.How Santa Cruz Plans to Attract Developers—and Build Affordable Housing

A walk through downtown Santa Cruz reveals construction projects in the works on just about every other street corner.

Throughout the city, 18 housing projects are either under construction or coming down the pipeline. These developments are part of the city’s efforts to address its housing crisis and meet state-mandated housing goals. 

The goals, known as Regional Housing Needs Allocations (RHNA), are handed down from the state in eight-year cycles and divided throughout Santa Cruz and Monterey counties. The two counties must collectively build 33,274 housing units in the following eight-year process.

Santa Cruz was allocated 3,736 of those overall units—a nearly fivefold increase from last cycle’s target of 747—that the city will have between December 2023 to December 3031 to build. Within that number, the city has to build affordable housing for people in moderate to very low-income brackets. 

Santa Cruz has already met and exceeded its RHNA numbers for this last cycle, a feat that neighboring cities of Capitola, Watsonville and Scotts Valley are far behind. 

At a meeting last Tuesday that lasted into the late hours of the evening, the Santa Cruz City Council reviewed the plan that lays out where all that housing could be built. The council advanced the project, which will be submitted to the state in the coming months. 

The planning commission presented a proposal that zoned for over 8,000 units, far beyond the 3,736 the state expects from the city. But as emphasized at the meeting, there’s no guarantee those lots will be built upon. Ultimately, it’s less a matter of available space and more a question of how to ensure developers will build on those parcels. 

“There just aren’t that many places to build apartments that will pencil out financially for a market rate developer or even an affordable housing developer,” Policy Director and YIMBY Law Advocate Rafa Sonnenfeld says. “The city, on paper, has enough places for projects to be developed to meet our housing goals. But not all of those will be developed in the next eight years.” 

BRINGING BUILDERS

There are some outside factors beyond the city’s control regarding enticing developers. Land costs, construction and labor cost and interest rates all play a role when developers decide what’s a feasible and lucrative housing development. In Santa Cruz, city Planning Commissioner Eric Marlatt says another challenge is the significant amount of land in private ownership for generations. 

A factor that’s up to the city’s determination is inclusionary rates or the number of affordable housing units that market-rate developers must include in any project. That number is set by cities and in 2020 Santa Cruz raised its inclusionary rate from 15% to 20%. That means developers must include 20% of their housing units as affordable to moderate and low-income residents. That’s the highest in the county, with Watsonville as the only other city with a similar rate.  

The city is confident developers will continue to come to Santa Cruz and see it as a highly desirable place to build new housing, Director of Planning Lee Butler says. He says Santa Cruz will continue to attract developments for reasons like its proximity to Silicon Valley, the natural environment and the concentration of jobs compared to other cities in the county. 

“The work-from-home dynamic, I think, has made Santa Cruz more attractive to people working in San Francisco, the South Bay or the East Bay,” Butler says. “I’d say that’s bearing out in the development proposals that we are seeing. Even with the interest rate hikes. The lending community is very much still believing that our local market is strong because of all of those factors.”

Still, Sonnenfeld worries that should the city raise the rate—a prospect some council members have raised—there might be a drop off in feasibility for developers. But it’s up to the city to find creative solutions to encourage more development. 

“Maybe having different inclusionary rates in different neighborhoods because not every neighborhood has the same demand and not every neighborhood has the same zoning and what’s allowed,” Sonnenfeld says. “The number one thing that cities have control over is their land use. So, if we want more housing, we can zone for more; we can have higher buildings.”  

There are also procedural hangups the city can tighten to speed up the project process, which might make Santa Cruz more appealing for developers. At the Tuesday council meeting, planning commissioners suggested cutting down the lengthy review process, the discretionary period. Once a project meets the city’s objective standards, there’s little reason why it wouldn’t be approved, they say. 

During that discretionary period, the council can add further requirements to a project and hold public review and input sessions.  

“The easiest thing the city could do is just change its procedures to where if something is already allowed to be built, according to the general plan using a state density bonus, then that kind of project shouldn’t need to be bogged down,” Sonnenfeld says. “Meeting after meeting and discretionary review is what delays and ultimately kills projects sometimes.” 

SB 9 

Local—and state—officials hoped to encourage more housing units through a bill that went into effect on Jan. 1, 2022.

The California HOME Act—or Senate Bill (SB) 9—allows homeowners to split their home’s lot and build up to four homes on a single-family lot. Many saw this as a significant victory for zoning reform that would open up new avenues for small-scale homebuilding.

The reality has shown varying results. 

A study by the Terner Center for Housing Innovation at UC Berkeley found that out of thirteen jurisdictions across the state, SB 9 applications are limited or non-existent. In Santa Cruz, four applicants have used SB 9 since it went into effect. 

Marlatt says SB 9 hasn’t produced the results some were expecting partly due to one of the bureaucracy’s pitfalls and democracy’s necessities: compromise. 

“SB 9, in its current form, really represents a compromise from previous bills that were initiated,” Marlatt says. “There was a lot of fear from the public of developers coming in and ruining single-family households or that tenants would be displaced. A lot of the public agencies feared that there was going to be a loss of local control. Earlier versions of the bill allowed for a lot more units to be built. So, the criteria that are currently in the bill really respond to those concerns, which reduces the number of SB 9 eligible projects.” 

Theoretically, the city could address many restrictions, such as increasing the number of units built on a lot or expanding the minimum size of the lot that SB 9 can apply to—so long as the adjustments loosen restrictions rather than tighten them. Marlatt also says that the newness of the legislation could be a reason why we aren’t seeing more developers employ it. 

LOOKING AHEAD 

According to Marlatt, the most challenging part of accomplishing last cycle’s housing goals was fulfilling the quota of 150 housing units affordable to people with very low income—those making less than 50% of the area median income, ​​$83,500 for one person in Santa Cruz County.  

He anticipates that for the next eight years, it will be meeting the number of affordable housing affordable to people making median incomes: wages that our middle-class and blue-collar workers are making.

“This is workforce housing; this is the missing middle,” Marlatt says. 

The city gets affordable housing from its inclusionary requirement and other state and federal government subsidies. The city must build around 700 housing units for that medium affordable bracket for the next cycle, almost as many units as the last cycle’s goals.

Again, Sonnenfeld says there are ways to encourage that production—it’s just a matter of adjusting. 

“We could create our own local density bonus program that gives incentives to developers to restrict rents to be those that are affordable to moderate incomes or let a developer build higher than the zoning would otherwise allow,” Sonnenfeld says. “Or, you know, there could be fee reductions; things like that would be helpful.” 

The city is already looking down the line, anticipating where housing could go after this next eight-year cycle. These goals aren’t going to let up, and Santa Cruz needs to be ready, Marlatt says.  

“We’re looking at going up. It’s all infill development, so we’ll have to build up,” Marlatt says. 

For now, both stress that the current plan includes areas that are already zoned for housing projects. 

“The city is currently not planning on rezoning immediately,” Sonnenfeld says. “All of the sites are already allowed to be built now. We should be embracing what is already allowed to be built, and we should be going further because we don’t actually have any certainty that the status quo is sufficient. That’s how we’ll have a more vibrant, healthy, sustainable community. We need to have more places for people to afford to live.”