Residential nexus analysis in California unreliable, often results in highly inflated affordable housing requirements, in-lieu fees, finds California Homebuilding Foundation study

SACRAMENTO, California , November 17, 2011 (press release) – According to a new study released today, the use of residential nexus analysis (RNA) in determining inclusionary housing percentage requirements and in-lieu fees for both residential and commercial development is unreliable and often produces highly inflated affordable housing requirements and in-lieu fees, the California Homebuilding Foundation announced today.

The study, The Use of Residential Nexus Analysis in Support of California’s Inclusionary Housing Ordinances: A Critical Evaluation, was prepared for the California Homebuilding Foundation by Adam F. Cray, JD, MPP, as part of a program of professional education at the Goldman School of Public Policy, University of California, Berkeley. The study examined RNAs from the three major consulting firms producing them in California today and evaluated the use of such analyses in support of California’s inclusionary housing ordinances, particularly the calculation of affordable housing in-lieu fees.

“Given the current market, it is important to get accurate assessments of affordable housing needs and requirements as builders often end up paying millions of dollars in fees,” said Gail Grimm, CHF’s Executive Director. “Whether commercial or residential, these fees often determine whether a project is financially feasible and could ultimately lead to scrapping the project altogether, eliminating much-needed jobs and affordable housing.”

The study found several issues that were common among all or most of the RNAs that were examined and found the nexus methodology questionable as a whole.

“All of the RNAs studied set inclusionary housing requirements and in-lieu fees based on estimates of affordable housing demand at the countywide level or greater,” the report states. “Cities relying on these estimates to set local inclusionary housing requirements and fees are likely charging developers for affordable housing demand generated in other cities and, in some cases, other counties.”

In addition, the study noted that maximum in-lieu fee estimates generated by these RNAs are likely inflated due to the inflated estimates of the affordability gap – the difference between the cost of developing an affordable unit and the amount a lower-income tenant could afford to pay for the unit.

According to the study, numerous cities have begun using RNAs as a result of recent court decisions that have invalidated inclusionary housing requirements and in-lieu fees, such as Palmer/Sixth Street Properties v. City of Los Angeles. The cities’ use of the RNAs is an attempt to forge a link between market-rate residential development and affordable housing demand to justify the use of inclusionary ordinances, which require homebuilders and commercial developers to either provide affordable housing or pay an in-lieu fee.

“Residential nexus analysis, as it has been applied in California to date, is an unreliable means of demonstrating the effects of market-rate residential development on the demand for affordable housing and of justifying the inclusionary housing percentage requirements and in-lieu fees purported to mitigate these effects,” the report concluded.

The California Homebuilding Foundation (CHF) is the research and education information center for California's building and construction industries, and the public. The Foundation serves the homebuilding industry by providing research and scholarships through its endowments, educational and professional development programs, and recognition of homebuilding professionals. For more information, visit the Foundation’s Web site at www.mychf.org.

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