My name is Sylvia Walker, and I am the writer and publisher of the Sweet Orange Housing blog. I grew up in Orange County; however, at the age of twenty I decided to venture out and see what the rest of the world looked like. Eventually, I ended up in the Silicon Valley area and spent many years there. While in the Silicon Valley, I worked as a freelance writer for high-tech companies such as Applied Materials, National Semiconductor, Applied Biosystems, and Oracle Corporation.
I enjoyed my time in the San Francisco Bay Area and working in the high-tech industry; however, fate intervened, and I returned to Orange County. Currently, I am pursuing freelancing, but I am shifting my focus to public policy, sustainability, cleantech and land use issues.
There is this thing out there called the California housing element. This document plays a decisive role in determining what gets built in California cities and counties. Since this document is so influential in shaping local housing policies, understanding how the housing element works is worthwhile. Therefore, I will give a more in-depth description in an upcoming post. At this time, knowing it is out there is enough. Now on to Irvine’s latest encounter with the housing element.
Photo of Montecito Vista Apartments, an affordable housing development in Irvine, courtesy HUD.gov
As required by state law, the Irvine Planning Commission reviewed the housing element document prepared by Irvine city staff. The planning commission approved the document as written with one change. That change requires the city council to consider, sometime in the coming year, adding an additional low-income housing set-aside for new rental developments. (Some set-asides already exist.) Note that this does not mean that the city council would have to adopt this new housing set-aside, just discuss it sometime in the coming year. If the city council eventually adopts the set-aside, builders of new rental developments in Irvine would be required to reserve 3% of the housing units for very low-income households. Very low-income is defined as below 30% of the median income of an area.
At the January 24th council meeting, the city council’s responsibility was to accept or reject the housing element as approved by the planning commission. Rejection would delay the housing element document being sent to the state. This could have serious consequences. (Look for the upcoming housing element post for more on this.)
Here is how it played out at the January 24th city council meeting:
Councilmember Lalloway stated, “The process is a little troubling to me.” He stated that, due to possible serious consequences of not approving the document in the as-is form, this forces the city council to approve the document and, therefore, discuss the 3% very-low income housing set-aside in the coming year. He also said that it was not the planning commission’s place to put such language in the housing element document. Councilmember Agran countered that, in the coming year, any one of the council members could ask that this be put on the agenda and the same result would occur. Councilmember Agran and Mayor Pro Tem Krom also stated that this would not require the adoption of the 3% very low-income set-aside, just that the City Council consider it in the coming year.
Lalloway also stated the grounds on which he disagreed with this type of requirement. His reasoning is that developers will increase the price on the market-rate units to cover the cost of the low-income units, and this would defeat the overall affordability goal. Agran countered that remembering that human beings are behind the numbers is important and gave this example: An elderly widow with a Social Security income of $10,000 would be able to rent in Irvine for approximately $250 per month. Having this widow live in Irvine as well as a mix of people with different incomes, including those with low incomes that work in Irvine, would be desirable, said Agran. “This is an important item to discuss.”
Here is my take:
Developers don’t increase the cost on the market-rate units to make up the difference on the low-income housing units. Instead, they charge what the market will bear. If this means they can make 100% profit, they will charge the amount that will give them a 100% profit. If the market-rate price will only allow them a small profit, or even a loss, then the developer will charge that amount. In other words, developers don’t add up their costs then add on some amount for profit to determine what they will charge. Instead, they charge what the market will bear.
Of course, if the developer reviews the numbers and determines that some requirements would make the profit too small to justify the project, they will drop their plan to build. However, if they decide to go ahead with the project, I am sure they have done a careful review and have determined that even with the low-income requirements the possible profits make the deal worth pursuing.
However, this is not the only question on housing set-asides that is open to debate. Whether any housing set-asides, for any reason, are worthwhile is a different philosophical discussion and for another time.
What now?
If the council did not adopt the housing element as approved by the planning commission, the city council would have had to send the document back to the planning commission before it could be sent for final state approval. Therefore, due to possible serious consequences if the housing element was delayed, all five council members voted yes on adoption of the housing element as submitted by the planning commission.
The state has 60 days to review the housing element and send it back to the city. At that point, it’s back in the city’s jurisdiction. This means the city will discuss the 3% very-low income inclusionary rule sometime in the coming year. If this is an important issue to you, watch for this item being placed on an upcoming agenda and be prepared to make your comments.
