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Agenda Item - 2021-12-21 - Number 5.2 - System Development Charge Exemptions for Affordable Housing 5.2 erCOUNCIL REPORT o t.4 Subject: Review of System Development Charge Exemption for Affordable Housing Meeting Date: 12/21/2021 Staff Member: Scot Siegel, Community Development Director Erica Rooney, City Engineer & Public Works Director Nadia Ahmed, Kincaid Intern (former) Department: Planning/Engineering Action Required Advisory Board/Commission Recommendation ❑X Motion ❑ Board or Commission ❑ Public Hearing ❑ Denial ❑ Ordinance ❑ None Forwarded ❑ Resolution ❑X Not Applicable ❑ Information Only Comments: ❑X Council Direction ❑ Consent Agenda Staff Recommendation: Update the affordable housing incentives in LOC Chapter 39 System Development Charges (SDCs) and the Master Fees and Charges Schedule. Recommended Language for Motion: Move to direct staff to prepare amendments to LOC Chapter 39 System Development Charges (SDCs) and the Master Fees and Charges Schedule to address for-sale housing and to make other changes as discussed in the Council Report. Project/ Issue Relates To: ❑X Council Goals/Priorities: Affordable housing ISSUES BEFORE COUNCIL Should the City exempt "for-sale affordable housing" from payment of System Development Charges and Development Review fees similar to the fee exemptions that exist for affordable rental housing and accessory dwelling units? Should the current criteria for affordable housing fee-exemptions be amended? 503.635.0215 380 A Avenue PO BOX 369 Lake Oswego, OR 97034 www.lakeosweao.citv Page 2 BACKGROUND On December 4, 2018, the City Council adopted Ordinance 2810 (Attachment 1) establishing financial incentives for multifamily affordable housing and accessory dwelling units (ADUs). The ordinance exempted developers of these types of housing from payment of system development charges in order to encourage development of affordable housing. In addition, the Council concurrently amended the Master Fees and Charges Schedule to exempt affordable housing developments from paying development review fees. (ADUs were already exempted from these fees.) The fee exemptions for multifamily housing are limited to rental housing in developments of "20 or more units where at least 10% of the units are continuously rented, leased or made available for an amount of rent plus expenses associated with occupancy, such as utilities and fees, totaling not more than 30% of the income level that is 80% of area median income according to the Clackamas County Housing Authority's income limits for affordable housing, adjusted for household size." (LOC 39.06.105.5.a.ii) The fee exemption for ADUs has no affordability component. The owner of a multifamily property requesting the SDC/Fee exemptions must record a covenant guaranteeing the subject housing remains affordable for at least 10 years. The fee exemptions apply to all units in the development, though only 10% of the units must be affordable. The owner of a property containing an ADU subject to the ADU fee waiver must record a covenant prohibiting use of the ADU as a short-term rental for 10 years. The penalty for violating these covenants is payment of SDCs with interest owed. System development charge and other fee exemptions typically fill only a percentage of the financing gap for affordable housing developments. Other sources of capital may include land cost write-downs (for example through a redevelopment district), federal low-income housing tax credits, and state and (more recently) regional funds. In addition, this year federal American Rescue Plan Act funds have been dedicated to a Habitat for Humanity affordable housing development in Lake Oswego, as discussed below. DISCUSSION Although the City has not yet granted any fee exemption for multifamily development under Ordinance 2810 (Attachment 1), there are two potential developments that might be eligible: • Marylhurst Commons, 100-unit apartment project on the former Marylhurst University campus proposed by Mercy Housing Northwest; and • Future affordable housing at the Boones Ferry Road construction staging property (total units and developer to be determined). In addition, Habitat for Humanity (Habitat) has secured land to build 23 for-sale townhomes on the south side of Boones Ferry Road (between Upper Drive and Washington Court), however 503.635.0215 380 A Avenue PO BOX 369 Lake Oswego, OR 97034 www.lakeoswego.city Page 3 the City' fee exemption program does not apply to for-sale housing1 and Habitat only builds for- sale units. Their model is unique in that homeowners participate in the building process. Habitat approached City staff this