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Staff Report 140-07
City of Palo Alto. City Manager’s Report TO: FROM: DATE: SUBJECT: HONORABLE CITY COUNCIL t~ 7 CITY MANAGER DEPARTMENT: PLANNING AND ’ COMMUNITY ENVIRONMENT MARCH 12, 2007 CMR: 140:07 ORDINANCE REMOVING AN EXEMPTION FOR HOSPITALS FROM THE HOUSING IN-LIEU FEE (CHAPTER 16.47 OF THE PALO ALTO MUNICIPAL CODE) RECOMMENDATION Staff recommends that the City Council adopt the attached ordinance removing an exemption for hospitals from the Housing In-lieu Fee (Chapter 16.47 of the Palo Alto Municipal Code). BACKGROUND Since 1984, the City has imposed a fee on new employment-generating development to fund affordable housing. Applicants may either provide affordable housing to the City or pay a fee. The City then uses this money to fund affordable housing developments, the most recent example being the Oak Court development on Ramona Street and Channing Avenue. These developments give preference to people who currently live or work in Palo Alto, including employees of the Stanford Medical Center. Several types of developments are exempt from this fee, either because they provide a public benefit, or because they are specifically encouragedby a City policy. Examples include small retail, commercial recreation, private educational facilities, public facilities, and hospitals. Most generate relatively small numbers of jobs. Hospitals are an exception, generating more than 8% of the employment in Palo Alto, or over 8,000 jobs. At least 3,000 of these employees are attributable to hospital expansions performed since the ordinance was first adopted. DISCUSSION In order to alleviate the impact of future hospital expansions on the City’s affordable housing stock, City staff recommends removing the exemption for hospitals from the in-lieu housing fee. The housing impacts of future hospital expansions are shown in the attached nexus analysis (Attachment A). According to the nexus study, each additional CMR: 140:07 Page 1 of 3 100,000 square feet of employment-generating uses in the City creates a need for five very-low income housing units, fifteen low-income units, and nine moderate-income units. The cost of providing this affordable housing, the "total linkage cost," is $58.29 per square foot of net new hospital floor area, which is comparable to the cost of the housing demand generated by other non-residential development types. The "total linkage cost" is the fee that would recover the entire cost fulfilling the housing demand for new development. The actual fee the City currently charges is lower, $16.01 per square foot. Applying this $16.01 per square foot fee to hospitals would mean that approximately 75% of the estimated cost of providing the additional workforce affordable housing generated would be funded by other sources, such as federal or state grants, non-profit organizations, or the City’s General Fund. The attached nexus report uses several conservative assumptions when generating these estimates. It assumes, for example, that one-third of employees eligible for affordable housing would elect to commute instead of living in Palo Alto, even if affordable housing were available to them. This is consistent with commuter data for other cities in the region. Conservative estimates are also used when estimating the cost to the City of building affordable housing. POLICY IMPLICATIONS This ordinance is consistent with Comprehensive Plan Policy B-32, which identifies the City’s goal of working with the Stanford Medical Center to address changing facility needs, but within the context of City planning goals and policies. The ordinance is also consistent with Policy H-15 and Program H-50 of the Comprehensive Plan, which support pursuing funding for construction or rehabilitation of affordable housing, and requiring developers of employment-generating developments to contribute to the supply of low- and moderate-income housing to reduce the housing impacts of the additional employment generated. This ordinance also furthers the goals of the City’s In-lieu Housing Fee ordinance. The goal and purpose of the ordinance is to "lessen the shortage of low-income and moderate- income housing in Palo Alto by requiring developers of large commercial and industrial projects, as a condition of using land for the privilege of development, to contribute to programs that increase the City’s low-income and moderate-income housing stock." As stated in the adopting ordinance, the City has an interest in ensuring that people who work in the City can live in the City, because "the lack of affordable housing in Palo Alto forces many new~ employees to commute considerable distances, adding to the air pollution and traffic congestion in Palo Alto and adjacent communities." CMR: 140:07 Page 2 of 3 RESOURCE IMPACT Currently, the in-lieu fee for projects that do not provide affordable housing units is $16.01 per square foot. This ordinance would apply this same fee to hospitals. A 1,000,000 square foot hospital expansion would generate $16 million in housing fees, which could only be used to provide affordable housing. The in-lieu fee only applies to net new square footage; replacement or renovation of existing facilities is exempt from the fee. ENVIRONMENTAL REVIEW The imposition of an in-lieu fee on development-is not a project under the California Environmental Quality Act, and does not require environmental review. ATTACHMENTS A. Ordinance amending Chapter 16.47 of the Palo Alto Municipal Code B. Nexus Study PREPARED BY: DEPARTMENT HEAD REVIEW: CITY MANAGER APPROVAL: Administrator gTI~E EM~LIE " Director of Planning and Community Environment Assistant City Manager CMR: 140:07 Page 3 of 3 ATTACHMENT A ORD!N~NCE NO~ ORDIN~CE OF THE COUnCiL OF THE CITY OF PALO ALTO ~ENDING SECT!ON 16.47.030 (EXEMPTIONS) OF TITLE 16 (BUILDING REGULATIONS) OF THE PALO ALTO MUniCIPAL CODE TO REMOVE AN EXEMPTION FOR HOSPITALS FROM THE HOUSING IN-LIEU FEE The Council of the City of Palo Alto does ORDAIN as follows: SECTION i. The Council hereby finds as fol!ows: (a)New non-residential deve!opment in the city generates additional employees, some of whom will earn low and moderate incomes. Those employees are most impacted by the lack of affordable housing. A Housing Linkage Analysis completed in September 2001 for the City revealed that new non-residential construction generates an affordable housing demand of 38 units for each i00,000 square feet of building area. (b) The lack of affordable housing in Palo Alto forces many new employees to commute considerable distances, adding to the air pollution and traffic congestion in Palo Alto and adjacent communities. (c)Large commercial and industrial developments that contribute to the jobs/hous±ng imbalance and the concomitant increasing shortage of 10w- and