Leslye Corsiglia, executive director of SV@Home, said that she supported the council’s action because it only impacted a handful of proposed high-rise developments, and eased conditions that made it economically infeasible to build. The exempted developments would be market rate, but would still help with our overall supply-demand imbalance. SV@Home is concerned about the potential expansion of this policy beyond the handful of projects that were initially identified last November, and the human costs of our failure to provide affordable homes for struggling families. Building affordable homes for lower- and moderate-income families requires tools like inclusionary zoning and funding sources like the commercial linkage fee under consideration by council.

BY: Matthew Niksa ┃Silicon Valley Business Journal
PUBLISHED: August 20, 2020 6:09pm PDT

When a divided San Jose City Council voted Tuesday to temporarily eliminate the affordable housing “in-lieu fee” for certain residential projects in downtown, it did so to spur the construction of more apartment and condo units in the city’s core by removing the burden of additional development costs.

Before Tuesday, a residential developer looking to build a project with at least 20 new units in downtown had a choice under the city’s Inclusionary Housing Ordinance (IHO): ensure that 15% of the development is set aside for onsite affordable housing or pay an in-lieu fee of $43 a square foot if the project’s units are for rent or $25 a square foot if the project’s units are for sale.

But in a 7-4 vote, the City Council approved eliminating the IHO’s in-lieu fee for downtown residential projects that are at least 10 stories tall if they obtain building permits by June 30, 2023. The resolution the council adopted included annual increases to the in-lieu fee: $13 a square foot for projects obtaining building permits by June 30, 2024, and $23 a square foot for projects obtaining building permits by June 30, 2025.

The council also voted to conduct a feasibility study into extending the in-lieu fee reduction to other parts of San Jose, such as the areas around the Diridon and Berryessa transit centers. Mayor Sam Liccardo, Vice Mayor Chappie Jones and councilmembers Raul Peralez, who represents downtown, Lan Diep, Dev Davis, Pam Foley and Johnny Khamis voted in favor of the fee reduction. Councilmembers Sylvia Arenas, Magdalena Carrasco, Maya Esparza and Sergio Jimenez were against it.

Tuesday’s vote was a follow-up to what the council discussed at a meeting last Nov. 5, in which it requested city staff to return with a resolution to extend the in-lieu fee reduction for both for-sale and for-rent highrise projects in downtown that obtain certificates of occupancy before June 30, 2025.

After June 30, 2025, the in-lieu fee returns to its full amount — $43 a square foot if a residential highrise project is for rent and $25 a square foot if it’s for sale. Notably, projects that fit the criteria for the in-lieu fee reduction would also need to obtain certificates of occupancy for 80% of units by or before June 30, 2025, to be eligible for the reduction.

Case Swenson, president and CEO of San Jose-based developer Swenson, said in a Thursday email that he was thrilled about the city council’s decision, adding that he wishes the city would also extend the fee reduction to Midtown, an area southwest of downtown that’s generally bounded by The Alameda/West San Carlos Street, Los Gatos Creek, the properties south of Auzerais Avenue and Meridian Avenue.

“At the bare minimum, they should allow affordable by design on a percentage of the units that are not in the downtown core or are high rise,” Swenson said.

Alex Sinunu, founder of Rendr Inc., a Palo Alto-based development services company, is concerned about what construction lenders may say about the two deadlines to meet the in-lieu fee, one for building permits, the other for certificates of occupancy.

“Say you achieved a building permit by June 2023,” he said. “Is a lender going to force you to set aside an extra $13 a square foot in case you miss the June 2025 certificate of occupancy deadline?”

Leslye Corsiglia, executive director of affordable housing advocacy group SV@Home, said in a Wednesday email that SV@Home supported the council’s action at its Nov. 5 meeting because it was narrow in scope — it impacted only a handful of proposed high-rise developments and conditions made it economically infeasible to build.

“Even though the exempted developments that benefited from the action would be market rate, it would help with our overall supply-demand imbalance,” Corsiglia said.

That said, she and SV@Home are concerned about the potential expansion of this policy beyond the handful of projects that were initially identified last November. One of those projects is Garden Gate Tower, an approved 290-unit condo tower at 600 S. 1st St. in downtown that is being developed by the U.S. platform of Scape, a British developer that specializes in student housing, and KT Urban. SV@Home was also disappointed that there was “very little discussion Tuesday night, with one exception, about the human costs of our failure to provide affordable homes for struggling families,” Corsiglia said.

“The only way to build affordable homes for lower- and moderate-income families is to provide additional funding or adopt tools like inclusionary zoning,” she said. “And, as we know, funding to build affordable housing is limited, meaning that lots of different approaches are required to meet the need,” examples of which include a strong inclusionary zoning ordinance and funding sources like a so-called “commercial linkage fee,” a one-time fee for new commercial developments aimed at supporting affordable housing.

The City Council is slated to vote on the linkage fee program at a Sept. 1 meeting and at that time will be asked to consider approving an ordinance and a fee resolution. The ordinance would establish the fee, effective Oct. 15, while the resolution would set the fee amount, effective Nov. 14.

Dick Scott, president of the Silicon Valley chapter of commercial real estate association NAIOP, said in an email that providing a reduction and/or elimination of the in-lieu fee “is a great start” toward lowering costs and barriers to develop San Jose.

“As the city continues to try to improve the jobs-to-housing ratio, we sincerely hope the City of San Jose will suspend the commercial linkage fee for all development until the impacts of the current health and economic crisis are fully understood,” Scott said.