
Total Fee Per
Unit
Very Low Income (<=50% AMI) $306,164 3.87 $1,552,251
Low Income (51-80% AMI) $252,258 9.51 $3,092,683
Moderate Income (81-120% AMI) $249,596 7.87 $2,488,472
Total $7,133,407 70 $101,906
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
Figure VI-5. Maximum Fee per SF for Single-Family Detached Prototype
Income Category
Average
Affordability Gap
(per Household)
Number
Worker
Households
Total
Affordability
Gap
Net
Residential
Area (SF)
Total Fee Per
SF
Very Low Income (<=50% AMI) $306,164 6.98 $2,137,025
Low Income (51-80% AMI) $252,258 17.15 $4,326,225
Moderate Income (81-120% AMI) $249,596 14.19 $3,541,767
Total $10,005,017 90,000 $111.17
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
Figure VI-6. Maximum Fee per SF for Single-Family Attached Prototype
Income Category
Average
Affordability Gap
(per Household)
Number
Worker
Households
Total
Affordability
Gap
Net
Residential
Area (SF)
Total Fee Per
SF
Very Low Income (<=50% AMI) $306,164 1.32 $404,136
Low Income (51-80% AMI) $252,258 3.24 $817,316
Moderate Income (81-120% AMI) $249,596 2.68 $668,917
Total $1,890,370 21,000 $90.02
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
DRAFT Palo Alto Housing Impact Fee Nexus Study -54-
Figure VI-7. Maximum Fee per SF for Condominium Prototype
Income Category
Average
Affordability Gap
(per Household)
Number
Worker
Households
Total
Affordability
Gap
Net
Residential
Area (SF)
Total Fee Per
SF
Very Low Income (<=50% AMI) $306,164 3.87 $1,184,855
Low Income (51-80% AMI) $252,258 9.51 $2,398,974
Moderate Income (81-120% AMI) $249,596 7.87 $1,964,321
Total $5,548,149 73,500 $75.49
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
Figure VI-8. Maximum Fee per SF for Apartment Prototype
Income Category
Average
Affordability Gap
(per Household)
Number
Worker
Households
Total
Affordability
Gap
Net
Residential
Area (SF)
Total Fee Per
SF
Very Low Income (<=50% AMI) $306,164 5.07 $1,552,251
Low Income (51-80% AMI) $252,258 12.26 $3,092,683
Moderate Income (81-120% AMI) $249,596 9.97 $2,488,472
Total $7,133,407 67,970 $104.95
Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015.
DRAFT Palo Alto Housing Impact Fee Nexus Study -55-
INCLUSIONARY HOUSING REQUIREMENTS
In addition to establishing the maximum potential justified fee for new development projects, the
nexus results described above can also be used to establish the percentage of inclusionary units under
the City’s current program. At present, inclusionary housing is one of the primary tools for providing
affordable housing units in Palo Alto. Palo Alto currently has an inclusionary policy in the General
Plan that requires that 15 to 20 percent of units in new developments be affordable housing units. The
affordability levels for the inclusionary units are typically determined on a case by case basis, and
developers have historically built the units within their projects. If the City adopts a housing impact
fee, it could replace its inclusionary zoning program with an impact fee program that still allows
developers the option of providing affordable units; or it could continue to require on-site units in for-
sale projects.
The principal way in which the equivalent inclusionary percentage can be estimated from the nexus
analysis is by taking the total number of households requiring affordable housing (for each prototype)
and dividing this number by the number of total units in each prototype. The analysis indicates that
the nexus-based inclusionary percentage rate is much higher than the City’s existing inclusionary
policy. Therefore the results of the nexus analysis support the current inclusionary requirements. In
fact, the results of the nexus analysis indicate that inclusionary rates of 39 percent and higher
(depending on the prototype) are supported by the nexus analysis.
DRAFT Palo Alto Housing Impact Fee Nexus Study -56-
There are a number of policy considerations that can be taken into account when jurisdictions
consider adopting an affordable housing impact fee on new market-rate development. These may
include factors such as the likely impact of the proposed fee levels on local housing development, the
competitiveness of the city in attracting development relative to neighboring jurisdictions, the impact
of the proposed fee on existing city fee level, and the role of the proposed fee in meeting the city’s
overall affordable housing objectives. This section provides a discussion of some of the key financial
and policy questions for Palo Alto.
FINANCIAL FEASIBILITY ANALYSIS
Summary of Residential Prototypes
As discussed in more detail in Section III of this report, this nexus analysis is based on four
residential prototypes: for-sale single-family detached, single-family attached and condominiums, and
rental apartments. Figure VII-1 summarizes the characteristics of the four development prototypes
that were tested for financial feasibility. These prototypes are representative of the types of market
rate housing development projects that can reasonably be expected in Palo Alto. All residential
prototypes are Type V wood frame construction. The single-family detached units have an attached
garage and a density of 6 units per acre. On average, the net residential area is 3,000 square feet per
unit. The single-family attached prototype building has podium parking and a density of 11 units per
acre, with an average net area per unit of 2,100 square feet. The condominium prototypes have
underground parking, a density of 30 units per acre, and an average net size of 2,100 square feet. The
apartment prototype building has podium parking and a density of 41 units per acre. The average net
area per unit is 971 square feet. Most of the apartment units are two bedrooms, with a small number
of one bedroom units.
Figure VII-1. Residential Prototypes
Building Characteristics
Single-Family
Detached
Single-Family
Attached Condominiums Apartments
Building Type Type V Type V Type V Type V
Total Residential Units (a) 30 10 35 70
Avg. Size Unit in Square Feet (SF) 3,000 2,100 2,100 971
Net Square Footage (NSF) 90,000 21,000 73,500 68,000
Parking Type Attached garage Podium Underground Podium
Efficiency Factor (b) 85% 85% 85% 65%
Gross Square Footage (GSF) 105,882 24,706 86,471 104,698
Floor Area Ratio (FAR) (c) 0.5 0.6 1.7 1.4
Land Area (SF) 211,765 41,176 50,865 74,785
Land Area (Acres) 4.86 0.95 1.17 1.72
Units per Acre 6 11 30 41
Notes:
(a) Unit characteristics are described in more detail in Section III.
(b) Ratio of leasable square footage to gross square footage.
(c) Floor area ratio (FAR) measures density by dividing gross building area by total site area.
Source: Vernazza Wolfe Associates, Inc. and Strategic Economics, 2015.
VII. FEASIBILITY AND POLICY CONSIDERATIONS
DRAFT Palo Alto Housing Impact Fee Nexus Study -57-
Fee Levels
In order to provide Palo Alto with some guidance on how proposed fees could impact development
decisions, the Consultant Team conducted a financial feasibility analysis that tested the impact of
different fee scenarios on developer profit. Given that it is unusual for local jurisdictions to enact an
impact fee at its maximum nexus-based level, three additional fee scenarios were evaluated for each
prototype. These calculations provide Palo Alto with an understanding of the impact of different fee
scenarios on the financial feasibility of residential development projects.
