REPORT TO PLANNING COMMISSION
SUBJECT
Title
Forward a Recommendation to the City Council to Take the Following Actions: Introduce an Ordinance to Amend Sunnyvale Municipal Code Title 19 (Zoning) Chapter 19.67 (Inclusionary Below Market Rate Ownership Housing Program) to Convert the Below Market Rate In-Lieu Fee for Ownership Developments to a Square Footage-Based Fee; Adopt a Resolution Amending the Below Market Rate In-Lieu Fee for Rental Developments and Ownership Developments; Amend Council Policy 2.3.3 to Conduct Periodic Reviews of the City’s Inclusionary Housing Policy; and Find the Actions are Exempt from the California Environmental Quality Act (Council Priority Project HO-9)
Report
REPORT IN BRIEF
The City completed a financial feasibility study to determine whether modifications to the City’s current inclusionary housing requirement and in-lieu fees could be supported. Based on the results of the study and Council feedback, staff recommends maintaining the existing 15% inclusionary requirements for ownership and rental housing because the study does not support increasing the requirement to 20% under current market conditions.
Staff also recommends:
• Converting the BMR in-lieu fee for ownership developments from a percentage of sales price to a square-footage-based fee of $93 per square foot for projects with seven or more units;
• Increasing the BMR in-lieu fee for rental units to $93 per square foot for projects with seven or more units and $46.50 per square foot for projects with three to six units; and
• Establishing a four-year cycle for reviewing the City’s inclusionary housing requirements and BMR in-lieu fees, with an earlier review if economic conditions warrant.
BACKGROUND
In 1980, Sunnyvale adopted its first Affordable Housing Requirements, known as the Below Market Rate (BMR) Program. The program has been amended over time in response to Council direction, changes in housing market conditions, and changes in State law. A summary of the major amendments is included in Table 1 below.
Table 1. Modifications to Inclusionary Housing Ordinance
After the 2009 Palmer Decision, when the City could not require BMR rental units in residential developments some developers chose to include deed-restricted affordable units to qualify for State density bonuses. In 2015, the City adopted a Housing Impact Fee for Rental Housing under the Mitigation Fee Act as an alternative means of addressing the increased need for affordable housing associated with new development. The City subsequently resumed requiring rental inclusionary housing following the adoption of Assembly Bill 1505.
In March 2023, City Council approved Study Issue CDD 23-01 (Attachment 2), which was placed above the line and funded. The study is to consider increasing the City’s inclusionary housing requirement to 20% and to review and update BMR in-lieu fees for both rental and ownership housing. In 2025 the Study Issue was renamed as Council Priority Project HO-9.
On August 11, 2026, a City Council Study Session was held to present the preliminary findings from the Residential Feasibility Study and Inclusionary Analysis (the “Study”) and gather feedback (see Attachment 3 for a copy of report).
The Housing and Human Services Commission is scheduled to consider this item on October 28, 2026.
The City Council is scheduled to consider this item on November 10, 2026.
EXISTING POLICY
General Plan, Housing Element, Goal HE-2
Assist in the provision of adequate housing to meet the diverse needs of Sunnyvale’s households of all income levels.
Policy HE 2.2 Continue to implement and consider revisions to the Below Market Rate (BMR) Housing program to increase the amount of affordable housing built in the city.
Policy HE 2.3 Utilize the Below Market Rate (BMR) Housing requirements as a tool to integrate affordable units within market rate development and increase availability of affordable housing throughout the community.
H5. Below Market Rate (BMR) Housing Program. Continue to implement the BMR Program citywide. Complete a feasibility study to determine if an increase to the BMR percentage for rental and ownership projects can be supported. Review and refine the BMR program code requirements and amend the Guidelines periodically as needed to accommodate changing market conditions and improve overall program effectiveness. Expand outreach opportunities, education, and visibility of the BMR program as needed to ensure success and fairness for all that are interested.
ENVIRONMENTAL REVIEW
The proposed modification of inclusionary housing requirements do not constitute a “project” within the meaning of the California Environmental Quality Act (CEQA) pursuant to CEQA Guidelines Section 15378 (b)(4) because it constitutes a governmental fiscal activity that does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. The actions are also covered by the common sense exemption in CEQA Guidelines Section 15061(b)(3), as it can be seen with certainty that there is no possibility that they may have a significant effect on the environment.
