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Home My WebLink About2016-06-21 Finance Committee Agenda PacketFinance Committee 1 MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE CITY COUNCIL AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE CITY CLERK’S OFFICE AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. June 21, 2016 Regular Meeting Community Meeting Room 7:00 PM Agenda posted according to PAMC Section 2.04.070. Supporting materials are available in the Council Chambers on the Thursday 10 days preceding the meeting. PUBLIC COMMENT Members of the public may speak to agendized items. If you wish to address the Committee on any issue that is on this agenda, please complete a speaker request card located on the table at the entrance to the Council Chambers/Council Conference Room, and deliver it to the Clerk prior to discussion of the item. You are not required to give your name on the speaker card in order to speak to the Committee, but it is very helpful. Call to Order Oral Communications Members of the public may speak to any item NOT on the agenda. Action Items 1.Third Quarter FY 2016 Financial Report 2.Review Updates to Commercial and Residential Impact Fee Nexus Studies and Recommend Framework for a Draft Ordinance to Adopt Housing Impact Fees for Residential and Commercial Construction Future Meetings and Agendas Adjournment AMERICANS WITH DISABILITY ACT (ADA) Persons with disabilities who require auxiliary aids or services in using City facilities, services or programs or who would like information on the City’s compliance with the Americans with Disabilities Act (ADA) of 1990, may contact (650) 329-2550 (Voice) 24 hours in advance. 2 June 21, 2016 MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE CITY COUNCIL AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE CITY CLERK’S OFFICE AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. Finance Committee Items Tentatively Scheduled Meeting Date Line No. Item Title Referral Date 9/6/2016 1 Policy on Use of Low Carbon Fuel Standard Credits (Utilities) 11/15/2016 2 Year End Financial Report (ASD) 3 Comprehensive Annual Financial Reports (CAFR) (ASD) Finance Committee Items to be Scheduled Referral Date Line No. Item Title Status 2015 4 Consideration of Stronger Encroachment Fees for Construction that Impact Portions or all of a City Street or Sidewalk (Public Works) To be scheduled in 2016 5 Cubberley Center Master Plan: Additional Information and a Timeline for the Site (requested by the FC) (City Manager) City of Palo Alto (ID # 6986) Finance Committee Staff Report Report Type: Action Items Meeting Date: 6/21/2016 City of Palo Alto Page 1 Summary Title: 3rd Quarter FY 2016 Financial Report Title: Third Quarter FY 2016 Financial Report From: City Manager Lead Department: Administrative Services Motion Staff recommends that Finance Committee review and approve the Third (3rd) Quarter financial report. Background The purpose of this report is to provide the Finance Committee with information on the financial status of the City’s General Fund and Enterprise Funds as of the end of the 3rd Quarter of fiscal year (FY) 2016, which includes the nine-month period from July 1, 2015 through March 31, 2016. As reported in the FY 2017-2026 General Fund Long Range Financial Forecast and the FY 2017 Operating Budget, the City’s major tax revenue streams continue to exceed expectations. As a result, the mid-year budget changes for FY 2016 included a $4.3 million upward adjustment in revenues, a 2.6 percent increase over the FY 2016 Adopted Budget. Expenses were also adjusted and, after subtracting Budget Amendments authorized by Council, the net projected surplus for FY 2016 was estimated at $3.1 million. Based on updated projections subsequent to the mid-year budget, FY 2016 may yield an additional $3.4 million to $4.5 million in surplus funds as a result of increased property and utility user tax revenue, and receipt of one-time sale proceeds from the former City Manager’s house. The FY 2017 City Manager’s Proposed Budget conservatively accounts for $3.4 million of this potential additional surplus in the General Fund Budget Stabilization Reserve (BSR) as outlined on page 80 of the FY 2017 Proposed Operating Budget, and includes these projections in the estimated FY 2017 BSR balance. Attachment A contains a line by line report of major revenues and expenditures for 3rd Quarter year-to-date (YTD), as well as a comparison to the FY 2016 Adopted Budget and Adjusted Budget as of March 31, 2016. As part of closing the FY 2016 Budget, staff will bring forward recommendations to allocate surplus funds. As detailed in the Proposed FY 2017 Operating Budget, $4.9 million is recommended to be drawn from the BSR to balance the FY 2017 Budget. City of Palo Alto Page 2 Attachment B is a revenue and expenditures report for 2nd Quarter YTD, which was inadvertently omitted from the mid-year budget CMR #6756. Discussion GENERAL FUND Revenue Highlights for FY 2016 3rd Quarter Year to Date (YTD) Following is a table which highlights the City’s major revenue sources for the 3rd Quarter YTD, compared to the same period of the prior year. Revenue for each period is expressed as a percentage of Adjusted Budget. FY 2016 FY 2015 % change FY 2016 %FY 2015 % Inc (Dec) Property tax 22,453$ 20,715$ 8%35,967$ 62%32,556$ 64% Sales tax 13,143 17,703 (26%)1 28,430 46%29,238 61% Charges for services 13,654 18,052 (24%)2 24,700 55%24,863 73% Utility user tax 8,690 8,070 8%10,489 83%10,895 74% Transient occupancy tax 13,794 9,400 47%21,991 63%15,901 59% Documentary transfer tax 3,854 4,744 (19%)7,052 55%6,500 73% Permits and licences 5,515 6,288 (12%)8,280 67%7,738 81% Rental income 11,794 11,110 6%15,226 77%14,207 78% Charges to other funds 8,956 8,006 12%11,929 75%10,647 75% All other revenue sources 6,149 4,114 49%5,464 113%5,203 79% Total General Fund Revenues 108,002$ 108,202$ 0%169,528$ 64%157,748$ 69% 1 Adjust for timing of triple flip sales tax receipts 4,979 3,375 One-time adjustment to true-up FY15 sales tax accrual (2,918) 2 Adjust for 2nd and 3rd Quarter Stanford fire revenue 3,765 GF Revenues - Normalized 116,746$ 108,659$ 7% 3rd Quarter YTD Actuals City of Palo Alto General Fund Revenues FY 2016 3rd Quarter YTD (000's) Adjusted Budget Final Budget After adjusting for the one-time sales tax adjustments and the Stanford fire revenue timing difference, revenue is up $8.1 million, or 7 percent, from prior year as of the end of the 3rd Quarter YTD. The increased revenue is due primarily to property tax and transient occupancy tax increases. In total, receipts are at 64 percent of Adjusted Budget, which is typical for the City of Palo Alto Page 3 end of the 3rd Quarter due to property tax receipts which spike in the last quarter of the fiscal year. Each of the major revenue categories is discussed in more detail below. Following is a chart which depicts the three-year trend for major sources of General Fund tax revenue, comparing FY 2014 and FY 2015 full year actuals with FY 2016 Adjusted Budget. As detailed in the City’s most recent Long Range Financial Forecast, sales and property tax revenue streams are expected to continue their upward growth trends, while other tax streams will advance at a slower rate or remain flat. The chart is followed by a more detailed discussion of each major revenue category. Property Tax Sales Tax Tr Occ Tax Doc Tsf Tax UUT FY 2014 Actual $30,587 $29,424 $12,255 $8,143 $11,008 FY 2015 Actual 34,117 29,675 16,699 10,384 10,861 FY 2016 Adj Budget 35,967 28,430 21,991 7,052 10,489 $0 $10,000 $20,000 $30,000 $40,000 General Fund Tax Revenues FY 2014 and 2015 Actuals Compared to FY 2016 Adjusted Budget (000's) Property tax revenue at the close of 3rd Quarter YTD was $22.5 million, an increase of 8 percent over the same period prior year. Property tax is received from the County of Santa Clara during the 2nd, 3rd and 4th quarters of the year, and receipts at 62 percent of full-year budget is typical for this line item through March 31. The FY 2016 Adjusted Budget is $35.9 million, 5.4 percent higher than the prior year’s actual revenue of $34.1 million. Staff expects property tax revenue will exceed FY 2016 Adjusted Budget by $0.7 million based on year-to- date receipts. It should be noted that both FY 2015 and FY 2016 budget forecast include a non- recurring receipt of $0.9 million and $1.0 million, respectively, for excess Educational Revenue Augmentation Fund (ERAF) distributions from the County of Santa Clara. ERAF is the fund used to collect and disburse property taxes that are shifted to/from cities, the county and special districts prior to their reallocation to K-14 school agencies. Property tax increases are driven by high demand in the residential sector and robust activity in the commercial property market, which is expected to continue into FY 2017. The continued growth in assessed values will, in turn, translate into higher property tax revenue. City of Palo Alto Page 4 Sales tax revenue as of the end of the 3rd Quarter is flat year over year (FY 2016 - $18,122 vs FY 2015 - $18,160), after factoring out the one-time accrual change in FY 2015 and equalizing the timing of triple flip receipts. Based on the City’s sales tax consultant updated forecasts, staff expects this revenue will exceed the FY 2016 Adjusted Budget by $0.6 million. While sales tax has fully recovered from its Great Recession low of $17.9 million in FY 2010, there are concerns over future growth due to the continued erosion of brick and mortar receipts that is resulting from steady growth in on-line retail sales. Completion of Stanford Hospital construction projects will also reduce future sales tax revenue. Transient occupancy tax (TOT) revenue reached $13.8 million through the end of the 3rd Quarter, an increase of $4.4 million from prior year. Staff expects TOT will be slighty above the FY 2016 Adjusted Budget by $0.3 million. Average daily room rates increased 9 percent from prior year - $245 per day to $267 per day - while average occupancy rates fell slightly from 75 percent to 74 percent. The increase in number of rooms available as a result of newly opened hotels has kept occupancy rates lower than 85 percent, which is considered full occupancy. Two new hotels on San Antonio Road have been proposed, in addition to the expansion of an existing hotel. These potential new revenues will be incorporated into future budgets. Effective January 1, 2015, the TOT rate increased from 12 percent to 14 percent. The entire 14 percent rate from new hotels, plus the 2 percent increase from existing hotels, has been allocated to the Infrastructure Plan pursuant to prior City Council direction. Following is a comparative breakdown of the allocation of transient occupancy tax receipts: 3rd Quarter YTD FY 2016 3rd Quarter YTD FY 2015 General Fund: $ 9,227,158 $ 8,334,456 Infrastructure Plan: (8 months of receipts) (3 months of receipts) New hotels – 12% 2,559,402 691,305 All hotels – 2% 2,007,788 373,992 4,567,190 1,065,297 Total TOT Receipts 3rd Qtr YTD $ 13,794,348 $ 9,399,753 Documentary transfer tax revenue for the nine months ended March 31 totals $3.9 million, down $0.9 million or 19 percent from the prior year. FY 2015 YTD revenue included an unusually large receipt for $1.3 million which was not replicated in FY 2016. Staff expects full year revenue in the range of $6.4 million, which is $0.7 million less than was forecasted in the Mid-Year Budget document. This revenue source is difficult