A developer who promised nearly five years ago to build 13 affordable housing units as part of a 131-unit residential complex was able to get out of their commitment by paying the City of Morgan Hill a cash settlement.
City officials say the settlement amount of $2.75 million, paid by developer Monterey Dynasty LLC, will in fact allow the city to leverage enough funding to build up to 40 affordable, or below-market-rate (BMR) homes.
They also noted at the Dec. 7 city council meeting, in support of the settlement proposal, that Monterey Dynasty’s project—known as Diamond Creek—is highly “complex,” and forcing the developer to build the affordable units they promised would make things even more complicated for the city and the builder.
The council approved the $2.75 million settlement Dec. 7 on a 3-1 vote, with Councilman Gordon Siebert in dissent. Mayor Pro Temp Rich Constantine was absent from the meeting.
Siebert said he voted against the settlement, which city staff and the developer have been negotiating for several months, because he thought the city should have gained more out of the deal.
“I thought we should have negotiated for more money, or for some of the units” originally promised by Monterey Dynasty, Siebert said. “This was a good chance to get some units and money.”
Under the city’s Residential Development Control System, developers have to compete for a limited number of annual housing allocations. They do this by adding features to their projects that add points to each development proposal under an established RDCS scoring system. The higher the points, the more likely a project will gain allocations.
One area where developers gain points in the RDCS is by promising to build BMR units (15 points) as a portion of the total units, paying a $300,000 fee per-BMR (12 points) or paying a $150,000 per-BMR fee (6 points). The fee options are paid instead of building the BMRs, and developers can choose which option to submit for competition.
Shortly after Monterey Dynasty submitted its plans for Diamond Creek in 2008, the developer promised to build 13 BMRs (about 10 percent of the project) to gain the maximum points in the BMR category, Morgan Hill Housing Manager Rebecca Garcia told the council Dec. 7.
Diamond Creek, 15685 Monterey Road, when fully built, will consist of 102 rental units and 29 for-sale townhome units. Under the original agreement with the city (from 2013), 10 of the rentals and three of the for-sale units were designated as BMR, according to city staff.
“The project is complicated by the design of ownership, whereby the project requires 102 units to remain rental units for only a period of 10 years,” reads the city staff report.
Diamond Creek began construction in 2010, at a time when the city offered to cut the $150,000 BMR opt-out fee in half due to the recession. Diamond Creek was eligible for this $75,000 per-unit rate at the time, but missed the deadlines, Garcia said.
The first phase of the project is complete, and construction is expected to be finished on the second and final phase by August 2017, according to Richard Liou of Monterey Dynasty.
Under the settlement approved by the council Dec. 7, Monterey Dynasty will now pay almost $212,000 for each of the 13 BMR units they initially promised.
Councilman Larry Carr noted this fee would have given the project only six points under the RDCS scoring system, but instead they gained 15 points by committing to build the BMR units—a commitment the $2.75 settlement erases. Carr asked if Diamond Creek would have scored high enough to gain the allocations if they had paid the lower-scoring fee instead, but city staff didn’t have an immediate answer at the Dec. 7 meeting.
Garcia noted that with the $2.75 million, the city can leverage funds from outside sources—such as state tax credits, the county’s new Measure A affordable housing bond, community development block grants and others—to build about 40 BMR units elsewhere in Morgan Hill.
Furthermore, the settlement relives the city of ongoing “monitoring and compliance” of any BMR units that would have been built at Diamond Creek, Garcia added. That’s helpful due to the “complexities of this project given that it consists of four types of units”—a mix of market-rate, BMR, ownership and rental homes that would have varying restrictions and covenants under the original development agreement.
“Having $211,000 in our housing dollars is a very good thing for us,” Carr said just before the council voted to approve the settlement.
