Morgan Hill

City Council Staff Report
No Action Taken
May 2, 2018 7:00 PM



Department:DS (General)Sponsors:



1a.       Should the City place increased priority upon the production of affordable housing units at assigned income levels by increasing affordability goals within the existing Residential Development Control System (RDCS) process, and by making modifications to the current RDCS process?


1b.              Should the City eliminate RDCS multi-year allotment award consideration until housing affordability can be better aligned to meet State targets and the City can develop a comprehensive approach to satisfying the Housing Accountability Act (HAA).


2.            Should the City consider adopting an Inclusionary Housing Ordinance?


3.            Should the City consider eliminating/reducing impact fee requirements on Accessory   Dwelling Units (ADUs)?


4a.              Should the City consider locking impact fees for 100% affordable projects at RDCS application, at time application is deemed complete or at construction permit application, as well as exempting all affordable rental housing projects, not just 80% and below, from sub-metering requirements?


4b.              Should the City develop housing product criteria within the proposed Block level masterplans and the Mixed-Use Flex specific plan/form-based code areas along Monterey Road to assist with construction of Moderate Income workforce housing units and above moderate (120%-150% AMI) units to serve the “missing middle”?


5.            Should the City consider adopting a commercial linkage fee on new industrial/commercial projects?



Silicon Valley has long had an affordable housing challenge, but the latest economic boom has created what many have called a “housing crisis” statewide. Market-rate housing is unattainable for those most in need, and it has become increasingly out of reach for the middle class. This impacts renters and homeowners, service workers and tech employees, homeless individuals and families, and everyone in between. Although the City has various programs and policies designed to obtain affordability, the purpose of this report is to receive input from the City Council about additional ideas which could be considered to build a better strategic framework for achieving the City’s RHNA affordable housing goals. These ideas require specific policy direction. Addressing these policy issues may involve certain trade-offs and updates to existing housing programs. Staff has developed an initial menu of considerations which could potentially increase production and is seeking direction from the Council to confirm approach. Based upon Council input, a framework and future action items may require meetings with the development community as well as housing advocates prior to returning to the City Council for consideration. No formal action is requested at this meeting.


Informing the Discussion:  Key Facts and Information

This subsection of the staff report provides key facts and information to help inform the discussion and Council’s deliberation. It may prove helpful to start the discussion by providing a reminder of who it is that affordable housing serves. “Affordable housing” is used to describe housing that is affordable to households in specified income categories, typically from the Extremely Low-Income up to the Moderate-Income categories. Additionally, “affordable housing” is deed-restricted to ensure the housing cost is affordable to families in those income categories, usually for 55 years or more. Table 1 below summarizes the various income categories as well as the maximum housing cost that a household can afford to rent or to buy without experiencing a housing burden, defined as spending no more than 30 percent of household income on housing costs. Table 1 also includes a row for Above Moderate-Income to help inform the discussion on middle-income housing and homeownership often referred to as the “missing middle”.


Table 1—Income Categories and Limits and Associated Maximum Housing Costs


Income Categories


1 Person


2 Persons


3 Persons


4 Persons



Income Limit


Max Rent/ Max Price


Income Limit


Max Rent/ Max Price


Income Limit


Max Rent/ Max Price


Income Limit


Max Rent/ Max Price

Extremely Low (ELI)

0% up to 30% AMI





















Very Low (VLI) 30% up to 50% AMI





















Low (LI)

50% up to 80% AMI





















Median 100% AMI

















Moderate (MOD) 80% up to 120% AMI





















Above Moderate (MOD)

120% up to 150% AMI





















*  2017 HCD State Income Limits

Santa Clara County (SCC) Area Median Income is $113,300.00


Data from CoreLogic reports the median price of a home in Santa Clara County is up 27.8 percent since February 2017; $1.08 million. To afford a median priced home, a purchaser needs an annual income of over $200,000 assuming a 5% down payment ($49,425) and minimal debt (using Zillow’s affordability calculator). The median price of homes currently listed in Morgan Hill is $949,000 (as of February 28, 2018) while the median price of homes that sold in February 2018 is $889,100 for a single-family home. Morgan Hill home values have gone up 15.0% over the past year and Zillow predicts they will rise an additional 7.5% within the next year (Zillow data through March 31, 2018). For apartments, the average rent for a 1-bedroom in Morgan Hill is $1,770/month, $2,462/month for a 2-bedroom, $3,048/month for a 3-bedroom and $4,135/month for a 4-bedroom (Rentometer). However, these rents are averages for all apartments regardless of age, amenities, or location. New apartments rent for higher prices. As a result, there are more households than ever experiencing a housing burden (e.g., spending more than 30 percent of household income on housing costs), more employees being priced out of the City, more commuters forced to commute in heavier traffic, increased traffic congestion, and more at risk and homeless persons in our community.