moderate-income housing should be required as a condition of development to assist the community in alleviating the housing shortage. (d) Hospitals in Palo Alto employ over 8,000 people, and over 3,000 of these employees are a result of hospital expansions performed since the initial adoption of the City’s housing impact ordinance in 1984. (e) Removing the fee exemption for hospitals will ensure that hospitals share in the cost of providing housing for the employees they generate.. SECTION 2. Section 16.47.030 (Exemptions) of Chapter 16.47 (Approval of Projects with Impacts on Housing) of Title 16 (Building Regulations) of the Palo Alto Municipal Code is hereby amended to read as follows: 060705 syn 0i20132 NOT YET APPROVED 16.47.030 Exemptions. The following uses, as defined in Title 18 of the Palo Alto Municipal code, are exempt from this chapter: (a)Residential uses; (b)Churches; (cJ Co!leges and universities; (d)Commercial recreations; (c)Hospi-t~.!s and conva!esccr~---f-e~c--is~itics~ 6~-}(e) Private clubs, lodges, and fraternal organizations; ’,~-+(f)Private education facilities; +h+(g)Public facilities.; ,imvi-~(h)Retai! service, eating and drinking service, personal service, or automotive services 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 al! square footage, including the first 1,500 square feet. SECTION 3. This ordinance does not constitute a project having potential effects upon the environment and therefore does not require environmental review under the California Environmental Quality Act. // // // // // // // // // 060705 syn 0120132 SECTION 4. This ordinance shall be effective on the thirty-first day after the date of its adoption. INTRODUCED: PASSED: AYES: NOES: ABSTENTIONS: ABSENT: ATTEST: City Clerk APPROVED AS TO FORM: Senior Deputy City Attorney Mayor APPROVED: City Manager Director of Planning and Community Environment 060705 syn 0120132 ATTACHMENT B DRAFT Addendum to: Jobs Housing Nexus Analysis Report, October 1993, Portions Revised March 1995, Updated by the September 2001 Housing Linkage Update Analysis Medical & Hospital Buildings Prepared for: City of Palo Alto Prepared by: Keyser MarstonAssociates, Inc, Janua~ 2007 TABLE OF CONTENTS Page OVERVIEW AND SUMMARY OF FINDINGS ..............................................................................1 Introduction ............................................................................................................................. Summary of Nexus Findings ..................................................................................................2 SECTION 1 - MEDICAL / HOSPITAL NEXUS ANALYSIS ..........................................................5 Analysis Approach and Framework ..........................................: ...........................................5 Analysis Steps .........................................................................................................................5 Summary by Income Level .....................................................................................................8 Adjustment for Commute Relationship .................................................................................8 Summary Conclusions ...........................................................................................................9 SECTION II -AFFORDABILITY GAP AND TOTAL LINKAGE COST .....................................13 Income and Household Size Assumptions ..........................................................................13 Affordable Rent Levels and Sales Prices ............................................................................"14 Market Sales Price I Development Costs ............................................................................"14 Affordability Gap ...................................................................................................................15 Total Nexus Costs ......................................... ........................................................................16 Conservative Assumptions ..................................................................................................16 LIST OF TABLES Table I-1: Net New Households and Occupation Distribution Table 1-2: Estimate of Qualifying Households by Income Level Table I-3: Worker Households by Affordability Level Table II-1: Value of Affordable Rental Units Table 11-2: For-Sale Units- Affordable Prices Table 11-3: Average Market Sales Prices Table 11-4: Residential Prototype- Rental Housing Table 11-5: Affordability Gaps Table 11-6- Total Nexus Cost- Medical/Hospita APPENDICES Table 1: Table 2: 2005 National Medical and Hospital Worker Distribution by Occupation Average Annual Compensation. 2006 - Medical and Hospital Worker Occupations DRAFT OVERVIEW AND SUMMARY OF FINDINGS Introduction This report is an addendum to the Jobs Housing Nexus Analysis, Prepared for the City of Palo Alto, October 1993, Portions Revised March 1995, Prepared by Keyser Marston Associates, Inc. (KMA) Which was subsequently uPdated by the Housing Linkage Update Analysis prepared by Keyser Marston Associates, Inc. in September 2001. The addendum has been prepared per request of the City to address Medical and Hospital uses which were not specifically addressed in either the 1993 / 1995 report or the 2001 update. This analysis is a new analysis, using all current information and the KMA nexus model which has been refined since last utilized for Palo Alto in 1993/1995. A nexus analysis is an analysis that quantifies the linkages between the construction of new commercial and other workplace type buildings and the demand for housing at various affordability levels. The conclusions are expressed in terms of the number of housing units at various affordability levels associated with a given amount of workplace building area. The 1993 / 1995 report addressed office, R&D, industrial, warehouse, retail/services, and hotel buildings. In KMA’s more recent nexus analyses, a separate analysis is usually provided for medical and hospital buildings since these buildings are perceived as unique. In addition, very good data on the density of medical workers and their occupational structure is now available. Finally, the medical industry has evolved in a manner that sometimes results in medical activities in commercial type structures and indeed there are medical specialties that locate in commercial areas and closely resemble other commercial activities. Many jurisdictions find the distinctions between for profit and non-profit medical activities difficult to administer as a building type and find the distinctions no longer helpful for other applications as well. As a result the medical and related category is often included within affordable housing linkage fee programs and treated