DISCUSSION
Current BMR Program
The City’s current inclusionary housing program generally requires 15% of units in new residential development projects to be deed-restricted as BMR affordable housing units, distributed throughout the project. As an alternative to providing required on-site BMR units, developers may request City Council approval of an alternative compliance plan, which may include payment of a BMR in-lieu fee.
BMR in-lieu fees are deposited into the City’s Housing Mitigation Fund and used to support the development of affordable housing. Table 2 shows the City’s current inclusionary housing requirements and BMR in-lieu fees for Fiscal Year 2026/27.
Table 2. Current Inclusionary Housing Requirements and BMR In-Lieu Fees
The City’s existing inventory demonstrates that the BMR program has contributed to the production of affordable housing over time. The proposed changes are intended to continue that contribution while ensuring that the inclusionary requirements and in-lieu fees remain financially feasible and aligned with current economic conditions.
Sunnyvale currently has 2,650 active deed-restricted affordable housing units, including 366 BMR rental units (including the developer-provided units), 516 BMR ownership units, and 1,768 units within 100% affordable rental developments. In addition to these active units, since the BMR program was initiated in 1980, affordability restrictions have expired on 581 BMR rental units, 153 BMR ownership units, and 38 units within a 100% affordable housing development, bringing the total number of units that have been subject to affordability restrictions through the City’s affordable housing programs to 3,422 units.
Inclusionary Housing Study
To implement Council Priority Project HO-9 and Housing Element Program H5, the City selected Strategic Economics to prepare the Study, which was completed on March 30, 2026 (Attachment 3).
The Study was intended to answer two primary policy questions: (1) whether the City could increase its current 15% inclusionary housing requirement to 20% without creating significant financial feasibility concerns for new residential development; and (2) whether the City’s BMR in-lieu fees appropriately reflect the cost of providing affordable units on site.
The Study analyzes current market conditions, development costs, and housing revenues in Sunnyvale to evaluate these questions. It also considers stakeholder input, peer jurisdiction policies, and applicable State laws.
Methodology
The Study uses five residential development prototypes to assess the financial feasibility of 15% and 20% inclusionary housing requirements under current market conditions. Each prototype features distinct physical characteristics, densities, parking configurations, and unit sizes that reflect realistic development scenarios in Sunnyvale. Prototypes include:
• Five-story condominium (Ownership)
• Townhome (Ownership)
• Small scale apartment (Rental)
• Five-story apartment (Rental)
• Eight-story apartment with ground floor retail (Rental)
Financial feasibility is measured through a residual land value (RLV) analysis, which is commonly used by developers as a conceptual test of financial feasibility for a potential project. RLV analysis determines the maximum amount a developer could pay for land while still achieving a minimum acceptable return on investment. A project is considered financially feasible when its RLV is equal or greater than the market land value. If the RLV is lower than market land value, then a project is considered financially infeasible and unlikely to attract developer interest.
For each prototype, the Study also calculates equivalent in-lieu fees by estimating the revenue foregone from providing the required inclusionary units instead of market-rate units. This approach is intended to establish an economically equivalent in-lieu fee based on the cost of providing BMR units on site.
The RLV analysis is a conceptual assessment and does not predict the feasibility of any individual project. Actual project feasibility may vary based on site-specific conditions, financing, land costs, development standards, market conditions, and other factors. In addition, the study reflects market conditions at a particular point in time and cannot predict future changes in the residential market.
Strategic Economics also gathered input from residential developers (affordable and market rate), housing advocates, and the public. Developer feedback informed the study's assumptions regarding development costs, revenues, financing, and market conditions. Stakeholders discussed the challenges of delivering new housing amid rising construction costs, changing market conditions, and the need to balance affordable housing production with the financial feasibility of residential development.
Peer City Policies
The peer comparison indicates that Sunnyvale’s existing 15% inclusionary requirement is generally consistent with neighboring jurisdictions for rental housing and is within the range of requirements used for ownership housing. The comparison also shows that Sunnyvale’s current ownership in-lieu fee structure is unique among the jurisdictions reviewed because it is based on a percentage of sales price rather than a square-footage-based fee. Summaries of neighboring jurisdictions’ inclusionary housing requirements and in-lieu fees are shown in Table 3 and 4 below, respectively.