fall to ask if the City would consider extending its fee exemption program to include for-sale housing. The public benefit, they say, is that for-sale single-family homes (or townhomes) meet a different need than apartments and allow homeowners to build equity, albeit with resale prices limited to maintain affordability. Staff has researched examples of affordable housing programs in 11 cities around the state to determine the types of housing that are typically eligible for fee waivers. We also wanted to know whether the criteria in LOC 39.06.105.5.a.ii are similar to what other cities require for the following. (Refer to Attachment 2): • For-sale housing • Percentage of affordable units • Maximum income (percentage of area median) • Number of years ANALYSIS The following general summary compares Lake Oswego's fee exemption policy to the 11 cities that staff surveyed. For a breakdown of each city's policies please refer to Attachment 2. For-Sale Housing As discussed, Lake Oswego's affordable housing fee exemptions are limited to rental housing. By comparison, the cities of Bend, McMinnville, Portland, Salem, and Tigard offer SDC exemptions for both rental and for-sale housing. Definitions of Affordable Housing Lake Oswego Code (LOC 39.06.105.5.a.ii) defines affordable housing for purposes of SDC exemptions for rental housing as, "A multi-family development of 20 or more units where at least 10% of the units are continuously rented, leased or made available for an amount of rent plus expenses associated with occupancy, such as utilities and fees, totaling not more than 30% of the income level that is 80% of area median income according to the Clackamas County Housing Authority's income limits for affordable housing, adjusted for household size." By comparison, the cities staff surveyed use different affordable housing criteria/definitions for rental and for-sale affordable housing: Rental housing: "'Low income persons' or 'affordable housing' with regards to rental housing, accounts for an income at or below 60 percent of the area median income (AMI) as determined by the United States Department of Housing and Urban Development (HUD)." This definition applies to Ashland, Bend, Forest Grove, and Portland. 1 The City of Lake Oswego supported Habitat for Humanity in securing American Rescue Plan Act(ARPA)funding through a through Representative Salinas and State Senator Wagner. 503.635.0215 380 A Avenue PO BOX 369 Lake Oswego, OR 97034 www.lakeoswego.city Page 4 For-sale housing: "'Low income persons' or 'affordable housing' with regards to ownership housing, accounts for an income at or below 80 percent of the area median income (AMI) as determined by the United States Department of Housing and Urban Development (HUD)." This definition applies to Ashland, Bend, Forest Grove, Salem, and Tigard. Percentage of Affordable Units The affordable housing fee exemptions in Lake Oswego Code (LOC 39.06.105.5) are limited to developments with at least 20 multifamily units of which at least 10% must be affordable. Bend, Portland, and Salem exempt SDCs only for the housing units in the development that meet their affordable housing criteria. Number of Years Housing in our fee exemption program must remain affordable for a period of not less than 10 years. The required number of years the units must remain affordable in other cities varies. Bend and Salem require 30 years, Portland requires 60 years, and Tigard requires 20 years. Compliance The cities of Ashland, Bend, Portland, Salem, and Tigard all require a written compliance agreement in the form of a covenant, similar to Lake Oswego. Revenue Replacement Of the 11 cities surveyed, none have practices in place for replacing forgone SDC funds. Cities stated the revenue is simply lost and as a result they get to their CIP projects slower. The City of Sisters provides grants to cover the cost of housing construction, which may include SDCs (in lieu of waiving them). CONCLUSION Nearly all of the programs surveyed provide SDC exemptions for both types of housing, rental and for-sale. The most common income limitation is 60% of area median income. The most common minimum affordability period for the housing is 30 years. Notably, it is common for cities to require every unit that receives a fee waiver to meet affordability criteria. FISCAL IMPACT AND ALTERNATIVES Any change to the current SDC and Development Review fee exemptions would have a budgetary impact. For example, the total SDCs (transportation, water, sanitary sewer, storm drainage, and parks fees) for a 23-unit townhome development are estimated to be approximately $520,000 in 2021. (Refer to Attachment 3.) Without dedicated