Figure VII-2 demonstrates the calculated fees per unit at different levels for each prototype. The fee
scenarios can also be calculated on per square foot basis, which are shown in Figure VII-3.
Figure VII-2. Fee Levels per Unit for Prototypes
Prototype
Net
Residential
SF per Unit Per Unit Fee Levels Tested
Single-Family Detached 3,000 $150,000 $225,000 $285,000 $333,501
Single-Family Attached 2,100 $63,000 $105,000 $147,000 $189,037
Condominium 2,100 $52,500 $84,000 $105,000 $158,519
Apartments 971 $29,143 $48,571 $82,571 $101,906
Sources: Vernazza Wolfe Associates, Inc.; Strategic Economics, 2015.
DRAFT Palo Alto Housing Impact Fee Nexus Study -58-
Figure VII-3. Fee Levels per Square Foot for Prototypes
Prototype
Net
Residential
SF per Unit Per SF Fee Levels Tested
Single-Family Detached 3,000 $50 $75 $95 $111
Single-Family Attached 2,100 $30 $50 $70 $90
Condominium 2,100 $25 $40 $55 $75
Apartments 971 $30 $50 $85 $105
Sources: Vernazza Wolfe Associates, Inc.; Strategic Economics, 2015.
Methodology
Financial feasibility of the fee options was tested using a pro forma model that measures the residual
land value of a given development project. Many pro forma models are structured to solve for the
financial return for the developer or investors (internal rate of return). In contrast, the residual land
value method of analysis solves for the value of the land. This method recognizes that the value of
land is inextricably linked to what can be built on it, and that development potential is heavily
influenced by zoning, lot size/configuration, neighborhood context, and other factors. The pro forma
model tallies all development costs (minus land) including direct construction costs, indirect costs
(including financing), and developer fees. Revenues from unit sales or rental leases are then summed.
The total project costs are then subtracted from the total project revenues. The balance is the residual
value, representing the price a developer would pay for the land if pursuing that project. The fee
levels were then added as an additional development cost to measure the effect on the residual land
value.
Revenues
To estimate income from residential development, the analysis uses the sales prices and monthly rents
presented in Section III of this report and summarized in Figure VII-4. These revenue assumptions
were based on a review of local and regional market data, including information on the type of
development that has been recently constructed or is planned or proposed in Palo Alto; and current
sales prices and rental rates of recently built residential development in Palo Alto and neighboring
cities. For ownership projects (single-family detached, single-family attached, and condominiums),
the revenues are calculated by multiplying the unit count by the sales price. For rental projects, the
revenues were estimated using an income capitalization approach. This valuation approach first
estimates the annual net operating income (NOI) of the apartment prototype, which is the difference
between total project income (annual rents) and project expenses, including operating costs18 and
vacancies. The NOI is then divided by the capitalization rate (cap rate) to derive total project value.
Figure VII-5 summarizes the calculations and data source used for estimating the value of the
apartment prototype.
18 Operating costs were calculated based on the Institute of Real Estate Management Survey of Apartment
Buildings in the San Francisco Metropolitan Statistical Area (MSA).
DRAFT Palo Alto Housing Impact Fee Nexus Study -59-
Figure VII-4. Sales Prices and Rents for Prototypes
Prototype Unit Type
Number
of Units
Net Area
(SF)
Unit Sales
Price/ Monthly
Rent
Price or
Rent per
SF
Single-Family Detached (For-Sale)
Type V wood frame 5 BD/4 BA 30 3,000 $3,043,000 $1,015
6 units per acre
Attached garage
Net Residential Area (Net SF) 90,000
Single-Family Attached
(For-Sale)
Type V wood frame 3 BD/ 4 BA 10 2,100 $1,666,000 $793
11 units per acre
Podium parking
Net Residential Area 21,000
Condominiums (For-Sale)
Type V wood frame 4 BD/3 BA 35 2,100 $1,390,000 $662
30 units per acre
Underground parking
Net Residential Area (Net SF) 73,500
Apartments (Rental)
Type V wood frame 1 BD/ 1 BA 20 795 $3,247 $4.09
41 units per acre 2 BD/2 BA 50 1,114 $4,191 $3.76
Podium parking
Net Residential Area 68,000
Average Net SF per Unit 1,063
Sources: Strategic Economics & Vernazza Wolfe Associates, Inc., 2014.
Figure VII-5. Apartment Revenue Calculations
Apartment Revenues Calculation Total
Gross Annual Rental Income (a) Gross annual rents $3,294,184
Operating Expenses (b) 30 percent of income ($988,255)
Vacancy (c) 5 percent of income ($164,709)
Annual Net Operating Income (c)
Income less expenses
and vacancy $2,141,219
Capitalization Rate (d) 5 percent 5.00%
Capitalized Value Project value $42,824,386
Notes:
(a) Average monthly rents multiplied by 12 months multiplied by unit count for each unit type.
(b) Institute of Real Estate Management, San Francisco MSA Apartment Properties, 2011.
(c) Assumes a vacancy rate of 5 percent in a stabilized rental market.
(d) According to DTZ's San Francisco Real Estate Forecast 2015, the cap rate for
apartments is approximately 5 percent.
Sources: IREM, DTZ, Strategic Economics, 2015.
DRAFT Palo Alto Housing Impact Fee Nexus Study -60-
Development Costs
Cost estimates for the residential prototypes include direct construction costs (site work, building
costs, and parking), indirect costs, financing costs, and developer overhead and profit. Development
cost estimates for the pro forma analysis are based on RS Means and project pro formas for recent
projects in the region. Soft costs and developer overhead/profit were calculated based on a review of
similar project pro formas in the Bay Area. City fee calculations were provided by City staff. Each of
the cost factors used in the analysis is summarized in Figure VII-6.
Figure VII-6. Development Cost Factors
Development Costs Metric
Direct Costs (a)
Single-Family Detached $155 Per NSF
Single-Family Attached $150 Per NSF
Condominiums $225 Per NSF
Apartments $210 Per NSF
Indirect Costs (b)
A&E & Consulting 6.00% of direct costs
Permits & Fees (Excl. Housing) (c) estimated by City
Taxes, Insurance, Legal & Accounting 3.00% of direct costs
Other (d) 3.00% of direct costs
Contingency 5.00% of indirect costs
Total Indirect Costs
Financing Costs (b)
Loan to Cost Ratio (LTC) 80% of total costs
Loan Interest Rate 6% annual rate
Compounding Period 12 months
Construction/Absorption Period (e) 12 to 24 months
Utilization Rate 55% of loan
Loan Fees 2% of loan
Developer Overhead & Profit 12% of total costs (excl. land)
Notes:
(a) Direct costs include site work, building construction, and parking costs of $30,000 per space for underground parking and
$25,000 per space for podium parking. Costs estimates are based on review of Bay Area pro formas for similar projects and
data from RS Means.
