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SLO wants more affordable housing. So it made it cheaper to build smaller homes

View of San Luis Obispo.
View of San Luis Obispo. File photo

The San Luis Obispo City Council hopes to spur construction of smaller-sized, more affordable homes to address the local housing crunch with a new policy unanimously passed Tuesday adjusting developer impact fees.

The new fees — assessed to new homes to help pay for services including water, wastewater, roadways, public safety and parks — are designed to increase costs for larger-scale homes but drop for smaller builds.

"It seems to me that this is the pedal-to-the-metal moment to create any kind of inclusivity and affordability in this community," Mayor Heidi Harmon said. "(The local housing situation) is heartbreaking, and I feel super emotional about it actually."

The new policy still must be formally adopted in a second reading of a new ordinance.

A new housing project in San Luis Obispo of more than 600 residential units and 29,000 square feet of commercial space is proposed for 1150 Laurel Lane and the adjacent 1160 property, which was the Crux Gym.

The new general cutoff for fee reductions is homes built under 1,400 square feet, though fees related to water and wastewater are lowered for homes under 1,200 square feet.

The city's policy had been to assess the same impact fees for larger and smaller homes, and council members believed developers weren't discouraged from constructing larger, more expensive homes.

Harmon has repeatedly said she believes bringing down housing costs will create a more economically and racially diverse community, which she's striving to achieve, and fees are a critical piece in doing so.

"I don’t want to be the leader of an all-white, rich, older, affluent, exclusive community," she said.

As an example, developers of a new single-family home of 1,100 square feet on the city's southern end would pay $33,064 in impact fees, while an 1,800-square-foot home would be charged $39,688, according to city officials.

Under the existing fees, the two homes would both incur $38,617 in fees.

Within the overall fee structure, the council also created a tiered scale related to transportation, parks and police that reduce fees for homes by scale between 1,400 and 700 square feet, with a flat fee of $12,268 for units up to 699 square feet. Homes above 1,400 square feet would pay $17,395 for the same fee categories within the overall cost structure.

"We need greater affordability," Councilman Aaron Gomez said. "If we don’t figure that out, the housing development side of things, our community will look very different than it has — and it already does. We see this on a daily basis. What we were 10, 20, 30 years ago, it’s a very different community now."

The Housing Authority of San Luis Obispo (HASLO) plans to build 36 affordable-housing units off Prado Road near the South Hills Open Space.

However, Councilman Dan Rivoire, while supporting the plan, expressed some concern about how directly the fees will affect housing prices.

"I live in a 680-square-foot home that I rent and that I would hope to buy, but it's pricing at $650,000 on a tiny lot," Rivoire said.

Rivoire expressed concern that some new development would be faced with higher costs based on the new fee schedule.

Development impact fees are assessed differently between the various categories. For example, fees related to road infrastructure carry a higher cost than public safety fees.

One of the overarching goals of the change was to make the fee schedule more consistent by eliminating most differentiations between charges in different parts of the city.

While development fees overall are increasing, the new transportation-specific fee is decreasing by 11 percent.

However, the burden of paying for water and wastewater costs will include a shift of some costs to ratepayers, with the removal of $22.7 million and $10.9 million in capital infrastructure for water and wastewater, respectively, from the existing fee program.

Over the past year, the City Council has reviewed its comprehensive fee structure leading up to this week's decision.

The city's research showed that about $360 million is needed to help pay for projects associated with the fee schedule, and the maximum amount the city could currently charge in development impact fees is $209 million.

The total amount expected to be recovered through the city's new development impact program is $146 million., according to a city staff report.

The rest of the needed infrastructure costs would have to be made up from other sources, including developer agreements, General Fund money and potentially sales-tax dollars.

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