funding to offset these revenues, some capital improvement projects may have to be deferred. Another fiscal impact relates to administration. Once the City begins granting SDC exceptions, whether it is under the existing program or an amended program, it will need to maintain an 503.635.0215 380 A Avenue PO BOX 369 Lake Oswego, OR 97034 www.lakeoswego.city Page 5 accounting system for the fee waivers and be prepared to audit properties that are subject to the agreements. Increasingly, this will require staff resources. Alternatively, if the City Council does want to expand the current fee exemption program to include for-sale housing,the City could allow deferrals of SDC payments instead. Cities that allow deferral of fees typically collect the fees prior to final building inspections (occupancy) instead of when permits are issued. This reduces carrying costs for builders, which in turn should result in cost savings for homebuyers. RECOMMENDATION Staff requests City Council direction on whether to amend the existing SDC exemptions (and Development Review Fee waivers) to include "for-sale" affordable housing, consistent with the Council's ongoing efforts to support the production of affordable housing for families. Staff is also seeking Council's direction on whether to update the criteria for these housing incentives to more closely align with other cities' programs, including: • All units receiving fee exceptions meeting the City's affordability criteria; • Fee exemptions directed toward a wider range of incomes, including those earning 60% or less of area median income for rental units.The Council may also want to consider setting the affordability standard for rental units based on an "average" for all units in the development. • Ensuring units remain affordable for more than 10 years—possibly 30 years or more. ATTACHMENTS 1. Ordinance 2810—SDC Exemptions for Affordable Housing 2. SDC Exemptions Research Summary 3. SDC Estimate for a 23-Unit Townhome Development 503.635.0215 380 A Avenue PO BOX 369 Lake Oswego, OR 97034 www.lakeoswego.city ATTACHMENT 1 ORDINANCE 2810 AN ORDINANCE OF THE LAKE OSWEGO CITY COUNCIL ESTABLISHING SYSTEM DEVELOPMENT CHARGE EXEMPTIONS FOR AFFORDABLE HOUSING Whereas, the Lake Oswego City Council finds that the lack of affordable housing is a serious concern locally and throughout the region; and Whereas, it is in the public interest to encourage affordable housing through system development charge exemptions for accessory dwelling units and for multiple family developments that meet certain affordability criteria. The City of Lake Oswego ordains as follows: Section 1. Section 39.05.105 of the Lake Oswego Code is amended by adding the text shown in bold. double-underlined type and deleting the text shown in strikethrough type, as shown on the attached Exhibit 1. Section 2. Severability. The provisions of this ordinance are severable. If any portion of this ordinance is for any reason held to be invalid, such decision shall not affect the validity of the remaining portions of this ordinance. Section 3. Effective Date. As provided in Section 35.C. of the Lake Oswego Charter, this ordinance shall take effect on the 30th day following enactment. Enacted at the regular meeting of the City Council of the City of Lake Oswego held on the 4th day of December 2018. AYES: Mayor Studebaker, O'Neill, Buck, Manz, LaMotte, Gudman, Kohlhoff NOES: None ABSTAIN: None EXCUSED: None 044- -2" -tc76-izz--47---- Kent Studebaker, Mayor ATTEST: Anne-Marie Simpson, City RecordAr Ordinance 2810 Page 1 of 2 APPROVED AS TO FORM: David Powell, City Attorney Ordinance 2810 Page 2of2 Exhibit 1 to Ordinance 2810 39.06.105 Exemptions, Reductions and Waivers. 1. Structures and uses established and existing on or before July 1, 1991 are exempt from a system development charge, except water and sewer charges, to the extent of the structure or use then existing and to the extent of the parcel of land as it is constituted on that date. Structures and uses affected by this subsection shall pay the water or sewer charges pursuant to the terms of this ordinance upon the receipt of a permit to connect to the water or sewer system. 2. An alteration, addition, replacement or change in use that does not increase the parcel's or structure's use of the public improvement facility is exempt from all portions of the system development charge for that facility. 