(b) Based on review of similar project pro formas in the Bay Area and interviews with developers.
(c) Permits & fees are a generalized estimate of costs based on prototypes, calculated by City staff. Permits and fees for
actual projects vary depending on many factors.
(d) Other soft costs include marketing, personal property, environmental studies, etc.
(e) Absorption periods are estimated at 12 months for condominiums and single-family attached units; 18 months for single-
family detached subdivisions; and 24 months for apartments.
Sources: RS Means, 2014; Similar pro formas; City of Palo Alto, 2015; Strategic Economics, 2015.
Land Value
In order to understand what the different fee levels indicate regarding financial feasibility, the residual
land values for each fee scenario can be compared with the market value of residential land in Palo
Alto. If the residual value is higher than the market value, the project is feasible. If the residual value
is lower than the market price, then the project is infeasible.
To determine the land value of sites zoned for lower density uses (single-family detached and single-
family attached) and higher density multi-family residential uses (condominiums and rental
apartments), the Consultant Team analyzed recent sales transactions in Southern San Mateo County
and Northern San Mateo County, and reviewed third-party property appraisals. Figure VII-7
illustrates the results of the land value analysis for lower density single-family detached and single-
family attached residential uses, while Figure VII-8 shows the value of properties zoned for higher
density multi-family residential uses. For lower density residential uses, values range considerably
DRAFT Palo Alto Housing Impact Fee Nexus Study -61-
depending on location and size, from $50 per square foot for the lower quartile, to $172 per square
foot for the upper quartile. For higher-density multi-family housing, the range is between $96 and
$228 per square foot, with a weighted average (accounting for lot size) of $167. The majority of the
sales shown in Figures VII-7 and VII-8 were transactions that occurred earlier than 2014; today’s land
values are likely to be higher. Therefore, for this analysis, the estimated land value is estimated at
between $150 and $250 per square foot for higher density multi-family development, including
condominiums and apartments. For all prototypes, the market value of land is presented as a range
because the land value of properties is likely to vary depending on location, size, and other
conditions.
DRAFT Palo Alto Housing Impact Fee Nexus Study
Figure VII-7. Recent Single-Family Land Sales Transactions in Palo Alto and Neighboring Cities
Site Address Location Sale Price Lot Area
Price/ SF
of Land
10655 CORDOVA RD CUPERTINO CA 95014-3911 $880,000 14,000 $62.86
CUPERTINO CA $1,605,000 8,373 $191.69
21730 RAINBOW DR CUPERTINO CA 95014-4827 $1,312,500 79,432 $16.52
STEVENS CANYON RD CUPERTINO CA 95014 $1,700,000 36,155 $47.02
10231 HILLCREST RD CUPERTINO CA 95014-1081 $1,121,500 11,985 $93.58
CUPERTINO CA $1,960,000 46,043 $42.57
CUPERTINO CA $1,200,000 22,390 $53.60
22711 SAN JUAN RD CUPERTINO CA 95014-3932 $1,668,000 16,000 $104.25
12810 DEER CREEK LN LOS ALTOS HILLS CA 94022 $1,650,000 59,242 $27.85
12060 ELSIE WAY LOS ALTOS HILLS CA 94022-3388 $2,800,000 49,223 $56.88
WESTWIND WAY LOS ALTOS HILLS CA 94022 $6,000,000 37,462 $160.16
MILLER AVE LOS ALTOS CA 94024 $1,975,000 7,623 $259.08
W SUNSET DR LOS ALTOS HILLS CA 94022 $8,645,000 52,349 $146.82
W SUNSET DR LOS ALTOS HILLS CA 94022 $8,645,000 6,534 $146.82
WILDCREST DR LOS ALTOS HILLS CA 94022 $2,765,000 89,300 $30.96
24560 RUTH LEE CT LOS ALTOS CA 94024 $2,700,000 20,168 $133.88
26310 ESPERANZA DR LOS ALTOS HILLS CA 94022-2653 $2,530,000 43,560 $58.08
12501 ZAPPETTINI CT LOS ALTOS HILLS CA 94022-6316 $2,140,000 51,401 $41.63
181 ALVARADO AVE LOS ALTOS CA 94022-1220 $500,000 21,746 $22.99
969 SHERWOOD AVE LOS ALTOS CA 94022-1327 $480,000 4,960 $96.77
NIBLICK AVE LOS ALTOS CA 94022 $2,050,000 13,504 $151.81
25755 CARADO CT LOS ALTOS HILLS CA 94022 $1,730,000 44,350 $39.01
10 PASA ROBLES AVE LOS ALTOS CA 94022-1235 $1,850,000 6,200 $298.39
26400 ESHNER CT LOS ALTOS HILLS CA 94022 $3,400,000 55,321 $61.46
ALTA VIS LOS ALTOS CA 94022 $4,000,000 18,900 $211.64
ALTA VIS LOS ALTOS CA 94022 $4,000,000 31,147 $128.42
FREMONT RD LOS ALTOS HILLS CA 94022 $2,040,000 54,886 $37.17
12030 ELSIE WAY LOS ALTOS HILLS CA 94022-3388 $2,150,000 49,223 $43.68
LANTIS LN LOS ALTOS CA 94024 $1,950,000 11,326 $172.17
24600 RUTH LEE CT LOS ALTOS CA 94024-4750 $3,053,000 55,050 $55.46
HAPPY ACRES RD LOS GATOS CA 95032 $1,343,000 7,405 $181.36
OAK RIDGE WAY LOS GATOS CA 95032 $2,150,000 8,800 $244.32
BELLA VISTA AVE LOS GATOS CA 95032 $60,500 1,300 $46.54
101 COSTANCES CT LOS GATOS CA 95032-4845 $785,000 7,883 $99.58
17059 PINE AVE LOS GATOS CA 95032 $1,275,000 32,234 $39.55
403 MONTCLAIR RD LOS GATOS CA 95032 $785,000 15,304 $51.29
COLORADO CT LOS GATOS CA 95030 $900,000 40,075 $22.46
SUN RAY DR LOS GATOS CA 95030 $1,049,000 7,650 $137.12
16227 MAYA WAY LOS GATOS CA 95030 $2,638,500 43,680 $60.41
217 ALEXANDER AVE LOS GATOS CA 95030-5202 $1,450,000 7,500 $193.33
26 ALPINE AVE LOS GATOS CA 95030-7131 $675,000 20,038 $33.69
BUSKIRK ST MILPITAS CA 95035 $390,000 910 $428.57
826 CALAVERAS RIDGE DR MILPITAS CA 95035-3445 $600,000 46,426 $12.92
2212 LELAND AVE MOUNTAIN VIEW CA 94040 $577,000 5,152 $68.25
2206 LELAND AVE MOUNTAIN VIEW CA 94040 $577,000 3,302 $68.25
1755 PEACOCK AVE MOUNTAIN VIEW CA 94043-4436 $475,000 6,460 $73.53
2240 COLUMBIA ST PALO ALTO CA 94306-1234 $2,115,000 6,175 $170.22
2250 COLUMBIA ST PALO ALTO CA 94306-1234 $2,115,000 6,250 $170.22
PALO ALTO CA $1,658,000 6,000 $276.33
370 LOWELL AVE PALO ALTO CA 94301-3811 $4,450,000 12,474 $356.74
DRAFT Palo Alto Housing Impact Fee Nexus Study -63-
Figure VII-7. Recent Single-Family Land Sales Transactions in Palo Alto and Neighboring Cities
(continued)
Site Address Location Sale Price Lot Area
Price/ SF
of Land
4075 ORME ST PALO ALTO CA 94306-3137 $2,175,000 16,830 $129.23
ASH ST PALO ALTO CA 94306 $1,275,000 3,049 $418.17
1620 WEBSTER ST PALO ALTO CA 94301-3851 $6,000,000 20,000 $300.00