Table 3. Inclusionary Housing Requirements in Neighboring Jurisdictions
Table 4. Inclusionary Housing In-Lieu Fees in Neighboring Jurisdictions
State and Regional Policy Considerations
Several State and regional policies also inform the City’s consideration of changes to the inclusionary housing program. These policies do not require the City to adopt the proposed fees, but they establish important considerations and, in some cases, potential consequences of changing the City’s current requirements:
• Assembly Bill 1505: Effective in 2018, any rental inclusionary requirement greater than 15% for lower-income households (at or below 80% of AMI) may be subject to review by the California Department of Housing and Community Development (HCD) to demonstrate that “the ordinance does not unduly constrain the production of housing.” As a result, the City’s current requirement would not be subject to HCD review, but any increase to the City’s current rental inclusionary requirement should be supported by a feasibility study.
• Transit-Oriented Communities (TOC): The Metropolitan Transportation Commission’s (MTC) TOC policy program currently provides an incentivized One Bay Area Grant (OBAG) transit funding program for jurisdictions that are consistent with MTC TOC policies. TOC policy establishes the following minimum criteria for inclusionary housing requirements:
• Rental Policy: At least 15% of units are affordable, with average income of 80% of AMI or less; and
• Ownership Policy: At least 15% of units are affordable, with average income of 120% of AMI or less.
Because the City’s current inclusionary housing requirements meet the MTC TOC criteria, maintaining the 15% requirement would preserve the City’s current consistency with those criteria. Reducing the City’s required percentage could affect the City’s consistency with MTC TOC policy and eligibility for potential future OBAG incentive programs.
Study Findings and Recommendations
The Study’s financial feasibility and policy analyses identified five key findings:
• Increasing the inclusionary housing requirement from 15% to 20% is not supported for rental or condominium developments under current market conditions.
• The townhome prototype is marginally feasible at the 20% requirement under current market conditions and would become more feasible with modest improvements in market conditions.
• For ownership projects, the City’s current BMR in-lieu fee of 7% of sales price equates to approximately $70 per square foot, which is below the estimated cost of providing on-site BMR units of approximately $89 per square foot for five-story condos to $93 per square foot for townhomes
• For rental projects, the City’s current BMR in-lieu fee of $33 per square foot is substantially below the estimated cost of providing on-site BMR units, which ranges from $72 per square foot for small-scale rental apartments to $98 per square foot for eight-story rental apartments.
• The study therefore supports maintaining the current 15% inclusionary requirement and updating the BMR in-lieu fees to more closely reflect the estimated costs of providing the BMR units on site.
Based on these findings and council feedback, staff recommends maintaining the current 15% inclusionary requirement for ownership and rental projects; converting the ownership in-lieu fee to a per square-foot basis; increasing the rental BMR in-lieu fee; and establishing a regular schedule for reviewing the inclusionary program.
Nearly all new residential projects in Sunnyvale provide BMR units on site and typically pay in-lieu fees only for fractional units. Since 2016, Council has approved only four residential projects to pay the BMR in-lieu fee as an alternative compliance method. Aligning BMR in-lieu fees with on-site costs as recommended by the Study could further encourage developers to build BMR units on site. This is consistent with Housing Element Policy H-2.3, which calls for integrating affordable units within market-rate developments.
Study Session Outcomes & Staff Recommendations
On August 11, 2026, the City Council held a Study Session to present the Study’s recommendations and gather feedback. Council feedback focused on the following topics:
• Maintaining the City’s current 15% inclusionary housing requirements for rental and ownership projects;
• Converting the ownership BMR in-lieu fee to a square-footage-based fee and requiring BMR in-lieu fees to be paid earlier in the development process; and
• Establishing a regular update schedule for future inclusionary housing feasibility studies.
Based on the Study’s findings and Council feedback, staff recommends the following:
• Inclusionary Housing Requirement: Maintain the current 15% inclusionary requirements for both rental and ownership projects, consistent with MTC TOC policies and the Study’s findings.