3. A system development charge may be proportionately reduced if: a. Evidence indicates that the construction, alteration, addition, replacement or change in use does not increase the parcel's or structure's use of a system or systems to the degree calculated in or anticipated by the methodology for the particular system development charge; and b. Any future construction, alteration, addition, replacement or change in use that would or could increase the use of the system or systems would require a development permit that would permit imposition of a system development charge under this Chapter. 4. The Parks and Recreation system development charge may be waived or reduced by the City where the City requires a developer to dedicate or reserve more than the minimum amount of open space pursuant to LOC Chapter 50 or where a property owner voluntarily donates a conservation easement pursuant to LOC 59.04.015 (1). 5. The following percentages of all portions of the systems development charge for non profit or state or fedoral low to moderate cost housing for elderly and disabled persons may be deferred by the City Manager. Such deforra may be made upon a showing, to tho ✓atiofaction of the City Manager, that the deforra io nocessary to make the project economically frcablo within tho msnim:,rn rontal rate o:*bl'ahod by the funding agency, or for projects with intcrc:t, rato subsidies only, to bring the monthly rental rates within 10 of then ailing rates for oimilc h Statistical Area. Maximum No. of Interest Rental-Rates Units Subsidy 75% 4--30 50%, 35% 31 15 3544 25% /16 60 20% Maxi-mum Noef Interest Rental Rates Units Subsidy 0 If a project change' in otntuc t^ ono wh1oh w td not n a ifv for o d forraI tho total amp nt of tho deferral terms of this chapter. 5. Affordable Housina Exemptions. a. The following are exempt from payment of all system development charges. so long as all conditions of this subsection (5) are met: i. An accessory dwelling unit, as that term is defined in LOC 50.10.003: or ii. A multi-family development of twenty or more units where at least 10% of the units are continuously rented. leased or made available for an amount of rent plus expenses associated with occupancy. such as utilities and fees. totaling not more than 30% of the income level that is 80% of Area Median Income according to the Clackamas County Housing Authority's "Income Limits" for affordable housing adjusted for household size. b. The buildina permit must be issued on December 1. 2018 or later: c. In the case of an accessory dwellina unit. the applicant must submit a covenant, in a form approved by the City Attorney, that prohibits for at least ten years the use of the accessory dwelling unit or any other structure on the property as a premises rented to occupants for fewer than 31 consecutive days, and includes provisions for monitoring compliance. d. In the case of a multi-family development. the applicant must submit a covenant, in a form approved by the City Attorney. that reauires the development to comply with all of the requirements of Subsection (5)(a)(ii) for a period of not less than ten years. and includes provisions for monitoring compliance. e. The applicant must record the covenant required under Subsection (c) or(d) in the deed records for the property before the City issues the building permit. f. If the covenant is violated. or if the covenant is terminated accordina to its terms before the expiration datei i. A nrocessina fee will be imposed in an amount established by resolution of thfi City Council_ ii. The exemption will be terminated and all previously exempt portions of system development charges. plus the processing fee, together with interest on the system development charges from the date of the building permit at a rate established by the City Council. will become immediately due and payable by the then-owner of the property. iii. The City Manager shall furnish a notice of the violation or termination.together with a statement of the charges and fees under this subsection (5)(e). and a description of the objection and hearing process. to the then-owner of the property in person or by certified mail. return receipt requested, addressed to the owner at the last-known address as shown in the count property tax assessment records. If no objection is filed with the City Recorder within 15 days from the date the notice is mailed. the reinstated system development charges. processing fees. interest. and all other charges under this subsection (5)(e) shall be a lien aaainst the property, iv. If an objection is filed with the 15-day period, the City Council shall hold a public hearing. upon not less than 15 days' notice to the owner. to consider the oral and written testimony and materials provided by the City Manager.the owner, or other interested persons. Following the hearing, the City Council shall determine whether the terms of the covenant have been violated, or whether the covenant has been terminated according to its terms before expiration, and, if so, the amount of the fees and charges that are due and payable under this subsection (51(f). The amount determined by the City Council shall be a lien against the property. The City Council's decision shall be final, v. The City Manager shall docket the lien in the lien docket. The lien will be enforceable in the manner provided in ORS Chapter 223, vi. In addition to the above remedies. any failure to comply with the terms of the covenant shall be a civil violation. enforceable as provided in Article 34.04 of this Code. Exhibit 1 to Ordinance 2810 39.06.105 Exemptions, Reductions and Waivers. 