similarly to other commercial structures. For example, the City of San Diego has been charging and collecting a housing nexus fee for all hospital and medical related buildings, both for-profit and non-profit, since the inception of the program in 1990. This addendum has been prepared for the City of Palo Alto to serve as a support document should the City wish to incorporate medical and hospital buildings into the existing jobs housing nexus program..The analysis uses the same general methodology as the analyses for commercial buildings in 1993 and an updated version of the same computerized model,used previously. Because the model has been revised and newer and more detailed data is now used, the results from the earlier analysis on commercial buildings and this analysis cannot be readily compared. The addendum is drawn from KMA’s extensive experience over the past fifteen years in the preparation of jobs housing nexus analyses, including the prior analyses for the City of Palo Keyser Marston Associates, Inc. 17175.007/001-001 .doc; 1/19/2007 Page 1 DRAFT Alto, recent assignments for other cities in Silicon Valley, and many other jurisdictions throughout the state. Summary of Nexus Findings " The findings of the nexus analysis for medical office and hospital buildings are summarize~l below. The results are expressed fiist in terms of the demand for housing by affordability level associated with 100,000 square feet of building area, and finally at the per square foot level. Employment Density and Composition The employment density and composition of medical and hospital buildings is drawn from several sources, such as detailed data on specific existing and proposed medical centers and numerous EIR’s for proposed medical projects. The occupational profile is drawn from Bureau of Labor Statistics Surveys as confirmed by information on specific projects. All compensation information is current State of California Employment Development (EDD) data for Santa Clara County. The average density of employment in .medical type buildings is approximately 350 square feet per employee, or 286 employees in the 100,000’square foot building module. Income of Worker Households The KMA nexus model uses occupation of employee data and EDD compensation levels to establish the income of workers or employees. Workers are then merged into households recognizing there is more than one worker in households today (there are 1.72 workers per worker household in Santa Clara County.) Households are distributed into various sizes and income levels. The model is adjusted to produce output for the desired income definitions, in this case four tiers of income up through 120% of median. The resulting output is numbers of worker households for each income tier, associated with the 100,000 square foot building module. CommuteAdjustment Consistent with the 1993/1995 analysis, the analysis recognizes that not all housing demand associated with medical facilities in Palo Alto will be located in Palo Alto, even assuming housing were affordable to worker households. Consistent with the 1993/1995 analysis, approximately 33% of worker households are assumed to seek housing in Palo Alto. As a result, after this "commute adjustment" which factors out 67% of the findings, the number of households seeking affordable housing in Palo Alto by affordability level is as follows: Keyser Marston Associates, Inc. 17175.007/001-001 .doc; 1/19/2007 Page 2 DRAFT Household Income Level Very Low Income (Under 50% Median) Low Income (50% to 80% Median) Lower Moderate (80% to 100% Median) U~ .~er Moderate(100% to 120% Median) To ?I Households 1 Afl~, the 33% commute adjustment consistent with the 1993/1995 Nexus Analysis. Housing Units Per 100,000 Sq.Ft. Bldg. Area 1 5 15 6 3 28 Cost o,~: Delivering Affordable Units The cos~ of mitigating the demand for affordable housing is based on the affordability gap, or the differeno- betweer~ the development cost of a new unit and the value of the unit when restricted to afford~ule rents or sales prices. KMA drew from recent work prepared for the City of Palo Alto on the E,!ow MarP.~t Rate (BMR) Housing Program for which affordability gaps at the applicable income wels we~-,:, calculated. Affordability gaps are based on a two bedroom unit at the low- end of t ~ averag, cost range. For the two moderate income tiers, households are assumed to be accc ~modate~" in small condominium units, for the lower tiers a rental unit are assumed. The aff~ dability g ".-.ps used in the analysis are as follows: Hous~ Low Ir Lower ~old Income Level ~;v Incom~~ (Under 50% Median) ome (50t ~ to 80% Median) *oderate ~0% to 100% Median) ’oderate( : 00% to 120% Median) Affordability Gap $259,300 $116,800 $346,0O0 $277,200- Total L~; age Cost Total tit: .age cost is determined by multiplying the demand for housing units at each income level b’, ~he corresponding affordability gap and then dividing by 100,000 square feet to bring the an~tysis back to the per square foot level. The nexus conclusions for medical office and hospib~; are: Ho~ :sehold Income Level Ve , Low Income (Under 50% Median) Lc.v Income (50% to 80% Median) Lower Moderate (80% to 100% Median) Upper Moderate(100% to 120% Median) Total Linkage Cost Nexus Cost Per Sq.Ft. $13.69 $16.96 $19.41 $8.23 $58.29 Keyser Marston Associates, Inc. 17175.007/001-001 .doc; 1/19/2007 Page 3 DRAFT These costs express the total linkage or nexus costs for medical and hospital buildings. These total nexus findings and cost represent the ceiling for any requirement placed on new construction of medical and hospital buildings for affordable housing. Many conservative assumptions were used in the preparation of the nexus analysis and costs. Alternative assumptions would produce higher costs. Keyser Marston Associates, Inc. 17175.007/001-001 .d oc; 1/19/2007 Page 4 DRAFT SECTION I - MEDICAL / HOSPITAL NEXUS ANALYSIS This section presents a summary of the analysis of the linkage between medical office and hospital buildings and the estimated number of worker households in the income categories that wilt, on average, be employed within those buildings. Inputs into the model reflect the most current data available. The analysis reflects many changes and updates to inputs used in the 1993/95 nexus. The nexus concept and underlying assumptions as summarized in Section I of the 1993 report continue to apply to this nexus analysis addendum and are incorporated herein by reference. Analysis Approach and Framework The analysis approach is to examine the employment associated with the development of a !00,000 square foot medical / hospital building module. Then, through a series of linkage steps, the number of employees is converted to households and housing units by affordability level. The findings are expressed in