Mathew Reed, Policy Manager at SV@Home, explains that the commercial linkage fee is a critical part of how neighboring cities build affordable housing. “What the nexus study shows is that as you add space, you create opportunities for new jobs, and many of those jobs don’t pay enough for people to afford to live in the city,” Reed said. “That’s why it’s so important that the city be held accountable and be responsible to make sure that we grow.”

BY: Matthew Niksa ┃Silicon Valley Business Journal
PUBLISHED: July 20, 2020

The city of San Jose now has the first of two reports that document how new commercial projects impact San Jose’s cost of living and housing crunch, and whether a one-time fee aimed at supporting affordable housing would deter new development.

More than a year after launching a study on so-called “commercial linkage fees,” the nexus study by real estate advisory firm Keyser Marston Associates Inc. on these one-time costs for new commercial developments was released Friday. It helps shed light on an issue of keen interest to developers and community housing groups alike.

Mathew Reed, policy manager at affordable housing advocacy group SV@Home, said Monday that the commercial linkage fee is a critical part of how neighboring cities build affordable housing and argued it’s been missing from San Jose’s toolkit.

“What the nexus study shows is that as you add space, you create opportunities for new jobs, and many of those jobs don’t pay enough for people to afford to live in the city,” Reed said. “That’s why it’s so important that the city be held accountable and be responsible to make sure that we grow.”

The Business Journal has reached out to several developers and will update this story as they respond.

The study shows the maximum supported levels for a commercial linkage fee, which is assessed to offset the need for affordable housing generated by new commercial projects. (See this graph for more.)

To be clear, the maximum fee level findings included in the chart, which reflect the cost of mitigating affordable housing impacts of new development excluding parking, are not recommended fee levels.

The San Jose City Council last month voted to cap the maximum commercial linkage fee rate at $20 per square foot for new office or research and development (R&D) developments on Sept. 7 if councilmembers don’t get a linkage fee recommendation from city staff by Sept. 3.

Councilman Raul Peralez, who recommended the $20 office/R&D fee rate cap in a June 15 memo, based it on the office/R&D commercial linkage fee rates in Sunnyvale, Cupertino, and Santa Clara that range from $16.50 a square foot to $24.60 a square foot.

The rate cap would remain in effect alongside a temporary infrastructure fee cap for building permits issued before Jan. 1, 2023. Setting the maximum linkage fee rate at $20 in tandem with the infrastructure fee cap “will allow developers to have clear guidelines and be able to anticipate all of the costs to continue with their developments,” Peralez said in his memo.

For context, the maximum supported commercial linkage fee level for new San Jose office space not designed for a high-tech tenant is $137.70 a square foot, and $151.30 a square foot for new high-tech office space, according to Keyser Marston’s report. For R&D space, the maximum supported fee level is $108.80 a square foot.

Chris Burton, deputy director of San Jose’s Office of Economic Development, said in a Monday email that the commercial linkage fee, if adopted, would only apply to projects that are approved after it is adopted. Typically, development impact fees such as the linkage fee are assessed when building permits are being issued, Burton said. The City Council is slated to vote on the linkage fee program at an Aug. 25 meeting and at that time will be asked to consider approving an ordinance and a fee resolution, according to Keyser Marston’s study. The ordinance would establish the fee, effective Oct. 15, while the resolution would set the fee amount, effective Nov. 14.

The fact that the fee is expected to only apply to projects whose building permit applications are approved after its adoption is notable because developer Jay Paul Co.’s redevelopment of CityView Plaza in downtown San Jose — a project that would become the largest single office project in Silicon Valley, which the City Council approved last month — would, therefore, be exempt from the fee if its building permits are issued by Aug. 25. The approximately 3.79-million-square-foot project would generate about $73.28 million in linkage fees, assuming Peralez’s recommended fee cap of $20 a square foot and excluding the project’s parking component. The Business Journal has reached out to Jay Paul for comment and will update this story if it receives a response.

SV@Home’s Reed said that due to the Covid-19 pandemic and the economic uncertainty it’s brought, now is a “very difficult time” to assess the feasibility of different commercial linkage fees. “We feel that the fees have to be robust. As the demand is created, we need the resources” for affordable housing, he said.

But Dick Scott, president of the Silicon Valley chapter of commercial real estate association NAIOP, said in a Monday email that commercial property owners and stakeholders are concerned with the linkage fee nexus study because the cost of construction, including fees, “will inevitably be passed to both small and large tenants as a cost of rent.”

“As we’re trying to be mindful of both the personal and financial impact of Covid-19, this is not the time to add financial burden to our businesses,” Scott said. “We’re waiting to review the feasibility study results, but know that additional fees would impact investment in the city and be a continued threat to retaining and increasing jobs in San Jose and potentially the region.” The feasibility study coming out at the end of this week will examine the economic feasibility of implementing new commercial linkage fees by building type and geographic area and will also recommend fee levels for San Jose’s linkage fee program.

Madison Nguyen, executive vice president of The Silicon Valley Organization, said in a Monday email that San Jose “must not be counterproductive by overtaxing commercial developments.”

“Covid-19 will have long-term impacts on the viability of commercial projects,” Nguyen said. “We are already seeing early signs that job densities will be lower as companies transition to remote working permanently. Speculative financing will likely be more difficult to attain in this economic downturn.”

Nguyen said the right approach is a “very low commercial linkage fee” that is sensitive to changing market conditions. She added that the Silicon Valley Organization would need to look at the linkage fee’s feasibility study to determine what’s an appropriate fee rate.

Correction/Clarification

This story has been updated to clarify that the proposed new commercial linkage fee is expected to only apply to projects whose building permit applications are approved after its adoption.