A communication transmitted from City Manager Louis A. DePasquale and Assistant City Manager Community Development Iram Farooq, relative to the Incentive Zoning Nexus and Jobs Linkage Study

Executive Summary

The City of Cambridge established an Incentive Zoning Ordinance in 1988 and amended it in 2015 to require non-residential development projects over 30,000 to make a housing contribution payment to mitigate impacts on the need for affordable housing. As part of the 2015 amendments, Cambridge undertakes a review to update housing contribution levels every three years.

This report provides a nexus study to assist Cambridge in completing this update and conducts a nexus analysis related to establishing an employment contribution similar to the jobs linkage fees in Boston and Somerville. The report quantifies the impact of future non-residential development on the demand for affordable low, moderate, and middle-income housing in Cambridge and the need for training services to allow less skilled Cambridge residents to access jobs at these projects.

It then analyses the proportionate housing contribution rate and employment contribution rate to mitigate these impacts. It also reviews the current Incentive Zoning Ordinance, several policy options and recommends a maximum determined rate for a new employment contribution along with changes to the City’s current housing contribution rate and the Incentive Zoning Ordinance.

Housing Demand. Based on projected new development of 5,840,000 square feet over the next ten years and the likely mix of tenant businesses, 14,863 new jobs are estimated to be generated in Cambridge by this development.

Information on the occupations and earnings of these new employees was combined with data on the distribution of households by size and number of workers as well as survey results on the share of employees who moved to or sought housing in Cambridge when they obtained a job in Cambridge to estimate the demand for new housing units by income level from projected new development and employment.

This analysis projected the need for 722 new housing units to address this demand over the next ten years, including 200 low-income units, 267 moderate-income units and 255 middle- income units1.

Development Costs and Needed Subsidy. A separate analysis of the development costs and needed subsidy for rental and homeownership units was conducted based on 251 ownership units and 471 rental units2. Development costs were estimated based on costs for recent comparable affordable housing projects built in Cambridge.

For rental projects, the needed subsidy was calculated as the difference between total development costs and the amount of debt and equity that could be supported by the housing cash flow using affordable rents at 30% of household income and comparable operating costs.

For ownership projects, the needed subsidy was calculated as the difference between total development costs and the affordable purchase price based on home mortgage payments, insurance and property taxes at 30% of household income and a 5% down payment. The results of this analysis are:

 Total development costs of $441.4 million; and

1 A low-income unit is for a household with income at or less than 50% of the Boston area median income (AMI), a moderate-income unit is for a household between 50% and 80% of Boston AMI and a middle-income unit is for a household between 80% and 100% of Boston AMI. 2 This mix is based on all of the low-income units developed as rental units, 70% of moderate-income units built as rental and 30% ownership, and middle-income units divided 50/50 between rental and ownership housing.

 Total needed subsidy of $322.8 million with $241.7 million needed for the low and moderate-income units and $81.1 million for the middle-income units. The housing contribution rate needed to provide the full $241.7 million in subsidy is $55.27 per square foot on new non-residential development. However, low and moderate-income housing development leverages public subsidies from federal and state sources in addition to those provided by Cambridge.

Since the Cambridge Affordable Housing Trust has provided 43% of the public subsidy in recent affordable rental projects and 67% of the subsidy for one recent affordable ownership project, it is appropriate to use these shares to determine the needed subsidy for low and moderate-income units used to calculate the housing contribution rate. Middle-income ownership units do not qualify for these subsidies so the city’s housing trust has to cover the full subsidy for these units.

Any available state subsidy was applied for middle- income rental housing. The resulting maximum determined housing contribution rate is $33.34 per square foot, with $20.90 needed to build low and moderate-income units and $12.44 needed for the middle-income units.

Resident Employment and Employment Contributions. Large non-residential development projects are expected to generate 5,932 low- and middle-skill jobs accessible to low-income and moderate-income Cambridge residents.

Depending on the city’s policy goal for resident employment, this development will generate demand for occupation training that ranges from 593 training slots to reach a goal of filling 10% of the jobs at new development projects with city residents to 2,966 training slots for a goal of preparing city residents to fill 50% of these jobs. Existing skills training programs have existing resource to train 1,080 to 1,300 Cambridge residents for these jobs over a ten-year period.

This results in a funding gap, or needed subsidy, of $4.8 to $12.8 million based on resident employment goals between 30% and 50%. The resulting maximum determined employment contribution ranges from $.82 to $2.20 per square foot of new non-residential development.

Impact on Competitiveness. An important consideration for Cambridge in establishing the housing and employment contribution rates is their potential impact on attracting new development and tenants.

This is particularly important since the combined maximum determined rate of $35.54 per square foot ($33.54 for housing and $2.20 for employment) is more than twice the current rate of $17.10, more than three times the combined housing and jobs linkage fee in Boston ($10.81) and almost three times Somerville’s combined $12.46 linkage fee.

If the maximum determined rate is fully passed on as increased tenant rents, it is estimated to add $2.22 per square foot to Cambridge rents, assuming the added cost is spread over a ten-year lease. This $2.22 rent increase would raise the current rent differential for Class A office space between West Cambridge and the 128/West market area by 11% and raise the rent differential for Class A office space between East Cambridge and Boston’s Seaport District from $17.28 to $19.50 per square foot.