terms of numbers of households related to building area. In the final step, we convert the numbers of households for 100,000 square foot buildings back to the per square foot level. The income categories addressed in this analysis are as follows. For a four person household, these income levels are: ¯Very Low Income - Under 50% of Median (Up to $53,050) ¯Low Income- 50% to 80% of Median (Up to $84,900) ¯Lower Moderate I nc0me- 80% to 100% of Median (Up to $105,500) ¯Upper Moderate Income- 100% to 120% of Median (Up to $126,600) The analysis is conduced using a computerized model that KMA has developed for application in many jurisdictions. It is an updated version of the model applied in the previous KMA nexus analysis for the City of Palo Alto in1993. The model inputs are all local data to the extent possible, and are fully documented. Analysis Steps Tables I-1 through I-3 at the end of this section summarize the nexus analysis steps. Following is a description of each step of the analysis: Keyser Marston Associates, Inc. 17175.007/001-001 .doc; 1/19/2007 Page 5 DRAFT Step "1 - Estimate of Total New Employees The first step in Table I-1 identifies the total number of direct employees who will work at or in hospital and medical type buildings. The calculation is based on an average employment density factor of 350 square feet per employee. This average is based on KMA experience and research, including detailed employment information for several existing and proposed medical centers and facilities, and multiple medical/hospital EIR documents where employment is covered. Medical office and hospitals buildings cover a range of facilities from specialized in- patient care facilities where densities are lower to outpatient care centers and specialized facilities where hospital beds and living quarters are not present, and employment densities are higher. Since the existing program already covers medical office buildings, this analysis supports expanding the program to cover all types of medical facilities. The employment density factor used in the analysis is but an average; individual facilities can be expected to be fairly divergent from the average from time to time. (An ordinance variance provision addresses the possibility of a building that is so divergent from the average so as to need special treatment.) For ease of analysis and understanding, KMA conducted the analysis on a prototype building of 100,000 square feet. We have used this size building in order to count jobs and housing units in whole numbers that can be readily communicated and understood. Our hypothetical 100,000 square foot building therefore has 286 employees, based on a density of 350 square feet per employee. Step 2 - Adjustment for Changing Industries This step is an adjustment to take into account any declines, changes and shifts within all sectors of the local economy and to recognize that new space is not always 100% equivalent to net new employees. Some new jobs in medical office or hospital buildings, for example, may be taken by workers who lost their jobs in another industry and thus already had local housing. Consistent with the previous analyses for Palo Alto, this analysis incorporates a 5% adjustment to recognize the possibility of future minor declines and other internal economic adjustments: Step 3 - Adjustment from Employees to Employee Households This step (Table I-1) converts the number of employees to the number of employee households that will work at or in the building type being analyzed. This step recognizes that there is, on average, more than one worker per household, and thus the number of housing units in demand for new workers must be reduced. The workers per worker household ratio eliminates from the equation all non-working households, such as retired persons, students, and those on public assistance. The Santa Clara County average of 1.72 workers per worker households is used in the analysis. Keyser Marston Associates, Inc. 17175.007/001-001 .doc; 1/19/2007 Page 6 DRAFT Step 4 - Occupational Distribution of Employees The occupational breakdown of employees is the first step to arriving at income level. Using the 2005 National Industry-Specific Occupational Estimates, a cross matrix of "industries" and occupations, produced by the Bureau of Labor Statistics (BLS), we are able to estimate the occupational composition of employees in medical and hospital buildings. The "industries" selected to represent uses in medical office and hospital buildings include: ¯Hospitals(general, surgical,and specialty hospitals as well as psychiatric and substance abuse hospitals); ¯Ambulatory and outpatient care centers; ¯Medical and diagnostic laboratories; and ¯Medical offices (dentists, physicians, ether heath practitioners). As indicated in Appendix Table 1, medical office and hospital employment is concentrated in healthcare practitioners, technical occupations, and healthcare support occupations, which account for 61% of employment. Office and administrative support occupations represent an additional 23% of employment. Management, social services, building and grounds maintenance, and other health care occupations together make up the remaining 16% of the total. The numbers in Step #4 (Table I-1) indicate both the percentage of total employee households and the number of employee households in our hypothetical 100,000 square foot building. Step 5 - Estimates of Employee Households Meeting the Lower Income Definitions I.n this step, occupation is translated to income based on recent Santa Clara County wage and salary data for the occupations associated with each building type. The wage and salary information indicated in Appendix Table 2 provides the income inputs to the model. This step in the analysis calculates the number of employee households that fall into each income category for each size household. Individual employee income data was used to calculate the number of households that fall into these income categories by assuming that multiple earner households are, on average, formed of individuals with similar incomes. Based on Census data, the model assigns fewer workers per household to smaller household sizes than it does larger households. Employee households not falling into one of the major occupation categories per Appendix Table 2 were assumed to have the same income distribution as the major occupation categories. Keyser Marston Associates, Inc. 17175.007/001-001 .doc; 1/19/2007 Page 7 DRAFT Step 6 - Estimate of Household Size Distribution In this step, household size distribution is input into the model in order to estimate the income and household size combinations that meet the income definitions established by HUD, as used by the State and the City. The household size distribution utilized in the analysis