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Page - 5 - fees rather than on-site construction. Such past decisions were made at the discretion of the City Council, on the basis of a negotiated Affordable Housing Agreement that sometimes included other benefits such as higher affordable housing fees paid per unit. In addition to affordable units being provided on-site, land dedication and projects using “credits” from other developments have also been accepted. While it was the City’s past practice to apply discretion in whether or not it accepted alternatives to meet IZO requirements, recent changes in state law require the City to rely only on objective standards in the regulation of development projects. Because the existing IZO is permissive and allows for alternative means to satisfy the inclusionary requirement, without any objective criteria for when or whether to accept such alternative, the City may not exercise discretion in approving proposed alternatives that are within the scope of those allowed by the IZO. A copy of the Inclusionary Zoning Ordinance (IZO) is included for reference as Attachment 2. DISCUSSION Below Market Rate (BMR) and Fees As described above, the IZO permits payment of fees, rather than constructing on-site units, and this is the approach proposed by the developer. The developer, City Ventures, has asserted that building the units on-site would not be financially feasible; and to support that claim, City Ventures made available pro-forma information which they allowed to be reviewed by the City’s consultant, Economics & Planning Systems, Inc. (EPS). EPS concurred that based on the financial specifics of this development, and under current economic conditions (particularly the current high-interest rate and high construction cost environment), building six (6) affordable units on-site would not be financially viable for the project. Therefore, for each of the 42 market-rate units, the Affordable Housing Agreement would specify payment of the affordable housing fee in effect at the time of building permit issuance, which effective January 1, 2024, is $51,077, for a total payment of $2,145,234. Pursuant to the PMC, Affordable Housing funds paid to the City may be used for a wide range of projects including support for existing City housing programs that benefit lower-income households; used to fund a future affordable housing project if proposed to or by the City; or to acquire land for construction of a project, among other purposes. While this is a substantial sum, it is nonetheless recognized that the amount is less than the cost to construct six (6) new below-market-rate units that would otherwise have been built. In December 2023, the City embarked on a project to comprehensively update the existing Inclusionary Zoning Ordinance, expected to be complete by approximately August 2024, to, among other changes, incorporate more stringent and objective standards into the IZO. These standards are anticipated to place a much greater emphasis on developers building affordable units. The study will also evaluate an increase to the Affordable Housing Fee to be more commensurate with the actual costs to construct affordable units. To the extent the IZO continues to allow for alternative means of compliance, greater parity between the cost to build on-site units, and the cost of affordable housing fees will discourage developers from choosing to pay the “in-lieu” fees.