San Jose seeks to squeeze more affordable housing out of developers
An aerial view of downtown San Jose is pictured. File photo.

San Jose lawmakers Tuesday unanimously approved updates to a housing policy that requires developers to integrate affordable housing into new projects — but the plan had some South Bay builders riled up.

“The city of San Jose’s ability to produce housing is clearly broken and the costs are too high,” Silicon Valley development company KT Urban wrote in a letter to the San Jose City Council. “Instead of continuing to tweak well-intended, but failed, policies that restrict our supply, we must seek out a new direction if we are to meet our goals of reducing the housing burden for many of our families.”

According to Housing Director Jacky Morales-Ferrand, updates to the Inclusionary Housing Ordinance (IHO) will ensure affordable housing is built for diverse income levels. She added the changes give developers more options for how they want to contribute to San Jose’s affordable housing stock.

If developers don’t want to build affordable housing, San Jose’s housing policy demands they pay an in-lieu fee, which the city then uses to fund its own affordable housing projects.

City projects often provide cheaper housing than what developers can — or want to — supply, due to increasing building costs, Morales-Ferrand said.

“You can see through COVID-19 that the demand for housing is really on these lowest income ranges,” Morales-Ferrand said.  “And it’s much harder for a market-rate developer to provide that depth of affordability.”

The updated policy would require developers to pay even higher in-lieu fees for projects in the West Valley and central areas of San Jose. It would also require some developers to make more housing for lower-income levels than previously required.

Patricia Sausedo, government affairs director for BIA Bay Area  — an organization representing for-sale and rental residential builders in San Jose — said strict requirements are making it more difficult for developers to generate enough income to support their projects.

BIA asked the council to lower in-lieu fees across the city.

“If the affordable percentage and in-lieu fees are pushed ever higher, it is likely to have the unintended consequence of worsening the city’s (and the region’s) housing outlook by sparking a spate of fee increases, eliminating market-rate projects in the pipeline and driving more and more projects toward infeasibility,” Sausedo wrote in a letter to the council.

What will change

The new ordinance requires developers to pay in-lieu fees of $43 per square foot in the West Valley and central areas of San Jose if they opt not to create affordable rental property. All other areas would pay $18.70 per square foot of livable space in the new development. For-sale developers would have to pay $25 per square foot.

“We don’t anticipate developers taking (the $43 per square foot) option because it is so much more expensive,” Morales-Ferrand said.

Under the current ordinance, rental property developers pay a $28-per-square-foot fee to make up for the affordable units they choose not to build, while for-sale developers pay $27.45.

If a developer wanted to build housing onsite under the new ordinance, 5% of rental units need to be priced for people making $99,100 a year — 100% of the Area Median Income (AMI) — or less. Another 5% would be reserved for those earning $66,360 and the last 5% would be available to residents making $55,300 a year.

Or, a developer could choose to build only 10% affordable units if they make them for extremely low-income residents who make $33,150.

Developers get a third option to build 5% of affordable units onsite and pay in-lieu of fees for the remaining 10% affordable housing requirement.

This option reduces costs depending on how affordable a developer makes the housing. If a developer builds housing for people who make 100% of the AMI, they get a fee reduction. But if they build housing for those making 60% AMI, they get an even greater fee reduction, Morales-Ferrand said.

Currently, residential developers must make at least 15% of for-sale units affordable to residents with an annual income of $118,950 or less — 120% of the AMI. Rental projects must make 9% of their units affordable to individuals who make $78,550 of less. Six percent is required for those who make $55,300 or less.

Projects proposed under the old ordinance have until May 1 to get planning permits before they are affected by the new ordinance. If developers get a permit before May 1, they can choose whether they want to be subject to new or old rules.

Jeffrey Buchanan, a public policy director at Working Partnerships USA, called the proposal “another sweetheart deal to politically-connected corporate developers” because of the mixed compliance loophole.

“Even in the hottest markets, where developers can certainly afford to pay their fair share for affordable housing, this loophole delivers 40% reductions from today’s fee to developers in exchange for providing units for middle-income families that likely wouldn’t actually reduce rents for tenants or cost developers a dime in today’s market,” he said.

Buchanan added that under the policy, developers in downtown and West San Jose could pay less in affordable housing fees than developers in East San Jose.

Sausedo wrote San Jose already is lacking in housing production and shouldn’t complicate the process. She noted that in 2020 the number of building permits dropped by 40% in San Jose.

“No amount of tinkering with the city’s flawed Inclusionary Housing Ordinance will change this dynamic,” Sausedo added.

Contact Carly Wipf at [email protected] or follow @CarlyChristineW on Twitter.

Editor’s Note: Derecka Mehrens, executive director of Working Partnerships USA, serves on San José Spotlight’s Board of Directors. 

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