Workforce housing is a term that is increasingly being used by employers and organizations concerned with housing policy. Workforce housing can refer to any form of housing, including ownership of single or multi-family homes, as well as occupation of rental units. Workforce housing is generally understood to mean affordable housing for households with earned income that is insufficient to secure quality housing in reasonable proximity to the workplace, which is a commonplace situation in today’s market. With each passing year the term “Affordable Housing” continues to morph into a movement that has captured the attention of the community and policy makers at large. Advocacy groups continue to educate the community about the need for housing, and the link between housing and other quality of life outcomes, including education, health, transportation, and the environment. Ultimately, families of all incomes need affordable homes - homes that are decent and accessible to jobs, shopping, and other services, and available at a cost that allows them to provide for life’s other necessities, such as food, clothing, and medical care.


The Rise of State Housing Policy

During the February 7, 2018 City Council meeting, the Housing Team provided an update to the City's Housing Program and discussed new 2017 housing legislation impacts. Responding to this crisis statewide, lawmakers introduced more than 130 bills during the 2017 legislative session; many focused on constraining local land use authority or eliminating local discretion to increase supply. In the past decade, there has been an average of 80,000 homes a year built in California, which is 100,000 units below what's needed to keep pace with population growth through 2025, according to a California Department of Housing and Community Development Report (see link).


Fifteen bills were approved as part of a “housing package,” and were all subsequently signed by Governor Brown. These bills are intended to make significant changes to the local land-use process and spur the production of housing in the State. In total, these bills reinforce the State’s position that the housing crisis requires local cities to create their “fair share of” new housing and should be accountable to create that housing at each designated income level. This represents a shift in State policy, with several mechanisms to incentivize as well as punish cities which fail to produce. As an incentive, for the first-time cities will be able to count “newly” constructed accessory dwelling units towards their affordable inventory goals if a survey of studio rentals in the area demonstrates an “affordable rental” level.


The most notable punitive measure is SB 35, which entitles developments with 50% affordable units (10% in cities not performing as well as Morgan Hill) to streamline permitting if the jurisdiction is failing to meet their affordability numbers in any affordability category. HCD makes its SB 35 determinations annually and while it is unlikely that Morgan Hill projects with 10% affordable units could become eligible for streamlined permitting under current law, given the trend in legislation, it is important that the City establish policies to improve housing production. Historically cities have had authority to reject projects for reasons other than objective standards. Other changes include for example, in the past a city could, and many times would, reject a project because it did not fit the feel or character of the community or felt too dense, especially after considering neighborhood input. Today a developer could have cause to go to court and compel a City to grant a permit if it meets zoning and objective development standards in the code. In addition, State Housing and Community Development (HCD) has been given a greater auditing and reporting role in measuring local cities affordable production success and can report non-performing communities to the Attorney General for compliance actions.


It is unclear how SB 35 would impact the City’s RDCS ordinance. We believe it is most likely that a project would have to meet the minimum Residential Development Growth Control System (RDCS) point score, which is based on objective criteria. However, we may not be able to restrict the timing and number of allotments issued to a 50% affordable project that meets the minimum RDCS score.


The 2017 package also recognized that the State’s single greatest source of affordable housing financing was historically provided through redevelopment agencies, which the Governor eliminated in 2011, and some source of state funding is necessary to take its place. Although the legislature understands that the lack of funding for affordable housing is the most critical barrier to building units, cities will continue to be held accountable for producing units. The 2018 legislative year continues this trend with no less than 200 proposed housing bills, with many proposing to increase local production, remove barriers to development and increase accountability (Sample List of Proposed Housing Bills 2018 attached.)


Summary of a Menu of Housing Policies and Programs for Consideration

Consistent with Council’s request at the February 7 meeting, this report suggests a menu of strategies to increase the supply of affordable housing including actions which would require changes to the City’s RDCS. Keyser Marston Associates, Inc. (KMA) was enlisted to assist the Housing Team identify potential ways to increase the supply of affordable housing (see attached KMA Housing Report 2018). Each of these issues seeks to respond to an important housing need. However, it is important to consider them holistically in order to develop a rational, coherent, affordable housing strategy. Trade-offs may need to be made, as satisfying one policy goal may impact the ability to achieve another policy goal.


