If plans proceed — which, for now, is largely dependent on whether the development team can snag significant state cap-and-trade money later this year, and other outside dollars — it would nearly deplete city resources for affordable housing in the foreseeable future. And, with council to consider changes to the fee that boosts those resources, it’s unclear when Berkeley will again be able to invest in it.
“The city is all in on this project, literally, by taking this action,” said Mayor Jesse Arreguín.
The two-building project, set to take the place of the public parking lot at Berkeley Way and Henry Street, is slated to include 89 affordable apartments in one building and, in the other, 53 studios of permanent supportive housing, 32 shelter beds, 12 transitional units for veterans, and a first-floor services center with a community kitchen. City leaders have long described the $90 million project, a collaboration with the Berkeley Food & Housing Project (BFHP) and Bridge Housing, as “visionary” in scope.
Jamie Hiteshew, project manager with San Francisco-based Bridge Housing, told the Berkeley City Council that, if all goes well, 90% of the project’s residential funding will come from outside the city. That includes a grant application to the state for cap-and-trade money in the winter, and nearly $9 million in Measure A1 affordable housing bond money from the county when that becomes available. “No Place Like Home,” a new federal program focused on housing for people with mental illness, could provide additional money, according to the city.
“It is a commitment that we’re making to address our homeless crisis, to address our housing affordability crisis,” said Arreguín. City staff, officials, BFHP and Bridge have been working diligently for years to make Berkeley Way a reality, he said in response to a community gripe about the slow progress.
“When you build housing for people that have no income, it requires a great deal of subsidies,” he said. “Moving forward with this item tonight is critical.”
For many, the vote was an exciting one. But the decisive move will essentially tap out public resources for affordable housing in Berkeley for now. Officials said Berkeley Way would use up much of its A1 and Housing Trust Fund money.
On June 27, council may vote on how high to set its affordable housing mitigation fee, the main mechanism for building up the Trust Fund. That is likely to impact how much money the city can bring in down the line to help pay for affordable housing around town. And finding the sweet spot can be a challenge.
But there was little hesitation from officials about voting Tuesday night to prioritize Berkeley Way, which is likely to help it get more serious attention and consideration from outside funding agencies.
Councilman Kriss Worthington said Berkeley Way may be the “single biggest opportunity” for the city to make a “dramatic difference” in affordable housing and housing for the homeless, and to create a homeless shelter as well as transitional housing for veterans.
“When I first ran for City Council, this motion is what I dreamed about being able to support,” Worthington said. The project is a dream, he added, “and it’s a dream that can come true.”
He said 53 of the units will be available to those making 30% or less of the area median income — that’s currently $21,950 for an individual or $25,050 for a couple. (BFHP said those units will actually be financed for 15%.) The 89 affordable units will be restricted to those making 50% and 60% of area median income.
The city did not actually spend any money as a result of its unanimous vote, though it did approve an $835,897 predevelopment loan for the project in September.
If Bridge secures the state Affordable Housing and Sustainable Communities grant, the city will need to come up with $13-14 million, according to the development team. That’s $8.9 million for affordable housing, $3.1 million for permanent supportive housing, $1 million for the shelter and veteran’s housing. It’s possible the city could turn to voters for another bond measure to help come up with that money.
“It’s going to be a lot of work to get that gap filled,” staff told council Tuesday night.
According to a staff report from earlier this year, the expected city contribution to Berkeley Way has “gone up significantly” since 2016 due to both construction costs and “reduced corporate interest in the market” because of expected tax reforms. The public parking has been estimated to cost perhaps $1.85 million or more, “which would need to come from local sources,” the city has said.
Bridge is ready to turn in its use permit application to the city, which means much more detailed information about project plans is coming, and the public input process can begin. San Francisco-based Leddy Maytum Stacy Architects was chosen to design the plans, which include one level of replacement parking. A staff report from September said that may be about 75 spots. There are 112 now.
Next month, the city’s Housing Advisory Commission is expected to ask council to reserve $3.1 million for Berkeley Way from the Housing Trust Fund, according to the staff report prepared for Tuesday’s meeting. The fund has about $3.6 million right now, “primarily mitigation fee revenues from two projects.” Three other projects, totaling $800,000 or so, are also trying to get money from the fund this year.
“We are now basically at zero,” Councilwoman Kate Harrison observed. “We have just spent all of the money in the affordable housing fund.”
Mitigation fee vote now set for June 27
Council was scheduled to vote Tuesday night on a mitigation fee increase proposed by Harrison, who represents the downtown district. But Mayor Arreguín announced, when that item came up, that there would be no vote until June 27. He said later in the night that this was due to concerns raised by Andreas Cluver, union organizer with the Building & Construction Trades Council of Alameda County.