is that of Santa Clara County since the workers are more representative of the larger universe (the County) than the City of Palo Alto. Step 7 - Estimate of Households that meet HUD Size and Income Criteria For this step we had to build a matrix of household size and income to establish probability factors for the two criteria in combination. For each occupational group a probability factor was calculated for each of HUD’s income and household size levels. This step is performed for each occupational category and multiplied by the number of households. Table I-2 shows the result after completing Steps #5, #6, and #7. The calculated numbers of households that meet HUD size and income criteria shown in Table I-2 are for the Very Low Income or under 50% of Median Income Category. At the end of these steps, for the under 50% of Median Income category We have counted medical and hospital workers in our buildings of 100,000 square feet. The methodology is repeated for each income tier (See Table I-3). Summary by Income Level Table I-3 indicates the results of the analysis for the other three additional income categories for the prototypica1100,000 square foot building. The table presents the number of households in each affordability category and the total number up to 120% of median. The highest concentration is in the 50% to 80% median tier. About 55% of medical / hospital worker households have incomes below the 120% of median income level in Santa Clara County. Adjustment for Commute Relationship A nexus analysis for a limited geographical area, such as a city, must make an adjustment for the share of housing demand generated by a new commercial or industrial project, to be located within the city. This adjustment may be based on historic experience and/or it may reflect policy goals. The 1993 analysis used 33% as a share, a conservative judgment about the share of total worker households generated by the project that would seek out housing in Palo Alto were it affordable. Of those who work in Palo Alto, the 1980 U.S. Census found that 19.7% also lived in the City. By 1990 the share had dropped to 15.3% and by 2000 itwas 14.2%. The 33% used in the 1993 analysis was based on an examination of other Silicon Valley and Peninsula cities where it was found that several cities of comparable size did realize about a 33% share. Keyser Marston Associates, Inc. 17175.007/001-001 .doc; 1/19/2007 Page 8 DRAFT Consistent with the 1993 analysis, estimates of households for each income category are adjusted downwards by a 33% commute factor. Table I-3 shows the number of households in each income category both before and after this commute adjustment. Summary. Conclusions This is the summary of the housing nexus analysis, or the linkage from buildings to employees, to housing demand by income level. We believe that it is a conservative approximation (understates at the low end) of the households by income/affordabitity level associated with these building types. I Before After 33%Percent of Total Commute Commute Worker Worker Households Adjustment Adjustment Households Under 50% Median lncome 16 5 10.2% 50% to 80% Median Income 44 15 27.9% 80% to 100% Median Income 17 6 10.8% 100% to 120% Median Income 9 3 5.7% Total Through 120% of Median 86 28 54.6% Keyser Marston Associates. inc. 17175.007/001-001 .doc; 1/19/2007 Page 9 TABLE I-1 NET NEW HOUSEHOLDS AND OCCUPATION DISTRIBUTION ADDENDUM TO JOBS HOUSING NEXUS ANALYSIS CITY OF PALO ALTO, CA Prototypica1100,000 Sq.Ft. Building Step 1 - Employees in Prototypica1100,000 SF Building Square Feet of Building Area Per Employee Number of Employees Step 2 - Adjustment for Changing Industries Replacement Factor (5%) Step 3 - Adjustment for Number of Households (1.72) Step 4 - Occupation Distribution1 Management Occupations Business and Financial Operations Computer and Mathematical Architecture and Engineering Life, Physical, and Social Science Community and Social Services Legal Education, Training, and Library Arts, Design, Entertainment, Sports, and Media Healthcare Practitioners and Technical Healthcare Support Protective Service Food Preparation and Serving Related Building and Grounds Cleaning and Maint. Personal Care and Service Sales and Related Office and Administrative Support Farming, Fishing, and Forestry Construction and Extraction Installation, Maintenance, and Repair Production Transportation and Material Moving Totals DFLAFT FOR DISCUSSION ONLY MEDICAL AND HOSPITAL 350 286 271 157 Total Percentaqe 4.8 3.0% 2.1 1.3% 1.0 0.7% 0.1 0.1% 1.1 O.7% 4.3 2.7% 0.0 0.0% 0.4 O.3% O.2 0.1% 72.2 45.9% 24.3 15.4% 0.8 0.5% 2..6 1.6% 3.7 2.3% 0.6 O.4% 0.4 0.3% 36.1 22.9% 0.0 0.0% O.3 O.2% 1.1 0.7% 0.7 0.5% 0.6 0.4% 157.4 100.0% 1See Appendix Table 2 for additional information from which the percentage distributions were derived. Prepared by: Keyser Marston Associates, Inc. Filename: 17175.007/Main Model 12-19-06.xls; I-1 Employees; 12/21/2006; dd TABLE I-2 ESTIMATE OF QUALIFYING HOUSEHOLDS BY INCOME LEVEL ADDENDUM TO JOBS HOUSING NEXUS ANALYSIS CITY OF PALO ALTO, CA DRAFT FOR DISCUSSION ONLY Prototypica1100,000 Sq.Ft. Ruilding Analysis for Households Earning Less than 50% Median MEDICAL AND HOSPITAL Step 5, 6, & 7 - Households in Major Occupation Categories Earning Less than 50% Median Management Business and Financial Operations Computer and Mathematical Architecture and Engineering Life, Physical and Social Science Community and Social Services Legal Education Training and Library Arts, Design, Entertainment, Sports, and Media Healthcare Practitioners and Technical Healthcare Support Protective Service Food Preparation and Serving Related Building Grounds and Maintenance Personal Care and Service Sales and Related Office and Admin Farm, Fishing, and Forestry Construction and Extraction Installation Maintenance and Repair Production Transportation and Material Moving Total HH earning less than 50% Median - Major Occupations 0.00 0.00 0.00 0.00 0.00 0.45 0.00 0.00 0.00 0.00 4.30 0.00 0.00 2.78 0.00 000 7.09 0.00 0.00 0.00 0.00 0.00 14.61 HH earning less than 50% Median -"all other" occupations [Total Households Earning Less than 50% of Median 1.22 15.8 1See Appendix Table 1 for additional information on Major Occupation Categories Prepared by: Keyser Marston Associates, Inc. Filename: 17175.007/Main Model 12-19-06.xls; I-2 Households; 12/21/2006; dd TABLE I-3 WORKER HOUSEHOLDS BY AFFORDABILITY LEVEL ADDENDUM TO JOBS HOUSING NEXUS ANALYSIS CITY OF PALO ALTO, CA DRAFT FOR DISCUSSION ONLY Medica and Hospital Prototypica1100,000 Sq.Ft. Building WORKER HOUSEHOLDS BEFORE At- ~ ~F, 33% COMMUTE COMMUTE Household Income Level ADJUSTMENT ADJUSTMENT Under 50% Mediar Income 16 5 50% to 80% Median Income 44 15 80% to 100% Median Income 17 6 100% to 120% Median Income 9 3 Subtotal Through 120% AMI 86 