1. Should the City place increased priority upon the production of affordable housing units by modifying the RDCS process?


Morgan Hill’s Housing Program

The City’s Residential Development Control System (RDCS) is Morgan Hill’s voter-approved growth management system that limits the total amount of new population as well as the pace of new residential construction and encourages high-quality development that enhances residents’ quality of life. The RDCS was first established in 1977 and has been extended and modified multiple times by voters since then. It has continued to serve as a tool to respond to diverse housing needs by implementing various policies to improve, preserve, and create safe quality rental and ownership housing in Morgan Hill for residents at all income levels. The City’s housing portfolio consists of 14,415 housing units, of which 1,682 are affordable and deed restricted. Although the City of Morgan Hill has proudly produced a significant amount of affordability per capita, with one in every eight homes being affordable, it remains challenged to respond to the new legislation that requires deeper levels of affordability be produced in accordance with RHNA goals. The following summarizes the City’s RHNA production to date, followed by ideas/strategies to increase production and their impact upon Morgan Hill.


Regional Housing Needs Allocations (RHNA)

State law requires each local government in California to adopt a Housing Element as part of its General Plan demonstrating how the community plans to meet the existing and projected housing needs of people at all income levels. The current Housing Element, focused on 2015-2022, has three strategic goals: (1) provide an adequate supply of housing to meet future needs, (2) preserve the existing housing supply, and (3) provide adequate housing for groups with special needs. The Regional Housing Need Allocation (RHNA) is the number of new dwelling units that a city is "assigned" to produce in a Housing Element cycle. It is determined by state HCD, and in collaboration with the Association of Bay Area Governments (ABAG), the numbers are distributed to individual cities based on State population projections and local conditions.


The City of Morgan Hill has historically met its “gross” housing production numbers but has never been able to meet production as a function of affordability level. For the current eight-year cycle (2015-2022), Morgan Hill’s RHNA allocation is a total of 928 units, of which 66% of those units are required to be at Moderate Income levels or below. The City has to-date permitted 1,111 total units during the period and met and exceeded requirements for both market rate and low-income units, producing more than double the number of market rate units required. Measure “S” allows a maximum of 215 units annually or 1,720 total to be permitted citywide during the 8-year cycle.


As of the most recent 2017 annual reporting period, the City needs to produce 402 more affordable units to meet the goals for this RHNA cycle. The 402-unit deficit is distributed as Extremely Low (116 units), Very Low (117 units) and Moderate (169 units). However, it is important to note that there are an additional 71 affordable units pending that have been pledged through RDCS to be permitted in this RHNA cycle, including secondary dwelling units, the recently approved UHC 39-unit project, and the traditional BMR rental and ownership pledges. Although these 71 units have not been reported to the State since permits have not yet been issued, if they are constructed, they will be counted in this 2015-2022 cycle. If all these projects begin construction of their affordable units, this respectively reduces the total number of affordable units needed in this cycle to 331 units. If the City was to attempt to aggressively pursue all strategies to meet its affordable RHNA goals, significant efforts would need to be made to align the RHNA cycle and RDCS Program with the 331 affordable units being awarded in the 2019 and 2020 RDCS competition years to get the required number of units under construction by 2022. This projection cautiously includes projects that have been awarded allotments to date. Any consideration of multi-year allotments is not factored in at this time. To receive credit from State HCD in this housing element cycle, units will need to have construction permits issued by 2022. If the 331 are set aside for affordable projects within the existing RDCS structure it would severely limit the availability of market rate allocations with the Measure S, 215 annual permit cap. As further background, the following tables provide the historical and current cycle status of local housing production (building permits) compared to the City’s Regional Housing Needs Allocation (RHNA) obligation.


