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Below Market Rate (BMR) Information For Housing Developers

Program H-36 of the Housing Chapter of the Comprehensive Plan
Implement the City's "Below Market Rate" (BMR) Program by requiring that at least 15 percent of all housing units in projects of five units or more, be provided at below market rates to very low-, low-, and moderate-income households. Projects on sites of five acres or larger must set aside 20 percent of all units as BMR units.

The City of Palo Alto's BMR program is intended to increase the supply of for-sale housing and rental housing for individuals and families whose incomes are insufficient to afford market rate housing. Since the program was initiated in 1974, 152 for-sale units and 101 rental units have been created. Continued affordability of the units is a major goal of the program. Deed restrictions control the resale price and limit rent increases. Occupancy for BMR units is determined according to City Council guidelines. The Palo Alto Housing Corporation, under contract to the City, has administered the program since its inception. Since the current rates of production of affordable housing in Palo Alto are very low, the BMR program requirement is essential to meet the City's need for affordable housing.

The Palo Alto Below Market Rate ("BMR") Program
Developers of projects with five or more housing units must comply with Palo Alto's BMR requirements. The BMR program objective is to obtain actual housing units or buildable parcels within each development rather than off-site units or in-lieu payments. At least 15 percent of the housing units developed in a project involving fewer than five acres of land must be provided as BMR units. Projects involving the development of five or more acres must provide at least 20 percent of all units developed as BMR units. (Projects that cause the loss of existing rental housing may need to provide a 25 percent BMR component, see Program H-29.) The BMR units must be comparable to other units in the development. For an application to be determined complete, the developer must agree to one or a combination of the following requirements or equivalent alternatives that are acceptable to the City.

For-Sale Units:
For projects with a 15 percent BMR component, the initial sales price for at least two-thirds of the BMR units must be affordable to a household making between 80 to 100 percent of the Santa Clara County median income, taking into consideration all housing expenses such as mortgage payment, taxes, insurance, and association dues. The initial sales prices of the remaining BMR units may be set at higher levels affordable to households earning between 100 to 120 percent of the County's median income. For projects with a 20 percent BMR component, three-fourths of the BMR units must be affordable to households in the 80 to 100 percent of median income range, and one-fourth may be in the higher price range of between 100 to 120 percent of the County's median income. For projects with a 25 percent BMR component, four-fifths of the BMR units must be affordable to households in the 80 to 100 percent of median range, and one-fifth may be in the higher price range of between 100 and 120 percent of the County's median income. In all cases, the sales price should be sufficient to cover the estimated cost to the developer of constructing the BMR unit, including financing, but excluding land, marketing, off-site improvements, and profit.

If the City determines that on-site BMR units are not feasible, off-site units acceptable to the City, or vacant land determined to be suitable for affordable housing construction, may be provided instead. Off-site units should normally be new units, but the City may accept rehabilitated existing units when significant improvement in the City's housing stock is demonstrated.

In-Lieu Payments: If the City determines that no other alternative is feasible, a cash payment to the City's Housing Development Fund, in lieu of providing BMR units or land, may be accepted. The in-lieu payment for projects subject to the basic 15 percent BMR requirement shall be 7.5 percent of the greater of the actual sales price or fair market value of each unit; for projects subject to the 20 percent requirement, the rate is 10 percent; for projects with a 25 percent requirement, the rate is 12.5 percent.

Rental Units:
Developers of rental housing must provide the required percentage of BMR units at affordable rents for occupancy by very low (below 50% of the HUD median income) and low-income households (below 80% of median income). Occupancy, rents, rent increases and other provisions of the BMR rental program are governed by standards approved by the City Council and by project-specific recorded regulatory agreements. Initial rents for new BMR units are established annually by the City. After occupancy, initial rents may be adjusted annually by one-half of the Consumer Price Index Rent Residential or other comparable formula adopted by the City.

