Setting In Lieu Fees

What is the best way to set the level of fees in lieu of building inclusionary units?

Replies to This Discussion

Permalink Reply by Rick Jacobus on November 10, 2008 at 6:09pm

BPI in Chicago produced a report on issues to consider when adopting an IZ program (available online at: http://www.bpichicago.org/documents/issuestoconsiderwhencreatingIZ.pdf) which included the following examples of in lieu fee formulas. They also created the attached matrix.

Subject to the approval of the head of the relevant City agency, developers may also propose to
achieve these affordable housing obligations by making a dollar contribution to an affordable
housing fund calculated by multiplying the total number of dwelling units in the proposed
residential development by 0.15, and by multiplying the result by the Affordable Housing Cost
Factor, currently standing at $52,000. This Affordable Housing Cost Factor is defined as the
average total public subsidy per new construction affordable housing unit permitted in the City
for the previous calendar year, and will be adjusted annually on July 1 of each year in an
amount commensurate with the cost of producing affordable housing. (Boston)

Whenever this chapter permits a cash-in-lieu contribution as an alternative to the provision of a
single permanently affordable housing unit, the cash-in-lieu contribution shall be as follows:
(a) For each unrestricted detached dwelling unit, the cash-in-lieu contribution shall be the
lesser of $13,200.00, or $55.00 multiplied by twenty percent of the total floor area of
the unrestricted unit.2
(b) For each unrestricted attached dwelling unit, the cash-in-lieu contribution shall be the
lesser of $12,000.00, or $50.00 multiplied by twenty percent of the total floor area of
the unrestricted unit
The city manager is authorized to adjust the cash-in-lieu contribution on an annual basis to
reflect changes in the median sale price for detached an attached housing, using information
provided by County Assessor records for the City. (Boulder)

In exceptional cases, instead of building the required number of affordable dwelling units, a
developer may offer to contribute to the Housing Initiative Fund an amount that will produce
significantly more affordable dwelling units. The procedures for considering and implementing
contribution offers must be established by executive regulation. To implement an offer, the
developer must sign an agreement with the Director of the Department of Housing and
Community Development not later than a time provided in the regulations.
(Montgomery County)

At the option of the City, the requirements of this Section may be met through a cash payment to
the City or its designee in an amount based on the guidelines adopted as per (f) below if the cash
payment is found by the City, in its discretion, to be advantageous to the City in creating or
preserving affordable housing. Cash contributions shall be used only for purposes of providing
affordable housing for very low, low, and moderate income persons. . . .
(f) The Planning Commission, in consultation with the Housing Commission and after public
notice and hearing, shall adopt guidelines to aid in the interpretation and determination of the
requirements of this Section. (Brookline)

Attachments:

Fee-in-Lieu Matrix.doc, 90 KB

Permalink Reply by HousingPolicy.org team on November 18, 2008 at 4:20pm

There seem to be two general methodologies for calculating fees in lieu.

In communities that use the "affordability gap" approach, the fee is based on the amount needed to make an average market-rate unit affordable to a family at the target income level, with adjustments for unit size, number of bedrooms, and other features.

The "production cost approach" bases the fee on the estimated cost to the jurisdiction of providing the affordable unit itself.

Of course in both methodologies the formula can be adjusted to encourage the on-site provision of housing rather than payment of a fee in lieu. This is generally accomplished either by establishing a very high fee (relative to the cost of actually building the unit) or requiring developers to demonstrate that providing the units on-site would result in excessive hardship (financial or otherwise).

Permalink Reply by HousingPolicy.org team on November 19, 2008 at 3:26pm

The city of Lafayette, Colorado appears to use the affordability gap approach to setting fees in lieu. As noted in the Community Housing Guidelines (relevant portion attached), for “permanently affordable units”, which are affordable at 80 percent of AMI, Lafayette subtracts the amount that an average household at 80 percent of AMI could afford to pay from the average cost of a market-rate unit. The difference is the fee for the year, although the program administrator can adjust sales prices quarterly to reflect fluctuation in mortgage interest rates and AMI.

Attachments:

LafayetteFeeInLieu.pdf, 38 KB

Permalink Reply by HousingPolicy.org on November 19, 2008 at 3:32pm

Similarly, according to the City's Inclusionary Housing Ordinance, the fee rate in Tallahassee, Florida ranges from $10,000 to $25,000 per unit depending on the median sales price of the market-rate units in the development. The higher the cost of the market-rate units, the higher the fee in lieu.