569 SAN ANTONIO RD PALO ALTO CA 94306 $6,250,000 30,943 $201.98
297 BEL AYRE DR SANTA CLARA CA 95050-2004 $855,000 17,424 $49.07
1476 MONROE ST SANTA CLARA CA 95050 $1,299,000 2,704 $480.40
VILLA OAKS LN SARATOGA CA 95070 $4,280,000 14,846 $288.29
SARATOGA-SUNNYVALE RD SARATOGA CA 95070 $1,300,000 18,800 $69.15
15651 ROBLES DEL ORO SARATOGA CA 95070-6430 $1,550,000 43,320 $35.78
HOWEN DR SARATOGA CA 95070 $1,670,000 10,169 $164.22
BROOKWOOD LN SARATOGA CA 95070 $1,650,000 18,050 $91.41
LAND ONLY SARATOGA CA 95070 $1,553,500 14,810 $104.90
14100 ALTA VISTA AVE SARATOGA CA 95070 $1,030,000 10,149 $101.49
SARATOGA VISTA AVE SARATOGA CA 95070 $1,300,000 12,760 $101.88
MERRIBROOK DR SARATOGA CA 95070 $1,822,000 4,136 $440.52
Summary Statistics
Lower Quartile (25%) $49.07
Median Value $99.58
Upper Quartile (75%) $172.17
Source: CoreLogic, 2015; Strategic Economics, 2015.
Figure VII-8. Recent Multi-Family Land Sales Transactions in Palo Alto and Neighboring Cities
Property Location
Sales
Date Sales Price
Site
Size
(SF)
Average
Sales
Price/ SF
Page Mill Palo Alto 2012 3,959,000 26,926 $147
389 El Camino Real Menlo Park 2012 $12,200,000 53,579 $228
1300 El Camino Real Menlo Park 2012 $24,500,000 148,165 $165
E. side of Tilton Avenue, N. of El Camino Real San Mateo 2012 4,505,000 33,572 $134
1275 El Camino Real Menlo Park 2014 $3,600,000 17,960 $200
3877 El Camino Real Palo Alto 2013 4,450,000 32,825 $136
536 N Wishman Rd Mountain View 2014 1,050,000 7,000 $150
1958 Latham St, Mountain View, CA 94040 Mountain View 2014 $1,600,000 16,600 $96
Value Range $96 - $228
Weighted Average Value per SF $167
Source: City of Palo Alto; Independent appraisals; Loopnet, 2015; Strategic Economics, 2015.
DRAFT Palo Alto Housing Impact Fee Nexus Study
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Financial Feasibility Results
Figures VII-9 and VII-10 provide the pro forma for the single-family detached, single-family
attached, condominium and apartment prototypes. Below is a discussion of the findings.
Single-Family Detached
The feasibility analysis indicates that at current market prices, without the addition of new impact
fees, the single-family detached prototype would have revenues of $91.3 million, with a total
development cost of $24.5 million. The difference between the revenues and costs is the residual land
value, which is estimated at $315 per square foot. This prototype, with no additional impact fees,
yields a residual land value that is higher than what is required to be financially feasible.
All of the impact fee scenarios were found to be financially feasible due to the very high value of
single-family detached homes in Palo Alto.
The maximum impact fee of $111 per square foot raises development costs from $24.5
million to $34.5 million. This cost increase results in a residual land value of $268 per square
foot.
An impact fee set at $95 per square foot increases development costs to $33 million. The
residual land value under this scenario is $275 per square foot
An impact fee of $75 per square foot increases development costs to $31.2 million. The
residual land value under this fee scenario is $284 per square foot.
A fee level set at $50 per square foot results in total development costs of $29 million, and a
residual land value of $294 per square foot.
Single-Family Attached
According to the feasibility analysis, with no added nexus fees, the single-family attached prototype
would have total development costs of $5.8 million and a sale value of $16.7 million. The residual
land value, without nexus fees, is then estimated at $263 per square foot, and exceeds the threshold on
financial feasibility, defined as between $50 and $175.
All of the potential impact fee levels are financially feasible due to the high value of single-family
detached units in Palo Alto.
The maximum impact fee of $75 per square foot brings development costs to $7.4 million.
This cost increase results in a residual land value of $224 per square foot.
A $50 per square foot nexus fee increases development costs to $6.9 million. Under this fee
scenario, the residual land value is $237 per square foot.
With an impact fee of $40 per square foot, development costs reach $6.7 million. In this case,
the residual land value is $242 per square foot.
A fee level set at $25 per square foot brings total development costs to $6.4 million, and the
residual land value to $250 per square foot.
Condominiums
The feasibility analysis shows that, following current market prices and without new impact fees, the
condominium prototype would have revenues of $48.7 million, with a total development cost of
$26.5 million. The difference between the revenues and costs is the residual land value, which is
DRAFT Palo Alto Housing Impact Fee Nexus Study -65-
estimated at $435 per square foot. The residual land value associated with this prototype is higher
than what is required to be financially feasible.
Given the high price of condominium units in Palo Alto, all of the housing impact fee levels were
found to be financially feasible, as described below:
The full justified impact fee of $90 per square foot raises development costs from $26.5
million to $33.1 million. This cost increase results in a residual land value of $305 per square
foot.
A reduced impact fee set at $70 per square foot raises development costs to $31.7 million.
The residual land value under this fee scenario is $334 per square foot.
Setting the nexus fee at $50 per square foot results in development costs of $30.2 million, and
a residual land value of $363 per square foot.
A fee level set at $30 per square foot results in a total development cost of $28.7 million, and
a residual land value of $392 per square foot.
Apartments
For apartments, the financial analysis shows that under current market conditions, without a nexus fee
on affordable housing, a prototypical apartment development costs approximately $25.5 million, with
a total project value of $42.7 million. The residual land value on this prototype, excluding a nexus
fee, is estimated at $231 per square feet, which is a higher value than what would be required to be
financially feasible.