1. Structures and uses established and existing on or before July 1, 1991 are exempt from a system development charge, except water and sewer charges, to the extent of the structure or use then existing and to the extent of the parcel of land as it is constituted on that date. Structures and uses affected by this subsection shall pay the water or sewer charges pursuant to the terms of this ordinance upon the receipt of a permit to connect to the water or sewer system. 2. An alteration, addition, replacement or change in use that does not increase the parcel's or structure's use of the public improvement facility is exempt from all portions of the system development charge for that facility. 3. A system development charge may be proportionately reduced if: a. Evidence indicates that the construction, alteration, addition, replacement or change in use does not increase the parcel's or structure's use of a system or systems to the degree calculated in or anticipated by the methodology for the particular system development charge; and b. Any future construction, alteration, addition, replacement or change in use that would or could increase the use of the system or systems would require a development permit that would permit imposition of a system development charge under this Chapter. 4. The Parks and Recreation system development charge may be waived or reduced by the City where the City requires a developer to dedicate or reserve more than the minimum amount of open space pursuant to LOC Chapter 50 or where a property owner voluntarily donates a conservation easement pursuant to LOC 59.04.015 (1). 5. The following percentages of all portions of the systems development charge for non profit or state or fedoral low to moderate cost housing for elderly and disabled persons may be deferred by the City Manager. Such deforra may be made upon a showing, to tho ✓atiofaction of the City Manager, that the deforra io nocessary to make the project economically frcablo within tho msnim:,rn rontal rate o:*bl'ahod by the funding agency, or for projects with intcrc:t, rato subsidies only, to bring the monthly rental rates within 10 of then ailing rates for oimilc h Statistical Area. Maximum No. of Interest Rental-Rates Units Subsidy 75% 4--30 50%, 35% 31 15 3544 25% /16 60 20% Maxi-mum Noef Interest Rental Rates Units Subsidy 0 If a project change' in otntuc t^ ono wh1oh w td not n a ifv for o d forraI tho total amp nt of tho deferral terms of this chapter. 5. Affordable Housina Exemptions. a. The following are exempt from payment of all system development charges. so long as all conditions of this subsection (5) are met: i. An accessory dwelling unit, as that term is defined in LOC 50.10.003: or ii. A multi-family development of twenty or more units where at least 10% of the units are continuously rented. leased or made available for an amount of rent plus expenses associated with occupancy. such as utilities and fees. totaling not more than 30% of the income level that is 80% of Area Median Income according to the Clackamas County Housing Authority's "Income Limits" for affordable housing adjusted for household size. b. The buildina permit must be issued on December 1. 2018 or later: c. In the case of an accessory dwellina unit. the applicant must submit a covenant, in a form approved by the City Attorney, that prohibits for at least ten years the use of the accessory dwelling unit or any other structure on the property as a premises rented to occupants for fewer than 31 consecutive days, and includes provisions for monitoring compliance. d. In the case of a multi-family development. the applicant must submit a covenant, in a form approved by the City Attorney. that reauires the development to comply with all of the requirements of Subsection (5)(a)(ii) for a period of not less than ten years. and includes provisions for monitoring compliance. e. The applicant must record the covenant required under Subsection (c) or(d) in the deed records for the property before the City issues the