October 10, 2024

Potential Changes to Inclusionary Housing Requirements in San Jose

Share:

Image: Prado Apartments, Santa Clara

What is an Inclusionary Housing Ordinance (IHO)?

Inclusionary housing ordinances require market-rate developments to restrict a percentage of new housing, usually, 15% of units, to be affordable to residents with incomes at lower income levels. Every major city in Santa Clara County now has an Inclusionary Housing Ordinance.  Cities often also provide alternative compliance methods, such as in-lieu fees, off-site affordable housing construction, or land dedication. 

Why are IHOs essential to producing affordable units?

  • There are very few local funding sources or policy tools to produce homes for families and individuals earning between 60% and 120% of the area’s median income (AMI). Inclusionary housing ordinances are critical to serving this population and helping address housing needs across a broader range of incomes.
  • Affordable units built within these traditionally market-rate developments promote mixed-income communities, providing equal access to services and amenities for people from diverse socioeconomic backgrounds.
  • Alternative off-site or contiguous-parcel development of 100% affordable buildings can leverage both the developer’s contribution and additional sources of state and federal funding to reach deeper levels of affordability.
  • In-lieu fees are an important source of local funding that cities can use to help close the gap for 100% affordable developments. These affordable developments leverage $3 – $5 of state and federal funding for every $1 investment of City funds.

What does San Jose’s IHO require now, and what changes is the City considering?

The City of San Jose’s IHO currently provides developers with a broad menu of options to satisfy inclusionary requirements. The base obligation for rental developments with ten or more units is to build affordable units on-site and dispersed throughout the residential community with either:

  1. 5% of units for households earning ≤ 100% AMI, 5% ≤ 60% AMI, and 5% ≤ 50% AMI, or
  2. 10% of units for households earning ≤ 60% AMI

Alternative means of compliance are extensive and include in-lieu fees, land dedication, partnership with an affordable housing developer to build a 100% affordable development or a mix of these alternatives.

Current economic conditions are creating strong headwinds for both market and affordable housing production. The high costs of construction materials, labor, high interest rates on loans, and rising insurance costs have led to very few new communities, even those that already have city approval, moving forward in 2024. In November of last year, the Office of Economic Development presented what has become an annual Cost of Residential Development Study to the City Council. The study showed that unless rents increased significantly, market-rate housing development was not financially feasible anywhere in the city.  Importantly, the study showed this was not due to city fees and taxes.  In fact, during the study period, the city could have eliminated every tax and fee, including housing fees and park fees, and projects still would not be feasible.  Despite this finding, in June 2024, the City Council directed staff to identify fees and taxes that could be reduced or waived to help stimulate development in the existing multifamily housing pipeline in growth areas outside of downtown.

City staff are currently proposing dramatic reductions in the affordable housing inclusionary requirements as they are developing this Residential Incentive Program (RIP). The current proposal waives all inclusionary fees if developers set aside 5% of new units at rents affordable to moderate-income households at 100% of AMI.  Current market rents are already at or below this level, meaning the proposal would essentially eliminate all the public benefits of the Inclusionary Housing Ordinance for affordable housing in these growth areas.  

Staff estimates that about 10,000 units of housing may qualify in developments with applications deemed complete by the end of June 2022 (although the exact universe of projects is not yet clear). Applicable developments would likely be in or adjacent to planned development areas or transit-oriented development with a density of 50 or more units per acre and 4-5 stories tall. These projects include all or most of the residential projects in the city, representing four to five years of planned development.

Other potential concessions include a reduction in parks fees in North San Jose that would bring fees into alignment with the rest of the city, a reduction in certain construction taxes that fund the City’s capital budget and staffing, and a new process for paying fees and taxes after the building is built rather than when construction begins. 

City staff has met with a variety of stakeholders, including labor, developers, and advocates focused on housing, parks, and transportation, to solicit feedback. We at SV@Home have actively participated in these meetings, providing comments and feedback in an effort to explore all the possible strategies for spurring more housing production but not at the expense of our neighbors most vulnerable to displacement. Staff continues to collect feedback and analyze the fiscal impacts to the City along with the likelihood of development feasibility. We will continue to watch this space and inform you all (our members and partners) as staff prepares to make a recommendation to Council before the end of the year. At that time, they will also propose a list of specific qualifying developments.