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HomeMy WebLinkAboutProvisionally adopt Ordinance 1814, amending the work force housing program, Chapter 17.02, BMC.pdf Commission Memorandum REPORT TO: Honorable Mayor and City Commission FROM: Tim McHarg, Director of Planning and Community Development SUBJECT: First Reading of Ordinance 1814 to Amend Chapter 17.02, Workforce Housing, to Defer the Applicability of the Program for a One Year Period MEETING DATE: July 18, 2011 AGENDA ITEM TYPE: Action RECOMMENDATION: Conduct a public hearing on Ordinance 1814, and having considered public testimony, the materials presented in the packet, and provisionally approve Ordinance 1814. RECOMMENDED MOTION: “Having heard and considered public testimony and the materials presented in the packet, I hereby move to provisionally adopt Ordinance 1814 amending Chapter 17.02 of the Bozeman Municipal Code.” BACKGROUND: Workforce Housing Program Summary The Workforce Housing Program was established by Ordinance 1710, which was provisionally adopted by the City Commission on June 18, 2007, finally adopted on July 16, 2007, and became effective on August 16, 2007. The Workforce Housing Program is a form of inclusionary zoning that applies to applications for residential subdivisions where the subject property exceeds 5 acres in area and the total number of lots created exceeds 10. The requirements of the program also apply to site plans for residential condominiums where the subject property exceeds 5 acres. The program established requirements for provision of a defined number of price restricted lots and units that have to be provided by residential subdividers and/or condominium developers. This ratio is 0.4 workforce housing units per the net area of the development in acres. The stated preference of the program is for the price restricted lots and units to be provided on- site, along with the market rate units. The workforce housing units are to be dispersed within the development, functionally equivalent, and similar in appearance to the market rate units. However, alternative methods of compliance are also permitted; including provision of price restricted units off-site; payment of cash-in-lieu of lots or units; and, creation of an individualized program that blends these methods of compliance or proposes others. 97 In order to mitigate the economic costs to residential subdividers and/or condominium developers for providing the price restricted workforce units, a range of offsets were provided for subdivisions and developments that were subject to the program. These offsets included the following, none of which were mutually exclusive: · Reduced parkland dedication requirements at a 1:1 ratio with the total area of the workforce housing lots · Reduced lot sizes for workforce housing units · A 1:1 density bonus for each workforce housing unit, along with waived parkland requirement for the bonus units · A sliding scale of impact fee deferrals and waivers · Low interest construction loans through City · Zero lot line construction by right for duplexes The program defined series of procedures and standards for pricing restrictions on lots and units. The restricted pricing schedule was calculated using a series of formulas that included household sizes, unit types, area median incomes, a 30% front end ratio, prevailing interest rates, and defined mortgage types (30 year fixed, 97% loan-to-value). Based on the pricing formula for the program, the following chart summarizes the pricing schedule for the six unit types for the period from Q3 2010 through Q2 2011: Workforce Housing (WFH) Unit Types and Pricing: Q3 2010 – Q2 2011 Unit Code Unit Type AMI HH Pricing Size Min # of Bedrooms Min # of Baths Garage Req'd Min. Lot Size (sq. ft) Maximum WFH Prices D, HH4 Detached 100% 4 3 1+.5 1 stall 2751- 3000 $222,425 D, HH3 Detached 100% 3 3 1+.5 1 stall 2500- 2750 $200,250 D, HH2 Detached 100% 2 2 1+.5 1 stall 2500- 2750 $178,074 A, HH4 Attached 80% 4 3 1+.5 1 stall 2500 $177,906 A, HH3 Attached 80% 3 3 1+.5 1 stall 2500 $160,267 A, HH2 Attached 80% 2 2 .75+.5 1 stall 2500 $142,459 The program also establishes a maximum for lot pricing. For the period from Q3 2010 through Q2 2011, the maximum lot pricing for a workforce housing lot is $12.50 per square foot. A deed restriction was to be used in the program to ensure compliance with use and occupancy requirements of the program, as well as to limit realized appreciation at resale to a maximum of 4.5% per year. The deed restriction also granted a right of first refusal to the City for purchase of 98 the property. The deed restriction was to be removed after 10 consecutive years of ownership. If the property was resold before 10 years of ownership, the deed restriction would remain on the property, with the buyer subject to a new 10 year period. In order to preserve affordability, the deed restriction limited resale of the workforce housing unit to households that were income qualified and eligible buyers under the program requirements. In order to purchase a workforce housing unit, buyers had to qualify based upon the eligibility requirements established by the program. These requirements included the following: · Household income less than 120% of area median income based on household size · Gallatin County residency · Total household assets of less than $100,000 (liquid) and $150,000 (non-liquid) · Completion of homebuyer’s education program · Mortgage prequalification · In the event that qualified