TO: ADAM PIRRIE, CITY MANAGER
FROM: BRAD JOHNSON, COMMUNITY DEVELOPMENT DIRECTOR
DATE: SEPTEMBER 8, 2026
Reviewed by:
City Manager: AP
SUBJECT:
Title
INCLUSIONARY HOUSING PROGRAM UPDATE AND POLICY DISCUSSION (FUNDING SOURCE: GENERAL FUND)
Body
SUMMARY
Claremont Municipal Code Chapter 16.036, the Inclusionary Housing Ordinance, requires that new for-sale and rental housing development projects include a percentage of units affordable to low- and moderate-income households, or satisfy the requirement through an in-lieu fee or land dedication. For housing development projects proposing five or six units, a developer may pay the in-lieu fee by right. For development projects proposing seven or more units, the developer must obtain discretionary City Council approval to pay the in-lieu fee, supported by findings that providing the required units on-site would create an unreasonable and unavoidable economic hardship.
The City Council last took substantive action on the Inclusionary Housing Ordinance in September 2021, when it adopted Ordinance No. 2021-04, restructuring the income tiers, and in May 2023, when it adopted the current in-lieu fee schedules. This report provides an update on the current in-lieu fee schedule and is the first comprehensive review of the ordinance's effectiveness since that time. This report also provides updates on the illustrative revenue it generates; the current inventory of inclusionary units; the City’s estimated equity position in restricted for-sale units; and the Inclusionary Housing Fund balance. Staff also recommends that the City Council discuss whether the by-right in-lieu fee option currently available to smaller projects should be extended to housing development projects of seven or more units and provide policy direction to staff.
This study session responds to City Council Objective 5.2, adopted as part of the 2026-28 Council Priorities and Objectives, which directs staff to conduct a study session regarding the effectiveness of the Inclusionary Housing Ordinance and to identify potential amendments to further desired policy outcomes.
RECOMMENDATION
Recommended Action
Staff recommends the City Council:
A. Receive and file the report;
B. Provide policy direction regarding the in-lieu fee approval process for housing development projects of seven or more units; and
C. If warranted, direct staff to prepare an ordinance amending Claremont Municipal Code Chapter 16.036 reflecting the City Council’s direction, for Planning Commission review and future City Council public hearing.
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ALTERNATIVES TO RECOMMENDATION
In addition to the staff recommendation, there are the following alternative(s):
A. Receive and file the program update and take no further action on the in-lieu fee approval process.
B. Provide other direction to staff.
FINANCIAL REVIEW
The staff cost to prepare this report and administer this program is estimated at $10,000 and is included in the operating budget of the Community Development Department.
ANALYSIS
Inclusionary Housing Program Overview
The Inclusionary Housing Ordinance is intended to ensure that the addition of affordable housing units to the City’s housing stock keeps pace with the overall increase in market-rate housing. The ordinance applies to all housing development projects except those of four or fewer units; projects exempt under State law; projects rebuilt after a fire or natural catastrophe under specified conditions; and student or faculty housing associated with educational institutions.
The ordinance requires both rental and for-sale projects to set aside five percent low-income units and ten percent moderate-income units. Density bonus units awarded under the ordinance and Government Code Section 65915 are excluded from the base unit count used to calculate the inclusionary obligation. Where the calculation results in a fractional unit, the developer may either provide a full unit or pay an in-lieu fee proportional to the fraction.
Program History
The City Council first adopted an Inclusionary Housing Ordinance on July 25, 2006, applicable to for-sale (ownership) housing developments only. As originally adopted, the ordinance required fifteen percent moderate-income units in ownership housing developments, with an option allowing developers to instead provide ten percent low-income units, together with the in-lieu fee, off-site unit, and land dedication alternatives described below.