to forecast because the volume and mix of commercial and residential transactions can vary significantly from year to year. Utility user tax (UUT) revenue for the nine months ended March 31 totals $8.7 million, an increase of $0.6 million, or 8 percent, from the prior year. It was expected that this revenue City of Palo Alto Page 5 stream would decrease due to the telephone UUT rate reduction from 5 percent to 4.75 percent, less water revenue due to lower consumption, and less gas revenue due to lower prices. The declines in water and gas are partially offset by elimination of the large utility user discount. While receipts from water, gas and electric services are in line with expectations, that is not the case with the telephone UUT. These revenues have surged past projections. Unfortunately, the City does not receive detailed information from telephone service providers, making it difficult to explain this result. The Mid-Year Budget decreased UUT budgeted revenue from $11.2 million to $10.5 million, however based on receipts through March 31 the full-year forecast is now estimated at $12.1 million, an increase of $1.6 million from the Mid-Year Budget. Charges for services revenue through the first three quarters of FY 2016 is down $0.6 million from the same period last year, after adjusting for the timing difference in billings to Stanford University for fire and emergency services. The decrease is due to $0.3 million less revenue from Stanford and $0.3 million less revenue for plan checking fees. Permits and licenses revenue for 3rd Quarter YTD is down $0.8 million from the same period prior year due to a lower number of new construction permits. FY 2015 new construction permit revenue was higher due to VMWare and construction at various Stanford facilities. This revenue category will be adjusted at year-end to defer a portion of revenue to FY 2017 for those permits that are in progress at June 30. Expense Highlights for FY 2016 3rd Quarter YTD Following is a table which highlights the City’s expenses by function for the 3rd Quarter YTD, and compares expenses to the same period prior year. In addition, the expense for the period is expressed as a percentage of budget for each of the years. City of Palo Alto Page 6 City of Palo Alto General Fund Expenses FY 2016 3rd Quarter YTD (000's) FY 2016 FY 2015 % change FY 2016 %FY 2015 % Inc (Dec) Police 26,790$ 25,563$ 5%36,725$ 73%34,655$ 74% Fire 20,499 20,209 1%26,774 77%28,801 70% Community services 17,591 16,688 5%26,521 66%24,274 69% Public works 10,924 9,777 12%15,807 69%14,458 68% Development services 7,530 6,852 10%12,282 61%10,895 63% Planning and community env 6,480 5,297 22%11,139 58%9,039 59% Library 5,794 5,802 0%8,974 65%8,641 67% Administrative services 5,892 5,341 10%7,987 74%7,399 72% All other departments 15,006 14,042 7%24,537 61%25,469 55% Total General Fund Expenses 116,506$ 109,571$ 6%170,746$ 68%163,631$ 67% 3rd Quarter YTD Actuals Adjusted Budget Final Budget Actual expenses through the first three quarters of the fiscal year total $116.5 million, a 6 percent increase over prior year. The expenses are right in line with the Adjusted Budget at 68 percent of full-year budgeted amounts. Public Safety comprises the largest portion of General Fund expenditures – 41 percent of actuals as of March 31. Following is the detail for Public Safety overtime expenses through the 3rd Quarter of the current fiscal year: City of Palo Alto Page 7 Public Safety Salaries and Overtime Expense FY 2016 3rd Quarter YTD (000's) FY 2016 FY 2015 % change FY 2016 %FY 2015 % Inc (Dec) Police - Salaries 11,633$ 11,509$ 1%17,007$ 68%15,749$ 73% Police - Overtime 1,536 1,497 3%1,539 100%1,500 100% Total Police 13,169 13,006 1%18,546 71%17,249 75% Fire - Salaries 8,330 8,400 (1%)11,918 70%12,440 68% Fire - Overtime 1,940 1,708 14%1,560 124%1,609 106% Total Fire 10,270 10,108 2%13,478 76%14,049 72% Total Public Safety Salaries & Overtime 23,439$ 23,114$ 1%32,024$ 73%31,298$ 74% 3rd Quarter YTD Actuals Adjusted Budget Police overtime has increased $39 thousand, or 3 percent, over the same period last year. On a combined basis, salaries and overtime are at 71 percent of budget through the first nine months of the fiscal year. Overtime cost is primarily due to vacancies. The Department’s overtime analysis is included in Attachment C. Fire overtime has increased $0.2 million, or 14 percent, from the same period last year. On a combined basis, salaries and overtime are at 76 percent of budget through the first nine months of the fiscal year. Overtime cost is driven by vacancies. The Department’s overtime analysis is included in Attachment C. General Fund Budget Stabilization Reserve (BSR) Balance The General Fund BSR balance as of July 1, 2015 was $48.2 million, of which $13.6 million was set aside for specific purposes such as capital projects, funding of FY 2016 one-time expenditures, and potential establishment of a Pension Trust Fund. Staff anticipates the City could end the current year with a surplus if revenue trends continue upward through the 4th Quarter. However, as noted earlier in this report, during the development of the FY 2017 Proposed Budget, staff closely monitored revenue and expense projections, and assumptions for this surplus are included in the FY 2017 Proposed BSR balance. Details can be found in the General Fund section of the FY 2017 Proposed Operating Budget on page 80. A conservative estimate of the potential surplus has been factored into the estimated June 30, 2016 BSR balance and it is from that balance ($40.5 million as outlined in the budget document) that the City of Palo Alto Page 8 staff proposed a $4.9 million reduction for a $35.6 million FY 2017 beginning BSR balance. Based on these most recent estimates, it is estimated that the June 30, 2016 balance could reach $41.8 million compared to the $40.5 million used in the development of the FY 2017 Proposed Operating Budget. As part of closing the FY 2016 Budget, staff will bring forward recommendations to allocate any surplus funds not already accounted for in the development of the FY 2017 Proposed Budget, including a transfer to the Infrastructure Reserve and a placeholder to balance the FY 2017 Operating Budget. Following is a table that summarizes actual and projected changes in the BSR balance from June 30 2015 through June 30 2016. FY 2016 Budget Stabilization Reserve (BSR) Summary (000’s) BSR Balance, June 30 2015 Comprehensive Annual Financial Report $ 48,198 Actions approved in FY 2015 year-end close CMR #6251 - Operating transfer to Capital Improvement Fund for Roth TDAs (1,000) - Operating transfer to Capital Improvement Fund Infrastructure Reserve (6,000) - Operating transfer to Technology Fund for radio replacements (1,000) - FY 2016 one-time expenditures (Ordinance 5329) (2,123) - FY 2016 Budget Amendment Ordinances (BAOs) approved to date (2,130) - Establishment of a Pension Trust Fund (retained in BSR) (1,305) BSR Balance, per FY 2015 Adopted Budget 34,640 18.7% FY 2016 Mid-Year Budget Changes approved in CMR #6756 - Budget Amendment Ordinances (various CMRs) (2,855) - Less: BAOs approved in FY 2015 year-end close 2,130 - FY 2016 excess revenues ($4.4 M) offset by expenditures ($1.4M) 3,055 BSR Projected Balance as of FY 2016 Mid-Year 36,970 - April 2016 updated FY 2016 projections for excess revenues and additional expenditure savings (as outlined and assumed in the FY 2017 Proposed Operating Budget balancing, page 80) 3,541 - June 2016 revised FY 2016 projections for excess revenues and expenditure savings 1,270 BSR Projected Balance, June 30 2016 41,781 22.5% ENTERPRISE FUNDS Following is a summary of operating revenues and expenses for each of the Enterprise Funds for the nine months ended March 31, 2016, including a comparison of results from the same period last year. City of Palo Alto Page 9 Enterprise Funds Operating Revenue Adjusted 3rd Quarter YTD Actuals % Change Budget FY 2016 FY 2015 Inc(Dec)FY 2016 % Electric 92,020$ 90,832$ 1%121,966$ 75% Water 27,029 27,040 (0%)39,117 69% Gas 23,639 23,995 (1%)37,162 64% Refuse 23,759 23,293 2%30,475 78% Wastewater treatment 17,463 16,701 5%23,261 75% Wastewater collection 12,362 11,743 5%17,757 70% Storm Drainage 4,868 4,662 4%6,325 77% Fiber Optic 3,523 2,783 27%4,842 73% Airport 706 413 71%948 74% Operating Revenue YTD 205,369$ 201,462$ 2%281,853$ 73% Electric revenue increased slightly from prior year due to a $1.5 million increase in service connection charges, offset by a slight decrease in kilowatt consumption. Staff anticipates that Electric Fund reserves may have to be drawn down in FY 2016 to offset lower revenue projections. Electric rates will increase 11 percent effective July, 2016. Water revenue is flat for the nine months ended September 30. Rates were increased 8 percent effective July 1, 2015 and a further 4 percent on September 1, 2015, however consumption declined 16 percent year over year which offset revenue from the rate increase. Water rates will increase an average of 6 percent effective July, 2016. Gas revenue decreased slightly from prior year. While consumption actually increased by 7 percent over the same period prior year, revenue from customers decreased due to lower commodity prices, resulting in lower overall revenue. Gas rates will increase 8 percent effective July, 2016. Refuse rates increased 9 percent for only residential customers on July 1, 2015. Further refuse rate changes are scheduled to take effect July, 2016. Fiber Optic revenue increased $0.7 million due to the timing of an invoice to a commercial lease customer - February 2016 versus May 2015. This difference will be neutralized in the 4th Quarter. Airport Fund 3rd Quarter YTD revenue increased $0.3 million from prior year due to increased rental and tie-down revenue. The City took over operation of the Airport from County of Santa City of Palo Alto Page 10 Clara during the 1st Quarter of FY 2015, so the prior year includes only seven months of operations, compared to nine months in the current year. Enterprise Funds Operating Expenses Adjusted 3rd Quarter YTD Actuals % Change Budget FY 2016 FY 2015 Inc(Dec)FY 2016 % Electric 75,970$ 78,604$ (3%)115,409$ 66% Water 20,134 19,366 4%32,778 61% Refuse 19,859 18,687 6%29,697 67% Gas 14,911 15,676 (5%)29,515 51% Wastewater treatment 14,972 13,569 10%20,430 73% Wastewater collection 9,479 9,237 3%14,750 64% Storm Drainage 1,952 1,856 5%3,169 62% Fiber Optic 1,345 1,052 28%1,989 68% Airport 767 835 (8%)1,535 50% Operating Expenses YTD 159,389$ 158,882$ 0%249,272$ 64% Electric Fund expenses have decreased $2.6 million, or 3 percent, from same period prior year. The volume of market purchases has increased due to delayed solar projects and lower delivery of hydroelectric purchases due to the ongoing drought, while commodity market prices were lower than expected. Water Fund expenses increased $0.8 million primarily due to per unit commodity cost increase from $2.93 to 3.75, offset by reduced consumption. Refuse Fund expenses increased $1.2 million, or 6 percent, over prior year due to costs associated with the new food scraps collection program. Gas Fund expenses decreased due to labor credits resulting from assignment of staff to the Water Fund, reduced customer incentives and reduced contract services expense. Wastewater Treatment Fund expenses have increased 7 percent over the same period last year due to overtime expense for plant bypasses and emergency work, and higher costs for chemicals and electrical work. Fiber