The Berkeley Planning Commission is considering recommendations to adjust the inclusionary housing in-lieu fee.

In February 2023, the Berkeley City Council updated the affordable housing requirements, establishing on-site below-market-rate housing requirements and introducing an in-lieu fee payment option. The in-lieu fee calculation changed from per unit to per square foot of Residential Unit Floor Area (RUFA). The initial fee was $56.25 per square foot and will be adjusted biennially based on the California Construction Cost Index. 

At the city's request, Strategic Economics and Street Level conducted a study to analyze these fees and recommend updates, considering current economic challenges like feasibility, inflation, and high construction costs. 

The analysis involved three approaches to evaluate the maximum reasonable fee:  

  • Affordability Gap: the capitalized difference in revenues between a market and BMR unit;
  • Production Cost Gap: the difference between the capitalized value of BMR unit revenue and the cost to produce a unit of income-restricted housing; and
  • Local Contribution: the average City of Berkeley contribution to 100 percent affordable projects.

To assess their financial feasibility, the study tested seven hypothetical development prototypes, ranging from small single-family homes to high-rise apartments.

The study’s key findings include:

  • Under current conditions, most rental projects are infeasible, except for a four-story low-rise prototype. High construction and financing costs and slower rent growth are the primary barriers.
  • Small single-family homes and townhomes are feasible but limited by land availability and developer interest. Larger projects, such as 10-unit multifamily buildings, are generally infeasible.
  • Based on the abovementioned approaches, the recommended maximum fees range from $59 to $118 per square foot, with the current fee set at $56.25.

The study says fees are not the main barrier to feasibility today, but are crucial for funding affordable housing.

It concludes with the following recommendations to the planning commission:

  • Maintain the existing $56.25 maximum fee level as the universally applicable fee;
  • Apply a universal in-lieu fee for all residential developments;
  • Exempt the first 5,000 square feet of residential unit floor area (RUFA) for projects paying the full fee and supporting missing middle housing types;
  • Adjust fees biennially using the California Construction Cost Index; and
  • Include a provision in the resolution dedicating 80% of Very Low-Income Units for Section 8 and Shelter Plus Care voucher holders.