The 2006 ordinance did not include an inclusionary requirement for rental developments. Rental inclusionary requirements were not a feasible option for California cities during much of this time period due to the Court of Appeal’s 2009 decision in Palmer/Sixth Street Properties, L.P. v. City of Los Angeles, which held that locally-imposed inclusionary requirements on rental housing were preempted by the Costa-Hawkins Rental Housing Act, foreclosing such requirements until the Legislature superseded Palmer in 2017 through AB 1505 (Government Code Sections 65850 and 65850.01), which restored cities’ authority to impose inclusionary requirements of up to fifteen percent on new rental units effective January 1, 2018.
On September 28, 2021, the City Council adopted Ordinance No. 2021-04, which established the current two-tier income structure for inclusionary housing. The ordinance established an inclusionary requirement for rental developments for the first time, requiring five percent of units to be affordable to low-income households and ten percent to moderate-income households, consistent with the authority restored by AB 1505. The ordinance also restructured the existing ownership requirement into two tiers: five percent “Claremont low-income” units and ten percent moderate-income units. As part of this change, the City created the “Claremont low-income” category, defined as households earning no more than eighty percent of the area median income. That category was added because the U.S. Department of Housing and Urban Development’s (HUD) federal “low-income” standard for Los Angeles County had compressed to within approximately $1,400 per year of the California Department of Housing and Community Development’s (HCD) moderate-income standard, which under the prior ordinance methodology, could provide an affordable sales price roughly $260,000 lower for a low-income buyer than a moderate-income buyer with nearly identical income.
Before the 2021 update, the in-lieu fee was a flat $121,782 per inclusionary unit. Following the 2021 restructuring, the City Council engaged Keyser Marston Associates (KMA) to prepare an updated nexus study, and on May 23, 2023, adopted the current in-lieu fee schedule, which established a per-square-foot, sliding-scale basis by project size rather than as a flat per-unit fee.
Current In-Lieu Fees Schedule (Adopted May 23, 2023)
The in-lieu fee schedule below was adopted by City Council resolution on May 23, 2023, based on the KMA nexus study, and is expressed as a dollar amount per square foot of total saleable or leasable area in the residential project. Amounts are in 2023 dollars and are adjusted annually based on the change in new home prices in Los Angeles County as published by the Real Estate Research Council of Southern California, with a full re-evaluation required every five years.
The 2023 update was intended to correct a structural problem with the prior flat $121,782 fee. Because that amount was well below the actual cost of subsidizing an affordable unit, developers had a financial incentive to pay the in-lieu fee rather than construct the unit on site. As KMA's nexus study explained, the affordability gap between achievable market rate sales prices or rents and the affordable sales prices or rents the City required had grown to the point that it “incentivized developers to pay the in-lieu fee instead of providing affordable units.” The foundational premise of the 2023 fee schedule is that the in-lieu fee should correspond to this affordability gap, so that paying the fee approximates the actual cost of producing and discounting an on-site affordable unit, rather than offering a below-cost buyout of the inclusionary obligation. Under the current schedule, a developer choosing between the two paths is choosing between two options of comparable value to the City, rather than a low-cost fee versus a comparatively expensive unit. Whether on-site production or fee payment better serves the City's housing goals in a given case is a separate policy question, addressed further in the Policy Discussion section below.
|
Number of Units |
Ownership Housing ($/SF) |
Apartment Development ($/SF) |
|
5 |
$3.00 |
$1.54 |
|
6 |
$6.00 |
$3.09 |
|
7 |
$9.00 |
$4.63 |
|
8 |
$12.00 |
$6.18 |
|
9 |
$15.00 |
$7.72 |
|
10 |
$18.00 |
$9.26 |
|
11 |
$21.00 |
$10.81 |
|
12 |
$24.00 |
$12.35 |
|
13 |
$27.00 |
$13.89 |
|
14 |
$30.00 |
$15.44 |
|
15 |
$33.00 |
$16.98 |
|
16 |
$36.00 |
$18.53 |
|
17 |
$39.00 |
$20.07 |
|
18 |
$42.00 |
$21.61 |
|
19 |
$45.00 |
$23.16 |
|
20 |
$48.00 |
$24.70 |
For projects above 20 units, the $48.00/SF (ownership) and $24.70/SF (apartment) rates continue to apply. Where the inclusionary calculation results in a fractional unit, the fractional in-lieu fee is calculated separately on a per square foot of one unit basis; for example, a 0.9 fractional moderate-income unit in a for-sale project currently carries an in-lieu fee of approximately $541,630, versus roughly $157,500 under the pre-2023 fee schedule.
