Berkeley City Council Special Meeting on Rental Housing Feasibility and In-Lieu Fee Recommendations - May 21, 2024
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Berkeley City Council Special Meeting on Rental Housing Feasibility and In-Lieu Fee Recommendations - May 21, 2024
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.
Presentation and Findings
- Consultants Dina and Rick presented the study. The analysis used pro forma methods, with feasibility thresholds of 6% yield on cost for rental projects and 8% return on cost for for-sale projects.
- Under the current INLU fee of $56.25 per square foot of residential unit floor area, all tested rental prototypes except group living accommodations were infeasible. For-sale product types like small-lot single family and fourplex townhomes were feasible but not being built due to site and developer constraints. The 10-unit small multifamily had a yield of 2.2%, below the 6% threshold.
- The maximum justifiable INLU fee was estimated to range from approximately $58.59 to $118 per square foot, compared with the current fee of $56.25. Raising the fee would not materially change feasibility, as external factors (construction costs, interest rates, rent growth) were the primary drivers of infeasibility.
- New policies were assessed: bird-safe glazing increased hard costs by 1–1.5%; the Hard Hats Ordinance (healthcare and apprenticeship requirements) increased hard costs by 18–25% for six- and eight-story mid-rise buildings, but only about 1% for 18-story high-rises (which predominantly use union labor already at prevailing wage).
- Recommendations included: keep the fee at $56.25 for now; exempt the first 5,000 square feet for projects paying the full INLU fee (replacing the current tiered exemption up to 12,000 square feet); and continue indexing the fee to the construction cost index, with the next increase scheduled for July 1, 2025.
Public Comments & Testimony
- An unnamed community member (who noted the study was requested by the Homeless Commission) asked for analysis comparing on-site inclusionary units vs. paying into the affordable housing trust fund, citing high construction costs and state budget deficits.
- EJ Syram (Sheet Metal Workers Local 104, representing Contra Costa Building Trades Council) defended the Hard Hats Ordinance, disputing the 18–25% cost increase claim; said non-union contractors already provide healthcare and can access state-approved apprenticeship programs.
- John Kane (Downtown Berkeley Association) said the 70+ page report was provided too late for adequate review; urged postponing action; cited the 20% increase in hard hat costs as a significant negative impact on six- and eight-story prototypes.
- Patrick Kennedy, a local developer, said the cost impact of hard hats and bird-safe requirements could add $130,000–$150,000 per student housing unit and about $1,000 per month in rent; urged deferral for more testimony.
- John Dal Rumpel, representing construction trade workers, argued the report was fundamentally flawed; said non-union workers already receive healthcare, apprentices lower costs, and labor should be consulted in future studies.
- Amir Massey, a developer and Berkeley resident, said passing hard hats based on the current data would have a chilling effect on housing production; requested more consultation before implementation.
- An unidentified developer, representing about 65% of mid-rise projects built in Berkeley in the last decade, asked whether anyone is pursuing new projects; said costs exceed $1 million per door without land; expressed fear they cannot move forward if the policy stands.
- Tim Frank (Construction Trades Workforce Initiative) called for real conversation with labor and criticized the lack of labor consultation; disputed the cost estimates as based on biased developer input.
- Kelly Hammergan (via Zoom) thanked the mayor for the Hard Hats Ordinance, urged the council to push the INLU fee to the high end to support inclusionary housing and integrated communities.
- Mark Roads (via Zoom) agreed generally with the study's findings but said the city has reached a tipping point on fees and exactions; expressed concern about Housing Element certification and the impact on the housing pipeline.
- Locke Lockery (via Zoom), a developer, urged preserving the current pipeline and taking no action for now, warning that a percentage of zero is zero.
- David Trachtenberg (via Zoom), an architect, said his firm has zero projects in the pipeline; implementing hard hats at this time would be counterproductive to housing production.
Council Discussion
- The Mayor said no decisions were ready to be made; hard hats is already adopted and not up for repeal. He wants more information from builders and labor to explore offsetting impacts while maintaining labor standards. He emphasized that workers deserve healthcare and wages, and rejected a zero-sum approach.
- Councilmember Merham said the council received the report only on Thursday and needs additional time. She asked about the 5,000 square foot exemption and the 10-unit prototype, and questioned the lack of consultation with labor. She suggested obtaining actual project financial data rather than verbal estimates, and recommended further inquiry into the hard hats impact.
- Councilmember Kissawani said all housing is a community benefit; supported exempting the first 5,000 square feet to encourage middle housing; expressed concern about cumulative fees; noted that developers may seek state density bonus concessions to avoid hard hats/prevailing wage requirements.
- Councilmember Bartlett asked about shifting to on-site inclusionary units; consultant Rick noted the state density bonus already drives on-site units. He discussed floating fees, saying no successful formula has been adopted. He also asked labor representatives about current field conditions.
- Councilmember Humbert said housing is a good in itself and objected to taxing it heavily. He cited Austin, Texas, and noted Berkeley's housing stock grew 6% from 2010 to 2020, while Emeryville grew 11% and Jersey City over 20%. He suggested capping total developer costs at 2021 levels and fully exempting missing middle; noted Berkeley's homeless population decreased by 45–48% over two years.
- Councilmember Lunaparo asked about potential shifts to single-family housing if fees on group living accommodations increased; the consultant clarified no separate fee was proposed for GLAs. She also asked why the fee was not set at $58.59 and expressed concern about disincentivizing on-site below-market-rate units.
Key Outcomes
- No formal action or votes were taken; the 4 p.m. special meeting was adjourned.
- Council directed staff to schedule further discussions, ensuring Councilmember Taplin's participation.
- Staff will conduct additional outreach with the labor community and developers, potentially gather actual project financial data, and provide further analysis on the Hard Hats Ordinance's impact.
- No changes to the INLU fee were adopted; the current fee of $56.25 remains in effect, with the next indexed increase planned for July 1, 2025.
Meeting Transcript
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.
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