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5. Provide alternative methods of compliance. Because one of the primary goals of an inclusionary requirement is to make affordable units available in all housing developments, ordinances should require on-site construction of the inclusionary units to the maximum extent possible. However, most jurisdictions have chosen to allow alternatives to on-site production of inclusionary units under certain circumstances. In California, state law requires that alternative methods of compliance be pruvided to develupeis or inclusionary rental housing, although what those alternatives are, and when each alternative is available, is left up to indi- vidual jurisdictions. The law doesn't require alternatives for developers of for - sale housing. Common alternatives include in -lieu fees, off-site construction, land donation, and the acquisition and rehabilitation of existing units. When weighing how to offer to provide some flexibility, alternatives should be appropriately limited to maximize on-site construction. Alternatives should be available where on-site production of units is less feasible, rather than as a default option for all developments. Common mistakes that can lead to inadequate production of actual housing units include setting in -lieu fees too low and failing to establish adequate standards for land donation. Timing is also -a crucial factor in the structure of alternatives. For example, some jurisdictions have required that off-site inclusionary units be completed concurrent with or prior to the development that triggered the inclusionary requirement, or before a certificate of occupancy for that development is issued. Ideally, alternatives should be used only when they will lead to the production of more affordable units than would otherwise be provided on-site, while still being consistent with the ordinance's other goals. In -lieu fees One common alternative is in -lieu fees, which are paid instead of constructing the required affordable units. In -lieu fees are generally paid into a local affordable -housing trust fund that finances the construction of afford- able housing at other locations within the community. Of all the alter- natives, in -lieu fees provide the greatest challenge to achieving inclusionary goals and therefore should be considered carefully and sparingly. Unlike off-site construction and land -dedication alternatives, in -lieu fees don't guarantee a site for the construction of the affordable units. If the amount of the fee is not sufficiently high,the payment may also not produce enough revenue to help produce new affordable units. Without adequate funding and identified locations for their use,the fee revenue could sit unused. TRUE COST: Furthermore, if in -lieu fees don't reflect the true cost of producing on-site units,this may drive most developers to opt for paying the fee rather than producing an affordable unit on-site. Over time,this can frustrate the policy and lead to an insufficient proportion of affordable units being developed. If properly designed, an in -lieu fee option can have advantages in certain jurisdictions. In -lieu fees can enable a jurisdiction to leverage state and federal funds that may not have otherwise been available, allowing for more affordable units to be built than would have been created on-site. IN -LIEU ADVANTAGES: It can also provide flexibility to produce needed units that the inclusionary requirement is not producing, such as extremely low- income units; use funds to preserve existing affordable housing with expiring deed restrictions; produce rental units in places where the inclusionary requirement is primarily creating for -sale units (or vice versa); or develop affordable units in parts of the city where development isn't happening and thus the inclusionary requirement is having no impact. If allowed,the fee amount should be set at a level comparable to the cost of producing a similar unit to the one that otherwise would have been provided on-site. One of the most common methods for determining the fee amount is to base it on the gap between the affordable -housing and market -rate costs. For example, if it costs $300,000 to produce a low-income unit but the rent only covers the financing on $230,000,then the in -lieu fee would be set at $70,000 to cover the difference. The amount of an in -lieu fee will need to change over time to reflect changes in construction costs, inflation and other market factors. Therefore, it is better to put the formula for determining the fee amount into an ordinance rather than state the amount itself, since amending an ordinance on a regular basis can be time-consuming, costly and potentially controversial. ADJUSTING THE FEE: The ordinance should specify the mechanism for adjusting the fee over time, such as tying it to increases in the local Construction Cost Index, as San Francisco does. If an ordinance distinguishes between rental and for -sale units in its inclusionary requirements, in -lieu fees should also be distinguished in the same manner to ensure they are an adequate substitute for the provision of on-site units. Off-site construction Allowing construction of inclusionary units off-site can have advantages. For example, a developer may be able to build affordable units more cost- effectively off-site, thus enabling more units to be produced. However, there are also pitfalls that jurisdictions should work to avoid. MEETING CALIFORNIA'S HOUSING NEEDS: BEST PRACTICES FOR INCLUSIONARY HOUSING