• Ownership In-Lieu Fees: Convert the ownership BMR in-lieu fee to from 7% of sales price to a square-footage-based fee. Staff recommends a fee of $93 per square foot for projects with seven or more units. A square-footage-based fee would also allow the fee to be collected at final inspection rather than at close of escrow. Staff recommends adopting an ordinance (Attachment 4) to amend Sunnyvale Municipal Code Chapter 19.67 to convert the ownership BMR in-lieu fee from a percentage of sales price to a square footage-based fee.
• Rental In-Lieu Fees: Increase the current rental BMR in-lieu fee to $93 per square-foot fee for projects with seven or more units and $46.50 per square foot for projects with three to six units.
• Annual Adjustments: Index both fees to the California Construction Cost Index (CCCI) to keep pace with rising construction costs. This index reflects changes in construction material and labor costs and is used by other jurisdictions, including Mountain View.
• Regular Schedule for Feasibility Study Update: Amend Council Policy 2.3.3 (Strategies for Affordable Housing and the Use of Housing Mitigation Fees) to require review of the City’s inclusionary housing policy every four years or sooner if economic conditions warrant. Depending on economic conditions, such review may consist of a full feasibility study, BMR in-lieu fee study, or other review as appropriate. The proposed amended Council Policy 2.3.3 (Attachment 6) includes the recommended changes.
Fiscal Impact
The revenue impact of the proposed modifications to the City’s BMR in-lieu fees is challenging to quantify because future revenue will depend on the amount and type of residential development subject to the fees and the extent to which developers elect to provide BMR units on site rather than request approval of an alternative compliance plan.
Currently, BMR In-Lieu fees (along with housing loan repayments and other smaller related revenues) are deposited into Fund 2023 - Housing Fund/Below Market Rate Housing Sub Fund. There, they are used to fund the development of affordable housing, program administration (2.1FTE), and first time home buyer loans.
The proposed fee changes would increase the current rental fee from $33 to $93 per square foot and the ownership fee from an equivalent of approximately $70 to $93 per square foot. The actual change in BMR in-lieu fee revenue will depend on future development activity and the number of projects that pay an in-lieu fee. If revenues decline, it could impact the above referenced programs. Conducting periodic feasibility studies will ensure the City stays current with market conditions so adjustments can be made as needed.
Public Contact
The City and Strategic Economics completed broad community outreach and targeted stakeholder engagement throughout the preparation of the Study and following its completion. Written and oral comments received on the Public Draft of the Study were reviewed and considered in the preparation of the Final Draft of the Study. Engagement included one-on-one interviews with residential developers as well as the following meetings:
• February 19, 2025: Real Estate Industry Stakeholder Meeting
• February 25, 2025: Affordable Housing Advocates and Developers Stakeholder Meeting
• December 9, 2025: Public Draft Meeting (Open to General Public)
• December 10, 2025: Public Draft Meeting (Open to General Public)
• August 5, 2026: Livable Sunnyvale Meeting
Public contact for this Planning Commission hearing was made by posting the Planning Commission meeting agenda on the City's official-notice bulletin board at City Hall. In addition, the agenda and this report are available at the NOVA Workforce Services reception desk located on the first floor of City Hall at 456 W. Olive Avenue (during normal business hours), and on the City's website.
A public hearing notice was also published in the Sun newspaper at least 20 days prior to the hearing (in accordance with recent legislation in AB 2904). Staff emailed interested parties to advise them of the public hearings.
As of the date of staff report preparation, staff has not received any public comments.
ALTERNATIVES
Forward a recommendation to the City Council to:
1. Take the following actions:
a. Introduce an Ordinance to Amend Sunnyvale Municipal Code Title 19 (Zoning) Chapter 19.67 (Inclusionary Below Market Rate Ownership Housing Program) to Convert the Below Market Rate In-Lieu Fee for Ownership Developments to a Square Footage-Based Fee;
b. Adopt a Resolution Amending the Below Market Rate In-Lieu Fee for Rental Developments to $93 per Square Foot for Projects with Seven or More Units and $46.50 per Square Foot for Projects with Three to Six Units, and Amending the Below Market Rate In-Lieu Fee for Ownership Developments to $93 per Square Foot for Projects with Seven or More Units, Each Adjusted Annually for Inflation;
c. Amend Council Policy 2.3.3 to Conduct Periodic Reviews of the City’s Inclusionary Housing Policy Every Four Years; and
d. Find the Actions are Exempt from the California Environmental Quality Act (CEQA) pursuant to CEQA Guidelines Sections 15061(b)(3) and 15378(b)(4).