2007-2014 Regional Housing Needs Allocation (RHNA) Numbers


Income Level

RHNA # Allocated to MH

Total Permits Issued

% Met

Very Low Income up to 50% AMI



31% (-219)

Low Income 51% to 80% AMI



40% (-149)

Moderate Income 81%-120% AMI



17% (-203)

Above Moderate Income more than 120%



257% (+786)




Achieved 116% of Total Unit Goal and 30% of Affordable Unit Goal



2015-2020 Regional Housing Needs Allocation (RHNA) Numbers


Income Level

RHNA # Allocated to MH

Permits Issued 2015

Permits Issued 2016

Permits Issued 2017

Total Permits Issued to Date

% Met

Very Low Income up to 50% AMI






15% (-233)

Low Income 51% to 80% AMI






103% (+5)

Moderate Income 81%-120% AMI






9% (-169)

Above Moderate Income more than 120%






283% (+579)







Achieved 120% of Total Unit Goal to Date


Achieved 35% of affordable units to date (215 permitted out of 612 required)


An additional 402 needed by 2022


Note: The Housing Element Planning Period for Bay Area jurisdictions runs from January 31, 2015 through January 31, 2023 (8-years).


As the Council is aware, regional job growth generally factors into the regional housing needs allocation (RHNA) and housing experts expect a larger allocation assignment for the future 2024-2031 cycle because of the regional job growth that has occurred since the recession, the State’s ongoing Housing crisis and the relationship to housing the workforce. In addition, recent legislation requires the State Department of Housing and Community Development to conduct a one-time “catch up” assessment of the State’s housing needs prior to preparation of numbers for 2024-31 housing allocations statewide. Changes implemented by the City now, will have a direct impact upon future RHNA allocations.

Modifying the RDCS Point Structure

The attached KMA report, makes several recommendations related to modification of the point structure of the RDCS to achieve increased affordability outcomes. The RDCS as a tool, may or may not be able to achieve RHNA affordability goals without significant modification. It is clear however, that the City is faced with the need to increase its affordability levels, whether it is through the RDCS points system, via set-a-side categories or a mix of other tools. These formulas would require some evaluation, and any increase in affordability will similarly require an adjustment to the City’s affordable housing impact fee.

Also, the City should consider potentially terminating the “on-going project” allocation award policy and eliminating multi-year RDCS allocation awards until the RDCS can be readjusted to better meet affordability goals and the City can determine whether it needs to increase affordability goals and/or adopt an inclusionary housing ordinance. As it is, any recommendations will need to navigate projects that are considered “on-going” by policy, which are market rate and not affordable.

Modify the RDCS Program to Permit the Development of Targeted 100% Affordable Units, exempting them from the Annual Building Permit Cap – Voter Initiative Required

Like the Downtown residential exemption, the City could consider eliminating 100% affordable projects from the RDCS annual allocation cap of 215 units. This would require Measure S to return to the voters with an amendment. As affordable projects take significant amounts of time to assemble financing and approvals, this would allow the units to be constructed without timing constraints. In addition, given the right location, it is possible, that 100% affordable projects, should they meet City objective code standards, could build outside of RDCS now, under SB 35 which became effective January 1, 2018. If this occurred, by current policy and action, the City Council would adjust the number of allocations available for market rate in the RDCS competition in ensuing years.


2. Should the City consider adopting an Inclusionary Housing Ordinance?


Inclusionary housing policies require developers to set aside a certain percentage of housing units in newly constructed or rehabilitated projects for low- and moderate-income residents. By creating mixed-income developments, people from different socio-economic backgrounds are given the opportunity to access the same services and amenities. With the 2017 passage of AB 1505, cities are now allowed to adopt inclusionary housing requirements for rental housing. With the change to State Law, the City could consider immediately adopting inclusionary requirements for future rental housing to meet, at a minimum, moderate and very low-income goals. This change could combine with RDCS or stand alone. In addition, it would be prudent to limit the current year RDCS cycle to single vs. multi-year applications, or to require that multi-year applications comply with new inclusionary standards in place at the time applications for building permits are received. The attached “Summary of Affordable Housing Inclusionary Policies in Cities in SCC” report summarizes the inclusionary requirements of cities in Santa Clara County. As shown, eleven of the county’s 15 cities have inclusionary programs, with six of the 11 requiring at least 15% of units be affordable.


3. Should the City consider eliminating/reducing impact fee requirements on Accessory Dwelling Units (ADUs)? Encouraging Accessory Dwelling Units “ADUs” (Secondary Units) by Creating a Program and/or Eliminating Fees?