buyers exceeded the number of available workforce housing units, selection through a lottery system The program involves a complicated system for delivery of the workforce housing units that is initiated with a 12 month period of active marketing of the designated workforce housing lots within the subdivision. If the workforce housing lots remain unsold after 12 months, the City of Bozeman has the right of first refusal (although no budget to exercise this right has been established). If the right of first refusal is not exercised, the lot can be sold at market rate and the deed restriction can be removed, with the increment between the market rate and the workforce housing lot pricing paid to the City. If the workforce housing lot is purchased by a builder, a three year period begins to draw a building permit to construct the workforce housing unit. Once the unit is constructed and a Certificate of Occupancy is issued, the unit must be actively marketed for a period of six months. If the workforce housing unit remains unsold after six months, the unit can be sold at market rate and the deed restriction can be removed. In this event, there is no requirement for the builder to pay the City for the increment between the market rate and the workforce housing unit pricing. ANALYSIS: Concerns with Workforce Housing Program The above section provides an overview of the major provision of the workforce housing program as currently designed. While the program design was believed to be implementable based on the local market conditions in 2007, the intervening four years have resulted in fundamental and structural changes to the real estate market. Based upon the current conditions, Staff has several concerns regarding the ability to implement the workforce housing program effectively. These concerns are outlined in the following sections. A. Residential Real Estate Market Conditions Since the establishment of the workforce housing program, the recession has had a tremendously adverse impact on the national, regional and local economies and housing markets. This has resulted in a significant price correction for residential real estate within the City. Because of the impacts on the economy and the financial markets, demand for residential real estate purchases has decreased, particularly for attached housing units and undeveloped lots. The recession has resulted in an increase in housing affordability in most housing markets that were previously experiencing inflationary pressure, including the local Bozeman market. 99 In order to quantify this increase in housing affordability, Staff requested sales data for real estate transactions within the City limits from the Gallatin Association of Realtors. This sales data was not for individual transactions, but rather aggregated data for the six workforce housing unit types defined by the program. (Note: Information provided by Gallatin Association of REALTORS®/Southwest Montana MLS is compiled from miscellaneous sources. Neither the Association, listing brokers, agents nor subagents are responsible for its accuracy. © 2011 Gallatin Association of REALTORS® / Southwest Montana MLS) The following charts compare this aggregated sales data to the maximum pricing levels for the workforce housing unit types: 100 Cumulatively, these charts illustrate that market prices peaked between Q1 2007 and Q1 2008, after which they have generally experienced a steady decline, as illustrated by the median price trendlines. In comparison, the maximum pricing for workforce housing units has steadily increased, primarily because of slight increases in area median incomes for households and significant decreases in prevailing interest rates. As a result, the discount from market sales pricing represented by the maximum pricing for workforce housing units has decreased significantly from the time the program was established. In fact, for some attached unit types, the maximum pricing for workforce housing units exceeds the median sales price for those unit types (i.e. the discount from market price is less than zero percent). These discounts are illustrated in the following charts for detached and attached unit types: 101 B. Use of Deed Restriction to Cap Price Appreciation As part of inclusionary zoning ordinances, there is a general consensus in the profession that a discount from market pricing of a minimum of 25% is necessary before buyers will consider accepting a deed restriction that limits price appreciation in the unit or establishes other significant restrictions on occupancy or resale. Unless the discount from market prices is above the 25% threshold, buyers will exhaust all of their financial alternatives before accepting these types of deed restrictions. Price discounts over the 25% threshold can be provided as part of inclusionary zoning ordinances in highly inflationary or generally expensive real estate markets. However, as market conditions change, it is important for the ordinances to have sufficient flexibility to adapt to the changed conditions. This allows for a sliding scale of mitigation and programmatic requirements, such as the use of shared appreciation mortgages, second mortgages, and fees in lieu. When the workforce housing program was established, the Bozeman real estate market was highly inflationary and expensive relative to area median incomes, resulting in justifiable concerns about affordability and displacement of workers. However, the correction in the local real estate market