Photo credit: San Jose Spotlight

It is imperative that as local jurisdictions take steps to help market rate housing development move forward, they do not sacrifice the significant public benefit of the City’s Inclusionary Housing Ordinance (IHO), an important tool to meet the needs of our lower-income residents struggling everyday with the high costs of housing in San Jose. 

The current environment for market-rate housing development in San Jose is extremely difficult, driven by high interest rates and the high costs of land, materials, and labor. Despite a significant number of residential developments having applications deemed complete or having received planning entitlement, in 2024 no projects began construction. At SV@Home, we believe this is an environment where it is appropriate to incentivize these projects to move forward as quickly as possible: San Jose needs more housing construction, and the industry needs to know that the City is taking steps to reduce costs and is open for business. These steps need to be carefully calibrated to preserve the value of the IHO to deliver affordable housing.

In June of 2024, as they renewed the City’s Downtown Highrise Program of incentives and fee waivers, Council directed city staff to explore reducing costs of development within the City’s control and to propose options to reduce certain fees and taxes. As this proposed program was developed, it became known as the Multifamily Housing Incentive Program (MHIP). In the MHIP staff memo, staff revealed that their analysis showed that “not many” of the targeted projects would be feasible in the current market, even if fees and taxes were reduced to zero in the current market. However, they hoped reducing fees may allow some developments to attract investors and move forward in 2025. Despite the uncertainty concerning whether the Program’s cuts would improve the feasibility of development, Council voted 9-1 to adopt the MHIP. 

The MHIP targets 35 non-highrise, high density multifamily developments in growth areas in the city with applications deemed complete by the end of 2022. These projects may be eligible for entitlements that expire as far in the future as 2029, representing a large proportion of the city’s residential development for this planning cycle. Although these include both market rate and affordable developments, the Program primarily benefits the 19 listed market rate developments, since affordable projects have no IHO obligation and are already eligible for discounts on some other fees impacted by the MHIP. The Program includes deep cuts to IHO obligations, which are reduced to just 5% of inclusionary units built on-site at 100% AMI with no alternative means of compliance (and notably, no in-lieu fees). 

It is important to point out that 100% Area Median Income (AMI) is not affordable housing in San Jose’s housing market. SV@Home’s analysis shows that current market rents are well below the City’s published rent limits for 100% AMI inclusionary units, compared to rents in the City’s most recent Housing Market Report. The table below shows that the City’s rent limits for 100% AMI 1- and 2-bedroom units are more than $1,000 above current rents in the market, including both existing and new construction units.

Notably, City staff reached a different conclusion about the relative affordability of 100% AMI units by calculating rent limits based on the net income of a household rather than the method established in the City’s published IHO program guidelines, which use HCD’s instructions and are based on gross income. HCD’s calculations of AMI and rent limits are also used to set affordability for developments receiving financing through state and federal tax credits, by far the most common source of funding for standalone affordable housing. 

We also note that cost burden, defined by the federal government as paying more than 30% (cost burdened) or 50% (severely cost burdened) of gross monthly income for housing costs, is most prevalent in Santa Clara County for households with very low or extremely low incomes. While 21% of households with moderate incomes (including those earning 100% of AMI) experience cost burden, very few experience severe cost burden. The city’s Regional Housing Needs Allocation (RHNA) responds to this depth of need by obligating the City to plan for about 24,000 new Low and Very Low Income units over the next 7 years. We believe there is a strong case to target programs such as IHOs and City subsidy to those experiencing the harshest impacts of our area’s affordability crisis.

To that end, SV@Home met with City staff and councilmembers to advocate for a phased approach in the MHIP: that the staff recommendation apply to the first 1,500 units in the eligible project list that also obtain a city building permit by December 31, 2025. This would allow developments that might be close to feasibility to move forward quickly. Thereafter, we proposed a choice for developers of 5% of units affordable at Very Low Income (which opens access to the State Density Bonus Law, providing regulatory relief and associated cost savings for developers at no cost to the City) or in-lieu fees reduced 65% to 70% from their current levels. This would preserve some of the benefits of the IHO in creating truly affordable housing.

Although in the face of pressure to move developments forward Council ultimately elected to adopt staff’s proposal, we appreciated the opportunity to engage in thoughtful discussions with City staff and councilmembers. We will continue to be engaged in future discussions around the IHO and City subsidy of affordable housing as well as working collaboratively with partners to identify new potential sources of funding for affordable housing.