“Irvine has one of the highest median rents in the nation. The average monthly rent is approximately $1,800. Its housing market is far beyond what is affordable for low- and middle-income families.” —Low-Income Families Make Irvine Their Home, HUD.GOV
Discuss below or at Talk Irvine.
“Irvine has one of the highest median rents in the nation. The average monthly rent is approximately $1,800. Its housing market is far beyond what is affordable for low- and middle-income families.”
Yet IAC are back to increasing rents. “The Market Pays What the Market Will Bear” is their mantra, but that has a Shelf Life.
I can tell you from first-hand experience that high rents are causing huge problems for Businesses in the Irvine Industrial section of Irvine, it’s very hard to recruit skilled and qualified People from out of State even though they are very highly paid Jobs.
So what will happen? Businesses will move to where the Labor is, away from Irvine, probably out of state.
There is a difference between charging what the market will bear and charging “what the customer is willing to pay”
It’s Housing market [Irvine’s] is far beyond what is affordable for low- and middle-income families” Eventually it will be far beyond what is affordable for anyone earning less than $100k per year. which is totally unobtainable for anyone working in the Service Industry, whom they are going to rely upon eventually to pay Rents when all the Manufacturing Business are gone.
You know what’s funny? The only way the Staff at IAC Rental Offices can afford to live in an IAC Complex is through rent discounts that come with the Job, which means even IAC’s own Employees really can’t afford to live here without a financial subsidy.
Talked to an employee at an IAC complex, the caveat was that although her rent was good (can’t remember if it was free or or not), she was obligated to move very frequently. Felt like whatever apartment they had a vacancy at is where she was – until someone wanted it, and then she had to move. After moving three times in one year, she was tired of moving so often.
As someone who has worked in the affordable housing field for a while, I have to disagree with Sylvia’s conclusions. Irvine is already an odd bird because there is no other jurisdiction in OC (or CA that I’m aware of) where a single developer essentially owns virtually all of the rental and commercial properties. And that land was basically free to TIC, so all they bear is the development and construction costs.
All that being said, the City of Irvine already has a mini-inclusionary policy due to legal action taken against TIC in the 1970’s for not providing enough affordable housing. Housing Element law came into it’s own around that same time. The very short version of what a housing element does is that it tells the state what the population is likely to be in the next planning period (now 8 years), at what income levels (there are 5 recognized categories), and how many housing units will need to be built in the planning period to address the needs of those residents.
Although I haven’t watched the Council or Planning Comm. discussions on this issue, from what I read here, there is little that Councilman Lalloway has to say here. State law requires that jurisdictions prepare a housing element and tell them how it is going to achieve those housing goals in the next 8 years at the 5 income levels.
Furthermore, with the Feb. 1st dissolution of all the state Redevelopment Agencies (including Irvine’s), there is likely to be little if any money to build affordable units with any public money. So, the theory goes, that if a for profit developer wants to make money on the market rate units, they can provide some affordable units to the community in return. And given that TIC pays so much less to develop since the land is basically free, I don’t see the problem with such a requirement.
Thanks for the comments. I will keep them in mind when this issue comes up again in Irvine. And I’ll be watching to see what decisions the Irvine City Council makes on these issues and how they compare to everyone’s comments.
To ocresident: I agree that Irvine is a unique situation since so much of the land belongs to The Irvine Company, but I am not sure that we disagree that much on this issue.
I’ll be writing more on this when this issue reappears in Irvine, and I look forward to continuing the discussion with everyone. So, again, thanks to everyone for joining in the conversation.
Syvia, You know very little about how developers price apartment units. Have you ever heard of IRR?
I appreciate your joining in and furthering the conversation. Since I believe it is worthwhile to consider other people’s opinions, I took a step back and compared my conclusion with your conclusion. However, after thinking more about this issue, my conclusion is the same.
Although the definition of IRR can get quite complicated, IRR is basically the break-even rate—the rate at which the value of cash outflows equals the value of cash inflows. So, as I wrote in the post, if the developer does the calculations and determines that any requirements will make the rate of cash inflows vs cash outflows not lucrative enough, the developer will drop development plans. But if the developer does the calculations and goes ahead with the development, they have determined that anticipated profits, even with any set-aside requirements that exist, make the project worth pursuing. Once the development is built, most owners will charge the maximum amount that the market will allow, not some amount for costs plus some amount for profit. So this is in line with what I wrote in the post.
Thanks for your thought provoking comment. I look forward to reading more of your observations on this topic when this subject comes up again.