Illustrative In-Lieu Fee Revenue by Project Size
The examples below illustrate the total in-lieu fee that would be generated if a project elected to pay the fee in full, using the KMA prototype average unit sizes: 1,880 SF for for-sale housing, and 958 SF for rental housing. Actual fees would depend on the project’s actual total market rate saleable or leasable area and unit mix. These figures are for illustration only.
Ownership Housing Development (Townhome Prototype, 1,880 SF Average Unit Size)
Apartment Development (958 SF Average Unit Size)
Relationship to State Density Bonus Law
CMC Section 16.036.030.D excludes density bonus units awarded pursuant to the Inclusionary Housing Ordinance and Government Code Section 65915 from the base unit count used to calculate a project’s inclusionary housing obligation. Accordingly, a developer is not required to provide additional inclusionary units as a result of receiving density bonus units. This provision, however, is distinct from the separate policy question of whether a development that satisfies its inclusionary housing obligation through payment of an in-lieu fee remains eligible to receive a density bonus.
Under Government Code Section 65915, a density bonus, along with the associated incentives, concessions, and reduced parking standards, is awarded in exchange for an applicant's agreement to construct a specified percentage of units affordable to very low-, low-, or moderate-income households (for common interest developments) as part of the housing development. Because eligibility is tied to the actual construction of on-site affordable units rather than to payment of a fee, a developer who satisfies the City's inclusionary obligation entirely through the in-lieu fee, without providing any on-site affordable units, would not independently qualify for a State density bonus on that basis.
A developer who instead provides the inclusionary units on site, at or above the applicable State Density Bonus Law thresholds, would be eligible for both the local inclusionary credit and the State density bonus for the same units. This dynamic was part of the original 2006 policy rationale for the ordinance: providing the affordable units on site was intended to be the more financially advantageous path once the value of the density bonus and companion incentives were taken into account, which tempered, without eliminating, the risk that easing the in-lieu fee approval process would shift larger projects away from on-site production.
Findings Required for a Discretionary In-Lieu Fee
To approve a discretionary in-lieu fee for a development project of seven or more units, the City Council must currently be able to make all the following findings, with the burden of proof on the developer:
• The project complies with all requirements of the Administrative Manual.
• Providing the units on site or through land dedication would create an unreasonable and unavoidable economic hardship, after considering feasible financial, design, or development alternatives that would mitigate that hardship.
• The developer has explored and exhausted options to reduce development costs or to fund on-site units, including low-income housing tax credits, below market rate government financing, tax-exempt bond financing, and other available government programs.
Even where the City Council can make these findings, it retains discretion to deny the request and require on-site units or land dedication instead, unless doing so would constitute a taking without just compensation.
Equity Share Agreement
For-sale inclusionary units are subject to a recorded equity share agreement and second deed of trust. On resale, the seller repays the City's original principal contribution plus a declining share of appreciation, phased out entirely after thirty years:
|
Resale Timing |
City Repayment Owed at Resale |
|
Before 10-year anniversary |
City principal + 100% of City share of appreciation |
|
10 to 15 years |
City principal + 80% of City share of appreciation |
|
15 to 20 years |
City principal + 60% of City share of appreciation |
|
20 to 25 years |
City principal + 40% of City share of appreciation |
|
25 to 30 years |
City principal + 20% of City share of appreciation |
|
After 30 years |
City principal only |
Illustrative Equity Share Example
The following hypothetical example illustrates how the City's equity share works for a single for-sale inclusionary unit, using figures from the KMA prototype three-bedroom townhome unit (market-rate value of $802,000 at initial sale). It assumes the unit is later resold for $950,000; actual resale prices and timing will vary by unit and market conditions, so this example is illustrative only and does not reflect any specific project or unit.
