Mayor Lee Proposes Transformative Affordable Housing Reform
You’ve got to give it Mayor Lee – he is thinking big. For a guy who has spent his career working within the confines of local government, now in his new role as the City’s top policymaker, he has shown a bold willingness to make big changes to how local government is run. The latest example of our Mayor’s big-thinking is his current proposal to completely restructure the way affordable housing is funded in San Francisco.
It’s not hyperbole to state that affordable housing production in San Francisco is at a crisis point. A number of major events – the global economic downturn, the end of California Redevelopment, significantly reduced state and federal funding – have conspired to make housing for middle- and lower-income families almost non-existent in the City. Just last week, the Wall Street Journal published an article on the difficulty of renting an apartment in San Francisco, quoting one former New Yorker making the move here saying “finding a rental home in San Francisco is ‘so much more cutthroat’ than in Manhattan.” Needless to say, this is not an area where we want to be beating New York.
Enter Mayor Lee, whose common-sense, no-drama approach to governing has won him a large mandate from a public tired politicians bickering over irrelevancies. His proposed Housing Trust Fund, and the various components of the “deal” to fund it, could in one swift action provide a mechanism for increased affordable housing production, while significantly reducing the burden felt by developers of new housing.
The Trust Fund
The core of the affordable housing reform is the creation of a new Housing Trust Fund. This fund would be administered by the Mayor’s Office of Housing, and would be used to:
- create, acquire, and rehabilitate housing affordable to households earning up to 120% AMI;
- provide loans to households earning up to 120% AMI for the use of down payments for the purchase of a new home;
- provide loans to households earning up to 120% AMI for the use of avoiding a homeowner’s loss of their home or rehabilitating housing;
- fund infrastructure improvements that would support increased density in the City;
- secure public bonds to be used to create, acquire, and rehabilitate affordable housing.
Funding for the Trust Fund would come from several sources. The City will kick in general fund monies each year, beginning with $20 million in the first year, increasing each year up to $50 million. The Mayor expects much of these monies to come from hotel tax revenue and leftover funds from the Redevelopment Agency. The remaining amount will come from two new sources of revenue.
Many of you have probably already heard that the Mayor and Supervisor Chiu will be introducing a ballot measure to change the payroll tax the City charges businesses into a gross receipts tax. If passed, new business registration fees are expected to generate $13 million, to be put towards the Housing Trust Fund.
Mayor Lee is also proposing a new transfer tax increase of 0.2% on transfers of real property sold for more than $1 million. This will spread the burden of affordable housing costs beyond just new residential developments to include all sales of such properties. Affordable housing funding is currently unstable, due to the fact that most funding comes from new residential development, which goes up and down depending on the development cycle and the economy. Since existing property sells every year in San Francisco, this will provide a much more stable source of affordable housing funds. As we’ve written before, this is also a more equitable way to pay for affordable housing – is there any reason why existing homeowners should not bear any of the affordable housing burden?
Some may argue that limiting the transfer tax to just sales of over $1 million is not equitable in itself. Indeed, roughly 19% of the residential property sales in San Francisco in May 2012 were for homes of $1 million or more, according to Pacific Union International. Board of Supervisors progressives John Avalos, David Campos, Jane Kim and Eric Mar have put a competing transfer tax increase on the ballot for this November, but it would only increase the transfer tax on the sale of properties for more than $2.5 million.
Relief for Residential Developers
And now for the good stuff. Mayor Lee’s Housing Trust Fund initiative would also reduce current affordable housing burdens on residential developers. These changes include:
- Reducing the citywide on-site below-market rate (“BMR”) requirement from 15% to 12% (off-site and affordable housing fee would not change);
- Prohibits the City from increasing the BMR percentages for on-site BMR, off-site BMR and the affordable housing fee;
- Prohibits the City from adopting any new exaction or fee to be used for affordable housing;
- Increases the unit count threshold subjecting residential projects to the Affordable Housing Program from 5 to 10 units.
It goes without saying that this is a significant improvement on the current affordable housing burden on residential developers. It’s not often in San Francisco that there is a serious discussion about reducing exactions and fees on new development. If enacted, all of these improvements (except for the Affordable Housing Program threshold increase) would be written into the City Charter, meaning it would take another Charter amendment to change the on-site BMR rate or add any new affordable housing fees.
The fate of the Housing Trust Fund is in no way secure at this point. The reform package is made up of several different legislative vehicles – the Trust Fund, the payroll/gross-receipts tax reform and the transfer tax increase are all separate ballot measures to be voted on separately this November. The Affordable Housing threshold increase is an ordinance that needs to be passed by the Board. That said, the Mayor has already lined up significant support. The Housing Trust Fund charter amendment is co-sponsored by Supervisors Wiener, Olague, Kim, Avalos and Mar. The payroll/gross-receipts tax reform is co-sponsored by Supervisor Chiu. That’s six Supervisors that are co-sponsoring some aspect of the reform package (and a politically diverse bunch too).
We will be watching the Housing Trust Fund Reform carefully as it makes its way through the process and will be keeping readers informed on future developments.
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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