The analysis shows that the maximum justified fee for apartments is not financially feasible to
implement. However, reduced fee levels are financially feasible. The following describes the
feasibility of potential housing impact fees at different levels for apartments:
The maximum nexus fee of $105 per square foot brings total development costs up to nearly
$32.6 million. This cost increase results in a residual land value of $136 per square foot,
which is not financially feasible under current market conditions.
A nexus fee of $85 per square foot increases development costs to $31.2 million. The residual
land value under this fee scenario is $154 per square foot, which is financially feasible.
With a housing impact fee level of $50 per square foot, development costs reach $28.9
million. The residual land value in this case is of $186 per square foot, which is financially
feasible.
A fee level of $30 per square foot increases development costs to $27.5 million, creating a
residual land value of $204 per square foot. This fee level would also be financially feasible.
DRAFT Palo Alto Housing Impact Fee Nexus Study
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Figure VII-9. Pro Forma Model Results for Single-Family Detached and Attached Prototypes
Single Family Detached Single-Family Attached
Development Costs (Excl. Land &
Nexus Fee) per Unit Total per Unit Total
Direct Costs (a)
Building & On-Site Improvements $465,000 $13,950,000 $315,000 $3,150,000
Building & Onsite per NSF $155 $150
Parking Incl. above Incl. above Incl. above Incl. above
Total Direct Costs $465,000 $13,950,000 $315,000 $3,150,000
Total Direct Costs per NSF $155 $150
Indirect Costs (a)
A&E & Consulting $27,900 $837,000 $18,900 $189,000
Permits & Fees (Excl. Nexus fee) (b) $158,808 $4,764,246 $138,777 $1,387,773
Taxes, Insurance, Legal & Accounting $13,950 $418,500 $9,450 $94,500
Other Indirect Costs $13,950 $418,500 $9,450 $94,500
Contingency $10,730 $321,912 $8,829 $88,289
Total Indirect Costs $225,339 $6,760,158 $185,406 $1,854,062
Financing Costs (a) $38,383 $1,151,485 $21,217 $212,172
Developer Overhead & Profit (a) $87,447 $2,623,397 $62,595 $625,948
Total Development Costs $816,168 $24,485,040 $584,218 $5,842,182
Total Development Costs (per NSF) $272 $278
Income
Gross Income/Sales Proceeds $3,043,000 $91,290,000 $1,666,000 $16,660,000
Less: Operating/Sales Expenses &
Vacancy
Net (Operating or Sales) Income $3,043,000 $91,290,000 $1,666,000 $16,660,000
Capitalized Value/Sales Value (c) $3,043,000 $91,290,000 $1,666,000 $16,660,000
Residual Land Value Analysis
Total Development Costs (TDC) Except
Land With Various Levels of Nexus Fee
Nexus Fee
per NSF
TDC incl. Nexus
Fee
Nexus Fee
per NSF
TDC incl. Nexus
Fee
$0 $24,485,040 $0 $5,842,182
$50 $28,985,040 $25 $6,367,182
$75 $31,235,040 $40 $6,682,182
$95 $33,035,040 $50 $6,892,182
$111 $34,475,040 $75 $7,417,182
Residual Land Value per Sq. Ft. at
Various Nexus Fee Levels
Nexus Fee
per NSF
Residual Land
Value per SF
Nexus Fee
per NSF
Residual Land
Value per SF
$0 $315 $0 $263
$50 $294 $25 $250
$75 $284 $40 $242
$95 $275 $50 $237
$111 $268 $75 $224
Current Land Values/ Threshold for
Feasibility $50-$175 $50-$175
Notes:
(a) See Figure VII-5.
(b) This represents a generalized estimate of the fee and permit costs for each prototype, calculated by city staff. Actual fee and permit costs for
development projects will vary depending on many factors.
(c) See Figure VII-4.
(d) Feasibility threshold varies by density of prototype. For single-family detached and single-family attached, the threshold is $50-$175 per
square foot. For multi-family rental apartments and condominiums, the threshold is $150 to $250 per square foot
Acronyms: SF: square feet NSF: net square feet TDC: total development costs Source: Strategic Economics, 2015.
Figure VII-10. Pro Forma Model Results for Condominium and Apartment Prototypes
Condominiums Apartments
DRAFT Palo Alto Housing Impact Fee Nexus Study -67-
Development Costs (Excl. Land & Nexus
Fee) per Unit Total per Unit Total
Direct Costs (a)
Building & On-Site Improvements $472,500 $16,537,500 $203,910 $14,273,700
Building & Onsite per NSF $225 $210
Parking $45,000 $1,575,000 $37,500 $2,625,000
Total Direct Costs $517,500 $18,112,500 $241,410 $16,898,700
Total Direct Costs per NSF $246 $249
Indirect Costs (a)
A&E & Consulting $31,050 $1,086,750 $14,485 $1,013,922
Permits & Fees (Excl. Nexus fee) (b) $63,247 $2,213,657 $30,617 $2,143,169
Taxes, Insurance, Legal & Accounting $15,525 $543,375 $7,242 $506,961
Other Indirect Costs $15,525 $543,375 $7,242 $506,961
Contingency $6,267 $219,358 $2,979 $208,551
Total Indirect Costs $131,615 $4,606,515 $62,565 $4,379,564
Financing Costs (a) $27,522 $963,286 $20,913 $1,463,945
Developer Overhead & Profit (a) $81,196 $2,841,876 $38,987 $2,729,065
Total Development Costs $757,834 $26,524,177 $363,875 $25,471,273
Total Development Costs (per NSF) $361 $375
Income
Gross Income/Sales Proceeds $1,390,000 $48,650,000 $46,971 $3,288,000
Less: Operating/Sales Expenses & Vacancy $16,440 $1,150,800
Net (Operating or Sales) Income $1,390,000 $48,650,000 $30,531 $2,137,200
Capitalized Value/Sales Value (c) $1,390,000 $48,650,000 $610,629 $42,744,000
Residual Land Value Analysis
Total Development Costs (TDC) Except Land
With Various Levels of Nexus Fee
Nexus Fee
per NSF
TDC incl.
Nexus Fee
Nexus Fee
per NSF
TDC incl.
Nexus Fee
$0 $26,524,177 $0 $25,471,273
$30 $28,729,177 $30 $27,510,373
$50 $30,199,177 $50 $28,869,773
$70 $31,669,177 $85 $31,248,723
$90 $33,139,177 $105 $32,608,123
Residual Land Value per Sq. Ft. at Various
Nexus Fee Levels
Nexus Fee
per NSF
Residual
Land Value
per SF
Nexus Fee
per NSF
Residual
Land Value
per SF
$0 $435 $0 $231
$30 $392 $30 $204
$50 $363 $50 $186
$70 $334 $85 $154
$90 $305 $105 $136
Current Land Values/ Threshold for
Feasibility $150-$250 $150-$250
Notes:
(a) See Figure VII-5.