has moderated these concerns relative to for sale housing. As currently designed, the workforce housing program does not have sufficient flexibility to adjust to the changes in the market conditions. In the current Bozeman real estate market, it is highly unlikely that buyers qualified for workforce housing program would choose to purchase a deed restricted unit because they can afford a comparable market priced unit. Without any demand for deed restricted lots or units, the program is not implementable as currently designed. C. Inability to Recapture Offsets A major assumption within the program is that subdividers will price the workforce housing lots at a significant enough discount from market prices to attract builders to construct units that meet the maximum pricing amounts for the unit types. Subdividers may have sufficient incentive to price the lots aggressively to sell to builders in order to comply with the program. However, in 102 the current market for undeveloped lots, it is unlikely that subdividers have sufficient profit margins to offer significant discounts on the workforce housing lots. Moreover, because the profit margins tend to be lower on price restricted units, it is unclear whether the discounted lot pricing will provide sufficient profit motive for builders to purchase the lots and construct the units. This is particularly true in the current market because of lower overall margins for builders as a result of reduced pricing power and high materials and transportation costs. As discussed above, if workforce housing lots or units are actively marketed for a defined period of time and remain unsold, the deed restrictions can be removed and the lots or units can be sold at market rate. The following summarizes these two scenarios: · If workforce housing lots remain unsold after 12 months, the City of Bozeman has the right of first refusal (although no budget to exercise this right has been established). If the right of first refusal is not exercised, the lot can be sold at market rate and the deed restriction can be removed, with the increment between the market rate and the workforce housing lot pricing paid to the City. · If a workforce housing unit has been actively marketed for a six month period and it remains unsold to a qualified buyer, the unit can be sold at market rate and the deed restriction can be removed. Staff believes that both of these scenarios are likely based upon the current market conditions, insufficient profit margins for subdividers and builders, and lack of demand for deed restricted units with price appreciation caps. In both of these scenarios, the workforce housing program does not have adequate provisions to recapture any offsets that were granted as part of the approval of the preliminary plat or site plan approval. The only subsidy recapture provision in the program is the requirement that the increment between the market rate and the workforce housing lot pricing be paid to the City if a lot remains unsold after 12 months. However, because the $12.50/square foot workforce housing lot pricing level vastly exceeds the current market price for an undeveloped lot, there would be no increment to pay to the City. None of the other offsets available to subdividers complying with the program would be recaptured, because they are imbedded in the design of the preliminary plat. As currently designed, there is no ability to recapture the reduced parkland dedication requirements, reduced lot size requirements, density bonuses, or impact fee deferrals or waivers. These offsets can be viewed significant relaxations of zoning standards that represent significant in kind public subsidies to mitigate the economic impacts of the program to developers. The offsets were viewed as a fair and proportionate mitigation in the case where below market housing was being provided as a public benefit. However, if the benefit is not being provided, the in kind subsidies are not necessary. The inability to recapture the offsets if the lots and units are sold at market rate is a major flaw in the current workforce housing program. D. Remaining Work Required to Implement Program 103 Because of the recession and real estate market correction, no subdivision or condominium site plan applications were received from the period from Q3 2007 to Q2 2010. As a result of the lack of application subject to the workforce housing program, much of the work required to implement the program was not completed. The deed restrictions have not been drafted. These types of documents require a significant amount of legal work and review by lending institutions, title companies, loan underwriters and realtors. There is no tracking system for the workforce housing lots or units. It is essential to track the delivery and marketing of lots and units. Sales of lots and units must also be documented and monitored on an ongoing basis. While these systems can be supported by title companies and realtors as part of closings, it is necessary to establish these relationships and communications. Creating a sufficient volume of demand of qualified buyers ready to purchase price restricted units prior to, or at the time of, issuance of a certificate of occupancy and delivery to market is essential for the success of an inclusionary zoning program. Because of the changes in the economy, the Road to Home program is currently focused on engaging their clients in market rate housing units. There is currently no pipeline of qualified