SV@Home’s Resource Hub is a comprehensive source of knowledge on housing topics, data on housing in all of Santa Clara County’s jurisdictions, and policy solutions such as San Jose’s new Commercial Linkage Fee. While the passage of the CLF was most definitely a win for the hundreds of people in the city who have advocated for this measure over the last few years, the adopted fees are the lowest in the county and exclude some types of development. SV@Home is committed to tracking the progress of the Commercial Linkage Fee ordinance’s implementation, and advocating for significantly higher fees in 2022 if they are reflective of the feasibility analysis.

BY: Matthew Niksa┃Silicon Valley Business Journal
PUBLISHED: Sep 10, 2020, 2:55pm, Updated Sep 10, 2020, 3:12pm

Within the next two years, San Jose plans to conduct a follow-up study on the effect its new commercial linkage fee has on the feasibility of commercial development within the city. It’s a chance for city officials to not only determine whether to adjust the fee rates that the City Council approved at a meeting last week, but also to gauge how well San Jose’s commercial real estate market has recovered from the Covid-induced economic downturn. 

What the next two years are not is a “trial run” for the fee, which is assessed on new commercial projects to offset the need for affordable housing created by that development, said Chris Burton, deputy director of San Jose’s Office of Economic Development, and Nanci Klein, San Jose’s director of real estate.

“It’s not an unreasonable reference,” Burton said Sept. 3 on the notion that the next two years represent a trial run. “I’m not sure it’s exactly how I would represent it … It’s more that we need to get a handle on what the state of the market is, post-pandemic, and the reality is we won’t fully understand those conditions for probably two years, and that’s why it’s in that timeframe,” he said, referring to the linkage fee feasibility study. 

The commercial linkage fee ordinance that the council approved during the wee hours of Sept. 2 is by far the most complicated in the Bay Area, affordable housing advocacy group SV@Home says on its website. Here’s a breakdown of several of the ordinance’s fee levels: 

• For an office development smaller than 100,000 square feet located in downtown or the rest of the city, the fee is $0 a square foot for the first 40,000 square feet and $3 for every square foot over 40,000 square feet. 
• For a hotel project in downtown or the rest of the city, the fee is $5 a square foot, or about $3,300 a room. It excludes hotel common areas. A hotel developer also has the option of constructing a number of affordable housing units equivalent to the applicable fee.
• For an industrial or a research and development project, the fee is $0 if it’s smaller than 100,000 square feet in size. If it’s greater than or equal to 100,000 square feet in size, the developer has three options: pay $3 a square foot upon certificate of occupancy (COO), construct a number of affordable housing units equivalent to the applicable linkage fee, or pay $1 a square foot at issuance of COO for a warm building shell and another $2 a square foot proportionate to the percentage of rentable building space for which there is tenant improvement certification.
• For a retail project, the linkage fee is $0, regardless of size or location in the city. The City Council voted to set the fee for new retail space to $0 in light of how hard San Jose’s retail sector has been hit by the Covid-19 pandemic and the Bay Area’s shelter-in-place order.

(Note: If you’re interested in learning more about the different fee levels, SV@Home’s website includes a table that provides a more comprehensive breakdown. Click here for the link).

The effective date of the linkage fee ordinance is Oct. 15 and the effective date of the fee resolution, which sets the various fee levels, is Nov. 14. That said, the ordinance applies to all commercial projects that had a condition of approval in their development permits to pay the linkage fee, effective since October 2019, said Jacky Morales-Ferrand, director of San Jose’s housing department, during last week’s council meeting. 

Among the notable commercial projects in just downtown San Jose that have been granted development permits since October 2019 include Jay Paul Co.’s CityView Plaza redevelopment, Urban Catalyst’s Fountain Alley Building project, and Acquity Realty’s The Carlysle mixed-use tower development. None of these specific projects are slated to be completed before the city of San Jose reevaluates its linkage fee ordinance sometime during the next two years.

When asked whether he knows of any large (100,000+ square feet), non-owner-user office projects in downtown San Jose that could receive COOs within the next two years, Shane Minnis, vice president at Colliers International’s San Jose office, said none came to mind. Minnis said that, not including the current Covid environment, new office developments are typically pre-leased and targeted toward a single tenant.

Therefore, a developer doing a large office project in downtown would likely prefer to pay a linkage fee amount of $12 a square foot upon COO, he said, instead of choosing to directly build affordable housing units equivalent to the applicable fee or pay $5 a square foot at issuance of COO for a warm building shell and another $10 a square foot proportionate to the percentage of rentable building space for which there is tenant improvement certification.

Burton acknowledged that there’s a “real limit” to Class A new construction lease comparables, or “comps,” in San Jose, but said that “certainly there’ll be market information to see how the demand for office space is trending in downtown and other parts of the city” — such as Class A leases on existing spaces — between now and when the next feasibility study on the linkage fee is conducted.

Klein added that if San Jose’s economy were to rebound sharply, that and potential changes to the linkage fee ordinance could help get some developers off the sidelines. 

“It may be that the economy really picks up … If that were the case, then when we re-evaluate, the commercial linkage fee may be higher,” she said. “And so developers that begin to see an eye for that would prefer to go sooner rather than later.”