San Jose lawmakers approve extension of tax breaks for high-rises

At the forefront of Tuesday’s San Jose City Council meeting, lawmakers discussed how the two interwoven crises plaguing the region — housing and homelessness — are alarmingly growing worse.

In response, the councilmembers passed a smorgasbord of housing measures, which include expediting the study of a commercial linkage fee and extending a contentious tax break for developers wanting to build in downtown — all aimed at providing longterm relief to the city’s burgeoning dilemmas.

Study on commercial linkage fee

During a report on the city’s Housing Crisis Workplan, the City Council unanimously voted to include an update on the city’s First Time HomeBuyer Program, after Councilmember Johnny Khamis expressed support for prioritizing homeownership for teachers. They also agreed to speed up the study of a commercial linkage fee — a controversial tax on businesses that would be used to fund the construction of affordable housing projects.

In Dec. 2018 the City Council directed staff to conduct a study, but almost a year later the report is nowhere near completion. One frustrated lawmaker, Councilmember Raul Peralez, called for city staff to expedite the long-awaited study on a potential commercial linkage fee after the city said that the study was delayed until June 2020. At the meeting Tuesday, city staff said the study’s completion is based on a third party consultant’s timeline, but expects that it will be completed by April 2020 — a few months earlier than the original delay.

Since he’s assumed office, Peralez has been an advocate of implementing a fee, which he says is “necessary” to generate affordable housing dollars for the region.

“There’s a clear nexus between the jobs that we’re creating in Silicon Valley and the lack of housing that we tie into that,” said Peralez. “That’s exactly what a commercial linkage fee does.”

Extending tax breaks for high-rises in downtown

The councilmembers were pit against one another on a program that extends a tax break to developers wanting to build market-rate housing in the city’s downtown core, as the program significantly cuts construction taxes in half and waives fees that would go toward affordable housing.

In a 6-5 vote, the lawmakers agreed to extend the highly-debated Downtown High Rise Development Program, after an hours long discussion on the merits of slashing fees in order to encourage more development.

Councilmembers Raul Peralez, Sergio Jimenez, Magdalena Carrasco, Maya Esparza and Sylvia Arenas voted against extending the program.

Some lawmakers, notably Peralez and Jimenez, said that a few of the nine qualifying projects in the pipeline shouldn’t receive tax breaks because they’re exempted from the recently-adopted workplace standards ordinance, which requires contractors to pay prevailing wages and other worker protections.

“We have a workforce standards agreement and the full council passed that,” said Peralez in an interview with San Jose Spotlight. “We agreed that if we’re going to be offering incentives to projects, that we should also be ensuring that these projects provide a benefit to our local economy, our local workforce, and have some of these workforce standards like prevailing wage.” 

During the meeting, Peralez also raised red flags about the cost of developments with high-parking ratios, estimating that a single parking space costs upwards of $75,000 per project. Reducing the amount of parking could save the developers at least $24 million, said Peralez in his memo, also adding that the city re-evaluate including workplace protections to “co-living” developments. Without those two critical components, he said, many of the projects currently in the pipeline would be deemed “infeasible.”

“I think quite frankly–yes– seven of these nine projects actually don’t show feasibility. There is absolutely two red flags in these subcategories that should have been and still should be re-evaluated,” added Peralez.

But pro-development advocates, such as Mayor Sam Liccardo said extending the tax break was one of the few ways that the city could get shovels in the ground. The mayor expressed concern about the costs of high-rise development, adding that the two independent consultants hired by the city said that those projects are not feasible without a reduction in costs.

“City staff have looked at a dozen high rise housing projects since 2014 and only three of them have actually moved forward to construction,” Liccardo said in an interview with San José Spotlight. “We have a market that is telling us that there’s not been a high rise residential tower that’s broken ground at any time in almost two years, despite a building boom that has occupied every available construction worker in the valley. We should look at the data first and the data is pretty clear with what the challenges are. The costs are too high– so builders cannot get financing to build.”

Councilmembers Dev Davis and Johnny Khamis agreed, going as far to suggest that the fee reductions become a permanent fixture with no end date. In a joint memo, the two pro-development lawmakers called for the Dec. 2023 deadline to be lifted and direct staff to craft an additional fee reduction program for mid-level projects.

“Why don’t we just make these fee reductions permanent?” said Davis. “If we ignore market realities, we don’t get stuff built. Everyone knows we have a housing crisis, we may differ in how we solve that issue but we have to continue to do everything we can to make sure every unit that can get built gets built.”

Khamis expressed frustration also, adding that the high costs of developing are contributing to the region’s crisis.

“I don’t know what proof anybody needs if we haven’t had a single high-rise development in the last two years, it just means things are too expensive here,” said Khamis. “If we want to continue to make it more expensive with more fees we’re going to get what we deserve—the current housing crisis that we’re in.”

City staff will return to the City Council in November to provide updates on a development cost study and the possible inclusion of an “in-lieu fee” that a developer would have to pay if they do not include affordable units in their residential project. Meanwhile, the program has been extended until Dec. 2023.

Contact Nadia Lopez at [email protected] or follow @n_llopez on Twitter.