28 Over 120% of Median Income 71 24 Total New Worker Households 157 52 PERCENT OF TOTAL 10.2% 27.9% 10.8% 5.7% 54.6% 45.4% 100.0% Notes 33°/~ commute adjustment consistent with the approach in [he 1993/1995 Nexus Analysis. Prepared by: Keyser Marston Associates, Inc. Filename: 17175.007/Main Model 12-19-06.xls; I-3 Affordability; 12/21/2006; dd DRAFT SECTION II - AFFORDABILITY GAP AND TOTAL LINKAGE COST This section merges the conclusions of the previous section on the number of worker households in the various affordability categories with the cost of assistance to make housing units affordable. The previous section quantified the number of worker households by affordability level associated with medical/hospital buildings in Palo Alto. This section puts a cost on each unit at each affordability level to produce the "total nexus cost." A key component of the analysis is the size of the gap between what households can afford and the cost of producing additional housing in Palo Alto. The analysis is conducted for the four affordability levels addressed in this assignment: Very Low Income (below 50% median) Low Income (50% to 80% median), Lower Moderate Income (80% to 100% median) and Upper Moderate Income (100% to 120% median). The assumption is that the two lower categories would be housed in rental apartment units and the two moderate income categories would be housed in ownership units. Affordability gaps were calculated as part of KMA’s recent work for the City of Palo Alto summarized in the June 2006 Draft Report "City of Palo Alto Below Market Rate Housing Program Economic/Policy Analysis and Recommendations." The report includes affordability gap calculations for ownership units (Tables 6-12, 6-13, and 6-14). These gaps arestill considered current Since market rate sales prices have not changed appreciably since 2005 and the HUD income limits for 2006 are the same as for 2005. Gaps for rental units were also calculated as part of the work program but not included in the BMR report. Calculations in respect to both ownership and rental units are.repeated here and presented on Tables 11-2 through 11-6. The prototypical units used in the analysis represent a hypothetical low end of what might be developed by the private sector in Palo Alto (development activity for ownership units has been focused on more high-end units and there have been no significant rental projects recently of which we are aware). The unit type for the two lower income categories is an apartment project with wood frame construction, built at a density of about 30 units per acre. The two-bedroom unit is 900 square feet, with surface parking. The condo prototype applicable to the two moderate income categories is a two-bedroom unit, wood frame consti’uction developed outside of the downtown. Consistent with market averages, this two-bedroom unit is 1,100 square feet. Income and Household Size Assumptions Income definitions for housing programs are established by HUD and issued by the State Department of Housing and Community Development (HCD), for each county (Area Median Income or AMI) for varying household sizes. In order to determine the affordabitity gap, there is a need to match a household size and unit size, at each income level according to Keyser Marston Associates, Inc. 17175.007/001-001 .doc; 12/22/2006 Page 13 DRAFT governmental regulations and policies. Prototypical units are assumed to be two-bedroom units that accommodate a three person household. Cities have a policy choice in the selection of the income level for the analysis. When addressing an income range, the city can use the upper end of the range or the average. Not all households demanding housing will have incomes as high as the upper limit of households in each category. In this analysis, the income level is 10% below the upper end of the range. In other words, very low income households are assumed to average 40% of median, low income households 70% of median, lower moderate income households 90% of median and upper moderate income households 110% of median income. This is the same approach used in the 2001 nexus update and is employed by most cities. Affordable Rent Levels and Sales Prices Table I1-1 presents the analysis summarizing affordable rent levels and supported unit value for rental units. Table 11-2 presents the affordable sales prices for the ownership units. Both tables are drawn from prior KMA work for the BMR program. The analysis is based upon current median income levels for Santa Clara County which is $95,000 for a three bedroom household. In Table I1-1 the income level is multiplied by 30% to estimate total cost of affordable housing, adjusted for utility allowance to arrive at affordable rent for various size units. The affordable rent level is translated to annual rent from which operating expenses are deducted to establish net operating income. Net operating income is converted to a value supported assuming a 6% capitalization rate. The value supported is the amount that can be spent to develop the unit without subsidy. If development costs exceed the value supported, there is an affordability gap for which a subsidy is needed to bridge the gap. The affordable sales prices for ownership units were presented in the aforementioned June 2006 Draft Report on the BMR Program~ Table 11-2 summarizes the affordable unit pricing for households at 110% and 90% of median income. For ownership units, the assumption has been used that affordable homeownership costs do not exceed 30% of gross including condominium homeowners association dues, insurance and property tax, per City policy. Market sales Price / Development Costs The cost of producing the affordable units is equal to the development cost or estimated market sales price of the units (sales price is theoretically equal to the total development cost of the unit including developer profit). For the ownership units, we were able to draw upon market research conducted by KMA for the BMR work. Prices in Palo Alto and the Bay Area did continue increasing after the surveys, but has leveled off and even declined slightly in some areas. The BMR analysis evaluated more expensive units constructed in the downtown and less expensive units constructed outside of the downtown and concluded that a "hypothetical market minimum" Keyser Marston Associates, Inc. 17175.007/001-001 .doc; 12/22/2006 Page 14 DRAFT unit in Palo Alto would have a sales price of approximately $605,000 for a 1,100 SF two bedroom unit (see Table 11-3). This represents the least expensive two-bedroom unit likely to be developed in Palo Alto. The development cost for the rental units is based on a prototype which was developed as part of that BMR Program analysis (but not included in the report). Since there has been little recent development activity for rental units, a prototype rental project was created based upon an older apartment project in Pato Alto, but with current costs and adjusted unit mix. Total development costs are estimated at approximately $315,000 per unit for a 900 square foot two bedroom unit as shown on Table 11-4. The development cost is a 2005 estimate and we have not made any adjustment for cost escalation; the cost may therefore be understated even for a very low-end unit in Palo Alto. The total development cost for the prototypical units is summarized below: Apartment Condominium Two Bedroom Unit 900 Sq. Ft 1,100 Sq. Ft. Per Unit $315,000 $605,000 Per Sq. Ft.