This Thursday, March 22nd, the Planning Commission will hear an informational presentation on an economic feasibility study regarding the potential for increasing the on-site inclusionary housing requirement in the Divisadero Street and Fillmore Street Neighborhood Commercial Transit Districts (NCTs). The report on the study concludes that in the Fillmore NCT the new inclusionary housing program’s affordability levels coupled with construction costs make a typical development project infeasible. And on the flip side, minor increases could be possible in Divisadero NCT, but not up to the total “ramping up” required by the Planning Code. The study may pave the way for the City to ultimately adjust the affordable housing requirements in these two districts. It provides an interesting case study.
By way of background, the City rezoned the Divisadero Street and Fillmore Street Neighborhood Commercial Districts (NCDs) to the Divisadero Street and Fillmore Street NCTs in 2015, which eliminated density limits. The rezoning legislation pointed to an unprecedented demand for housing and rising housing costs as the catalyst for getting rid of residential density. The goal was to find new ways to accommodate more housing units into the existing urban fabric to meet current and future demand without negatively impacting neighborhood character. Removing density limits while keeping other development standards intact allows more housing to be put into the same size buildings, and thus enables the City to increase the potential number of units permitted without increasing the scale of the district.
As part of the inclusionary housing overhaul in July 2017, the Board of Supervisors included a provision in Section 415.6(a)(8) that requires the Planning Department and Office of the Controller to study whether a higher on-site inclusionary housing requirement is feasible in rezoned areas that meet certain criteria. Of all the rezoning activities since January 1, 2015, only the rezoning of the Divisadero and Fillmore NCTs met the criteria for the mandatory feasibility study.
The economic feasibility study for the two districts estimated the maximum potential on-site inclusionary housing requirement that would be “economically feasible” for a typical development under current economic conditions. The “maximum” was calculated based on the assumption that any increase in property value attributable to the rezoning would be absorbed by the on-site inclusionary requirement. In calculating this value, the study found that there has been a significant increase in costs, and only a limited increase in prices and rents, if at all, since 2016 – an unexpected acknowledgment by the City that increased costs are making it harder to capture value from rezoning.
The study assumed that under the prior density limits, only projects under 25 units would be feasible in most cases, thus a 12% inclusionary housing requirement was applied. Based on the study’s prototypical development projects, the number of units in the Divisadero NCT was projected to rise from 16 to 47 units for condo projects, and 53 units for apartment projects. The Fillmore NCT was projected to grow from 21 units to 37 unit for condos and 43 units for apartments. This would bump each of the prototypical projects into the higher inclusionary housing requirement for 25 or more units.
The study ultimately found that the Divisadero NCT could support a maximum on-site inclusionary housing requirement of 23% for ownership units and 20% to 22% for rentals, slightly higher than the current citywide inclusionary requirements of 21% for ownership units and 19% for rentals. But most importantly, these maximums are still lower than the final citywide inclusionary housing percentages, which will ramp up annually until reaching 26% for ownership units and 24% for rentals in 2027. The study assumed an AMI breakdown of 50% low-income, 25% moderate-income, and 25% middle-income for ownership units and 56% low-income, 22% moderate-income, and 22% middle-income for rentals. This assumption was based on the pre-2018 AMI breakdown, which has since changed and will continue to shift annually until 2027.
Interestingly, the study concluded that the Fillmore NCT could not support additional inclusionary housing requirements. In fact, under current market conditions, the prototypical development project in the Fillmore NCT would not be feasible even with the current citywide inclusionary requirements for projects over 25 units.
The report is clear that the study was done solely for “illustrative purposes” and that the results are only applicable to the specific prototypes and projected unit counts. Nevertheless, the City may ultimately use the study’s findings to raise the affordable housing requirements in the Divisadero NCT District. The report also sheds light on the fact that the study’s typical development project would not be feasible in the Fillmore NCT under current inclusionary requirements. The practical implications of these findings are still up in the air. Stay tuned to see how this all shakes out.
Authored by Reuben, Junius & Rose, LLP Attorney, Sabrina Eshaghi
The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full-service real estate law firm. We specialize in land use, development, and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision, and condominium work.