|
|
Moderate Income Unit |
Claremont Low Income Unit |
|
Market Rate Value at Initial Sale |
$802,000 |
$802,000 |
|
Affordable Sales Price Paid by Buyer |
$257,400 |
$130,300 |
|
City Principal (Market Value less Affordable Price) |
$544,600 |
$671,700 |
|
City Share of Appreciation Ratio (Principal / Market Value) |
67.9% |
83.8% |
|
Assumed Resale Value (Illustrative) |
$950,000 |
$950,000 |
|
Appreciation Since Initial Sale ($950,000 less $802,000) |
$148,000 |
$148,000 |
|
City's Dollar Share of Appreciation |
$100,500 |
$123,955 |
Applying the resale timing schedule from the Equity Share Agreement above, the City's total repayment (principal plus its applicable share of appreciation) would vary as follows, depending on when the unit is resold:
|
Resale Timing |
City Repayment - Moderate Income Unit |
City Repayment - Claremont Low Income Unit |
|
Before 10-year anniversary |
$645,100 |
$795,655 |
|
10 to 15 years |
$625,000 |
$770,864 |
|
15 to 20 years |
$604,900 |
$746,073 |
|
20 to 25 years |
$584,800 |
$721,282 |
|
25 to 30 years |
$564,700 |
$696,491 |
|
After 30 years |
$544,600 (principal only) |
$671,700 (principal only) |
This example illustrates why the City's realized equity position declines the longer a unit remains with its original purchaser. The City always recovers its original principal contribution, but its share of any appreciation phases out on a sliding scale and is eliminated entirely after thirty years. It also illustrates why the Claremont low-income tier, which involves a larger gap between market rate value and the affordable sales price, produces a substantially larger City principal and equity position per unit than the moderate-income tier, all else being equal.
Program Status
As of September 3, 2026, the City’s inclusionary housing inventory is as follows:
|
Unit Type |
# of Units |
City Principal Position |
Est. City Equity Position |
|
Rental - Low Income |
0 |
0 |
N/A (rental, no equity share) |
|
Rental - Moderate Income |
16 |
0 |
N/A (rental, no equity share) |
|
For-Sale - Very-Low Income (In-perpetuity) |
4 |
0 |
N/A (In-perpetuity, no equity share) |
|
For-Sale - Claremont Low Income |
0 |
0 |
$0 |
|
For-Sale - Moderate Income |
40 |
$7,746,000 |
$2,532,000 |
|
Total |
60 |
$7,746,000 |
$2,532,000 |
The estimated total of the City’s principal and equity position in all Inclusionary units is $10,278,000.
The City's equity position in for-sale inclusionary units reflects the City's principal contribution at initial sale (the gap between fair market value and the affordable sales price) plus the City's share of any appreciation since original sale, per the schedule above. This position is only realized as cash to the City upon resale of a unit; while a unit remains owner-occupied by the original qualifying purchaser, the City's interest is a recorded but unrealized equity interest secured by a second deed of trust.
Inclusionary Housing Fund Balance
The Inclusionary Housing Fund receives all in-lieu fees collected under CMC Chapter 16.036, along with the City's equity-share repayments upon resale of restricted for-sale inclusionary units. As of September 3, 2026, the Fund balance is $613,638. The City also anticipates receiving approximately $1,700,000 in in-lieu fees from the Taylor Morrison Park View development, and $180,000 from City Ventures American Avenue development. With those fees, the projected total is approximately $2,493,638
The timing of the in-lieu payments depends on each project’s development schedule. One-half of the in-lieu fee must be paid prior to the issuance of a building permit for the project; the remainder of the fee is paid before a certificate of occupancy is issued for any unit in the project. The Taylor Morrison Park View project is anticipated to apply for Building Permits during 2026-27 and receive a certificate of occupancy for the first unit in 2027-28.
Consistent with CMC Section 16.036.080, Inclusionary Housing Fund monies may be used to increase and improve the supply of housing affordable to moderate-, low-, and very low-income households in the City, including rental assistance, pre-development loans, and assistance to housing development corporations or other government entities, as well as reasonable administrative costs of administering the ordinance.
