Understanding Potential Site-Level Impacts of California’s Proposed SB 50
Recent steps forward for Senate Bill 50, which if passed would upzone parcels near transit in California, have led to a flurry of analysis in the Bay Area and beyond. Last Wednesday, state Senators Scott Weiner and Mike McGuire came together in compromise on their competing housing and transit bills SB 50 and SB 4. In response to this and other recent milestones for SB 50, different stakeholders are asking important questions about the changes that cities will face if this landmark legislation ultimately becomes law in California.
The Urban Displacement Project, a research and action initiative out of UC Berkeley, recently released a policy brief identifying that SB 50 could quadruple overall market-feasible capacity in the affected geography and quintuple the capacity for on-site inclusionary affordable units in the affected geography in the Bay Area.[1] While the authors find that financially feasible capacity for inclusionary affordable units could increase in high resource areas, they note that there are many reasons why developers might opt out of developing affordable units, even where financially feasible, if given the choice. Because SB 50 in its current form would allow developers to pay in-lieu fees for affordable housing rather than build the units on-site, it is hard to fully understand how many units of affordable housing are likely to be built and where. The most recent amendments, however, offer helpful clarification by mandating that any units built off-site are within half a mile of the original project.
At UrbanSim we are working on tools that can help us better understand the impacts of SB 50 on development at the site level, which can complement larger-scale analysis. For example, we’re interested in understanding how developers might trade off between in-lieu impact fees and on-site inclusionary housing to meet their profit goals. This is the type of policy impact that, in aggregate, helps determine whether low-income populations can retain a foothold directly in transit- and job-rich areas, or whether they primarily benefit from upzoning through lower market rents and subsidized housing nearby.
We decided to take a closer look at a development scenario near Ashby BART station in South Berkeley using Penciler, our rapid site feasibility analysis tool. The site we chose is in a census tract that is likely to be impacted by upzoning because it is both low density and high income, according to research by the Terner Center for Housing Innovation and Urban Displacement Project.[2] But it is also surrounded by neighborhoods with incomes lower than the regional average.
The parcel is currently occupied by a single-story commercial building, although the current zoning (South Area Commercial) allows for a maximum height of 36 feet. Using Penciler, which automatically generates multifamily buildings using a constrained layout algorithm, we created four different building scenarios to test the financial impacts of upzoning under SB 50 in combination with on- and off-site inclusionary housing. In addition, we created a scenario in which the hypothetical developer uses the California state density bonus to achieve even greater height while building affordable units on-site. In all scenarios we maintained ground floor commercial space.
Our analysis shows that if a developer took advantage of a new 55 foot height limit under SB 50 at this site, given equal development costs, acquisition costs, operating costs and identical building programs (unit mix, unit count and ground floor retail), they could generate about 6% more profit by paying in lieu fees than including 15% affordable units on-site for residents who make 60 percent of Area Median Income (AMI).[3] This is based on the city of Berkeley’s Affordable Housing Mitigation Fee of $37,962 per new unit of rental housing.[4] Market rate rents for both residential and ground-floor commercial retail are held constant for both options.[5]
However, if the developer were to also take advantage of the California state density bonus, which allows for a 27.5% density bonus for 15% affordable units included on-site,[6] they could further increase the height of the building to 6-stories using the same wood frame construction. This scenario pencils out to offer a similar return on cost to the option in which the developer builds 5-stories and pays an in-lieu fee. Given that the developer could achieve up to a 35% density increase using the state bonus if they also increase the number of on-site affordable units, this could result in a taller and potentially more profitable building that includes affordable units on-site. We analyze the 6-story option in order to keep construction costs comparable across the different scenarios.
There are a number of other interesting things we can learn from Penciler. This site would normally require 1 parking space per residential unit based on the zoning, despite being less than a quarter mile from a BART station. Removing the parking requirement from this site under SB 50 makes development on this site, which is small, much more feasible. Further, the additional height creates a bigger profit margin as the acquisition and development costs are spread across more units, meaning there is more flexibility for both developers and cities to work together to make sure that both can meet their needs and priorities.
This is just one site, and just because a potential development project is profitable based on current (static) conditions, it doesn’t mean that the project will be built. In this case, adding additional height through the state density bonus may incentivize developers to include the affordable units on-site rather than pay an in-lieu fee. Whether or not the developer would choose to pay an in-lieu fee at 5-stories rather than build the affordable units on-site depends on many other factors that can’t always be quantified, including the actions of the local jurisdiction. This offers analysis for one site in a neighborhood likely to be impacted by SB 50 in its current form.
Penciler is a tool that allows cities, housing advocates, developers and other stakeholders to model potential development scenarios based on a changing policy landscape. Visit www.penciler.org to learn more and test out two different sites in San Francisco and Berkeley to better understand the potential impacts of SB 50 and other local and state housing policies.
To learn more about the assumptions made in this analysis, please contact christiana@urbansim.com. To view the documentation for the platform and learn more about the methodology, visit docs.penciler.org.
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[1] Cash, A., Zuk, M., and Carlton, I. (2019). Upzoning California: What are the implications of SB 50 for Bay Area Neighborhoods? Retrieved from http://www.urbandisplacement.org/blog/upzoning-california-what-are-implications-sb-50-bay-area-neighborhoods
[2] Terner Center for Housing Innovation and Urban Displacement Project, Classifying Neighborhoods Impacted by Upzoning in California (2019). University of California, Berkeley. Retrieved from http://upzoning.berkeley.edu/station_neighborhoods.html
[3] We assume $475 per square foot for residential construction costs, 15% soft costs and $500,000 to acquire the land based on comparable development lots using Loopnet. We assume that the developer would develop the property and sell it at a 4.5% residential capitalization rate.
[4] City of Berkeley (2018). Retrieved at https://www.cityofberkeley.info/ContentDisplay.aspx?id=74682.
[5] In each of these scenarios we use the same rents for the market-rate units based on one and two-bedroom units in new multifamily buildings within a half-mile of this site. We assume $3,400 for one-bedroom units and $4,200 for two-bedroom units. We assume $24 per sf per annum for ground floor commercial retail using comparable spaces along the same corridor from Loopnet.
[6] Goetz and Sakai (2017). Guide to the California Density Bonus Law. Retrieved at: https://www.meyersnave.com/wp-content/uploads/California-Density-Bonus-Law.pdf