(b) This represents a generalized estimate of the fee and permit costs for each prototype, calculated by city staff. Actual fee and permit costs for
development projects will vary depending on many factors.
(c) See Figure VII-4.
(d) Feasibility threshold varies by density of prototype. For single-family detached and single-family attached, the threshold is $50-$175 per
square foot. For multi-family rental apartments and condominiums, the threshold is $150 to $250 per square foot
Acronyms:
SF: square feet
NSF: net square feet
Source: Strategic Economics, 2015.
DRAFT Palo Alto Housing Impact Fee Nexus Study
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ADDITIONAL POLICY CONSIDERATIONS
While the nexus study provides the necessary economic analysis for the housing impact fees, it is up
to policymakers to decide what percentage of the maximum fee to charge on new development.
Financial feasibility is one important factor to examine. In addition, there are a number of other
policy issues to consider, such as:
How much will residential development fees increase?
What are the residential impact fee levels in neighboring jurisdictions?
How does a housing impact fee fit into Palo Alto’s overall housing strategy?
How can the city decide other administrative issues?
A discussion of each of these topics is presented below.
Comparison to Existing Fees on Residential Development
Figure VII-11 presents information on current city fees charged on the four residential prototypes
included in this nexus analysis. It also demonstrates how total residential fee levels would change
under the maximum fee and three additional residential impact fee scenarios.
Currently, Palo Alto’s existing city permits and fees for the residential prototypes are estimated at
$158,808 for a single-family detached unit, $138,777 for a single-family attached unit, $63,247 for a
condominium unit and $30,617 for an apartment unit.19 Once the nexus-based residential impact fees
at various levels are added to existing fees, the total fees increase as presented in Figure VII-11. The
maximum fee scenario increases total fees between 200 and 400 percent, depending on the prototype,
while the lowest fee scenario (Scenario 4) approximately doubles total city fees.
Figure VII-11 is intended to be a resource for the policy discussion that Palo Alto will have when
considering what fee level to select. A fee that is set too high could have a dampening effect on
private development. On the other hand, a low fee does not fully mitigate all the affordable housing
impacts from new residential development.
19 The fee estimates presented above represent the best approximations available from Palo Alto.
DRAFT Palo Alto Housing Impact Fee Nexus Study -69-
Figure VII-11. Palo Alto Total Residential Fees under Selected Fee Scenarios
Single-Family
Detached
Single-Family
Attached Condominiums Apartments
Existing Fees and Permits per Unit $158,808 $138,777 $63,247 $30,617
Existing Fees and Permits per SF $53 $66 $30 $32
Scenario 1: Maximum Fee per SF $111 $90 $75 $105
Nexus Fee Per Unit $333,501 $189,037 $158,519 $101,906
Combined Fees Per Unit $492,309 $327,814 $221,766 $132,523
Combined Fees per SF $164 $156 $106 $136
Scenario 2 Fee per SF $95 $70 $50 $85
Nexus Fee Per Unit $285,000 $147,000 $105,000 $82,571
Combined Fees Per Unit $443,808 $285,777 $168,247 $113,188
Combined Fees per SF $148 $136 $80 $117
Scenario 3 Fee per SF $75 $50 $40 $50
Nexus Fee Per Unit $225,000 $105,000 $84,000 $48,571
Combined Fees Per Unit $383,808 $243,777 $147,247 $79,188
Combined Fees per SF $128 $116 $70 $82
Scenario 4 Fee per SF $50 $30 $25 $30
Nexus Fee Per Unit $150,000 $63,000 $52,500 $29,143
Combined Fees Per Unit $308,808 $201,777 $115,747 $59,760
Combined Fees per SF $103 $96 $55 $62
Comparison to Neighboring Jurisdictions
Figure VII-12 compares the fee scenarios for Palo Alto with the current housing impact fees and in-
lieu fees in other nearby cities. If either the maximum housing impact fee levels (Scenario 1) or the
second-highest fee levels (Scenario 2) were adopted in Palo Alto, they would significantly exceed the
residential impact fees charged in the neighboring jurisdictions in San Mateo and Santa Clara
Counties listed in Figure VII-12. However, San Francisco has adopted fees ranging from $199,000 to
$522,000 per unit, depending on the unit size, which are somewhat similar to the maximum fee levels
calculated for Palo Alto. If Palo Alto were to adopt the recommended fee levels its fees would be
higher than most other cities in San Mateo and Santa Clara Counties, but lower than the housing
impact fees in San Francisco.
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Figure VII-12. Comparison with Impact Fees and In-Lieu Fees in Neighboring Jurisdictions
Single Family Detached Single Family Attached Condominiums Apartments
Date Fee Was
Adopted
Palo Alto Fee Scenarios
Scenario 1 (Maximum)
Per SF $111 $90 $75 $105 N/A
Per Unit $333,501 $189,037 $158,519 $101,906
Scenario 2
Per SF $95 $70 $50 $85 N/A
Per Unit $285,000 $147,000 $105,000 $82,571
Scenario 3
Per SF $75 $50 $40 $50 N/A
Per Unit $225,000 $105,000 $84,000 $48,571
Scenario 4
Per SF $50 $30 $25 $30 N/A
Per Unit $150,000 $63,000 $52,500 $29,143
Impact Fees
Cupertino $15/SF $16.50/SF (a) $20/SF $25/SF 2015
Daly City $14/SF $18/SF (b) $22/SF $25/SF 2014
East Palo Alto $22/SF $22/SF $22-$44/SF (c) $22/SF 2014
Mountain View N/A N/A N/A $15/SF 2015
San Carlos (d) $23.54-$43.54/SF $20.59-$42.20/SF $20.59-$42.20/SF $23.54-$43.54/SF 2010
San Francisco (e) $199,698-$522,545/unit $199,698-$522,545/unit $199,698-$522,545/unit $199,698-$522,545/unit 2015
San Jose N/A N/A N/A $17/SF (f) 2014
Sunnyvale N/A N/A N/A $17/SF (g) 2015
Inclusionary Policies and In-Lieu Fees
Palo Alto 15%-20% 15%-20% 15%-20% N/A
Mountain View 3% of Sales Price 3% of Sales Price 3% of Sales Price N/A 2015
San Jose (h) 15% or $17/SF in-lieu fee 15% or $17/SF in-lieu fee 15% or $17/SF in-lieu fee N/A 2014
Sunnyvale 7% of Sales Price 7% of Sales Price 7% of Sales Price N/A 2015
(a) This fee applies to small lot single family and townhomes.
(b) This fee applies to townhomes.
(c) Fee ranges from $22 per square foot for for-sale housing without structured parking to $44 per square foot for housing with structured parking.
(d) Fees shown as ranges. Actual fees charged depends on project size.