As it stands, developers of new market-rate housing in Berkeley can either build 20% affordable units on site, or instead pay a $34,000 fee for every market-rate unit in a project. They can also elect some combination of the two. That fee is typically paid when the certificate of occupancy is issued, or at the time of final inspection. That money goes into the Housing Trust Fund and the city can use it to build affordable housing elsewhere. In recent years, council has struggled to agree on the best level for the fee. Set it too high, and developers won’t pay. Set it too low, and no one will mix affordable units into market-rate projects.
City staff lists the fiscal impacts of a fee increase as “possible additional funds” for the Trust Fund. Harrison writes, in her agenda item, that her proposal “would result in additional fees … in the Affordable Housing Fund.”
While prevailing urban planning wisdom advises that it’s generally better to mix market-rate and below-market-rate units within the same project, other types of development — such as the Berkeley Way plan described above — can leverage Housing Trust Fund dollars to go after lots of other pots of money, which can make that money go farther and do more, say proponents of that approach.
Harrison insisted that her changes to the mitigation fee are “minor” and “quite straightforward.”
First, the proposal would increase the fee per unit to $37,000. Developers could elect to pay about two years earlier — when the building permit is issued — and get a discounted rate of $34,000. At the time of the building permit, she said, they would have to declare whether they planned to include below-market-rate units on site, or pay the fee. That isn’t currently required.
Harrison’s proposal would also specify that 20% of a project’s total units would be below-market-rate (BMR) if the mitigation fee is not paid. The city has previously said the required BMR unit percentage is based on the market-rate count only. Finally, projects with fewer than 10 market-rate units would be required to pay the mitigation fee and could not build affordable units on site.
Harrison’s proposal would also automatically increase the fee every other year by pegging it to the California Construction Cost Index beginning in 2018. Projects with completed applications into the city will still get the old rate.
“This is not a dramatic item,” Harrison said. “The sky is not falling folks.”
In a letter to council, development consultant Mark Rhoades said the mitigation fee and other items on the agenda Tuesday night would increase fees per unit in Berkeley by $12,700. According to calculations completed by his office, each unit in a 82-unit sample project is already assessed fees of about $42,000. In the first year, construction cost per unit, he estimated, is roughly $487,000.
“Tenants currently must pay almost $900/month just to cover the City fees and taxes in new projects and that doesn’t include anything for the actual building,” Rhoades wrote in a June 13 email to council. “Tonight’s fee proposal increases the burden on tenants.”
Rhoades said, too, that simply paying the fee two years early is no small task because lenders calculate project funding and interest rates very differently when use permits are issued versus when the job is done.
Though the vote was postponed, lengthy public comment on the item still took place.
Many speakers urged council to raise the fee as high as possible so developers just elect not to pay it, and instead build the affordable housing on site. That keeps affordable units in the neighborhood, fights displacement and gentrification, and gets more housing sooner, they said. Some said the city should increase the percentage of below-market-rate units per project again, too.
Others said they are concerned that hiking the fee will cause developers to “walk away” from Berkeley altogether. One speaker said San Francisco increased its inclusionary requirement to 25% last year, “and housing tanked.” Many said the city needs to look at ways to streamline the overall process so long delays, appeals and lawsuits are less likely to drive up project costs and discourage development.
“Delays are really a critical point,” one man told council early in the night. “Many of the lenders who were lending two years ago aren’t lending anymore.”
Councilwoman Susan Wengraf agreed. “Fees are only one part of the problem. Time is money,” she said.
Some members of the the public, citing a 2015 study that provides the legal basis for the city’s affordable housing mitigation fee, said the city should charge $84,000 per market-rate unit. But that amount does not take into account the financial feasibility of projects, which the city is required to do. Factoring that in, the study said, the city could charge a $34,000 fee.
Many speakers urged council to hold off on the fee until the city can update the 2015 study, and said the fee level should be supported by good data. It was not immediately clear what that data might show. The city attorney’s report noted that anecdotal evidence shows “the regional job engine is slowing due to the cost of housing.” At the same time, median rents continued to rise in 2016, though not as quickly as they did in 2015, he said.
Harrison provided median rents from 2015 through early 2017 in a supplemental item, but did not break down the figures annually.
Harrison told her fellow council members she received an email Tuesday from the consultant who did the 2015 study and was told parking and soft costs were understated in that report, as was the overall value of projects, because of rent levels. She said the consultant is willing to look again at the numbers in the next week, at no cost, and “would be happy to plug in new figures for us” to see what the right fee level would be now “given increased rent costs balanced against increased construction costs.”
Ultimately, council said it wants an updated report reflecting all existing fees, the cost of 100% union labor, current land costs and rent rates, and the cost for underground parking. Council members said they all want to get the best deal for the city, and the most affordable housing for Berkeley that they can.
[Note: The Berkeley Way project description and budget were updated shortly after publication when the co-developers shared the latest information with Berkeleyside.]