Optics Fund expenses are 21 percent higher than the same period last year primarily due to lower labor credits from Electric Fund. In the prior year, Fiber Optics received labor credits due to their staff being reassigned to work on streetlight and traffic signal outages. City of Palo Alto Page 11 Pension and Retiree Medical Liabilities Long-term unfunded liabilities for pension and retiree medical continue to dominate any discussion of the City’s long-range financial planning. City Council met in September 2015 and again in November 2015 to discuss the unfunded pension liability. Staff had recommended setting aside $1.3 million of the FY 2015 General Fund surplus to use as seed funding for a Section 115 trust account. This account would be used to fund contribution gaps during economic downturns. The Finance Committee and Council approved the recommendation. The $1.3 million will be moved from the General Fund Budget Stabilization Reserve to the trust account in FY 2017, and other funds will also contribute to the trust account. Staff will provide Council with a funding and policy plan, with a goal of making annual contributions. As of June 30, 2015 the City’s unfunded pension and retiree medical liabilities totaled $451 million, of which approximately $300 million is the General Fund share. Effective June 30, 2015 the pension liability was disclosed in the City’s government-wide financial statements as required by the Governmental Accounting Standards Board (GASB). In addition, new accounting standards for presentation of the retiree medical liability were enacted by GASB and will be effective for FY 2018. In order to slow the growth of pension costs over the long term, the City implemented a second tier pension formula in 2011 (2% @ 60), and the California Public Employees’ Pension Reform Act of 2013 (PEPRA) mandated a third tier pension formula of 2% @ 62 effective January 1, 2013. Following is a table which shows the employee count in each of the Miscellaneous and Safety plans as of March, 2016. As of that date, 32 percent of the City’s full-time employees were enrolled in Tier 2 and Tier 3 plans, compared to 29 percent as of November, 2015. City of Palo Alto Page 12 Mar 2016 Nov 2015 Mar 2016 Nov 2015 Tier 1 6 6 Tier 1 70 74 Tier 2 2 2 Tier 2 7 7 Tier 3 3 3 Tier 3 10 8 Sub-total 11 11 Sub-total 87 89 Tier 1 106 112 Tier 1 5 5 * Tier 2 49 48 Tier 2 0 0 Tier 3 35 34 Tier 3 0 0 Sub-total 190 194 Sub-total 5 5 Tier 1 352 369 Tier 1 4 4 Tier 2 64 67 Tier 2 0 0 Tier 3 125 101 Tier 3 0 0 Sub-total 541 537 Sub-total 4 4 Tier 1 45 44 Tier 1 59 63 ** Tier 2 0 0 Tier 2 4 3 Tier 3 2 1 Tier 3 10 11 Sub-total 47 45 Sub-total 73 77 Tier 1 6 7 Tier 2 1 1 Tier 3 0 0 Sub-total 7 8 Tier 1 1 1 Tier 2 0 0 Tier 3 0 0 Sub-total 1 1 Total Tier 1 509 531 Total Tier 1 145 154 Tier 2 115 117 Tier 2 12 11 Tier 3 165 139 Tier 3 20 19 Grand Total Misc Plans 789 787 Grand Total Safety Plans 177 184 %Tier 1 65%67%%Tier 1 82%84% Tier 2 15%15%Tier 2 7%6% Tier 3 21%18%Tier 3 11%10% Tier 1 2.7% @ 55 Tier 1 3% @ 50 Tier 2 2% @ 60 Tier 2 3% @ 55 Tier 3 2% @ 62 Tier 3 2.7% @ 57 *4 @ 3%@50; 1 @ 2.7%@55 **Excludes police trainees (4/2) Police Management Association Police Management Fire Management PAPOA Service Employees International Union Utilities Management Miscellaneous Plans Safety Plans Fire Chiefs Association Employee Group IAFFCity Council and Council Appointed Officers Employee Group Management and Professional # of Employees # of Employees Attachments:  Attachment A: General Fund Third Quarter Financial Report (XLSX)  Attachment B: General Fund Second Quarter Financial Report (XLSX)  Attachment C: Third Quarter Public Safety OT Analysis (XLSX) ATTACHMENT ACITY OF PALO ALTO GENERAL FUND THIRD QUARTER FINANCIAL REPORT FISCAL YEAR ENDING JUNE 30, 2016 (in thousands) BUDGET ACTUALS (as of 03/31/2016) Adopted Adjusted Pre % of Adj Categories Budget Budget Encumbr Encumbr Actual Budget Revenues & Other Sources Sales Tax 27,630 28,430 - - 13,143 46% Property Tax 35,067 35,967 - - 22,453 62% Transient Occupancy Tax 18,791 21,991 - - 13,794 63% Documentary Transfer Tax 6,852 7,052 - - 3,854 55% Utility Users Tax 11,189 10,489 - - 8,690 83% Motor Vehicle Tax, Penalties & Fines 2,180 2,180 - - 1,538 71% Charges for Services 25,399 24,700 - - 13,654 55% Permits & Licenses 8,211 8,280 - - 5,515 67% Return on Investment 824 824 - - 778 94% Rental Income 15,296 15,226 - - 11,794 77% From Other Agencies 1,659 1,591 - - 1,902 120% Charges To Other Funds 11,930 11,929 - - 8,956 75% Other Revenues 323 869 - - 1,931 222% Total Revenues 165,351 169,528 - - 108,002 64% Operating Transfers-In 18,589 19,141 - - 13,332 70% Encumbrances and Reappropriation 6,934 - - - - Contribution from Budget Stabilization Reserve - - As Assumed in the Adopted Budget 1,732 1,732 - - - - Total Sources of Funds 185,672 197,335 - - 121,334 64% Expenditures & Other Uses City Attorney 3,101 3,730 10 414 2,144 69% City Auditor 1,175 1,261 20 843 68% City Clerk 1,328 1,374 77 731 59% City Council 455 482 34 28 310 77% City Manager 3,008 3,513 250 353 2,304 83% Administrative Services 7,635 7,987 20 122 5,892 76% Community Services 24,804 26,521 32 2,198 17,591 75% Development Services 11,901 12,282 41 459 7,530 65% Fire 26,532 26,774 8 296 20,499 78% Library 8,555 8,974 47 199 5,794 67% Office of Emergency Services 1,051 1,184 81 89 787 81% Office of Sustainability 423 555 76 399 86% Human Resources 3,555 4,090 13 329 2,672 74% Planning and Community Environment 8,900 11,139 96 1,053 6,480 68% Police 36,859 36,725 106 274 26,790 74% Public Works 15,017 15,807 385 1,277 10,924 80% Non-Departmental 8,662 8,348 4,816 58% Total Expenditures 162,961 170,746 1,123 7,264 116,506 73% Operating Transfers-Out 1,834 5,374 - - 1,876 35% Transfer to Infrastructure 20,877 29,258 - - 15,658 54% Total Use of Funds 185,672 205,378 1,123 7,264 134,040 69% 6/8/2016 ATTACHMENT BCITY OF PALO ALTO GENERAL FUND SECOND QUARTER FINANCIAL REPORT FISCAL YEAR ENDING JUNE 30, 2016 (in thousands) BUDGET ACTUALS (as of 12/31/2015) Adopted Adjusted Pre % of Adj Categories Budget Budget Encumbr Encumbr Actual Budget Revenues & Other Sources Sales Tax 27,630 28,430 - - 6,909 24% Property Tax 35,067 35,967 - - 12,294 34% Transient Occupancy Tax 18,791 21,991 - - 9,051 41% Documentary Transfer Tax 6,852 7,052 - - 2,951 42% Utility Users Tax 11,189 10,489 - - 5,640 54% Motor Vehicle Tax, Penalties & Fines 2,180 2,180 - - 1,007 46% Charges for Services 25,399 24,700 - - 9,193 37% Permits & Licenses 8,211 8,280 - - 3,755 45% Return on Investment 824 824 - - 525 64% Rental Income 15,296 15,226 - - 7,851 52% From Other Agencies 1,659 1,591 - - 775 49% Charges To Other Funds 11,930 11,929 - - 5,984 50% Other Revenues 323 869 - - 392 45% Total Revenues 165,351 169,528 - - 66,327 39% Operating Transfers-In 18,589 19,141 - - 8,882 46% Encumbrances and Reappropriation 6,934 - - - - Contribution from Budget Stabilization Reserve - - As Assumed in the Adopted Budget 1,732 1,732 - - - - Total Sources of Funds 185,672 197,335 - - 75,209 40% Expenditures & Other Uses City Attorney 3,101 3,730 65 510 1,462 55% City Auditor 1,175 1,261 - 24 548 45% City Clerk 1,328 1,374 - 56 461 38% City Council 455 482 4 42 207 52% City Manager 3,008 3,513 250 195 1,516 56% Administrative Services 7,635 7,987 15 203 3,974 52% Community Services 24,804 26,521 242 2,830 12,042 57% Development Services 11,901 12,282 - 418 4,804 43% Fire 26,532 26,774 51 383 13,988 54% Library 8,555 8,974 - 336 3,907 47% Office of Emergency Services 1,051 1,184 50 165 494 60% Office of Sustainability 423 555 - 58 277 60% People Strategy and Operations 3,555 4,090 15 462 1,781 55% Planning and Community Environment 8,900 11,139 167 1,252 4,202 50% Police 36,859 36,725 57 430 17,971 50% Public Works 15,017 15,807 381 977 7,431 56% Non-Departmental 8,662 8,348 3,336 40% Total Expenditures 162,961 170,746 1,297 8,341 78,401 52% Operating Transfers-Out 1,834 5,374 - - 1,250 23% Transfer to Infrastructure 20,877 29,258 - - 10,439 36% Total Use of Funds 185,672 205,378 1,297 8,341 90,090 49% 6/8/2016 Attachment C thru 3/31/16 2014 2015 2016 POLICE DEPARTMENT Overtime Expense Adopted Budget $1,500,000 $1,500,000 $1,500,000 Modified Budget 1,500,000 1,500,000 1,539,053 Net Overtime Cost - see below 593,565 946,558 707,020 Variance to Budget $906,435 $553,442 $832,033 Overtime Net Cost Actual Expense $1,711,764 $1,893,220 $1,536,498 Less Reimbursements Stanford Communications 54,552 62,000 33,208 Utilities Communications Reimbursement 29,845 36,614 18,204 Local Agencies (A)8,905 10,417 7,630 Police Service Fees 73,934 69,570 65,195 Total Reimbursements 167,236 178,601 124,238 Less Department Vacancies 950,963 768,061 705,240 Net Overtime Cost $593,565 $946,558 $707,020 Department Vacancies (number of days)4,251 3,223 3,242 Workers' Compensation Cases 14 16 7 Department Disabilities (number of days)776 502 229 FIRE DEPARTMENT Overtime Expense Original Budget $1,424,414 $1,424,414 $1,382,714 Modified Budget 1,750,956 1,608,710 1,559,598 Net Overtime Cost - see below 1,012,521 94,836 532,617 Variance to Budget $738,435 $1,513,874 $1,026,981 Overtime Net Cost Actual Expense $2,562,549 $2,171,795 $1,940,133 Less Reimbursements Stanford Fire Services (B)776,452 658,054 500,000 Cal-Fire/FEMA (Strike Teams)50,542 184,296 111,667 Total Reimbursements 826,994 842,350 611,667 Less Department Vacancies 723,034 1,234,609 795,849 Net Overtime Cost $1,012,521 $94,836 $532,617 Department Vacancies (number of days)2,618 3,712 2,870 Workers' Compensation Cases 18 10 10 Department Disabilities (number of days)489 249 248 NOTES: (A)Includes Animal Services contract with Los Altos and Los Altos Hills. (B )Stanford reimbursed 30.3% of Fire Services through FY 2015. Of the FY 2016 total flat amount, $6.5 million, $500,000 estimated for overtime. Public Safety Departments Overtime Analysis for Fiscal Years 2014 through 2016 City of Palo Alto (ID # 6837) Finance Committee Staff Report Report Type: Action Items Meeting Date: 6/21/2016 City of Palo Alto Page 1 Summary Title: Commercial and Residential Impact Fee Nexus Studies Title: Review Updates to Commercial and Residential Impact Fee Nexus Studies and Recommend Framework for a Draft Ordinance to Adopt Housing Impact Fees for Residential and Commercial Construction From: City Manager Lead Department: Planning and Community Environment Recommendation Staff requests that the Finance Committee review and provide a recommendation on the proposed Affordable Housing Impact Fees. The Committee’s recommendation will be used to draft an ordinance that will be forwarded to the Planning and Transportation Commission and the City Council for their review and consideration. Executive Summary In April of 2014, the City initiated preparation of two “nexus studies” to provide the basis for updating its affordable housing impact fees, which are currently charged to non-residential development and market rate for-sale (i.e. not rental) housing. The studies and resulting recommendations were presented to the Finance Committee1 in February 2016. At that time, the Committee requested that staff:  update the comparison with other jurisdictions,  reconsider the balance of fees charged for non-residential versus residential uses,  consider whether fees could be set at the “maximum justified” rather than the “maximum feasible” amount,  look at ways to encourage inclusionary units for mixed use projects, and  meet with stakeholders before coming back to the Committee with revised recommendations in the form of an ordinance. 