S.J. needs change to create more affordable homes
The city of San Jose needs to change its formula for creating and funding affordable housing development as it struggles to attract investment in housing development.
Today, the San Jose City Council will review proposed amendments to its inclusionary housing ordinance, which if passed will craft a careful balance to improve the development feasibility of both marketrate and affordable homes.
San Jose’s current IHO requires that 15% affordable homes must be created in any residential development with more than 20 bedrooms. The ordinance also allows residential developers the option to pay an approximate $28 per square foot in-lieu fee instead of creating affordable homes on-site, which raises dollars for the city to finance its own affordable housing developments. While the IHO is well-intentioned, the current policy could potentially be a significant barrier to housing production.
The Silicon Valley Organization, the region’s largest chamber of commerce representing more than 1,200 businesses and 300,000 local employees, commissioned a research study by Beacon Economics LLC that conducted an analysis to assess the effectiveness of San Jose’s current IHO. Specifically, the study focused on housing development feasibility and how the IHO can be reformed to generate more dollars to finance affordable homes for our most vulnerable residents.
Key findings from our study include:
• On average, San Jose’s IHO adds about 5% to the cost of a development in the city where projects usually target a 5% to 6.5% return on investment in order to qualify as feasible.
• Out of 33 potential development projects across the city, only six projects are financially feasible with the IHO fee burden. If the IHO weren’t factored in, 19 of the 27 projects would be feasible.
• Only $3.2 million in in-lieu fees have been collected from a single project. With this revenue stream, this would equate to only 26 affordable homes that can be financed through the city’s Housing Department.
The need to build more deedrestricted, below market-rate affordable housing is more dire than ever before. If we are to reach Mayor Sam Liccardo’s ambitious housing goal of building 10,000 affordable homes and 15,000 market rate homes by 2022, then the current IHO formula must be reformed in order to move both market-rate and affordable homes forward.
To address the challenges of the housing market, the city is proposing a number of key reforms to the IHO.
First, a $43 per square foot in-lieu fee will be applied to all developments in the city of more than five bedrooms. The city is proposing an implementation strategy, delaying the $43 per square foot in specific geographic areas based on their analysis of housing development feasibility. For example, a lower in-lieu fee structure will be applied to East San Jose projects ($18.26 per square foot) and for downtown high-rises ($0 per square foot). The city will reevaluate this fee structure within three years and reassess whether the housing market has recovered before increasing taxes on housing developments. Second, the city is proposing a “mixed compliance” option to allow residential developers to build 5% moderate-income affordable homes, paired with an $18.26 per square foot fee. These could be “missing middle” homes that would support our teachers, firefighters and working families.
The city is headed in the right direction in changing the way it both creates and incentivizes affordable housing. Its approach places value on current market conditions, considers the development feasibility of housing projects by geographic area, and prioritizes moderate income affordable housing for our residents.
San Jose residents should support these key reforms to the city’s Inclusionary Housing Ordinance.