© Cornerstone Partnership 2015 Keeping Homes Affordable & Communities Strong The Pros and Cons of Establishing an In-Lieu Fee

© Cornerstone Partnership 2014 A program of the Community Solutions Group, LLC, a Subsidiary of We support inclusionary housing and homeownership programs to preserve long-term affordability and community stability.

3 Why Do In-Lieu Fees? Legal desirability of flexibility More units –Potential for levering outside funds –Use expertise of nonprofits –Can simplify financing of market rate units, particularly if development community is not used to IZ On site performance can be hard to monitor and manage (income verification, HOA dues) More flexibility in what units are built

4 Why Not Do In-Lieu Fees? Prices often set too low Can slow down the process Can be difficult to get units in neighborhoods if land is not available or too expensive There may not be strong non-profits to give the money to Subsidies may already be spoken for

5 Setting In-Lieu Fees Arbitrary What the Market Will Bear Affordability Gap Production Cost

6 Arbitrary Levels Low Fees High Fees The Winner!

7 What the Market Will Bear “Opportunity cost:” how much money the developer loses by having the affordable unit there.

8 Affordability Gap Oh no, here comes math Market sales price = $10 Lower income person can afford $4 Gap = $6 Sales/rent price lower income person can afford Sales/rent price of market rate unit City of Berkeley – The in-lieu fee shall be sixty two and a half percent (62.5%) of the difference between the permitted sale price for inclusionary units and the amounts for which those units are actually sold by the applicant.

9 Production Cost Cost to build minus cost to sell Without subsidies –6 units cost a total of $24 to build and will sell for $12 total. –In-lieu fee = $2 per unit With subsidies –6 units cost a total of $24 to build and will sell for a $12 total. Subsidies available from state or feds come to $6. –In-lieu fee = $1 per unit

10 San Francisco “San Francisco wanted to create a fee structure that reflected the true cost of developing a restricted unit when developers decided not to build on-site units…We now base our fees on the difference between what it costs to build a unit of housing and the affordable/restricted price.”

11 Boston and San Francisco Boston: $200,000 per unit in-lieu fee –Based on the average city subsidy (not total subsidy) used to build an affordable unit at the time. San Francisco: $335,000 per unit fee for a 2br unit in San Francisco –Based on the total subsidy required to create an affordable unit without federal subsidy.

12 Adding Confusion Some cities talk about the fee per market rate unit Some talk about it per affordable unit. Oh no, more math! A city requires developers pay an in lieu fee of $200,000 for every affordable unit they don’t build. A city requires developers that don’t build the affordable units to pay $20,000 per market rate unit in their development.

13 Key Takeaways Try to agree on the methodology first, then get accurate data for establishing the fee. Agree on goal: Do you want on-site units or fees? Fees allow leverage, which can be very powerful. If fee is priced too high, no one will use it. If fee is priced too low, you could get more units. While pro formas are complicated, in lieu fees are easier.

14 How Do You Respond? It won’t pencil. You’ll kill all development Liar liar, pants on fire!

15 How Do You Respond? Make sure it is not true (have flexibility in the program, perhaps phase in requirements, offer incentives). Keep conversation focused on goals and need. Have case studies from comparable cities that show development before and after the new requirements. Be able to articulate that it is land speculators who bear the cost. Ask to look at their pro forma. Share it with Cornerstone or other economics to get feedback. For fees, agree on goals and methodology.

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