(e) Fee charged depends on unit size (number of bedrooms).
(f) Fee goes into effect in 2016. Developments approved by July 2016 are exempt with a longer exemption for downtown development.
(g) Fees for projects that are between 4 and 7 units pay 50 percent of this fee.
(h) Inclusionary policy and in-lieu fee apply to for-sale developments of more than 20 units.
Sources: The Non-Profit Housing Association of Northern California; City of San Carlos Municipal Code; Vernazza Wolfe Associates, Inc; Strategic Economics, 2015.
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The potential fee scenarios can also be compared with existing housing impact fees in other Bay Area
cities for regional context. This list is not an exhaustive inventory of all Bay Area cities with housing
impact fees, but it provides information about many cities that have fees on rental, ownership or both
types of housing. As shown in Figure VII-13, housing nexus fees in other Bay Area cities vary
significantly from city to city. None of the fees presented in Figure VII-13 are as high as the
maximum justified fee in Palo Alto. However, some of the cities, such as Berkeley and Fremont, have
impact fees that are similar to the lowest fee scenario evaluated for Palo Alto.
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Figure VII-13. Existing Housing Impact Fees in Bay Area Cities
City Project Type Amount
Fremont For-Sale and Rental Development $19.50 per habitable SF
$22.50 per habitable SF for single family homes on
lots 6,000 SF or greater.
Santa Rosa For-Sale and Rental Development 2.5% of sale price of for-sale units. Based on SF
for rentals
Livermore For-Sale and Rental Development Based on type of dwelling produced
Pleasanton For-Sale and Rental Development Single Family (over 1,500 SF): $10,880 per unit
Single Family (1,500 SF or less) and Multi-family
(Apt. or Condo): $2,696 per unit
Adjusted annually based on CPI
Napa For Sale and Rental Development Single Family: $ 2.20 per SF
Condo: $2.20 per SF
Rental: $3.75 per sq.
Emeryville Rental Residential Projects $20,000 per dwelling unit
Berkeley Rental Development $28,000 per unit
Note: City of Berkeley Resolution No. 66, 015 authorizes $8,000 discount for eligible projects
Sources: The Non-Profit Housing Association of Northern California, Strategic Economics, and Vernazza Wolfe Associates, Inc, 2015.
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Role of Fees in Overall Housing Strategy
The City currently charges a commercial linkage fee of $19.31 per square foot on all new non-
residential development. These fees are payable at the time that the building permit is issued. The city
also has an inclusionary housing program that requires that 15 percent of the units in market-rate
developments consisting of five or more housing units must be sold at below-market rate (BMR)
prices. The inclusionary requirement increases to 20 percent for larger projects on five-acre and larger
parcels. Two-thirds of the BMR units are to be affordable at the 90 percent AMI level households
and the remaining one-third are to be affordable at the 110 percent AMI level. City policy generally
requires that the BMR units be provided in the project. In some cases, developers have the option of
paying an in-lieu fee of between 7.5 and ten percent of the sales price or fair market value, whichever
is greater. The developer must also pay a fee for fractional units.
Revenues from the BMR in-lieu fee and commercial linkage fee programs are deposited into the
City’s Affordable Housing Fund. The Affordable Housing Fund is a local housing trust fund
established by the City Council of Palo Alto to provide financial assistance for the development of
housing affordable to very low-, low- and moderate-income households that live or work within the
City. It is largely made up of two sub-funds: the Commercial Housing Fund and the Residential
Housing Fund. While both rental and ownership units are eligible for assistance, in practice all units
assisted thus far have been rental units and almost all have been affordable to very low- or low-
income households.
The revenues to be collected from the residential impact fee, if adopted, could provide an important
additional source of local funding; however, local fee revenues do not generally cover the entire
funding gap encountered by sponsors of new affordable housing. Additional funding from a variety of
sources will remain critical. These funding sources typically include public subsidies from Santa
Clara County, equity from the Low Income Housing Tax Credits, and financing from conventional
lenders.
Potential for Overlap between Residential and Commercial Fees
The City is also undertaking a housing impact nexus study simultaneously, and may soon adopt a
housing impact fee in a parallel process to the commercial linkage fee considered in this report. One
issue that may arise if a City considers the adoption of both fees is whether there is any overlap
between the two impact fees, resulting in potential “double-counting” of impacts.
The commercial linkage fee study examined jobs located in new commercial buildings including
office/ R&D/ medical office buildings, retail/ restaurants/ services, and hotels. The nexus analysis
then calculated the average wages of the workers associated with each commercial building to derive
the annual income of the new worker households. The analysis determines the area median income
(AMI) level of the new worker-households to identify the number of worker-households that would
require affordable housing.
The housing impact fee nexus analysis examined households buying or renting new market rate units
in the jurisdiction. The household expenditures by these new residents have an economic impact in
the county, which can be linked to new jobs. The nexus analysis quantified the jobs linked to new
household spending, and then calculated the wages of new workers and the household income of new
worker households. Each worker household was then categorized by area median income (AMI) to
determine the number of households that require affordable housing.
There may be a share of jobs counted in the commercial linkage fee analysis that are also included
in the residential nexus analysis, particularly those in the service sector. Other types of jobs counted
in the residential nexus analysis are unique to that analysis, and are not included in the commercial
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linkage fee analysis (for example, public sector employees). The commercial linkage fee analysis
is limited to new development in private sector office/ R&D/ medical office buildings, hotels, and
retail/ restaurants/ services space.
There is potential that some jobs could be counted in both analyses, and that the two programs may
overlap in mitigating the affordable housing demand from the same worker households. Each of the
proposed fees is required to mitigate no more than 100 percent of the demand for affordable units by
new worker households. In order to reduce the potential for overlap between the two programs, it is
advisable to set both the commercial linkage fees and housing impact fees at below 100 percent of the
nexus-based maximum. In this way, when combined, the programs would mitigate less than 100
percent of the impact even if there were overlap in the jobs counted in the two nexus analyses.
Administrative Issues
When adopting a Housing Impact Fee, there are several administrative issues to consider. First, does
the City want to encourage smaller units? By charging lower fees for smaller units, it is possible that
it could encourage development of smaller units.
Secondly, similar to any impact fee, periodically it will be necessary to adjust the housing
impact fees. Adjustments may be needed due to possible changes in the affordability gap. However,
the connection between new residential construction and growth in employment derived from the
IMPLAN3 Model is unlikely to change in the short run.
It is advisable that the City adjusts its housing impact fee annually by using an annual adjustment
mechanism. An adjustment mechanism updates the fees to compensate for inflation in development
costs. To simplify annual adjustments, it is recommended that the City select a cost index that is
routinely published. While there is no index that tracks changes in Palo Alto’s development costs,
including land, specifically, there are a few options to consider.