buyers in positions to purchase deed restricted units. These missing pieces represent a significant amount of work remaining to be completed to fully implement the workforce housing program. Because of reductions in staffing levels due to ongoing challenges to the Planning Department budget, it would require reassessment of current priorities to accomplish this. Moreover, the current staff does not have the kind of specialized experience or training in affordable housing to do this work efficiently. E. Subdivisions Approved with Workforce Housing Plans Two preliminary plats for subdivisions have been approved that were subject to the workforce housing program: Meadow Creek and Norton East Ranch. The workforce housing plans of the two preliminary plats are vastly different. Staff is working with the applicants for the two subdivisions to assess whether the workforce housing plans can be implemented. It is likely that the applicants for the two preliminary plats will come before the Community Housing Advisory Board (CAHAB) and the Commission to modify all or part of their workforce housing plans. F. Affordable Housing Needs Assessment The Community Affordable Housing Advisory Board (CAHAB) is in the process of requesting funding from the City Commission to update the City’s Affordable Housing Needs Assessment and develop a 5-year housing plan. The most recent housing needs assessment was completed in 2003. The goal of the updated assessment is to provide the citizens, local officials, affordable housing providers and other stakeholders with more current information resulting in policies focusing on the community’s greatest needs and measurable, well-defined outcomes. CAHAB believes that an update to the Affordable Housing Needs Assessment is critical at this time for two reasons: · The changes in the local housing market and capital markets have been significant since the last assessment was completed in 2003. 104 · The current budget environment for federal, state and local governments requires clear housing priorities to make the most efficient use of decreasing resources. Staff believes that the assessment will provide critical information relative to how the workforce housing program can be modified to apply to the current local real estate market and made more flexible to adapt to changing market conditions in the future. The updated assessment will also allow the community to prioritize our affordable housing needs to better understand the role of the workforce housing program within a broader context of housing policies. RECOMMENDATION: Ordinance No. 1814 Based on the above analysis and concerns with the workforce housing program, Staff is recommending adoption of Ordinance No. 1814. This ordinance takes a straightforward approach to provide a one year hiatus of the workforce housing program by extending the start date for applicability of the workforce housing program. The hiatus would begin on the anticipated effective date of the ordinance, September 1, 2011, and run through September 1, 2012. This one year hiatus will allow completion of the update to the Affordable Housing Needs Assessment to determine how the how the workforce housing program can be modified to be implemented in the current housing market. The hiatus can also be easily extended at the discretion of the Commission, if determined necessary. FISCAL EFFECTS: The hiatus of the program may prevent the inability of the City to recapture any real or in kind subsidies to preliminary plats as part of the offsets available through the workforce housing program. ALTERNATIVES: The following alternatives are available to the Commission: · Extend the hiatus of the workforce housing program for longer than one year. · Abolish the workforce housing program. · Maintain the current status of the workforce housing program. · Table the ordinance and provide other direction to staff for revisions. Attachments: Ordinance No. 1814 May 12, 2011 Comment Letter from Recreation and Parks Advisory Board Report Compiled: July 8, 2011 105 Page 1 of 6 ORDINANCE NO. 1814 AN ORDINANCE OF THE CITY COMMISSION OF THE CITY OF BOZEMAN, MONTANA, TO AMEND CHAPTER 17.02 OF THE BOZEMAN MUNICIPAL CODE, WORKFORCE HOUSING, TO DEFER THE APPLICABILITY OF THIS CHAPTER FOR A PERIOD OF ONE YEAR. WHEREAS, on July 16, 2007, Ordinance 1710 was finally adopted to establish standards and procedures for provision of workforce housing to income qualified households through the subdivision and zoning review processes of the City; and WHEREAS, since the adoption of Ordinance 1710, the residential real estate market in the City has undergone a significant correction, resulting in reductions in market prices for lots and housing units; and WHEREAS, the residential real estate market correction has resulted in greater housing affordability in the City as calculated by the formulas in Chapter 17.02 for determining workforce housing unit pricing for income qualified households; and WHEREAS, the two year workforce housing program review required by Sec. 17.02.110 was postponed because no subdivision or site plan applications that were subject to the program standards and procedures were submitted within the period from August, 2007 to August, 2009; and 106 Page 2 of 6 WHEREAS, within the last year, two subdivision applications that were subject to the workforce housing program standards and procedures, which provided the opportunity to review the program as intended by Sec. 17.02.110; and WHEREAS, the deferral