San Jose sees barriers to building affordable housing

In an effort to ease barriers to affordable housing construction, San Jose is exploring taking steps to incentivize developers.

On Tuesday, the City Council voted unanimously to accept recommendations based on interviews with seven developers and a detailed report highlighting three key barriers: construction costs, the permitting process and complying with development regulations such as requirements for private open space, like a balcony or patio for each unit.

Recommendations include creating internal coordination meetings between city departments to speed up the permitting process, creating an impact fee registry, exploring the effectiveness of cutting construction taxes and making city-issued bonds more competitive.

Councilmember Sergio Jimenez specifically directed the city to explore cutting construction taxes in all neighborhoods except those that have historically not received adequate investment through redevelopment.

He said cutting taxes in higher income neighborhoods could incentivize developers to build in those areas that have historically not welcomed affordable housing.

“I think, in turn, it would create a city in which every pocket is doing their part to provide a space for people to be living at all income levels,” Jimenez said.

San Jose continues to drag behind in building affordable housing. The city has built a few hundred below-market homes since 2018, but is still far short of its goal to build 10,000 affordable units by 2023.

On top of that, the housing crisis is driving rent sky high, making the San Jose metro region the second most expensive place to rent in the country. All while the homelessness crisis continues to grow.

Mayor Sam Liccardo said he appreciated the recommendations, but worried the real barriers are outside of the city’s control.

“It seems to me that there are certainly forces more powerful than City Hall here, and construction costs chief among them,” Liccardo said. “We can do everything right and we are still going to face this real challenge of seeing our dollars get consumed on fewer and fewer units.”

Construction costs

In the last three to five years, construction costs have increased significantly, which has forced developers to rely on additional sources of funding to complete a project. That makes it harder to afford and secure funding, said Jerad Ferguson, housing catalyst in the city’s Office of Economic Development.

“I’d say that’s the most significant factor,” Ferguson told San Jose Spotlight. “But there’s a lot of different issues that kind of stack on later, so it’s not the only factor.”

The city found most developers relied on the state’s Low-Income Housing Tax Credit to finance their buildings. The tax credits help subsidize the acquisition, construction and rehabilitation of affordable housing. However, receiving benefits is competitive.

The state ranks projects on a number of metrics, including cost, and then decides which projects to fund. Because San Jose is an expensive area, project costs are much higher and developers do not benefit from the state credit, said Nanci Klein, city economic development director.

“It goes into every affordable housing project and it’s become more and more difficult to get,” Klein told San José Spotlight.

Permitting process 

One critical change to keep costs down and simplify the process for developers would be to speed up the permitting process for development applications, Ferguson said.

Because of low staffing, the permitting process can drag on for a considerable amount of time. In the report, the city pointed to a 2018 grant from Destination: Home to fund a planner position in the Planning, Building and Code Enforcement Department that helped shorten the permitting process by two months. Because of its success, the nonprofit agreed to an additional three-year grant from July 2021 to June 2024.

Developers said they would want the same type of dedicated planner for construction permits, but the planning department doesn’t have capacity. So, Ferguson’s team plans to establish regular meetings between the planning and housing departments to review active projects.

“Time saving is important not just on affordable construction,” Ferguson said. “Time is money, especially with how fast these construction costs are increasing.”

Building requirements 

Many developers also noted there are requirements that make planning or building affordable housing much more difficult.

They pointed to the requirement for certain amounts of parking spaces or e-vehicle charging posts, as well as commercial requirements that mandate certain space for retail on the ground floor. The city eliminated the ground floor commercial requirement for projects in urban villages at the end of last year.

“We can do a lot of little things to remove sort of smaller barriers,” Ferguson said. “It’s going to be an iterative, incremental process to get to improvements.”

Alex Shoor, executive director of Catalyze SV, said cutting the parking requirements could be good in the long run to incentivize people to move away from using cars.

“The transportation demand management provisions are going to be really important for reducing our greenhouse gas emissions and our need for automobiles,” Shoor said at the meeting. “So I think we definitely want to continue to have provisions in there as we go along reducing parking requirements.”

The most common complaint heard from developers was about city construction taxes, Klein said. On average a developer pays $3,100 per unit in taxes.

From 2020 to 2021, there were seven affordable housing project building permits issued for 846 housing units that paid approximately $2.69 million in construction taxes. The money went to capital funding and staffing primarily for transportation and infrastructure, according to city documents.

Klein said the city is not “flushed with cash,” so tax revenue could help offset structural imbalances.

“So you really have to choose which (is the) priority,” Klein said. “It’s like choosing between your children.”

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