Permalink Reply by HousingPolicy.org team on March 24, 2009 at 9:06am

Posted on behalf of an inclusionary zoning program manager --

We wanted to create a fee structure that reflected the true cost of developing a restricted unit when developers decided not to build on-site below market rate (BMR) units. We hired a consultant to help us determine the best new methodology for setting the fees. We now base our fees on the difference between what it costs to build a unit of housing and the affordable/ restricted price. We’ve collected only one in lieu fee since the updating of the fee structure.

We learned not to be afraid of raising the bar when we could put sound logic and research behind the change.

Permalink Reply by Michelle Allen on March 7, 2009 at 6:06pm

It seems that the general methodology is to determine the affordability gap by subtracting what the target household AMI can afford to pay from the average cost of a market-rate unit. One variable you may look at in determining the "average cost of a market rate unit" is the age of this group of units. It need not be the average cost of all units sold but perhaps a subgroup that represents the type of unit that would reasonably represent the units not built on site. For instance, you could average the cost of market units less than 2,500 square feet built within the last 3 years.

Permalink Reply by Tom Liao on April 17, 2009 at 7:05pm

The City of San Leandro in lieu fee formula iis as follows: median sales price of a home (SF detached, condo/townhome) in San Leandro minus affordable ownership cost multiplied by a fractional inclusionary unit percentage. Affordable ownership cost is generally calculated what a household can affordable based on 35% of their income. We only charge in lieu fee currently to BMR ownership units (for new residential developments with 2 to 6 units). Projects with more than 6 ownership units and all new rental developments with 4 or more units must build the inclusionary units.

By pegging our formula to a market based index like current median sales price, which has declined significantly due to the drop in home values in the past year, a potential unintended result is that the formula may result in a negative in lieu fee calculation. Since our development pipeline is currently dry and we have had no opportunities to collect an in lieu fee, we have some time to re-think our in lieu fee structure. I am considering modifying the formula in the near future to eliminate reference to median sales price index and using a per unit housing construction cost to calculate the fee.

During the seminar that Rick and the Lincoln Institute hosted, it was helpful to hear from some other cities in attendance on how they may have structured their in lieu fees. If people would be willing to post their in lieu fee formulas they feel are model ones, that would be helpful.

Permalink Reply by Center for Housing Policy staff on May 22, 2009 at 10:58am

Posted on behalf of a IZ administrator in Massachusetts:

When the ordinance was first written, the City's non-profit developers did not have the capacity to build large quantities of affordable housing. As a result, while the ordinance allowed for in-lieu fees, it was a very punitive formula aimed at discouraging developers from taking this option. As the City's non-profit developers built capacity, we decided it would actually be beneficial to receive cash for the Trust Fund to allocate to non-profit developers, who would be able to build units that fit the needs of low- and moderate-income buyers better, and often more efficiently.

At that time, we revised our ordinance so that the cash in-lieu option would place the same monetary burden on the developer as offering a unit on-site, as opposed to a larger one. This has led several developers to take this option and has allowed the Trust to allocate funds to non-profit developers. Now, we are seeing that with the market being what it is, we would prefer developers to build units, because our non-profits are having a harder time getting financing for large projects and the cash in-lieu amounts are not enough to off-set these issues.

We would like our ordinance to actually have provisions that allow it to adjust to changes in the market without having to be revised every time. We have not found that solution yet, but would appreciate insights from the group. It would be best if the ordinance could reference certain market conditions and apply one formula in certain markets that encourages cash and another formula in certain markets that encourages physical units.

Permalink Reply by Michelle Allen on May 7, 2009 at 7:36am

One approach is to base the in-lieu fee on the affordability gap. Generally you want the fee to reflect the cost of obtaining a similar unit to the one that would have been provided on-site. So you determine the affordability gap between what an affordable buyer can pay (depends on the income parameters for your program) and what a similar unit costs. A "similar unit" could be defined as the median price for a unit 2000 sf or less built within the last five years - these variables depend on what type unit you'd be willing to purchase for the program and can have a big impact on the gap number. You may consider phasing a high in-lieu fee in over time or discounting the fee. If you would be spending the in-lieu monies on new construction, it may make sense to discount the fee to remove the typical developers profit, say 15%.

Permalink Reply by Rebecca Cohen on June 25, 2009 at 9:58am

The Lincoln Institute of Land Policy and Center for Housing Policy have compiled a brief overview of strategies that local jurisdictions have adopted to craft in lieu fee schedules, based on interviews with IZ administrators and questionnaires submitted by practitioners across the country.

In their responses, many communities emphasized the importance of developing a fee schedule that can be modified to respond to local market conditions. In particular, formulas based on the difference between the cost of an affordable home and the median market sales price may yield negative in lieu fees in declining markets - a real possibility in many places where home prices have fallen dramatically. Has anyone developed a good strategy for developing in lieu fees that respond to market conditions?

See the attached document to read more.