1 CMR #6490 is provided as Attachment A and the nexus studies are provided as Attachment B and C. City of Palo Alto Page 2 City staff is still in the process of drafting the ordinance, but would appreciate the Committee’s review of the materials provided with this staff report and their recommendation on the proposed fees in Table 1 so that a draft ordinance can be prepared and presented to the Planning and Transportation Commission during the Council’s summer break. Objectives of the proposed ordinance would include:  To increase the funds available to support the preservation and production of new affordable housing in Palo Alto;  To ensure that developers of new non-residential square footage provide funding to address the impacts of new employment on the demand for affordable housing;  To ensure that developers of new market-rate rental housing provide funding to address the impacts of new residents on the demand for employment and its secondary impacts on the demand for affordable housing; and  To create incentives for developers to build new affordable units on or off-site instead of paying the impact fees. The February 2016 proposal has been adjusted in response to the Committee’s input as described further in the Discussion section of this report. Briefly, the Finance Committee had asked staff to explore potentially setting fees above the “feasible” amount; staff completed this review and would advise against setting fees above the “maximum feasible” amount. The maximum feasible amount is now shown in the revised proposal in Table 1 and using this “maximum feasible” amount would mean a substantial increase in the fee charged for new office/R&D square footage. The Committee also asked staff to ensure that fees on commercial development were more than fees on residential development. The supplementary report from the City’s consultant included as Attachment D provides updated information and analysis including a summary of existing city fees and permits for housing and commercial development prototypes in Palo Alto demonstrating that the fees proposed in February 2016 were higher for commercial development than for residential development, with the exception of the single-family detached prototype, so this fee has been proposed for reduction as shown in Table 1. The consultant’s report also provides an updated table on existing linkage fees and housing impact fees in other jurisdictions demonstrating that the proposed fees would be significantly higher than other jurisdictions in the region. The supplemental report also provides a comparison of the potential housing impact fees with Palo Alto’s existing below market rate (BMR) housing policy for ownership units. This comparison examines the costs to the developer under the existing in-lieu fee structure both if units are provided on-site, and if housing impact fees are paid. Table 1. Existing and Proposed Affordable Housing Fees City of Palo Alto Page 3 Existing Fees February 2016 Proposal Proposal based on Finance Committee Direction Office/R&D $20.37/sf $35/sf $60/sf Hotel $20.37/sf $30/sf $30/sf Retail/Restaurant/Other** $20.37/sf $19.85/sf $20.37/sf Market Rate Single Family Detached* 7.5 to 10% of sales price $95/sf $50/sf Market Rate Single Family Attached* 7.5 to 10% of sales price $50/sf $50/sf Market Rate Condo* 7.5 to 10% of sales price $50/sf $50/sf Market Rate Rental Housing None $50/sf $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. With the new fees, rental and for-sale units would be charged the same fees, even though one would be called an impact fee, and the other would be called an in lieu fee. Projects providing affordable units on site would not be charged a fee. **Retail uses are not addressed in the nexus study and this row includes the current fee based on the last nexus study. The fee was updated as part of the City’s budget process from $19.85/sf to $20.37/sf. Source: Department of Planning & Community Development, June 2016 City staff organized a stakeholder meeting on April 20, 2016 and fifteen representatives from twelve organizations participated. The input and concerns expressed at the meeting are summarized in the Discussion section below. Background & Discussion In April of 2014, the City entered into a 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. The City’s updated Housing Element (adopted November 2014) referenced these updated nexus studies in several implementation programs and final drafts of the two studies were provided to City staff in late November 2015. 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.” City of Palo Alto Page 4 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 staff presented the results of the two nexus studies to the Finance Committee on February 16, 2016. Table 1, above, provides a summary of the proposed fees that were presented to the Committee, along with the updated proposal based on the Committee’s input. The Committee directed staff to revise the recommendation and prepare an Ordinance with the objective of increasing impact fees for commercial development in order to maximize affordable housing revenue. A motion was made to set the impact fee per square foot for office, medical and research and development uses at substantially more than the amount for residential uses and to consider the extent to which the City can set the impact fee for nonresidential uses somewhere between the maximum feasible fee and the maximum justified fee. The Finance Committee also made the request to include the option of either a fee or an inclusionary housing requirement, which will allow the developer to construct units instead of paying the fee. Nexus Study Methodology The two nexus studies, one for residential construction and one for commercial construction, were prepared by Strategic Economics and Vernazza Wolfe Associates, Inc. (the consultants), based on staff’s input and direction. Each used a similar methodology to generate data and conclusions as shown in Table 2. This same methodology is also being used to support updated impact fees in jurisdictions throughout San Mateo County. (More detail on the methodology 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 Office2 Condominiums (sale) Apartments (rental) 2 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 $20.37/new net square footage for retail/other based on the prior nexus study. City of Palo Alto Page 5 2. Determine Household Income of Residents and Disposable Income X 3. Determine Employee Density3 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, May 2016 This is a standard methodology that is used in creating nexus studies of this nature and includes an assessment of the “affordability gap,” which is the theoretical difference 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 units. Commercial Nexus Study Conclusions 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 $20.37 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 concluded (in Step 7) that the maximum justifiable fees for each prototype are $177 and $264/square foot, respectively. The feasibility analysis (in Step 8) concluded that the maximum feasible fees for each prototype are $30 and $60 per square foot respectively, and the Finance Committee expressed an interest in setting the fees at or above this amount. The original recommendation (Step 9) of $35 per square foot for office/R&D/medical office, which was about 40% below the feasible maximum, was 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 3 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. City of Palo Alto Page 6 consider is that some percentage of new workers may already be housed in Palo Alto or nearby communities. The revised fee amount of $60 per square foot reflects the Committee’s interest in charging a fee equal to or above the “maximum feasible.” At this level, the fee would be substantially higher than in other jurisdictions and may act as an incentive for developers to provide affordable units on- or off-site rather than paying the fee. Residential Nexus Study Conclusions 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, $95/square foot for single family attached, $75/square foot for condominiums, and $105/square foot for apartments. 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 $90 per square foot or less is feasible for single-family attached development; a fee of $75 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. The study recommended 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. These recommendations were 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. The Finance Committee expressed an interest in reducing the fees for residential uses where warranted and the consultant’s supplemental analysis supports reducing the fee for single- family detached units based on the Finance Committee’s desire to have residential fees that are lower than commercial fees. With 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. As in San Francisco, the high fees can act as an incentive for developers of market rate rental housing to provide affordable units on-site, even though their projects are not subject to the City’s inclusionary requirement. Supplemental Analysis: Balance between Non-Residential & Residential Fees As directed by the Finance Committee at the February 16, 2016 meeting, City staff has explored the balance between residential and non-residential fees, as well as the extent to which the City can set the impact fee for office, medical and R&D somewhere between the maximum feasible fee and the maximum justified fee. As part of the analysis, staff looked at the total existing fees and permits charged to commercial versus residential projects using the prototypes from the nexus studies. This analysis, which City of Palo Alto Page 7 also examines the fees recommended by the Nexus study and the alternative proposal based on the Finance Committee’s recommendation, is contained in Attachment E. As shown in this analysis, the highest total fees would be paid by the Single-Family detached prototype in the amount of $13,314,246, followed by the Office/R&D/Medical Office prototype in the amount of $7,245,450 if the City moved forward with the nexus study recommendations. With the alternative proposal based on the Finance Committee’s recommendations, the highest total fees would be paid by the Office/R&D/Medical Office prototype in the amount of $9,745,450, followed by the Single-Family detached prototype in the amount of $9,264,246. As mentioned above, staff explored the potential for setting fees above the maximum “feasible” amount. While technically 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. For these reasons, staff does not recommend this approach. Supplemental Analysis: Updated Commercial Linkage Fees in Other Jurisdictions Table 3, below (Figure 2 from the Supplementary Memorandum Report) compares Palo Alto’s existing commercial linkage fee and proposed fee scenarios with the linkage fees adopted by nearby cities. At present, Palo Alto maintains a fee of $20.37 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 proposal based on the Finance Committee’s recommendation would charge a “maximum feasible” fee for hotel of $30/sf and for office/R&D of $60/ft. These fees would be substantially higher than those charged in other jurisdictions. Table 3. Commercial Linkage Fees in San Mateo and Santa Clara County Cities City Hotel Office/R&D/ Medical Office Date Adopted/ Updated Cupertino $10 $20 2015 Mountain View (a) $2.50 $25 2015 Oakland (b) N/A $5.44 2015 City of Palo Alto Page 8 City Hotel Office/R&D/ Medical Office Date Adopted/ Updated Redwood City (c) $5 $20 2015 San Francisco (d) $18 $16-$24 2015 Sunnyvale $7.50 $15 (e) 2015 Menlo Park (f) $8.45 $15.57 2015 Notes: (a) New gross floor area under 25,000 SF pays 50 percent of full fee. (b) Oakland’s fee applies to office and warehouse/distribution development over 25,000 SF. (c) The fee applies to projects adding more than 5,000 SF of new commercial space. The fee is reduced by 25% if all construction workers are paid prevailing wages. (d) 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. (e) The fee on the first 25,000 SF is discounted by 50 percent. (f) The linkage fees are applied to commercial developments of 10,000 SF or more that do not include on-site affordable units. Sources: City staff and websites; Nonprofit Housing Association of Northern California, 2015; Vernazza Wolfe Associates, Inc. & Strategic Economics, May 2016. Housing Impact Fees for Neighboring Jurisdictions Figure 3: Housing Impact Fees in Bay Area Cities from the Supplementary Memorandum Report (Attachment F) compares the residential impact fee scenarios for Palo Alto with the current housing impact fees and in lieu fees in other nearby cities. If the recommended fees 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. As noted above, the high fees can act as an incentive for developers of market rate rental housing to provide affordable units on-site, even though their projects are not subject to the City’s inclusionary requirement. 