of applicability of Chapter 17.02 will allow City Staff and the Community Affordable Housing Advisory Board (CAHAB) to conduct a Housing Needs Assessment that will analyze the local residential real estate market and recommend appropriate policies; and WHEREAS, after proper notice, the City Commission held a public hearing on July 18, 2011, to receive and review all written and oral testimony on the amendment to Chapter 17.02; and WHEREAS, at its public hearing, the City Commission found that the proposed amendment to Chapter 17.02 would in the public interest. NOW, THEREFORE, BE IT ORDAINED by the City Commission of the City of Bozeman, Montana: Section 1 That Chapter 17.02.030, Workforce Housing, of the Bozeman Municipal Code shall be amended to read as follows: 17.02.030. Applicability: A. 1. A developer of a subdivision that includes residential lots for which preliminary plat is submitted on or after August 15, 2007 September 1, 2012, and which will result in development of ten or more residential lots shall provide a lot or lots for the construction of 0.4 dwelling units per net acre of development for the workforce housing program. Multiple developments or projects by the same applicant or responsible party within any consecutive 12 month period on parcels held in contiguous ownership at the time of the 107 Page 3 of 6 initial development that in the aggregate equal or exceed ten residential lots shall be subject to this section. 2. Any site plan including residential condominiums on lots created or annexed on or after August 15, 2007 September 1, 2012, with a gross project area of more than 5 acres shall provide or shall cause to be provided 0.4 dwelling units per net acre of development for the workforce housing program. Multiple site plans by the same applicant or responsible party within any consecutive 12 month period that in the aggregate exceed a gross project area of 5 acres shall be subject to this section. B. Project Size: 1. Subdivisions with fewer than ten lots or condominium site plans with a gross project area of 5 acres or less: No workforce housing requirements. 2. Subdivisions with ten or more lots or condominium site plans on lots created or annexed on or after August 15, 2007 September 1, 2012, with a gross project area of more than 5 acres: 0.4 dwelling units per net acre of development in the subdivision must be dedicated to workforce housing requirements excluding any additional dwelling units approved through a density bonus subject to the provisions of Section 17.02 040. Section 2 That Chapter 17.02.110, Workforce Housing, of the Bozeman Municipal Code shall be amended to read as follows: 17.02.110. Program Review The Workforce Housing Program established herein shall be reviewed two years after its inception becoming applicable and annually thereafter to determine its effectiveness and to determine if the mechanics of the program are found to impose an unreasonable burden on either the parties producing the housing or the on the parties purchasing it. The initial Workforce Housing Program review shall be completed by October 15, 2014, for the applicability period from September 1, 2012, to August 31, 2014. Section 3 Repealer All provisions of the ordinances of the City of Bozeman in conflict with the provisions of this ordinance are, and the same are hereby, repealed and all other provisions of the ordinances of the 108 Page 4 of 6 City of Bozeman not in conflict with the provisions of this ordinance shall remain in full force and effect. Section 4 Savings Provision This ordinance does not affect the rights and duties that matured, penalties that were incurred or proceedings that were begun before the effective date of this ordinance. All other provision of the Bozeman Municipal Code not amended by this Ordinance shall remain in full force and effect. Section 5 Severability That should any sentence, paragraph, subdivision, clause, phrase or section of this ordinance be adjudged or held to be unconstitutional, illegal, or invalid, the same shall not affect the validity of this ordinance as a whole, or any part or provision thereof, other than the part so decided to be invalid, illegal or unconstitutional, and shall not affect the validity of the Bozeman Municipal Code as a whole. Section 6 Codification The provisions of Section 1 shall be codified as appropriate in Title 17, Housing, of the Bozeman Municipal Code. All references within the Bozeman Municipal Code shall be revised to reflect the changes in this ordinance. Section 7 Effective Date This ordinance shall be in full force and effect thirty (30) days after final adoption. PROVISIONALLY PASSED by the City Commission of the City of Bozeman, Montana, on first reading at a regular session held on the _______ day of _______, 2011. ____________________________________ JEFFREY K. KRAUSS Mayor ATTEST: 109 Page 5 of 6 _________________________________ STACY ULMEN, CMC City Clerk APPROVED AS TO FORM: ____________________________________ GREG SULLIVAN City Attorney FINALLY PASSED, ADOPTED AND APPROVED by the City Commission of the City of Bozeman, Montana on second reading at a regular session thereof held on the ____ day of ________________, 2011. The effective date of this ordinance is __________, __, 2011. ____________________________________ JEFFREY K. KRAUSS Mayor ATTEST: _______________________________ STACY ULMEN, CMC City Clerk APPROVED AS TO FORM: ____________________________________ GREG SULLIVAN City Attorney 110 Page 6 of 6 111 112