$350 $550 Housing development costs are intended as averages, and are, in fact, at the lower end of the average range. The lower end of the range represents a minimum; it is probably virtually impossible to construct units at the lowest end of the range at this time. Total development costs include direct construction costs, a host of indirect costs (such as permits and fees, design and engineering, marketing and leasing Or sales costs), financing costs and land costs. Detailed information is provided at the endof this section. Affordability Gap The a~ffordability gap is the difference between development cost and supported unit value and represents the subsidy necessary to produce the affordable unit. Affordability gaps for each of the target income levels are summarized in Table 11-5, and below: Target Income Level Very Low (40% AMI) Low (70% AMI) Lower Moderate (90% AMI) Upper Moderate (110% AMI) Unit Type Rental Rental Ownership Ownership Supported Home Price / Unit Value $47,800 $169,900 $259,000 $327,800 Development Cost $315~000 $315,OOO $605,000 $605,O00 Affordability Gap Per Unit $267,200 $145,100 $346,000 $277,200 Keyser Marston Associates, Inc. 17175.007/001-001 .doc; 12/22/2006 Page 15 Total Nexus Costs The last step in the nexus analysis marries the findings on the numbers of household for each income category associated with medical / hospital buildings, per the end of Section 1, with the affordability gaps. Table 11-6 summarizes the analysis. The numbers of households associated with each building type by income category, indicated on the left side of the table assume 100,000 square foot buildings. The "Nexus Cost per Square Foot" is the result of the calculation: number of units times the affordability gap, divided by 100,000 sq. ft. to bring the conclusion back to the per square foot level. The total nexus cost for medical / office after the commute adjustment is $58 per square foot. With or without the commute relationship adjustment, the total nexus cost for each building type is far in excess of any reasonable fee amount likely to be considered. Conservative Ass um ptions The nexus costs are high due to a combination of factors, the principal ones being: ¯The high cost of housing in Palo Alto relative to income levels; The extent of income categories covered in the analysis, up to 120% of median income and thus more than half of worker households. In establishing the total nexus cost many conservative assumptions were employed in the analysis that result in a total nexus cost that is probably understated. These conservative assumptions include: The commute adjustment, or target, assumes that 33% of all new employee households are targeted to be accommodated in Palo Alto. The City could readily adopt a policy to house more than 33% of its new worker households. No Census or other hard data was available enabling a differentiation between the household size compositions by income level. Anecdotally one can observe that there are. probably some significant differences. Only direct employees are counted in the analysis. Many indirect employees are also associated with each new workspace: Indirect employees in a medical office or hospital building may include "contract" employees or services such as janitors, laundry services, window washers, landscape maintenance people, delivery personnel, and a whole range of Keyser Marston Associates, Inc. 17175.007/001-001 .doc; 12/22/2006 Page16 DRAFT others. These indirect workers are not taken into account in the analysis. The analysis does not employ multipliers. Also construction workers are not included in the analysis. In summary, many less conservative assumptions could be made that would result in higher linkage costs. The tota nexus cost represents the ceiling, supported by this analysis for any reauirement to be placed on new construction for affordable housing. They represent only maximums and, in no way, should be construed as recommended fee amounts. Keyser Marston Associates, Inc. 17175.007/001-001 .doc: 12/22/2006 Page 17 TABLE I1-1 VALUE OF AFFORDABLE RENTAL UNITS ADDENDUM TO JOBS HOUSING NEXUS ANALYSIS CITY OF PALO ALTO, CA DRAFT FOR DISCUSSION ONLY 40% of Median ’70% of Median ’ Annual Income Limit z 30% of Household Income Per Month <Less> Utility Allowance ~ Affordable Rent Affordable Rent, Annual <Less> Operatin.q Expenses. Net Revenue per Unit Capitalized Value (@ 6.0%) $38,000 $66,500 $11,400 $19,950 $95O $1,663 $862 $1,575 $10,344 $18,894 $3,344 $11,894 $55,700 $198,200 Notes: 1 Assumes two bedroom unit. 2 Three person HH (based on number of bedrooms plus one). Median Income for a three person household is $95,000 3 Utility allowance assumes tenant pays for heat, water, hot water, cooking, sewer, and electricity. Sources: HUD, Santa Clara County Housing Authority. Prepared by: Keyser Marston Associates, Inc. Filename: 17175.007/Main Model 12-19-06.xls; I1-1 Rental Value Supported;12/21/2006 TABLE 11-2 FOR-SALE UNITS -AFFORDABLE PRICES ADDENDUM TO JOBS HOUSING NEXUS ANALYSIS CITY OF PALO ALTO, CA DRAFT FOR DISCUSSION ONLY BMR Sales Prices for New Units (Based on 2006 income levels’ Lower Moderate: 90% of Median Income One Bedroom $224;500 Two Bedroom [$259,000 ] Three Bedroom $293,400 t Higher Moderate: I 10% of Median Income One Bedroom $285,800 Two Bedroom I $327,800 Three Bedroom $369,900 2006 income limits are the same as the 2005 income limits used in the Draft BMR report. Source: "City of PaTo Alto Below Market Rate Housing Program Economic/Policy Analysis and Recommendations" dated June 2006. Prepared by: Keyser Marston Associates, Inc. 17175.007/Main Model 12-19-06.xls; 11-2; 12/22/2006 TABLE 11-3 AVERAGE MARKET SALES PRICES ADDENDUM TO JOBS HOUSING NEXUS ANALYSIS CITY OF PALO ALTO, CA DRAFT FOR DISCUSSION ONLY Average Sales Average Size (SF)Price (/SF)Sales Price Townhome Two Bedroom 1,300 SF $600 $780,000 Three Bedroom 1,550 SF $580 $900.000 Downtown Condominium One Bedroom 1,000 SF $675 $675.000 Two Bedroom 1,250 SF $625 $781,000 Three Bedroom 1,450 SF $625 $906,000 Condominium Outside of Downtown One Bedroom 900 SF $650 $585,000 Two Bedroom 1,100 SF $600 $660.000 Three Bedroom 1,300 SF $575 $748,000 Higher End Market Average One Bedroom 950 SF $710 $675,000 Two Bedroom 1,200 SF $650 $780 000 Three Bedroom 1,425 SF $632 $900,000 Hypothetical Market Minimum One Bedroom 800 SF $550 $440,000 Two Bedroom 1,100 SF $550 I $605,000 J Three Bedroom 1,300 SF $550 $715,000 Source: Market research perl:ormed January, February 2005. "City of Palo Alto Below Market Rate Housing Program Economic/Policy Analysis and Recommendations" June 2006. Prepared by: Keyser Marston Associates, Inc. 17175.007/Main Modei 12-19-06.xls; 11-3; 12/21/2006 z~ > 0 o & < °~ <-’8 TABLE 11-5 AFFORDABILITY GAPS ADDENDUM TO JOBS HOUSING NEXUS ANALYSIS CITY OF PALO ALTO, CA DRAFT FOR DISCUSSION ONLY Affordability Gap With Two-Bedroom Unit/Three Person Household Target Income Level Unit Type % AMI 40%Rental 70%Rental 90%Ownership 110%Ownership Supported Home Price / Unit Value Development Cost Affordability Gap Per Unit $55,700 1 $315,000 2 $259,300 $198,200 1 $315,000 2 $116,800 $259,000 3 .