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Approved in August 2013, the 345 unit multi-family housing and commercial project includes a Development Agreement and Affordable Housing Agreement. As approved, the project contains a mix of 293 market rate and 52 below market rate units. The related Affordable Housing Agreement includes provisions for 3 fully accessible units, requires that the development accept Section 8 vouchers, adjusts income levels based on the Area Median Income (AMI) produced by the Department of Housing and Urban Development (HUD), is subject to the city's preference system, and is recorded with the land and remains in place in perpetuity. The Agreement also contains a provision allowing the payment of $4.5 million in lieu of providing the 52 rent-restricted units and indicates that the developer will still provide the 3 fully accessible units but allows that those will no longer be affordable units. A similar agreement, which grew out of the recent Palmer case and challenges to implementing the city's Inclusionary Zoning Ordinance (IZO), was approved with the recent Summerhill development. Mr. Bocian outlined three alternatives for the Council's consideration. Alternative 1 requires the developer to provide the 52 below market rate units. This alternative meets the city's long standing practice of trying to obtain BMR units through the inclusionary process and to have those remain with the project in perpetuity. It also sets the rent restrictions at various income levels to address households at the very low, low and median income levels, assists in meeting the city's RHNA allocation, and supports Goal 5 of the Housing Element which aims to produce affordable units. Staff does have concerns that in the post-Palmer case era, there will be fewer opportunities to secure BMR units on an inclusionary basis. Alternative 2 accepts the $4.5 million in lieu fee and places $1,041,421 in the Lower Income Housing Fund (LIHF) for general allowable Lower Income Housing Fees. The remaining $3,458,000 would be set aside in a separate fund for a future affordable housing project, preferably one developed by a non- profit housing developer. This alternative is consistent with the city's IZO and takes steps towards fulfilling Goal 6 and Policy 25 of the Housing Element which focus on working with non-profits to develop affordable lower-income housing. It provides funding to the LIHF, which has appropriated $10 million of its current $16 million balance to the Kottinger Gardens project, and staff acknowledges that future opportunities for growing that fund are uncertain. Staff also acknowledges, however, that partnering in the development of affordable housing requires a significant financial involvement by the city and that the success of such an endeavor is uncertain. Alternative 3 also accepts payment of the in lieu fee and places $1,041,421 in LIHF but deposits the remaining $3,458,000 in a special fund to be used for a one-time operating program or capital project, which may include an affordable housing project. This alternative provides the Council with the flexibility to fully evaluate the city's needs, including those related to affordable housing, in allocating these funds as part of its priority setting process, the annual budget or Capital Improvement Program, or any other special process determined to be appropriate. Mr. Bocian presented several slides outlining anticipated rents for the project and their relation to 2014 HUD income limits. He discussed the potential impacts of Alternatives 2 and 3 on the RHNA surplus, which the Council and public may recall was topic of considerable discussion during the recent review of the Housing Element. Assuming removal of the CMA Capital 2 site as discussed at that meeting, the surplus of very and low income units is estimated to be 190 units with this project and 163 units without. While staff does not consider it likely, the potential implications of Alternative 2 or 3 could include the need to rezone an additional site if the state were to reject some of the sites included in Housing Element Update's site inventory. Mr. Bocian presented the staff recommendation as Alternative 1. He explained that the city continues to struggle with the limited amount of affordability in town, which is estimated to include 1,300 units, and future opportunities are likely going to prove difficult. Staff also believes that the anticipated rents at this development are such that if Alternative 1 were not selected, median income households would have a very difficult time living in the development. City Council Minutes Page 7 of 12 September 16,2014