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Silicon Valley Town Eliminates Controversial Affordable Housing Fees

A polarized San Jose City Council last Tuesday voted 7-4 to eliminate affordable housing fees for downtown residential high-rises.

The resolution, which reduces San Jose's inclusionary requirement of about $25K per unit for 20-plus-unit developments to zero until 2023, was met with clear-cut support from San Jose Mayor Sam Liccardo, but censure by some council members. 

"I’m deeply concerned about the fact that we’re facing an ever-worsening housing crisis and yet here we are on the cusp of moving forward on another giveaway to developers while working families and communities are out working multiple jobs, struggling with increasing rents and all while enduring the worst of this pandemic," San Jose District 7 Council Member Maya Esparza said.

Downtown San Jose, California

The city initially moved on a November 10-1 vote to eliminate inclusionary fees through 2025 on downtown high-rises before implementation was stalled by the coronavirus. Opponents like Esparza cited a study done by the city anticipating a loss of $67M in revenue from the drop in fees, but Liccardo said the current economy has rendered that forecast moot.

“The $67M number is nothing but a charade," Liccardo said. "I’ve said it before, I’ll say it again. You do not get a single dollar out of a builder from a fee that they cannot get financing to build or if they do not want to build."

A study done by urban economics consulting firm Strategic Economics identified nine large-scale projects planned in the city's downtown, including a 708-condo project by Z&L Properties to Bayview Development Group's 630-unit project Miro, as raising $57M in affordable housing impact fees if built. 

Developers like KT Urban, which is an adviser to co-living company Starcity's 803-bedroom co-living project in downtown San Jose, say the city's fees paired with Bay Area construction costs have made many high-rises close to impossible to pencil. 

"San Jose’s rents never generated the returns necessary to attract the institutional capital that is crucial to build at scale," KT Urban partner Shawn Milligan said.

The fee elimination has the support of others as well.

“This shows true leadership on the part of the San Jose City Council," Cynthia Parker, president and CEO of nonprofit affordable housing developer Bridge Housing, said in a statement to Bisnow. "We need more housing supply of all types, period. Dropping the inclusionary in-lieu fee to $0 until June of 2023 might indeed be just the thing that makes a project more feasible.” 

Beginning after 2023, the inclusionary requirements on downtown high-rises will be gradually restored on a per SF basis after council voted to apply requirements that way last year. Projects obtaining building permits by June 30, 2024, or June 30, 2025, will pay $13 per SF and $23 per SF, respectively. After that, the full $43 per SF for for-rent projects and $25 for for-sale projects will be restored.

Projects also must receive certificates of occupancy for 80% of units by June 30, 2025, to qualify.