The 2017 Housing Package allows cities to count new accessory dwelling units towards its affordable housing supply for the first time. The law provides credit for newly created units only if a survey of studio rental rates in the city is performed demonstrating that studio rents are serving an identified affordability level. Legislation also relaxed local regulation of accessory dwelling units, including parking requirements, and permitted units in many residential areas with ministerial review only. In addition, cities are now precluded from charging meter and utility connection fees for these units. The City could further encourage development of these housing units by eliminating the payment of impact fees for accessory structures. (SB 831 Wieckowski, currently pending in the Legislature will prohibit cities from imposing fees, impact fees, connection, fees capacity charges or any other fee levied by local agency, school district, special district, or water corporation. It also requires a city to act within 120 days of submission of application or it is deemed approved. The bill allows ADUs on any lot that permits construction of a home.)


4. Should the City consider i) locking impact fees for 100% affordable projects, exempting affordable rental housing projects from sub-metering requirements, and ii) developing housing product criteria for Mixed Use Flex block level masterplans and subsequent specific plan/form-based code areas along Monterey Road to assist with construction of moderate and above moderate-Income workforce housing units?


Locking impact fees for 100% affordable projects at the time of allocation competition application, allocation award or construction permit: Locking impact fee amounts at construction permit application rather than at certificate of occupancy would reduce the cost of developing affordable housing. There is pending legislation (AB 3147 Caballero) that would preclude the levying of new or increased fees after housing development applications are deemed complete. This legislation would apply to all housing projects, not just affordable.


Exempting Affordable Rental Housing Projects from Sub-Metering Requirements: Since 100% affordable projects are generally required to complete both CEQA and NEPA review and pay prevailing wages for construction due to the mix of federal, state and local financing, the City could consider eliminating some impediments to the construction and financing of nonprofit affordable housing projects including amending the municipal code to exempt them from sub-metering. Code Section 13.04.130 requires projects to be sub-metered. This is part of the City’s water conservation program. Nonprofit projects, however, are required to charge rents, including utilities, as a function of income. Separate metering will not result in an individual being charged beyond their income level and becomes a management problem for the nonprofit housing developer. Exempting nonprofit housing from this requirement would reduce the cost of developing affordable housing and eliminate contradictions in management and practice between business operations.


Developing housing product criteria for block-level masterplans and future Mixed-Use Flex specific plan/form-based code areas along Monterey Road to assist with market construction of Moderate Income and “Missing Middle” workforce housing units; provide environmental clearance as an incentive to development. While moderate income (80 – 120%) unit production does receive credit for RHNA, workforce housing, 121%-150% AMI, does not, but is of critical concern to local employers and consistently mentioned each time that the team meets with existing and prospective businesses in the region to discusses business needs. During the Monterey Corridor Mixed-Use Flex, block level plan and subsequent Specific Plan development process attention could be paid to preparing guidance that would present criteria to induce affordability by density, configuration, size, and design.


5. Should the City consider adopting a commercial linkage fee on new industrial/commercial projects?


A commercial linkage fee is a type of impact fee that can be charged based on an assessment impact which new commercial and/or non-residential development – including offices, hotels, retail stores, and industrial space – market rate housing, generates added demand for affordable housing. The nexus study for a commercial linkage fee must demonstrate that new development will create new jobs, and that some of the new workers will make lower wages and need affordable homes or that the new workers will demand services of lower-wage workers who will need to access affordable housing. Several communities in Santa Clara County have adopted such fees, but generally those cities have seen tremendous office growth from the high-tech industry. In this housing production discussion, all options need to be reviewed. However, as Morgan Hill is a housing rich, not jobs rich community, this fee, in addition to other impact fees would create yet another impediment to the City’s desire and efforts to attract good paying jobs to this community and achieve a greater jobs/housing balance.


COMMUNITY ENGAGEMENT: Inform. This report serves to inform the public about the City’s current housing efforts and potential future impacts.



The Council can choose not to move forward with any or all recommendations, and/or direct staff to return with alternatives.



The City Council adopted the County Housing Task Force and Cities Association resolution to affirm the City of Morgan Hill's commitment to affordable housing February 3, 2016, and the Santa Clara County Community Plan to End Homelessness June 17, 2015.



There is no fiscal impact of this report.


CEQA (California Environmental Quality Act): 

Not a Project. This report is for information only.



Meeting History

May 2, 2018 7:00 PM Video City Council Regular Meeting
draft Draft

Housing Manager Rebecca Garcia, along with Assistant City Manager Leslie Little and Debbie Kern with Keyser Marston and Associates, provided the report.

The public comment was opened at 9:18 p.m.

There being no requests to speak, the public comment was closed.