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 in-lieu fee revenues per market rate unit under the existing method would be $40,275 for a 3,000 square foot single family detached home, while the fee would be $285,000 if the fee were City of Palo Alto Page 9 assessed at the original level recommended ($95 per square foot) and $150,000 if the fee were assessed at the revised level of $50 per square foot. For the single-family attached prototype of 2,100 square feet, in-lieu fee revenues per market rate unit would be $31,238 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 in-lieu fee revenue per market rate unit under the existing program would be $17,375 and $105,000 at the recommended fee of $50 per square foot. These fees are summarized in Figure 4: Cost Comparison of Inclusionary Policy and Housing Impact Fees (Attachment G). Adopting high in lieu fees for market rate for-sale housing would reflect the City’s preference for seeing units constructed on site, minimizing the use of in lieu fees to truly special situations and fractional units. Also, adopting per square foot fees instead of a fee based on a percent of the sale price would be a simpler approach, both in terms of calculating the fee, and in terms of administering the fee program. Stakeholder Meeting City staff held a Stakeholder meeting on April 20, 2016 to obtain feedback from various parties on the proposed impact fees that were presented to the Finance Committee on February 16, 2016. Invitations were sent to representatives from 32 different organizations, including the Building Industry Association of the Bay Area, NAIOP Commercial Real Estate Development Association, for-profit and non-profit developers and other non-profit organizations and interested parties. Fifteen representatives from twelve organizations participated in the discussion. The stakeholders expressed concerns regarding the magnitude of the proposed fees that are being considered, particularly the Finance Committee’s suggestion that fees be set above the “maximum feasible” amount. Attendees raised a number of questions about the City’s objectives, the study methodology, and the unintended consequences of proceeding with the suggested fees. At the big picture level, there was a concern that with high fees, no development would occur, and thus no funds would be generated for affordable housing and the City’s fundamental problem related to the supply of housing would not be addressed. There was also a concern that if Palo Alto raises its fees well above other Peninsula cities, it would trigger an “arms race,” or “bidding war,” such that other Cities would raise their fees and development of new housing in the region would completely stop. Other questions and comments along with responses included the following: Table 4. Summary of Stakeholder Questions and Comments Questions/Comments Responses The City should provide examples to show Staff will prepare some examples for the City of Palo Alto Page 10 Questions/Comments Responses how the fees would apply to some sample projects. Finance Committee meeting. The City needs to clarify the relationship between these impact fees and in lieu housing requirements (i.e. where in lieu requirements apply, fees should not be charged). This can certainly be clarified in the ordinance that will be needed to implement the new fees. Where in-lieu requirements apply, impact fees will not be charged with the exception of fractional units. Shouldn’t the affordability gap analysis take into account a reasonable commute distance from Palo Alto? The analysis assesses the gap between costs and affordability within Palo Alto, since that is the focus of the study and where fees will be charged. Did the State’s approval of a $15 minimum wage change the calculations at all? No. Most of the hourly rates for the job types used for the analysis already exceed the $15/hour minimum wage. If the City is going to adopt substantial increases, they should be phased in over several years. This can certainly be considered in the ordinance that would be needed to implement the new fees. The City should ensure that fees are charged for net new square footage, not replacement square footage. Under the existing ordinance (PAMC Section 16.47), commercial impact fees apply to net new square footage and this is not expected to change. The City should clarify the time limit for spending fees that are collected. What’s the City’s track record for spending and housing construction? Under AB 1600 the City is required to spend collected impact fees within five years of receipt or make findings that it still has use for such fees. The City intends to comply with this requirement. Did the City look at alternative ways to stimulate affordable housing? The City has in place a variety of affordable housing programs and zoning incentives. Even with these programs, there is still a considerable need for affordable housing in Palo Alto. The City should compare its suggested fees to all Santa Clara County cities, not just those with impact fees. Staff provided the comparisons considered most relevant given Palo Alto’s land values and housing costs. The City should allow developers to build new affordable housing on- or off-site instead of paying fees. Also, developers These options can be considered in the ordinance that will be required to adopt the new fees. City of Palo Alto Page 11 Questions/Comments Responses should be able to rehabilitate and deed restrict existing units for low income households instead of paying fees. The study methodology seems amiss because the results are so high. San Francisco is not a good comparable jurisdiction. The study methodology is standard, however, due to Palo Alto’s high cost of land and high housing prices, the results are higher than in many surrounding jurisdictions. The high cost of land and high housing costs are comparable to San Francisco. Is there some overlap between the housing and commercial fees in the methodology? In other words, could both fees be seeking to address the needs of the same households? There is some overlap in fees and the study acknowledges this. This is one reason that the recommended fees are less than the maximum justified fees. The City should look at all of the impact fees that are charged to a project in total. The Supplemental memo evaluated the total fees for the various prototypes. Where is the City going to build the new affordable housing from the generated impact fees? The City has not yet determined this. The 50,000 square foot office cap should be factored in to the study. Staff does not understand the relevance of the office cap. The City needs to look at changing policies that discourage affordable housing development, such as height limits. Changes to the height limit and other zoning regulations are being evaluated as part of the ongoing Comprehensive Plan Update. Source: Department of Planning & Community Environment, June 2016 Parameters of a Draft Ordinance The proposed fees would require adoption of an ordinance amending Sections 16.47 (non- residential projects) and 18.14 (residential projects) of the Palo Alto Municipal Code and possible amendment of Housing Element Program H3.1.2. Based on the Committee’s input, a draft will be prepared for presentation to the Planning and Transportation Commission at a public hearing tentatively scheduled for July 27, 2016. As currently envisioned, the draft ordinance would: City of Palo Alto Page 12  Consolidate the commercial and residential fee programs into a single uniform ordinance.  Give the City the ability to charge a fee for rental housing. 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 there which 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. In the absence of a legislative fix, the most legally defensible way to justify an affordable housing impact fee for rental housing is through a nexus study.  Give developers the opportunity and an incentive to build affordable units on-site instead of paying the impact fees, even for commercial (mixed use) projects. The ordinance will encourage developers to provide units on-site as a first priority when feasible. If providing the units on-site is not feasible, then developers would have the option to pay the impact fees. The ordinance can also provide an option for providing affordable units off-site as stakeholders suggested or provide vacant land to the City.  Differentiate fee structure for commercial development. Under the current structure for commercial development, all commercial development is subject to the same fee per square foot, which is currently set at $20.37. Under the draft Ordinance, there will be one fee for hotel development, one for office/R&D and retail will continue to charge the existing fee of $20.37.  Simplify the fee for residential development. Under the current fee structure, residential developers who pay the in-lieu fee are required to pay 7.5% of the sales price of the market rate units. Thus City is unable to collect the in-lieu fees until the market rate units are sold and the actual amount of the fees is not known until that time. With the proposed fees, all residential prototypes would be charged the same fee, whether they are rental or for-sale housing, condos, attached, or semi-detached. Also, the amount of the fees will be known early in the project and fees can be collected prior to the issuance of building permits or final map approval, if required.  Clarify projects which should be exempt from commercial impact fees. Staff welcomes the Committee’s input on whether the current list of exemptions should be carried forward in the new ordinance. These exemptions (in PAMC Section 16.47.030) are: City of Palo Alto Page 13 (a) Residential uses; (b) Churches; (c) Colleges and universities (d) Commercial recreation; (e) Hospitals and convalescent facilities; (f) Private clubs, lodges, and fraternal organizations; (g) Private education facilities; (h) Public Facilities; (i) Retail service, eating and drinking service, personal service, or automotive service when the total additional square footage is 1,500 square feet or less. This exemption shall apply only when the additional square footage of new development does not exceed 1,500 square feet. New development that is larger than 1,500 square feet shall pay a fee for all square footage, including the first 1,500 square feet.  