Many cities have written these fees as specific dollar amounts in their ordinances. Over time, a fixed fee will drop relative to inflation and the cost of providing affordable housing. Some communities keep fixed fees current by enabling the city council to annually approve a change to the fee calculation, but these yearly approvals can be a challenging source of local controversy. In response, a number of communities have begun to index their fees to allow for regular increases (and potentially decreases) in response to market conditions.
Santa Barbara County, California
Santa Barbara County sets the in-lieu fee for low-income units based on the amount of subsidy that the county must provide to create an offsite affordable unit. This amount is adjusted each year based on the percent change in the median sale price of condominiums in the area over a 12 month period.
Santa Monica, California
Santa Monica annually increases its in-lieu fee based on an index that accounts for annual changes in the cost of construction and local land values.
It is important for cities to be aware of market conditions when they set their inclusionary housing requirements, both for the entire city and for various neighborhoods.
Most cities do not adjust their inclusionary requirements at a neighborhood level. For cities without wide variations in neighborhood market conditions, this may be appropriate because incentives and inclusionary requirements automatically compensate for differences in market conditions. For example, it may be more expensive to build in high-cost neighborhood, but a density bonus is worth more in neighborhoods where home prices or rents are higher.
Some cities, however, have responded to concern about the impact of inclusionary requirements in certain sensitive neighborhoods by varying their requirements or incentives by neighborhood. This is called geographic tiering.
Rather than vary the requirements by neighborhood, some cities vary their requirements based on construction type. These are generally places where local market conditions make higher-density construction economically marginal enough that affordable housing requirements can become a barrier to development.
The decision to vary affordable housing requirements by neighborhood or construction type should typically be made based on the findings of an economic feasibility study. In general, a city may want to pursue these varying requirements if the feasibility study showed that citywide supportable requirements would have an adverse impact on the feasibility of otherwise desirable development in certain areas.
When considering in-lieu fees, it is important to decide if a city wants to always allow developers the option to pay the fee or restrict its use to some developers. Some cities allow an in-lieu fee by right, while others require developers to demonstrate either some net benefit to the city, or a substantial hardship.
Generally, whatever method cities use to arrive at a fee level, they should apply that single fee level to all projects of the same type. Many cities will have different fee levels for rental and ownership projects. Some cities adjust their in-lieu fees based on the size of the development. These cities typically offer a lower fee for smaller projects. Cities often do this because they want to simplify the management of their program by discouraging a pattern where market rate buildings have only one or two affordable units. Also, the economics of smaller developments may be more marginal and a lower in-lieu fee could help make them feasible.