$605,000 3 $346,000 $327,800 3 $605,000 3 $277,200 Notes: ~ See Table 11-3 2 See Table 11-4 3 See Tables 11-5 and I1-6. Based on KMA and Anderson Associates Draft Report: "City of Pa/o Alto Below Market Rate Housing Program, Economic/Policy Analysis and Recommendations. " June 2006. Prepared by: Keyser Marston Associates, Inc. Filename: 17175.007/Main Model 12-19-06.xls; 11-5 Affordability Gap;12/21/2006 0 _l 00 0 00 0(D 0 ooco 0 00 0o o 0 0o co oo 0 ~ o0 o -- ~ o 0 0 o~ Appendices APPENDIX TABLE ! 2005 NATIONAL MEDICAL AND HOSPITAL WORKER DISTRIBUTION BY OCCUPATION JOBS HOUSING NEXUS ANALYSIS ADDENDUM CITY OF PALO ALTO, CA DRAFT FOR REVIEW BY STAFF ONLY Major Occupations (2% or more) Management occupations Community and social services occupations Heatthcare practitioners and technical occupaiions Healthcare support occupations Building and grounds cleaning and maintenance occupations Office and administrative Support occupations All Other Medical and Hospital Related Occupations INDUSTRYTOTAL 2005 National Medical and Hospital Occupation Distribution 3.0% 2. 7% 45.9% 15.4% 2.3% 22.9% 7,7% 100.0% Source: Bureau of Labor Statistics Prepared by: Keyser Marston Associates, Inc. Filename: 17175.007/Medical and hospital-appendix tbls.xls; Ap tbl Major ©ccupations Matrix; 12/22/2006; dd APPENDIX TABLE 2 AVERAGE ANNUAL COMPENSATION, 2006 MEDICAL AND HOSPITAL WORKER OCCUPATIONS JOBS HOUSING NEXUS ANALYSIS ADDENDUM CITY OF PALO ALTO, CA Occupation DRAFT FOR REVIEW BY STAFF ONLY % of Total % of Total 2006 Avg.Occupation ~edical and Hospital Compensation ~Group ~Workers Management occupations Chief executives General and operations managers Administrative services managers Financial managers Medical and health services managers Managers, all other All Other Management occupations (Avg. All Categories) Weighted Mean Annual Wage Community and social services occupations Substance abuse and behavioral disorder counselors Mental health counselors Child, family, and school social workers Medical and public health social workers Mental health and substance abuse social workers Health educators . . Social and human service assistants All Other Community and Social services occupations (Avg. All Categories) Weighted Mean Annual Wage Healthcare practitioners and technical occupations Registered nurses Licensed practical and licensed vocational nurses All Other Healthcare practitioners and technical occupations (Avg. All Categories) Weighted Mean Annual Wage Healthcare support occupations Nursing aides, orderlies, and attendants Dental assistants Medical assistants Medical transcriptionists Healthcare support workers, all other All Other Healthcare support occupations (Avg. All Categories) Weighted Mean Annual Wage Building and grounds cleaning and maintenance occupations First-line supervisors/managers of housekeeping and janitorial workers Janitors and cleaners, except maids and housekeeping cleaners Maids and housekeeping cleaners All Other Building and grounds cleaning and maint. (Avg. All Categories) Weighted Mean Annual Wage $182,900 4.4%0.1% $128,800 17.3%0.5% $96,700 7.3%0.2% $128,400 5.0%0.2% $101,100 47.4%1.4% $129,400 6.0%0.2% $126 900 12.6%0.4% $1~5,500 100.0%3.0% $39,100 10.0%0.3% $38,300 13.8%0.4% $41,500 5.2%0.1% $60,900 "17.6%0.5% $40,000 17.2%0.5% $47,100 6.5%0.2% $34,500 14.5%0.4% $43 600 15.3%0.4% $43,600 100.0%2.7% $89,800 39.4%’18.1% $52,800 6.9%3.2% ~53.7%24.6% $84,300 100.0%45.9% $32,900 29.6%4.6% $33,800 17.8%2.7% $34,800 24.3%3.8% $41,400 5.3%0.8% $40,700 9.1%1.4% $35,0O0 13.8%2.1% $35,000 100.0%15.4% $41,300 4.5%0.1% $24,500 34.9%0.8% $23,400 58.2%1.4% 24_$._2.~.~2.4%0.1% $24,600 100.0%2.3% Sources: U.S. Bureau of Labor Statistics, California Employment Development Department, Prepared by: Keyser Marston Associates, Inc. Filename: 17175.007/Medical and hospital-appendix tbls.xls; Ap tb2 Compensation; 12/22/2006; dd APPENDIX TABLE 2 AVERAGE ANNUAL COMPENSATION, 2006 MEDICAL AND HOSPITAL WORKER OCCUPATIONS JOBS HOUSING NEXUS ANALYSIS ADDENDUM CITY OF PALO ALTO, CA Occupation DRAFT FOR REVIEW BY STAFF ONLY % of Total % of Total 2006 Avg.Occupation ~edical and Hospital Compensation 1 Group ~Workers Office and administrative suppod occupations First-line supervisors/managers of office and administrative support workers Billing and posting clerks and machine operators Bookkeeping, accounting, and auditing clerks Interviewers, except eligibility and loan Receptionists and information clerks Executive secretaries and administrative assistants Medical secretaries Secretaries, except legal, medical, and executive Office clerks, general All Other Office and administrative support occupations (A~g. All Categories) Weighted Mean Annual Wage $57 400 $37 000 $39 800 $32 7OO $31 4OO $51 6OO $38 300 $37 60O $33 100 $3 ~ ~ 00 6.9%1.6% 8.1%1.9% 4.4%1.0% 4.4%1,0% 14.9%3.4% 4.8%1.1% 16.3%3.7% 7.9%1.8% 13.6%3.1% 18.8%,4.3% 100.0%22.9% 92.3% The methodology utilized by the California Employment Development Department (EDD) assumes that hourly paid employees are employed full-time. Annual compensation is calculated by EDD by multiplying hourly wages by 40 hours per work week by 52 weeks. Occupation percentages are based on the 2005 National Industry - Specific Occupational Employment survey compiled by the Bureau of Labor Statistics. Wages are based on the 2005 Occupational Employment Survey data for San Jose-Sunnyvale-Santa Clara MSA (Santa Clara, and San Benito Counties) updated by the California Employment Development Department to 2006 wage levels. Including occupations representing 4% or more of the major occupation group. Sources: U.S. Bureau of Labor Statistics, California Employment Development Department, Prepared by: Keyser Marston Associates, Inc. Filen ame: 17175.007/Medical and hospital-appendix tbls.xls; Ap tb2 Compensation; 12/22/200’6; dd