In-Lieu Payments: If the City determines that provision of BMR rental units on site is infeasible, it may accept a payment in lieu of such units to the City's Housing Development Fund. The annual payment shall be the difference between the initial affordable rent and the market rate rent of each required BMR unit. If a one-time in-lieu payment is accepted in full satisfaction of the project's BMR requirement, the payment shall be the appraised value of the housing project at market rate rents multiplied by the applicable fee rate. The fee rate is 7.5 percent for a project with a 15 percent BMR requirement, 10 percent for a project with a 20 percent BMR requirement and 12.5 percent for projects with a 25 percent BMR requirement.

Projects with a Condominium Map That Will Be Operated as Rental Housing: No residential condominium map shall be approved without provision for the future sale of BMR ownership units or an equivalent alternative acceptable to the City, even though the project will be initially operated as rental housing.

Open Space (OS) District Projects:
The Open Space district sets a minimum lot size of ten acres. Projects of any acreage with fewer than 10 units or lots must provide a 15 percent BMR component. Projects with more than 10 units or lots must provide a 20 percent BMR component.

Subdivision of Land to be Sold Without Development:
Land that is subdivided into three or more lots and sold without construction of housing must transfer buildable parcel(s) equivalent to 15 percent (or other applicable BMR requirement percentage) of the development to the City or the City's designee. The buildable parcel(s) is to be used for the purpose of developing affordable housing units. The City may sell the buildable parcel(s) with the proceeds placed in the City's Housing Development Fund for future housing development. When the City determines that the transfer of land, or the construction of BMR units within the subdivision, is infeasible, a comparable in-lieu fee payment may be accepted by the City.

Fractional Units:
When the BMR requirement results in a fractional unit (for example: 16 units x 15% = 2.40 BMR units), an in-lieu payment to the City's Housing Development Fund may be made for the fractional unit (the 0.4 unit) instead of providing an actual BMR unit. The in-lieu fee percentage rate shall be same as that otherwise required for the project (7.5 percent, 10 percent, or 12.5 percent). The fee on for-sale projects will be paid upon the sale of each market unit in the project. For rental projects, the fee shall be paid prior to approval by the City of occupancy of the project.

Larger Projects of 30 or More Units: Projects with 30 or more units must provide a whole BMR unit for any fractional unit of one-half (0.50) or larger; an in-lieu fee may be paid, or equivalent alternatives provided, when the fractional unit is less than one-half.

Adjustments, Waivers, Appeals of the BMR Requirement:
Within fifteen days of entering into a BMR agreement with the City for a project, the developer may request a determination that the BMR requirement, taken together with any inclusionary housing incentives, as applied to the project, would legally constitute the taking of property without just compensation under the Constitution of the United States or of the State of California. The burden of proof shall be upon the developer, who shall provide such information as is reasonably requested by the City, and the initial determination shall be made by the Director of Planning and Community Environment. The procedures for the determination shall generally be those described in Chapter 18.90 of the Palo Alto Municipal Code, including the right of appeal to the City Council under Chapter 18.93, or such other procedures as may be adopted in a future BMR ordinance. Notice of the hearing shall be given by publication but need not be sent to nearby property owners. If the City determines that the application of the BMR requirement as applied to the project would constitute a taking of property without just compensation, then the BMR agreement for the project shall be modified, reduced or waived to the extent necessary to prevent such a taking.

For Density Bonuses under Government Code Section 65915 (see Program H-38)

Program H-38:
Adopt a revised density bonus program ordinance that allows the construction of up to three additional market rate units for each BMR unit above that normally required, up to a maximum zoning increase of 50 percent in density. Allow an equivalent increase in square footage (Floor Area Ratio) for projects under this program. The revised density bonus program will meet State standards for the provision of housing units for very low and lower-income renters, seniors and moderate-income condominium buyers in compliance with Government Code Section 65915, et seq.

Given Palo Alto's limited supply of land suitable for housing, the City must encourage housing opportunities particularly if one-fourth of all additional units would be affordable to low- or moderate-income households.

Last Updated: June 16, 2007