San Jose council considers cutting fees for downtown high-rise

The San Jose City Council is looking at cutting fees for a downtown high-rise, potentially saving the developer more than $4 million.

Councilmembers will decide later this month whether to halve two construction taxes and waive the city’s Affordable Housing Impact Fee for The Carlysle—a proposed mixed-use tower at 51 Notre Dame Street. A Tuesday vote to consider waiving the costs was deferred to Feb. 15.

The 21-story building would include 290 market-rate apartments with retail space on the ground floor and over 100,000 square feet of office space across several lower floors.

“High-rises like this make a lot of sense for San Jose to build because of the density in adding and enlivening the downtown with the numbers of people, and of course providing homes,” Nanci Klein, city director of economic development, told San José Spotlight.

Klein said the name of the game is density—getting more people living and working in the downtown core. It would help revitalize the city center, a goal since the 1980s. After decades of neglect, the city saw a boom in the post dot-com era. However, COVID-19 impacts stunted growth.

The Carlysle would not increase the affordable housing stock—a point that may ruffle some feathers if the project gets its affordable housing impact fee waived. Under the city’s program, new market-rate rental housing developments are charged a per square foot fee on net rental space. At a current per square foot fee of $19.15 , the high-rise would have an impact fee of approximately $3.6 million—if it isn’t waived.

The project could be a bust without the discounts for developer Acquity Realty Inc., Klein said. This is because high-rises, specifically, are difficult to finance because of their size, materials they use and the larger labor force required to build them.

A 2019 study commissioned by the city found that without tax and fee waivers, a “typical high-rise development” in downtown would not be financially feasible.

“Even without the fee waivers it is very difficult,” Jared Ferguson, housing catalyst for San Jose’s Office of Economic Development, told San José Spotlight. “The approval of this is important for them to be able to move forward to get the financing required to start construction.”

The developer is in the process of getting the building permit. If the City Council approves the waivers, construction could start in the spring.

It would not be the first time San Jose has granted fee waivers for high-rises. The city did so in 2007, 2012 and again in 2016—resulting in the construction of 2,412 units, Klein said.

And in 2019, the city also decided to extend its Downtown High-Rise Incentive program to allow developers to get fees waived and construction taxes cut by 50% as long as construction is completed by 2025.

Ferguson said while waiving $4 million in fees and taxes may look like a loss for the city, having the mixed-use tower would bring in more revenue. Property, business and sales taxes could generate more than $382,000 annually.

The city would also get a one-time payment of $1.9 million in construction taxes, $4.2 million from park fees and $1.5 million from the commercial linkage fee.

“By not having the project go forward, the city is at a larger risk,” Klein said. “There would be no people, there’d be no parks contribution, there would be no construction jobs coming.”

In a memo, Councilmember Raul Peralez wrote he would support the discount, but wants the developer to commit to not work with any contractor or sub-contractor with a proven history of wage theft violations in the last five years.

“I encourage the applicant to commit their project to local labor and talent which the applicant has already initiated conversations with,” Peralez wrote. “I believe that investment into our downtown should not only be for our economy but for our community at large.”

The San Jose Downtown Association also supports waiving fees and cutting construction taxes for The Carlysle development.

“It’s a unique project with its mix of uses and the location is on an infill site that serves to link San Pedro Square and Little Italy,” Scott Knies, executive director, told San José Spotlight.

Contact Jana Kadah at [email protected] or @Jana_Kadah on Twitter.