The first option is the Consumer Price Index (CPI) Shelter component. The shelter
component of the CPI covers costs for rent of primary residence, lodging away from home,
owner’s equivalent rent of primary residence, and household insurance. Of the total shelter
index, costs associated with the owner’s equivalent rent of primary residence constitute 70
percent of total costs entered into the index.
A second option to adjust the fee for annual inflation is the construction cost index published
in the Engineering News Record (ENR). This index is routinely used to update other types of
impact fees. Cost index information for the San Francisco region, the smallest geographical
area available for this purpose, is available on an annual basis. The ENR cost index measures
inflation in construction costs, but it does not incorporate changes in land costs or public fees
charged on new development.
Because these indices are readily available, reliable, and relatively simple to use, it is recommended
that Palo Alto use these indices for annual adjustments. However, because both understate the
magnitude of inflation, it is recommended that the City base its annual adjustment mechanism on the
higher of the two indices (CPI or ENR), using a five-year moving average as the inflation factor.
In addition to revising the fee annually for inflation, the City is encouraged to update the housing
impact study every five years, or at the very least, update the housing affordability gap used in the
basic model. The purpose of these updates is to ensure that the fee is still based on a cost-revenue
structure that remains applicable in the Palo Alto housing market. In this way, the fee will more
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accurately reflect any potential structural changes in the relationships between affordable prices and
rents, and development costs.
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GLOSSARY OF TERMS
Affordable Housing: Under state and federal statutes, housing is defined as affordable if housing
costs do not exceed 30 to 35 percent of gross household income.
Annual Adjustment Mechanism: Due to inflation in housing construction costs, it is frequently
necessary to adjust impact fees. An index, such as the Consumer Price Index (CPI) or a published
construction cost index (for example, from the Engineering News Record) is used to revise housing
fees to reflect inflation in housing construction costs.
Assisted Housing: Housing that has received public subsidies (such as low interest loans, density
bonuses, direct financial assistance, etc.) from federal, state, or local housing programs in exchange
for restrictions requiring a certain number of housing units to be affordable to very low-, low-, and
moderate-income households.
Boomerang Funds: Monies returned to the City by the State of California, after dissolution of
redevelopment agencies in the State.
Consumer price index (CPI): Index that measures changes in the price level of a market basket of
consumer goods and services purchased by households.
Employment Densities: The amount of square feet per employee is calculated for each property use
that is subject to a commercial development housing linkage fee. Employment densities are used to
estimate the number of employees that will work in a new commercial development.
Household: The US Census Bureau defines a household as all persons living in a housing unit
whether or not they are related. A single person living in an apartment as well as a family living in a
house is considered a household. Households do not include individuals living in dormitories, prisons,
convalescent homes, or other group quarters.
Household Income: The total income of all the persons living in a household. Household income is
commonly grouped into income categories based upon household size and income, relative to the
regional median family income.
Housing Affordability Gap: The affordability gap is defined as the difference between what a
household can afford to spend on housing and the market rate cost of housing. Affordable rents and
sales prices are defined as a percentage of gross household income, generally between 30 percent and
35 percent of income.
VIII. GLOSSARY OF TERMS AND ACRONYMS
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For renters, rental costs are assumed to include the contract rent as well as the cost of utilities,
excluding cable and telephone service. The difference between these gross rents and
affordable rents is the housing affordability gap for renters. This calculation assumes that
30% of income is paid for gross rent.
For owners, costs include mortgage payments, mortgage insurance, property taxes, property
insurance, and homeowner association dues. 20 The difference between these housing
expenses and affordable ownership costs is the housing affordability gap for owners. This
calculation assumes that 35% of income is paid for housing costs.
Housing Subsidy: Housing subsidies refer to government assistance aimed at reducing housing sales
prices or rents to more affordable levels.
Housing Unit: A housing unit can be a room or group of rooms used by one or more individuals
living separately from others in the structure, with direct access to the outside or to a public hall and
containing separate toilet and kitchen facilities.
IMPLAN3: A software model that is used to provide a quantitative assessment of the
interdependencies between different branches of a regional (or national) economy. The latest model,
IMPLAN3, was used in the nexus studies. The major input is household income, and the major output
is direct and induced employment reported by industries
Inclusionary Zoning: Inclusionary zoning, also known as inclusionary housing, refers to a planning
ordinance that requires that a given percentage of new construction be affordable to households with
very low, low, moderate, or workforce incomes.
In-Lieu Fee: A literal definition for an in-lieu fee for inclusionary units would be a fee adopted “in
place of” providing affordable units. For the purposes of operating an inclusionary housing program,
a public jurisdiction may adopt a fee option for developers that prefer paying fees over providing
housing units on- or off-site. A fee study is frequently undertaken to establish the maximum fee that
can be charged as an in-lieu fee. This fee study must show that there is a reasonable relationship
between the fee and the cost of providing affordable housing.
Market-Rate Housing: Housing which is available on the open market without any public subsidy.
The price for housing is determined by the market forces of supply and demand and varies by
location.
Nexus Study: In order to adopt a residential housing impact fee or a commercial linkage fee, a nexus
study is required. A nexus requires local agencies proposing a fee on a development project to
identify the purpose of the fee, the use of the fee, and to determine that there is “a reasonable
20 Mortgage terms for first-time homebuyers typically allow down payment of five percent; these terms require private
mortgage insurance.
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relationship between the fee’s use and the type of development project on which the fee is imposed.”
A nexus study establishes and quantifies a causal link or “nexus” between new residential and
commercial development and the need for additional housing affordable to new employees.
Linkage Fee: A fee or charge imposed on commercial developers to pay for a development’s impact
on the need for affordable housing. The fee is based on projected household incomes of new
employees that will work in newly created space. The fee varies according to the type of property use.
Prototypes: Prototypes are used for residential and commercial developments in order to define
housing impact fees. The prototypes generally represent new development projects built in a
community and are used to estimate affordable housing impacts associated with new market rate
commercial and residential developments. While the prototypes should be “typical” of what is built,
for ease of mathematical computation, they are often expressed as larger developments in order to
avoid awkward fractions.
Residential or Housing Impact Fee: A fee imposed on residential development to pay for a
development’s impact on the need for affordable housing. The fee is based on projected incomes of
new employees associated with the expansion of market rate developments. Two steps are needed to
define the fees. The first step is the completion of a nexus study, and the second step entails selection
of the actual fee amount, which can be below the amount justified by the fee study, but not above that
amount.
RS Means: Data source of information for construction cost data.
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DEFINITION OF ACRONYMS
AMI: Area Median Income
CBIA: California Building Industry Association
EDD: State of California Employment Development Department
FAR: Floor-area-ratio
FF&E: Furniture, Fixtures, and Equipment
GBA: Gross Building Area
HCD: Department of Housing and Community Development (State of California)
NAICS: North American Industry Classification System
NSF: Net Square Feet
QCEW: Quarterly Census of Employment and Wages
R&D: Research and development
SF: Square Feet
TDC: Total Development Costs