Provide an exemption for “pipeline” projects that have obtained their planning entitlements prior to the effective date of the ordinance, even if those projects have not “vested” by obtaining and acting upon a building permit or by obtaining a vesting tentative map.  In addition, the City could consider adjusting the threshold for inclusionary units from projects with five or more units to projects with three or more units as stated in Program H3.1.1 of the Housing Element. The draft ordinance is not proposing to increase the existing inclusionary housing requirements to adjust the percentage of affordable units required. The current percentage required (15%) can be examined in a separate planning effort at a later date. Conclusion When setting fees, it is helpful to compare both the subject fee as well as the entire package of impact fees to neighboring communities. In this instance, staff recommends that the City’s fees be set at or below the maximum feasible amount after a thorough review of total fees charged for commercial and residential development, as well as impact fees charged in other jurisdictions. Timeline The Finance Committee’s input will be forwarded to the Planning and Transportation Commission, who will also have an opportunity to provide a recommendation (on the draft 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 City of Palo Alto Page 14 adoption. The implementing ordinance would determine applicability to pending (pipeline) projects. Resource Impact Adjusting affordable housing impact fees is 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 annually 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%, although the increase will -- of course -- depend on the amount of development that occurs. 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 City of Palo Alto Page 15 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). The proposed draft ordinance will be reviewed for CEQA compliance. Attachments:  Attachment A: February 16, 2016 Finance Committee CMR 6490 without Attachments A & B (PDF)  Attachment B: Draft Commercial Linkage Fee Nexus Study (PDF)  Attachment C: Draft Residential Impact Fee Nexus Study (PDF)  Attachment D: Supplementary Memorandum Report (PDF)  Attachment E: Existing Palo Alto Fees and Permits by Prototype (PDF)  Attachment F: Housing Impact Fees in Bay Area Cities (PDF)  Attachment G: Cost Comparison of Inclusionary Policy and Housing Impact Fees (PDF)  Attachment H: Existing and Proposed Housing Fees (PDF) 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. Attachment A 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 $1 Per Unit $333,501 $189,037 $158,519 $101 Scenario 2 Per SF $95 $70 $50 $ Per Unit $285,000 $147,000 $105,000 $82 Scenario 3 Per SF $75 $50 $40 $ Per Unit $225,000 $105,000 $84,000 $48 Scenario 4 City of Palo Alto Page 11 Per SF $50 $30 $25 $ Per Unit $150,000 $63,000 $52,500 $29 Impact Fees Cupertino $15/SF $16.50/SF (a) $20/SF $25 Daly City $14/SF $18/SF (b) $22/SF $25 East Palo Alto $22/SF $22/SF $22-$44/SF (c) $22 Mountain View N/A N/A N/A $15 San Carlos (d) $23.54-$43.54/SF $20.59-$42.20/SF $20.59-$42.20/SF $23.54-$ San Francisco (e) $199,698-$522,545/unit $199,698-$522,545/unit $199,698-$522,545/unit $199,698-$ San Jose N/A N/A N/A $17/ Sunnyvale N/A N/A N/A $17/S Inclusionary Policies and In-Lieu Fees Palo Alto 15%-20% 15%-20% 15%-20% N Mountain View 3% of Sales Price 3% of Sales Price 3% of Sales Price N 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 Sunnyvale 7% of Sales Price 7% of Sales Price 7% of Sales Price N (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: x 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. x 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. x 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: x A: Draft Comercial Linkage Fee Nexus Study (PDF) x 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 B 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 Draft Palo Alto Linkage Fee Nexus Study -4- 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 Draft Palo Alto Linkage Fee Nexus Study -5- 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. Draft Palo Alto Linkage Fee Nexus Study -6- 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. Draft Palo Alto Linkage Fee Nexus Study -7- 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. Draft Palo Alto Linkage Fee Nexus Study -8- 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. Draft Palo Alto Linkage Fee Nexus Study -9- 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. Draft Palo Alto Linkage Fee Nexus Study -10- 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. Draft Palo Alto Linkage Fee Nexus Study -11- 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. Draft Palo Alto Linkage Fee Nexus Study -12- 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 Draft Palo Alto Linkage Fee Nexus Study -13- 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 Draft Palo Alto Linkage Fee Nexus Study -14- 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. Draft Palo Alto Linkage Fee Nexus Study -15- 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 Draft Palo Alto Linkage Fee Nexus Study -16- 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 Draft Palo Alto Linkage Fee Nexus Study -17- 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. Draft Palo Alto Linkage Fee Nexus Study -18- 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 Draft Palo Alto Linkage Fee Nexus Study -19- 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. Draft Palo Alto Linkage Fee Nexus Study -20- 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 Draft Palo Alto Linkage Fee Nexus Study -21- 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. Draft Palo Alto Linkage Fee Nexus Study -22- 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% Draft Palo Alto Linkage Fee Nexus Study -23- 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% Draft Palo Alto Linkage Fee Nexus Study -24- 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% Draft Palo Alto Linkage Fee Nexus Study -25- 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% Draft Palo Alto Linkage Fee Nexus Study -26- 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% Draft Palo Alto Linkage Fee Nexus Study -27- 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% Draft Palo Alto Linkage Fee Nexus Study -28- 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% Draft Palo Alto Linkage Fee Nexus Study -50- 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. Draft Palo Alto Linkage Fee Nexus Study 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. Draft Palo Alto Linkage Fee Nexus Study 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. Draft Palo Alto Linkage Fee Nexus Study 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 Draft Palo Alto Linkage Fee Nexus Study 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. Draft Palo Alto Linkage Fee Nexus Study 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. Draft Palo Alto Linkage Fee Nexus Study -56- 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. Draft Palo Alto Linkage Fee Nexus Study -57- 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. Draft Palo Alto Linkage Fee Nexus Study -58- 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. Draft Palo Alto Linkage Fee Nexus Study -59- 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. Draft Palo Alto Linkage Fee Nexus Study 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. Draft Palo Alto Linkage Fee Nexus Study 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. Draft Palo Alto Linkage Fee Nexus Study 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. Draft Palo Alto Linkage Fee Nexus Study 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. Draft Palo Alto Linkage Fee Nexus Study 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. Draft Palo Alto Linkage Fee Nexus Study 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. Draft Palo Alto Linkage Fee Nexus Study -66- 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. Draft Palo Alto Linkage Fee Nexus Study -67- 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. Draft Palo Alto Linkage Fee Nexus Study -68- 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 Draft Palo Alto Linkage Fee Nexus Study -69- 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 Draft Palo Alto Linkage Fee Nexus Study -70- 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. Draft Palo Alto Linkage Fee Nexus Study -71- 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. Draft Palo Alto Linkage Fee Nexus Study -72- 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. Draft Palo Alto Linkage Fee Nexus Study -73- 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. Draft Palo Alto Linkage Fee Nexus Study -74- 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. Draft Palo Alto Linkage Fee Nexus Study -75- 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. Draft Palo Alto Linkage Fee Nexus Study -76- 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. Draft Palo Alto Linkage Fee Nexus Study -77- 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. Draft Palo Alto Linkage Fee Nexus Study -78- 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. Draft Palo Alto Linkage Fee Nexus Study -79- 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. Draft Palo Alto Linkage Fee Nexus Study -80- 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. Draft Palo Alto Linkage Fee Nexus Study -81- 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 Draft Palo Alto Linkage Fee Nexus Study -82- 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. Draft Palo Alto Linkage Fee Nexus Study -83- 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. Draft Palo Alto Linkage Fee Nexus Study -84- 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. Draft Palo Alto Linkage Fee Nexus Study -85- 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 Draft Palo Alto Linkage Fee Nexus Study -86- 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. Draft Palo Alto Linkage Fee Nexus Study -87- 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. Draft Palo Alto Linkage Fee Nexus Study -88- 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 C 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 DRAFT Palo Alto Housing Impact Fee Nexus Study -3- 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 DRAFT Palo Alto Housing Impact Fee Nexus Study -4- 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 DRAFT Palo Alto Housing Impact Fee Nexus Study -5- 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 DRAFT Palo Alto Housing Impact Fee Nexus Study -6- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -7- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -8- 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 DRAFT Palo Alto Housing Impact Fee Nexus Study -9- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -10- 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 DRAFT Palo Alto Housing Impact Fee Nexus Study -11- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -13- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -14- 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 DRAFT Palo Alto Housing Impact Fee Nexus Study -15- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -16- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -17- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -21- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -31- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -32- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -33- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -34- 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 DRAFT Palo Alto Housing Impact Fee Nexus Study -35- 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 DRAFT Palo Alto Housing Impact Fee Nexus Study -36- 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 DRAFT Palo Alto Housing Impact Fee Nexus Study -37- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -38-  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. DRAFT Palo Alto Housing Impact Fee Nexus Study -39- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -40- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -41- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -42- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -43- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -44- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -45- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -46- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -47- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -48- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -49- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -50- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -51- 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 DRAFT Palo Alto Housing Impact Fee Nexus Study -52- 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 -64- 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 -66- 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 -68- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -70- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -71- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -72- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -73- 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 DRAFT Palo Alto Housing Impact Fee Nexus Study -74- 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 DRAFT Palo Alto Housing Impact Fee Nexus Study -75- accurately reflect any potential structural changes in the relationships between affordable prices and rents, and development costs. DRAFT Palo Alto Housing Impact Fee Nexus Study -76- 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 DRAFT Palo Alto Housing Impact Fee Nexus Study -77- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -78- 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. DRAFT Palo Alto Housing Impact Fee Nexus Study -79- 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 Attachment D 2991 SHATTUCK AVENUE #203 | BERKELEY, CALIFORNIA 94705 | P: 510.647.5291 | F: 510.647.5295 | STRATEGICECONOMICS.COM Date: April 18, 2016 To: Eloiza Murillo-Garcia, City of Palo Alto From: Sujata Srivastava, Strategic Economics Project: Palo Alto Housing Impact Fee and Commercial Linkage Fee Nexus Studies (1401c) Subject: Supplementary Memorandum Report INTRODUCTION The City of Palo Alto is interested in adopting a new affordable housing impact fee on new residential development, and updating its commercial linkage fees on hotel and office/R&D/medical office development. The purpose of these fees is to mitigate the impact associated with new development on the need for affordable housing from new worker households. In February 2016, Strategic Economics completed draft nexus study reports for the commercial linkage fees and housing impact fees. This memorandum report is a supplement to the nexus studies, providing updated information and analysis including: • Existing city fees and permits for housing and commercial development prototypes in Palo Alto; • An updated table on existing linkage fees and housing impact fees in other jurisdictions; and • A comparison of the potential housing impact fees with Palo Alto’s existing below market rate (BMR) housing policy for ownership units. EXISTING CITY FEES AND PERMITS The City of Palo Alto has existing building permit and development impact fees on both residential and commercial development. Figure 1 compares the total existing permits and fees for the office/R&D/medical office development prototype with the residential prototypes. As shown, current city fees and permits for the office/R&D/medical office prototype, including the existing commercial linkage fees, are higher than for the residential prototypes. If the recommended linkage fees and housing impact fees for each prototype are applied, the total combined city fees and permits by prototype would be highest for single-family detached units ($13.3 million), followed by the office/R&D/medical office prototype ($7.2 million). Under the recommended housing impact fee scenarios, the total fees and permits for single-family detached, condominiums, and apartment prototypes would be much lower, ranging from $1.4 million to $2.2 million. DRAFT MEMORANDUM Supplementary Memo Report | April 2016 2 COMMERCIAL LINKAGE FEES AND HOUSING IMPACT FEES IN OTHER BAY AREA JURISDICTIONS A number of Bay Area jurisdictions have commercial linkage fees and/or housing impact fees in place. Figure 2 summarizes the current commercial linkage fees in cities in San Mateo County and Santa Clara County as of May 2016. Figure 3 shows current housing impact fees in Bay Area cities by housing type, as of May 2016. COMPARISON WITH BELOW MARKET RATE HOUSING POLICY For ownership units, Palo Alto has an existing Below Market Rate (BMR) Program requiring that 15 percent of the units in market-rate developments consisting of five or more housing units be sold at below-market rate prices.1 Two-thirds of the BMR units are to be affordable to households earning between 80 percent and 100 percent of the area median income (AMI) for Santa Clara County; one-third of the BMR units must be affordable to households earning between 100 and 120 percent of AMI. City policy generally requires that the BMR units be provided on-site, and that the BMR units are comparable to the market-rate units. 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. When the BMR percentage results in a fractional unit, the developer has the option of paying the in-lieu fee on the fractional unit. Figure 4 compares the cost of the housing impact fees for ownership products to the cost of either providing the inclusionary units on site or paying the in lieu fees. As shown, if a developer pays the in- lieu fees for the inclusionary units, the cost is between $17,000 and $40,000 per market-rate unit, depending on the prototype. However, under most circumstances, developers in Palo Alto build units onsite rather than paying the in lieu fees. The calculated cost to the developer of providing units onsite - known as the “foregone revenues” – is measured as the total gap between market-rate and affordable prices for the affordable units. The foregone revenues for providing units onsite are $460,000 per market- rate unit on single-family detached units; $307,000 per market-rate unit for single-family detached units, and $160,000 per market-rate unit for apartment units. The maximum and recommended housing impact fees per unit for all the housing prototypes are lower than the foregone revenues per market-rate unit if a developer were to build the required affordable units onsite. The housing impact fees at the maximum and recommended levels are significantly higher than the in lieu fees per market rate unit if a developer does not build the inclusionary units onsite. 1 The inclusionary requirement increases to 20 percent for larger projects on five-acre and larger parcels. Supplementary Memo Report | April 2016 3 Figure 1: Existing Palo Alto Fees and Permits by Prototype Total Fees by Prototype Office/R&D/ Medical Office Single- Family Detached Single- Family Attached Condo Apartment Prototype Size (Square Feet) 1 100,000 90,000 21,000 73,500 68,000 Existing City Fees and Permits 2 $3,745,450 $4,764,246 $1,387,773 $2,213,657 $2,143,169 Commercial Linkage Fees/Housing Impact Fee Scenarios Current Linkage Fees/ Housing Impact Fees $1,985,000 $0 $0 $0 $0 Maximum Feasible Fee Scenario $6,000,000 $9,990,000 $1,890,000 $5,512,500 $5,780,000 Recommended Fee Scenario (Nexus Study) $3,500,000 $8,550,000 $1,050,000 $3,675,000 $3,400,000 Total Combined City Fees and Permits by Scenario With Current Linkage Fees/ Housing Impact Fees $5,730,450 $4,764,246 $1,387,773 $2,213,657 $2,143,169 Maximum Feasible Fee Scenario $9,745,450 $14,754,246 $3,277,773 $7,726,157 $7,923,169 Recommended Fee Scenario (Nexus Study) $7,245,450 $13,314,246 $2,437,773 $5,888,657 $5,543,169 1 The Office/R&D/Medical Office prototype is expressed in gross square feet, while the residential prototypes are expressed in net square feet. 2 Estimate of Existing City Fees and Permits excludes the existing commercial linkage fee of $19.85 per square foot. Sources: City of Palo Alto, 2015; Strategic Economics, May 2016. Supplementary Memo Report | April 2016 4 Figure 2: Commercial Linkage Fees in San Mateo County and Santa Clara County Cities City Hotel Office/R&D/ Medical Office Date Adopted/ Updated Cupertino $10 $20 2015 Mountain View (a) $2.50 $25 2015 Oakland (b) N/A $5.44 2015 Redwood City (c) $5 $20 2015 San Francisco (d) $18 $16-$24 2015 Sunnyvale $7.50 $15 (e) 2015 Menlo Park (f) $8.45 $15.57 2015 Notes: (a) New gross floor area under 25,000 SF pays 50 percent of full fee. (b) Oakland’s fee applies to office and warehouse/distribution development over 25,000 SF. (c) The fee applies to projects adding more than 5,000 SF of new commercial space. The fee is reduced by 25% if all construction workers are paid prevailing wages. (d) 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. (e) The fee on the first 25,000 SF is discounted by 50 percent. (f) The linkage fees are applied to commercial developments of 10,000 SF or more that do not include on-site affordable units. Sources: City staff and websites; Nonprofit Housing Association of Northern California, 2015; Vernazza Wolfe Associates, Inc. & Strategic Economics, May 2016. Supplementary Memo Report | April 2016 5 Figure 3: Housing Impact Fees in Bay Area Cities Single Family Detached Single Family Attached Condominiums Apartments Date Adopted/ Updated Berkeley N/A N/A N/A $31/SF (a) 2016 Cupertino $15/SF $16.50/SF (b) $20/SF $25/SF 2015 Daly City $14/SF $18/SF (c) $22/SF $25/SF 2014 East Palo Alto $22/SF $22/SF $22-$44/SF (d) $22/SF 2014 Emeryville N/A N/A N/A $33/SF (e) 2015 Mountain View N/A N/A N/A $17/SF 2015 Oakland (f) $8,000-$23,000 $8,000-$20,000 $12,000-$22,000 $12,000-$22,000 2016 (proposed) Redwood City (g) $25/SF $25/SF $20/SF $20/SF 2015 San Carlos (h) $23.54-$43.54/SF $20.59-$42.20/SF $20.59-$42.20/SF $23.54-$43.54/SF 2010 San Jose N/A N/A N/A $17/SF (i) 2014 Sunnyvale N/A N/A N/A $17/SF (j) 2015 Notes: (a) Berkeley's affordable housing impact fee is $28,000 per unit. The per square foot fee is estimated based on the prototype unit size. (b) This fee applies to small lot single family and townhomes. (c) This fee applies to townhomes. (d) Fee ranges from $22 per square foot for for-sale housing without structured parking to $44 