San Jose housing law divides business and labor communities

Is a 2010 law originally meant to increase affordable housing in Silicon Valley doing just the opposite? This question has split development advocates, labor leaders and some San Jose lawmakers.

The law in question – the city’s Inclusionary Housing Ordinance (IHO) – currently requires all market-rate developments with 20 or more units to designate 15 percent of those apartments as affordable or pay a fee to an affordable housing fund.

The San Jose City Council will vote on amending the policy as part of Tuesday’s agenda, based on a staff recommendation to apply the law to all projects with five or more units and phase in the in-lieu fee for projects between 5 and 20 units. A cost of development study prepared for the city by real estate advisory firm Keyser Marston Associates supported changes, including applying the IHO to smaller projects of five units and not requiring downtown developers to pay affordable housing impact fees.

In a separate report commissioned by the Silicon Valley Organization, the area’s largest Chamber of Commerce, research consulting firm Beacon Economics found that the current rate of development in San Jose is contrary to the law’s goal. It reported that only 107 affordable homes have been created since 2017. If that trend continues, the Los Angeles-based firm estimates that only 150 more would be created by 2022.

“This policy has not worked and produced the intended result,” said Matt Mahood, president and CEO of the SVO. “The city of San Jose has set a goal of producing 10,000 new affordable homes by 2020 to combat the housing crisis, but we’ll never achieve this goal without significant reforms to the existing policy.”

But labor leaders on Thursday denounced any changes to the law, concerned that any amendments to the IHO could contribute to resident displacement.

“Folks are concerned about the loss of affordable housing. With the IHO proposal, it could cut anywhere from from 21 to 100 percent of fees the developers would pay now,” said Jeffrey Buchanan, policy director for Silicon Valley Rising. “It’s concerning, because developers like KT Urban… may pay zero dollars in terms of contributing to affordable housing.”

But according to Beacon Economics, the SVO’s research firm, one of the biggest factors hindering development is project feasibility, and IHO fees are the single biggest city fee – accounting for 4.7 to 5.2 percent of a project’s costs. Mark Tersini, partner at Cupertino-based developer KT Urban, said Wednesday these high rates push away would-be developers, since most seek to make at least a 4 to 6 percent return in order to secure funding needed to build new housing.

“Right now the way it’s pushing forward, it is not working,” Tersini said. “These returns that they mentioned here are not sustainable. It’s basically we’re out of business until returns attract investment.”

The report also found only six out of 33 potential development projects analyzed across the city are financially feasible under the current IHO. That number would jump to 19 of 33 if the “fee burden is removed,” it said.

Councilmember Johnny Khamis supports fee reductions, especially for projects either built near public transit or that feature community spaces, pools and gyms. “We keep trying the same solutions – more regulations, more taxation, more fees. This is a recipe that isn’t working,” Khamis said. “Quite frankly, we need to look at doing the opposite.”

This isn’t the first time business and labor leaders have publicly sparred over housing policy.

A similar disagreement in September focused on the Downtown High Rise Incentive Program, which includes reduced park impact fees and options to delay payment of some construction taxes until after a project’s completion for qualified developers who satisfy building timeline benchmarks.

Labor and affordable housing advocates said the program first established in 2007 strips affordable housing funds and gives “handouts” to wealthy developers, while business community members said these types of city policies – including the potentially amended IHO – are what actually get shovels in the ground. After five hours of debate, the program’s extension was narrowly approved 6-5 through 2023.

Now less than a week before the upcoming IHO vote, Councilmember Lan Diep – who supports amending the ordinance – doesn’t think there’s much disagreement within the council. He said all of the issues discussed Wednesday are aligned with what city staff has recommended.

“I don’t expect this to be some sort of fight,” Diep said. “There might be differences in the specifics of how to amended how to change the ordinance, but I think the general feeling is we should amend it.”

Contact Katie Lauer at [email protected] or follow @_katielauer on Twitter.

Editor’s Note: Silicon Valley Rising is a campaign of Working Partnerships USA. The executive director of Working Partnerships USA, Derecka Mehrens, serves on San José Spotlight’s Board of Directors.