The Berkeley City Council held a special meeting/work session on May 21, 2024, beginning at 4:00 pm (the council had been in meetings since 3:00 pm). The sole agenda item was the presentation of the Rental Housing Feasibility Study, which examined the impact of the city's inclusionary housing in-lieu (INLU) fee and recently adopted labor and building standards on residential development feasibility. Councilmembers and the mayor heard public testimony from developers, labor representatives, and community members, then discussed the study's findings and recommendations. No formal action or votes were taken; the council will revisit the item after additional stakeholder engagement.
Recording in progress structure or inclusionary housing structure. So next slide. We use two measures of return, and we arrived at these measures in consultation with many Berkeley developers and contractors, so that we were using something that would make sense in the real world. The yield on cost is the measure that is typically used for rental projects. And we used a 6% feasibility threshold for the yield on cost. Return on cost is the metric that's used for for sale product types. And for this, we used an 8% return on cost. In terms of my final comment about methodology for analysis, next slide, please. I want to uh point out to you that uh a pro forma is a snapshot in time. It's composed of multiple assumptions about a wide variety of variables. Uh, and these variables can change, each variable can change uh over time. And depending on how these variables work in conjunction with each other, they can make projects either more or less feasible. So just looking at the at this particular chart illustrates this point. Um, and what we looked at here was a for sale option for the townhouse product type. And uh this is a bit of a spoiler alert, but you'll see that this product is highly feasible with a 29.16 uh return on cost today. But if uh the you have a change in sales price and uh construction costs remain the same, uh the feasibility gets even better. Um, however, if you have a change in sales value where sales values decrease, feasibility gets uh lower. Uh, and then that's affected also by the change in development costs. So this this two-way matrix shows you kind of how that progression could work together, but this is just for two of the many variables that go into making uh a pro forma. Uh I think one of the key things to keep in mind with a pro forma is that most of the variables that affect feasibility are things that are outside of the city's control. So it's really important to remember that that the city does not control feasibility. So with that, let's look at some of our findings. Um today um development again using the current in LU fee for the rental prototypes that we tested, going all the way from small lot single family across to the um 18-story high rise. Nothing is feasible except for the group living accommodation product type. Again, this is for rental projects. So uh the the um the yeah, everything to the right there uh above uh to the right of the box that stands above that dashed line there are the mid-rise and high rise, and then to the left, you have first of all the 10-story small multifamily, which is in fact uh the least feasible of any of the product types, again as a rental. Next slide. Some ownership and sort of this missing middle continuum, some product types are currently feasible, but the the small the 10 lot prototype, the 10 units, sorry, it's not 10 lots, it's 10 unit prototype is not feasible. The two bars that you see on the right again represent the small lot single family and the um fourplex town homes. Um, and these are highly feasible, but one of the factors that we see here is that these are not getting built. And the reason is not because they don't yield a profit for a developer, but there are other kinds of challenges to producing these products, including the fact that the sites are available are small and the developers who take on these kinds of projects is relatively small. So the right, the two bars, the one with a negative return and the one with a very low return, the 2.2 are different ways of testing the small lot single family prototype. One of them includes the inclusionary units on site. That would be the negative project, and the 10 unit uh small multifamily that uses just the in LU fee uh is still only 2.2% is the yield. Uh so again, below our six percent threshold. And it's important to keep in in mind the impact of the fee on these 10 unit small multifamily projects as we go forward with demonstrating our analysis. So then our next step, next slide, please, was to test what the maximum reasonable in LU fee would be on a square foot range using the three methods that I talked about previously. So you can see in this row on the bottom, which shows the uh per square foot cost per RUFA square foot that the range of these in LU fees could potentially be 58.59 cents up to about 118 dollars, again, all on a square foot basis. Just to give you some reference for thinking about this, the current fee is about $56.25. So the next thing that we did was to test each of these uh different inclusionary fees for each product type. And in this case, we only tested this for uh rental. Uh, and so um uh we um you don't see the townhouse and small lot single family here. Um, and what you see again is that nothing is feasible, right? Uh again, proving that the infeasibility is being driven by different factors. Today, these factors include high construction costs, they include uh high uh financing costs, including the famous interest rates that everybody is talking about, and then also the increase in rents has slowed down, which is actually good for core inflation, but not good if you're a developer. Um, the impact of the in LU fee is different for uh different kinds of projects. It's actually much more significant for this 10 unit uh multifamily. And the reason for this is because these buildings are too small to take advantage of the um state density bonus. Um, and um so they are paying either the full fee or having to provide the full um uh uh amount number of inclusionary units. And so you see a greater step down between the no fee and the affordability uh uh gap fee, which is the highest of the of the fees um for the multifamily.