per square foot for housing with structured parking. (e) Emeryville's affordable housing impact fee is $28,000 per unit. The per square foot fee is estimated based on the prototype unit size. (f) Oakland's affordable housing impact fee for residential development are proposed only, with implementation beginning in 2018. (g) The fee applies to projects over 4 units, and is reduced by 25% if all construction workers are paid at prevailing wage. (h) Fees shown as ranges. Actual fees charged depend on project size. (i) Fee goes into effect in 2016. Developments approved before July 2016 are exempt with a longer exemption for downtown development. (j) Smaller projects with between 4 and 7 units pay 50 percent of this fee. Sources: City websites; Nonprofit Housing Association of Northern California; Vernazza Wolfe Associates, Inc. and Strategic Economics, 2016. Supplementary Memo Report | April 2016 6 Figure 4: Cost Comparison of Inclusionary Policy and Housing Impact Fees Single-Family Detached Single-Family Attached Condominium Prototype Description Number of Units in Prototype 20 10 35 Estimated Sales Price Market-Rate Unit $3,043,000 $1,666,000 $1,390,000 Average Unit Size (square feet) 3,000 2,100 2,100 Inclusionary Requirement Percentage Inclusionary Requirement 15% 15% 15% Number of Market-Rate Units 17 8 30 Number of Inclusionary Units Required 3.00 1.50 5.25 Number of Affordable Units Required (rounded) 3 2 5 Fractional Units1 - - 0.25 Cost to Developer if In-Lieu Fees are Paid Total In-Lieu Fees $684,675 $249,900 $521,250 In-Lieu Fee Revenues per Market-Rate Unit $40,275 $31,238 $17,375 Cost to Developer if Units Provided on Site Estimated Sales Price for Affordable Units2 $436,929 $436,929 $436,929 Foregone Revenue per Affordable Unit3 $2,606,071 $1,229,071 $953,071 Total Foregone Revenues $7,818,213 $2,458,142 $4,765,355 Total In Lieu Fees for Fractional Units $0 $0 $26,063 Foregone and In Lieu Fee Revenues per Market-Rate Unit $459,895 $307,268 $159,714 Cost to Developer if Housing Impact Fees are Paid Maximum Impact Fee per Market-Rate Unit (Maximum Justified Fee per Nexus Study) $333,501 $189,037 $158,519 Recommended Impact Fee per Market-Rate Unit $285,000 $105,000 $105,000 1 If the BMR percentage results in a fractional unit, the developer has the option of paying the in-lieu fee on the fractional unit. 2 The affordable unit price is assumed to be affordable to a 5-person household at 110% Area Median Income in Santa Clara County. 3 The foregone revenue per unit calculation is calculated as the difference between the market-rate sales price and the affordable sales price. Sources: City of Palo Alto, 2015; Vernazza Wolfe Associates, Inc. and Strategic Economics, 2016. Attachment E Figure 1a: Palo Alto Fees and Permits by Prototype (Nexus Study Recommended Fees) Total Fees by Prototype Office/R&D/ Medical Office Single- Family Detached Single- Family Attached Condo Apartment Prototype Size (Square Feet) 1 100,000 90,000 21,000 73,500 68,000 Existing City Fees and Permits 2 $3,745,450 $4,764,246 $1,387,773 $2,213,657 $2,143,169 Commercial Linkage Fees/Housing Impact Fee Scenarios Current Linkage Fees/ Housing Impact Fees $2,037,0003 $0 $0 $0 $0 Maximum Feasible Fee Scenario $6,000,000 $9,990,000 $1,890,000 $5,512,500 $5,780,000 Recommended Fee Scenario $3,500,000 $8,550,000 $1,050,000 $3,675,000 $3,400,000 Total Combined City Fees and Permits by Scenario With Current Linkage Fees/ Housing Impact Fees $5,782,450 $4,764,246 $1,387,773 $2,213,657 $2,143,169 Maximum Feasible Fee Scenario $9,745,450 $14,754,246 $3,277,773 $7,726,157 $7,923,169 Recommended Fee Scenario $7,245,450 $13,314,246 $2,437,773 $5,888,657 $5,543,169 1 The Office/R&D/Medical Office prototype is expressed in gross square feet, while the residential prototypes are expressed in net square feet. 2 Estimate of Existing City Fees and Permits excludes the existing commercial linkage fee of $20.37 per square foot. Sources: City of Palo Alto, 2016; Strategic Economics, May 2016. 3Based on updated fee of $20.37 per square foot, May 8, 2016. Figure 1b: Palo Alto Fees and Permits by Prototype (Finance Committee Recommended Fees) Total Fees by Prototype Office/R&D/ Medical Office Single- Family Detached Single- Family Attached Condo Apartment Prototype Size (Square Feet) 1 100,000 90,000 21,000 73,500 68,000 Existing City Fees and Permits 2 $3,745,450 $4,764,246 $1,387,773 $2,213,657 $2,143,169 Commercial Linkage Fees/Housing Impact Fee Scenarios Current Linkage Fees/ Housing Impact Fees $2,037,000 $0 $0 $0 $0 Maximum Feasible Fee Scenario $6,000,000 $9,990,000 $1,890,000 $5,512,500 $5,780,000 Recommended Fee Scenario $6,000,000 $4,500,000 $1,050,000 $3,675,000 $3,400,000 Total Combined City Fees and Permits by Scenario With Current Linkage Fees/ Housing Impact Fees $5,782,450 $4,764,246 $1,387,773 $2,213,657 $2,143,169 Maximum Feasible Fee Scenario $9,745,450 $14,754,246 $3,277,773 $7,726,157 $7,923,169 Recommended Fee Scenario $9,745,450 $9,264,246 $2,437,773 $5,888,657 $5,543,169 1 The Office/R&D/Medical Office prototype is expressed in gross square feet, while the residential prototypes are expressed in net square feet. 2 Estimate of Existing City Fees and Permits excludes the existing commercial linkage fee of $20.37 per square foot. Sources: City of Palo Alto, June 2016; Strategic Economics, May 2016. Supplementary Memo Report | April 2016 5 Figure 3: Housing Impact Fees in Bay Area Cities Single Family Detached Single Family Attached Condominiums Apartments Date Adopted/ Updated Berkeley N/A N/A N/A $31/SF (a)2016 Cupertino $15/SF $16.50/SF (b) $20/SF $25/SF 2015 Daly City $14/SF $18/SF (c) $22/SF $25/SF 2014 East Palo Alto $22/SF $22/SF $22-$44/SF (d) $22/SF 2014 Emeryville N/A N/A N/A $33/SF (e)2015 Mountain View N/A N/A N/A $17/SF 2015 Oakland (f) $8,000-$23,000 $8,000-$20,000 $12,000-$22,000 $12,000-$22,000 2016 (proposed) Redwood City (g) $25/SF $25/SF $20/SF $20/SF 2015 San Carlos (h) $23.54-$43.54/SF $20.59-$42.20/SF $20.59-$42.20/SF $23.54-$43.54/SF 2010 San Jose N/A N/A N/A $17/SF (i) 2014 Sunnyvale N/A N/A N/A $17/SF (j) 2015 Notes: (a) Berkeley's affordable housing impact fee is $28,000 per unit. The per square foot fee is estimated based on the prototype unit size. (b) This fee applies to small lot single family and townhomes. (c) This fee applies to townhomes. (d) Fee ranges from $22 per square foot for for-sale housing without structured parking to $44 per square foot for housing with structured parking. (e) Emeryville's affordable housing impact fee is $28,000 per unit. The per square foot fee is estimated based on the prototype unit size. (f) Oakland's affordable housing impact fee for residential development are proposed only, with implementation beginning in 2018. (g) The fee applies to projects over 4 units, and is reduced by 25% if all construction workers are paid at prevailing wage. (h) Fees shown as ranges. Actual fees charged depend on project size. (i) Fee goes into effect in 2016. Developments approved before July 2016 are exempt with a longer exemption for downtown development. (j) Smaller projects with between 4 and 7 units pay 50 percent of this fee. Sources: City websites; Nonprofit Housing Association of Northern California; Vernazza Wolfe Associates, Inc. and Strategic Economics, 2016. Attachment F Attachment G Figure 4: Cost Comparison of Inclusionary Policy and Housing Impact Fees Single-Family Detached Single-Family Attached Condominium Prototype Description Number of Units in Prototype 20 10 35 Estimated Sales Price Market-Rate Unit $3,043,000 $1,666,000 $1,390,000 Average Unit Size (square feet) 3,000 2,100 2,100 Inclusionary Requirement Percentage Inclusionary Requirement 15% 15% 15% Number of Market-Rate Units 17 8 30 Number of Inclusionary Units Required 3.00 1.50 5.25 Number of Affordable Units Required (rounded) 3 2 5 Fractional Units1 - - 0.25 Cost to Developer if In-Lieu Fees are Paid Total In-Lieu Fees $684,675 $249,900 $521,250 In-Lieu Fee Revenues per Market-Rate Unit $40,275 $31,238 $17,375 Cost to Developer if Units Provided on Site Estimated Sales Price for Affordable Units2 $436,929 $436,929 $436,929 Foregone Revenue per Affordable Unit3 $2,606,071 $1,229,071 $953,071 Total Foregone Revenues $7,818,213 $2,458,142 $4,765,355 Total In Lieu Fees for Fractional Units $0 $0 $26,063 Foregone and In Lieu Fee Revenues per Market-Rate Unit $459,895 $307,268 $159,714 Cost to Developer if Housing Impact Fees are Paid Maximum Impact Fee per Market-Rate Unit (Maximum Justified Fee per Nexus Study) $333,501 $189,037 $158,519 Recommended Impact Fee per Market-Rate Unit (Finance Committee Recommendation) $150,000 $105,000 $105,000 1 If the BMR percentage results in a fractional unit, the developer has the option of paying the in-lieu fee on the fractional unit. 2 The affordable unit price is assumed to be affordable to a 5-person household at 110% Area Median Income in Santa Clara County. 3 The foregone revenue per unit calculation is calculated as the difference between the market-rate sales price and the affordable sales price. Sources: City of Palo Alto, June 2016; Vernazza Wolfe Associates, Inc. and Strategic Economics, 2016. Attachment H Revised May 2016 Existing and Proposed Affordable Housing Fees Use Existing Fees Maximum Justified Fee (per SF) Maximum Feasible Fee (per SF) Consultant Recommendation (per SF) Finance Committee Direction (per SF) Hotel $20.37/sf $177 $30 $30 $30 Office/Medical/R&D $20.37/sf $264 $60 $35 $60 Retail/Restaurant/Other1 $20.37/sf N/A N/A $20.37 $20.37 Single-Family Detached2 7.5 to 10% of sales price $111 $111 $95 $50 Single-Family Attached2 7.5 to 10% of sales price $90 $90 $50 $50 Condominium2 7.5 to 10% of sales price $75 $75 $50 $50 Rental Apartments2 None $105 $85 $50 $50 1Retail/Restaurant/Other was not studied as part of this nexus study, and the staff’s recommendation is to maintain the current fee of $20.37/new net square footage for this prototype based on the prior nexus study. The fee was updated on May 8, 2016. 2Market rate ownership housing projects are currently subject to the City’s Affordable housing program which requires on site affordable units or payment of in-lieu fees. Market rate rental projects are not subject to this program due to a court decision titled Palmer v. City of Los Angeles. Sources: Vernazza Wolfe Associates, Inc. & Strategic Economics, 2015 and Department of Planning and Community Environment, May 2016 Definitions Nexus Study: 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. A nexus study is required in order to adopt a residential housing impact fee or a commercial linkage fee. Maximum Justified Fee: Based on the nexus study, this is the maximum fee 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. Maximum Feasible Fee: This is the maximum fee that can be charged based on the financial feasibility of the fee levels. The financial feasibility study looks at the difference between the revenues and costs of development (residual land value) using “prototype” projects. If the residual land value is higher than the market value, the project is feasible. If the residual land value is lower than the market price, then the project is infeasible. Consultant Recommendation: The recommendations were made by the consultant in the Draft Commercial and Residential Impact Fee Nexus Studies. The recommendations are based on the results of the financial feasibility analysis, a comparison with fees adopted in other Bay Area communities and other policy considerations.