Affordable Housing & Fee Relief

Now that the demise of the San Francisco Redevelopment Agency is complete and transition plans are in place and gaining maturity, collateral issues are becoming the focus. The loss of the San Francisco Redevelopment Agency (“Agency”) jobs has caused concern and created friction during the transition. However, the single most attention-grabbing issue is the subtraction of the Agency as the catalyst and generator of subsidies for affordable housing in San Francisco.

For years, the Agency had been the most prolific creator and sponsor of affordable housing projects at all levels. Through the acquisition of land, earmarking the revenues generated by tax increment financing, and the creation of higher density opportunities through its Project Area Plans, the Agency had the tools and incentives to create affordable housing. All of the constituents including the Mayor’s Office, non-profit housing developers, market-rate housing developers, the Board of Supervisors, and others are in agreement that something should be done to fill in at least a part of the Agency’s affordable housing role.

Through the prompting of the Mayor’s Office, there have been a series of meetings of an informal working group known as the Housing Trust Fund Work Group. Although nothing has been decided and agreements are far from being reached (and there may never be agreement on this), many ideas have been floated to create a steady-and protected-revenue stream to fund affordable housing. Voters could be asked to weigh in on these ideas in upcoming ballot measures.

One proposal would simply create a funding set-aside out of existing revenues. Another proposal that seems to be gaining traction is establishing a Community Equity Increment Fund (“CEIF”). The CEIF would set aside a portion of the increased property tax revenue from the development of market-rate housing to fund new affordable housing construction. From that point, the discussions get dicey. In the initial years, the creation of tax increment, on its own, would raise small amounts of money, which would, over time, grow into a larger and relatively stable funding source. The Agency had been bonding tax increment income streams. This created additional up-front funding for affordable housing, but increases long-term debt obligations and financing costs. The talks within the Housing Trust Fund Work Group are varied. Many of the constituents would far prefer a “pay as you go” system simply using the actual dollars created. Others wish to use those funds for bonding purposes to produce more funding in the near term. As we understand it, the resolution is far from clear. A CEIF may or may not make it to the ballot, now, or possibly ever.

A related proposal that is gaining some interest has to do with the existing affordable housing requirements found at Sections 415 et. sec. of the Planning Code. Many of the participants in the talks are convincingly making the case that the existing affordable housing program is an impediment to creating market-rate housing because the cost of the inclusionary units or in-lieu fee requirements add a significant increment to the overall cost of housing production on the order of $50,000 to $70,000 a unit, depending on a variety of factors. There has been some discussion about reducing inclusionary requirements or continuing the inclusionary housing program but requiring that the Mayor’s Office of Housing use some of its CEIF to pay down the cost of those inclusionary units. Either approach could significantly boost the production of market-rate construction, and thereby increase revenue flowing to the CEIF and general fund. The outcome and probability of any agreement is again, unclear.

Finally, and by no means are we intending to be comprehensive in surveying the ideas that are being discussed, there has been some talk of an overall fee cap for new housing. As of now, in addition to the inclusionary housing requirements, depending on the location of the project within the City, there are school impact fees and PUC fees (which have gone up dramatically in the recent past). There is also talk of the imposition of a transit fee and an art fee on the production of housing. In addition, much of the proposed new housing is within relatively new and recently enacted “plan areas” which include their own infrastructure fees that can be in the range of $20 per square foot. Combined with the inclusionary housing mandate, total city fees clock in at $80,000 – $90,000 per unit in areas like Rincon Hill. Taken as a whole, those fees simply don’t pencil on many projects and create significant increased costs on those that get built. Unfortunately, some constituencies are resisting the very idea of a study that would comprehensively analyze the impact of all exactions on the feasibility of new housing production – a critical first step in determining whether a cap is needed, and, if so, at what level it would be set.

We will continue to monitor and try to provide at least the most important ideas being discussed in subsequent E-letters. Certainly if any agreements are reached, they will be well-publicized and will probably be on the ballot for electorate consideration.

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, 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.

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