building permit. f. If the covenant is violated. or if the covenant is terminated accordina to its terms before the expiration datei i. A nrocessina fee will be imposed in an amount established by resolution of thfi City Council_ ii. The exemption will be terminated and all previously exempt portions of system development charges. plus the processing fee, together with interest on the system development charges from the date of the building permit at a rate established by the City Council. will become immediately due and payable by the then-owner of the property. iii. The City Manager shall furnish a notice of the violation or termination.together with a statement of the charges and fees under this subsection (5)(e). and a description of the objection and hearing process. to the then-owner of the property in person or by certified mail. return receipt requested, addressed to the owner at the last-known address as shown in the count property tax assessment records. If no objection is filed with the City Recorder within 15 days from the date the notice is mailed. the reinstated system development charges. processing fees. interest. and all other charges under this subsection (5)(e) shall be a lien aaainst the property, iv. If an objection is filed with the 15-day period, the City Council shall hold a public hearing. upon not less than 15 days' notice to the owner. to consider the oral and written testimony and materials provided by the City Manager.the owner, or other interested persons. Following the hearing, the City Council shall determine whether the terms of the covenant have been violated, or whether the covenant has been terminated according to its terms before expiration, and, if so, the amount of the fees and charges that are due and payable under this subsection (51(f). The amount determined by the City Council shall be a lien against the property. The City Council's decision shall be final, v. The City Manager shall docket the lien in the lien docket. The lien will be enforceable in the manner provided in ORS Chapter 223, vi. In addition to the above remedies. any failure to comply with the terms of the covenant shall be a civil violation. enforceable as provided in Article 34.04 of this Code. Attachment 2: SDC Exemptions Research Summary SDC Exemptions Research SDC Exemptions are eligible for both rental and for-sale housing in the following cities: Which cities waive fees for both rental Bend, McMinnville, Portland, Salem, and Tigard housing and for-sale housing? SDC Deferrals are eligible for both rental and for-sale housing in the following cities: Ashland and Forest Grove Definition of Affordable Housing: Rental housing: "'Low income persons' or'affordable housing' with regards to rental housing, accounts for an income at or below 60 percent of the area median income (AMI) as determined by the United States Department of Housing and Urban Development (HUD)."This definition applies to Ashland, Bend, Forest Grove, and Portland. For-sale housing: "'Low income persons' or'affordable housing' with regards to ownership housing, accounts for an income at or below 80 percent of the area median income (AMI) as determined by the United States Department of Housing and Urban Development (HUD)."This definition applies to Ashland, Bend, Forest Grove, Salem, and Tigard. How do cities define "affordable Number of Affordable Units per Development: housing,"and what standards apply? Bend, Portland, and Salem exempt SDCs proportional to the number of units in the development that meet the affordable housing criteria. Number of Years the Units Remain Affordable: The required number of years the units must remain affordable varies. Bend and Salem require 30 years, Portland requires 60 years, and Tigard requires 20 years. Assuring Compliance: The cities of Ashland, Bend, Portland, Salem, and Tigard all require a written compliance agreement in the form of a covenant. Other cities such as Florence, Forest Grove, and Newburg either have no compliance requirement in place or have had no compliance issues therefore no need for the requirement. Which jurisdictions replace the SDC Of the 11 cities, none have practices in place for replacing forgone SDC funds. Cities stated the revenue is simply lost funds (streets, parks,sewer,water, and as a result they get to their CIP projects slower. stormwater)forgone due to waivers? If do,what funding sources do they use? Attachment 3: SDC Estimate for 23-Unit Townhome Development(11/03/2021) 123 mutil-farnilytownhomes 13/4'water (Assume 3030 sf impervious I SDC Rate _(Water 8,384 192,832 ) (Sewer 3,052 70,196 (Storm 167 3,841 1ITransp 2,828 65,0,1,1 1IParks 8,071 185,633 1 I TOTAL 517,545 > I