San Jose City Council Votes to Extend Incentives for High-Rise Developers Downtown

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San Jose skyline at dusk, taken from the Silicon Valley Capital Club. (Rachael Myrow/KQED)

Updated Wednesday, Sept. 25, 8:10 a.m.

Following roughly five hours of debate, the San Jose City Council Tuesday night narrowly voted 6-5 to extend a package of fee breaks for downtown housing developers to encourage new construction through 2023.

Supporters like Mayor Sam Liccardo argued continuing waivers on things like affordable housing impact fees are necessary in a real estate market growing more expensive by the day.

"These are all folks who have been hunting for financing. It’s not like they’re sitting on their hands. And we haven’t seen a single high-rise tower break ground in nearly two years," Liccardo said. "So we’ve got a market that is telling us simply that it’s not viable to move forward unless we do something to reduce the cost.

Still, several council members balked in the face of criticism from people like Louise Auerhahn, director of Economic and Workforce Policy with Working Partnerships San Jose.

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"Every single time, we’re promised this is the last time. Well, now it’s 2019. We’ve had this temporary subsidy for well over a decade, and while we’ve been running this experiment, has this model worked to produce affordable housing? No!" Auerhahn said.

The vote followed the most contentious reassessment of the incentives in more than a decade.

San Jose officials first approved the Downtown High Rise Incentive Program before the Great Recession brought development to a screeching halt in late 2007. Since then, the City Council has extended the program both in terms of dates and benefits.

As it stood, the incentive package included a 50%-off discount on park impact fees, as well as two primary construction taxes, and delays payment of those construction fees until the development has tenants in place renting units.

More controversially, downtown developers also get a break on a $17-a-square-foot affordable housing impact fee, if they meet certain criteria designed to spur construction sooner rather than later.

City staff calculate that the program can be credited with adding 1,522 units since it began, and an additional 1,043 units in the pipeline.

That was then, this is now

In the last two years, Google has launched an expansion on a massive scale near Diridon Station downtown, fueling a local real estate gold rush in a neighborhood that has struggled for decades.

The local chamber of commerce argued this is no time to end the party by allowing construction incentives to lapse.

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"Many of these cranes are here specifically because of the fee reduction program. In the absence of it, the investor risk, the volatility of the markets, actually make it very difficult for these high-rises to pencil out," said Eddie Truong, director of government and community relations for the Silicon Valley Organization.

Truong added, "Most people think builders in general have a very large cash reserve to invest in residential high-rises. If you can't demonstrate with a business plan that you can get a reasonable return on investment, you're not going to get investor funding or lender financing from the capital markets."

Construction, land and labor costs have been rising in San Jose and sky high rents appear to have hit a ceiling, limiting that potential return on investment. Development costs for high-rise apartments average $651,000 per unit, according to city staff.

An opinion piece published by Silicon Valley Organization's President & CEO Matthew Mahood argues that developers have to promise at least a 5% profit to secure lender financing. As it happens, a project feasibility study referenced in the agenda item before the San Jose City Council argues the same — that high-rise developments in the downtown core are not generally feasible without the current fee reduction program.

Liccardo was solidly behind extending the incentives. In a statement released last week, he argued that “Exceedingly high construction costs will prevent any residential builder from getting the financing to build a high-rise in Downtown for several years—despite a housing crisis that screams for more housing."

The statement added, "Either reduce fees and get housing built, or we sit on our hands and hope for some miracle to solve this housing crisis for us.”

One South Market is one of the newest additions to San Jose's downtown skyline. Because of a recent Supreme Court ruling, San Jose can still require new developers to set aside some of their units for sale below market value.
One South Market is one of the newest additions to San Jose's downtown skyline. Because of a recent Supreme Court ruling, San Jose can still require new developers to set aside some of their units for sale below market value. (Rachael Myrow/KQED)

Affordable housing advocates skeptical

Google, sensitive to criticism of its role in creating the region's housing crisis region-wide, has pledged to pay for 5,000 affordable housing units. But as Truong of the Silicon Valley Organization puts it, "Google alone is not going to solve our housing crisis."

To meet state mandates, San Jose was supposed to build 14,231 market-rate homes between January 2014 and October 2022.

While the city is well on its way to meeting the target for market-rate homes, San Jose has permitted just a fraction of its target for affordable housing.

Meanwhile, the average rent for an apartment in San Jose is $2,790, according to Rent Cafe.

In 2010, San Jose required that all new residential developments of 20 units or more set aside 15% of those units for sale below market rate. Developers could also pay a fee in lieu of creating affordable units. That 15% figure has become a de facto floor for the discussion that affordable housing advocates are trying to have in downtown San Jose.

At a press conference outside City Hall last week, Sandy Perry, president of the Affordable Housing Network of Santa Clara County, called the proposal to extend tax breaks a “tone deaf" handout to wealthy developers. "Our housing policy should not be based on what benefits the profits of millionaire and billionaires," Perry said.

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He added, "Our city, and actually our whole state, is in the middle of a huge housing crisis. 42 percent increase in homelessness in just the last two years in San Jose. The city is doing well enough in achieving its market rate housing goals, but it’s doing absolutely terribly in its affordable housing goals. What we're doing is not working."