Impact of a Unit Resale on the Fund
When a restricted for-sale inclusionary unit is resold, the City’s equity share repayment (City principal plus its applicable share of appreciation, per the Equity Share Agreement schedule above) is deposited into the Inclusionary Housing Fund and becomes available for the purposes described above. Using the illustrative Equity Share Example above (a moderate-income unit resold in the 10-to-15-year window for $950,000), a single resale could add approximately $625,000 to the Fund.
A Claremont low-income unit resold under the same illustrative assumptions would add between $671,700 and $795,655, depending on resale timing, reflecting its larger City principal. Because equity share repayments are one-time events tied to individual resales rather than a recurring revenue source, they should be treated as opportunistic additions to the Fund rather than budgeted or relied upon in any given fiscal year.
Policy Discussion Item: By Right In Lieu Fee for Projects of Seven or More Units
The Ordinance currently allows developments of five or six units to pay the in-lieu fee by right, while developments of seven or more units must obtain discretionary City Council approval and satisfy the economic hardship findings described above. Staff is bringing forward, for City Council discussion and direction, the policy question of whether to extend by-right treatment to projects of seven or more units, thereby removing the discretionary findings requirement for those larger projects.
Beyond the discretionary hearing itself, the current process is staff-intensive because of the administrative work required to manage the initial sale of each on-site affordable unit. This includes marketing the unit, verifying buyer income eligibility, coordinating with the Administrative Manual's qualification process, and preparing and recording the inclusionary housing agreement, equity share agreement, and second deed of trust for every restricted unit produced. A by-right fee removes this administrative burden entirely for units paid out through the fee rather than built, simplifying the process for both staff, who no longer need to administer the sale and recordation process for those units, and the applicant, who no longer needs to market and sell a restricted unit alongside its market rate units or prepare the pro forma and financing documentation needed to support a discretionary hardship finding.
Because the 2023 fee update was designed to align the fee with the actual affordability gap, a by-right in-lieu fee would be expected to generate a more predictable, steady stream of revenue for the Inclusionary Housing Fund.
This change would not eliminate the incentive to build on-site. As discussed under Relationship to State Density Bonus Law section above, a developer who elects the fee instead of building on-site already forgoes eligibility for a State density bonus, along with its associated incentives and parking reductions. That tradeoff is independent of the discretionary finding’s requirement, so it would continue to encourage on-site production even if the fee were made by-right.
Unlike an on-site unit, which benefits a single qualifying household selected through the initial sale process, in-lieu fee revenue gives the City Council discretion each year over how those dollars are deployed under Section 16.036.080, including rental assistance, ADU grants and loans, pre-development loan funds, and assistance to housing development corporations or other government entities, potentially spreading the benefit of a single project's inclusionary obligation across more households than a single on-site unit would reach.
Options for Council Direction
• Option A: Maintain the current structure. Keep the by-right threshold at five to six units and require discretionary findings for projects of seven or more units.
• Option B: Extend the by-right treatment to all project sizes. Amend Section 16.036.040.A to allow the in-lieu fee by-right regardless of project size, eliminating the discretionary findings requirement entirely. This would require directions to staff to prepare an ordinance amending Claremont Municipal Code Chapter 16.036 reflecting the City Council’s direction, for Planning Commission review and future City Council public hearing.
RELATIONSHIP TO CITY PLANNING DOCUMENTS
Staff has evaluated the agenda item in relationship to the City’s strategic and visioning documents and finds that it applies to the following City Planning Documents: Council Priorities, Sustainable City Plan, Economic Sustainability Plan, General Plan, and the 2026-28 Budget.
CEQA REVIEW
This item is not subject to environmental review under the California Environmental Quality Act (CEQA).
PUBLIC NOTICE PROCESS
The agenda and staff report for this item have been posted on the City website and distributed to interested parties. If you desire a copy, please contact the City Clerk’s Office.
Submitted by: Prepared by:
Brad Johnson Alex Cousins
Community Development Director Senior Management Analyst