2. Provide Other Direction to Staff Regarding the Inclusionary Requirement, Fees and Schedule for Feasibility Study Updates.
3. Take no action.
STAFF RECOMMENDATION
Recommendation
Recommend to City Council:
Alternative 1: Take the following actions:
a. Introduce an Ordinance to Amend Sunnyvale Municipal Code Title 19 (Zoning) Chapter 19.67 (Inclusionary Below Market Rate Ownership Housing Program) to Convert the Below Market Rate In-Lieu Fee for Ownership Developments to a Square Footage-Based Fee;
b. Adopt a Resolution Amending the Below Market Rate In-Lieu Fee for Rental Developments to $93 per Square Foot for Projects with Seven or More Units and $46.50 per Square Foot for Projects with Three to Six Units, and Amending the Below Market Rate In-Lieu Fee for Ownership Developments to $93 per Square Foot for Projects with Seven or More Units, Each Adjusted Annually for Inflation;
c. Amend Council Policy 2.3.3 to Conduct Periodic Reviews of the City’s Inclusionary Housing Policy Every Four Years; and
d. Find the Actions are Exempt from the California Environmental Quality Act (CEQA) pursuant to CEQA Guidelines Sections 15061(b)(3) and 15378(b)(4).
JUSTIFICATION FOR RECOMMENDATION
Converting ownership BMR in-lieu fees to a square-footage-based rate and adjusting the rental and ownership BMR in-lieu fees to $93 per square foot will align fees with the actual cost of providing on-site BMR units without significantly impacting project feasibility. These adjustments ensure that, as an alternative compliance method, the BMR in-lieu fee is financially equivalent to satisfying the inclusionary requirement on site and helps ensure that BMR units are integrated within market-rate projects consistent with Housing Element Policy H-2.3. Also, a reduced fee of $46.50 for smaller projects (three to six units) aligns with the City’s current fee schedule and supports smaller project types.
Additionally, establishing a regular schedule for future inclusionary housing feasibility studies will enable the City to more proactively plan and adjust its inclusionary housing requirements in response to changing market conditions.
Levine Act
LEVINE ACT
The Levine Act (Gov. Code Section 84308) prohibits city officials from participating in certain decisions regarding licenses, permits, and other entitlements for use if the official has received a campaign contribution of more than $500 from a party, participant, or agent of a party or participant in the previous 12 months. The Levine Act is intended to prevent financial influence on decisions that affect specific, identifiable persons or participants. For more information see the Fair Political Practices Commission website: www.fppc.ca.gov/learn/pay-to-play-limits-and-prohibitions.html
An “X” in the checklist below indicates that the action being considered falls under a Levine Act category or exemption:
SUBJECT TO THE LEVINE ACT
___ Land development entitlements
___ Other permit, license, or entitlement for use
___ Contract or franchise
EXEMPT FROM THE LEVINE ACT
___ Competitively bid contract*
___ Labor or personal employment contract
___ Contract under $50,000 or non-fiscal
___ Contract between public agencies
X General policy and legislative actions
* "Competitively bid" means a contract that must be awarded to the lowest responsive and responsible bidder.
Staff
Prepared by: Lorena Lopez, Housing Specialist I
Reviewed by: Ryan Dyson, Housing Specialist II
Reviewed by: Amanda Sztoltz, Housing Officer
Reviewed by: Trudi Ryan, Director of Community Development
Reviewed by: Kurtis Mock, Budget Division Manager
Reviewed by: Matt Paulin, Finance Director
Reviewed by: Connie Verceles, Assistant City Manager
Approved by: Tim Kirby, City Manager
ATTACHMENTS
1. Reserved for Report to Council
2. Council Priority Project HO-9 (Study Issue CDD 23-01)
3. Residential Feasibility Study and Inclusionary Analysis
4. Draft Ordinance
5. Draft Resolution
6. Draft Council Policy 2.3.3 Strategies for Affordable Housing and the Use of Housing Mitigation Fees (Redline)