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Affordable housing crunch: Silicon Valley cities weigh new developer fees

January 31, 2014 | Silicon Valley Business Journal

By Lauren Hepler

High housing demand, low housing supply and drastically reduced affordable housing funding have collided to form a murky outlook for those seeking a place to live in Silicon Valley.

Demand for rentals from workers at all income levels — from waiters to young tech executives — has been compounded by the needs of tens of thousands of area residents displaced during the foreclosure crisis, said Kevin Zwick, CEO of San Jose affordable housing nonprofit Housing Trust Silicon Valley.

Average San Jose area rents reached $2,153 by the end of 2013, representing a 10.1 percent jump for the year.

Meanwhile, local cities and housing advocates are in damage control mode after the loss of several tools — namely, local redevelopment agencies and inclusionary zoning — that were previously used to increase the number of affordable housing units in the region.

“Developers aren’t coming to us with as many new potential projects,” Zwick said. “People are incredibly cautious. It's complicated because there's not that local funding.”

One potential avenue to bring some of that funding back: additional developer fees.

San Jose, Sunnyvale and East Palo Alto are all currently evaluating new housing impact fees, where developers are charged a per-square-foot fee on market rate housing projects to fund affordable units. Before implementing these fees, cities studied the potential nexus between new market rate development and ways to address the need for affordable housing.

The building industry has generally opposed these fees, warning that new up-front costs could inhibit new development.

Fremont, Walnut Creek and San Carlos are a few cities that already have rental impact fees on the books. The fees in those cities range from $15-$28 per square foot. There are also closely-related commercial linkage fees, where cities charge a fee on new office development to fund affordable housing.

As of early 2014, these cities in the South Bay and on the Peninsula are studying housing impact fees:

San Jose: Completing a study with possible fees ranging from $14.89-$24.04 per square foot and covering both rental and owner housing. City debate on the issue was slated for February 2014 but delayed after business protests that the process was being rushed.

Sunnyvale: A study was completed with fees likely in the $10-$20 per-square-foot range. City hearings on the measure slated for April-July 2014.

East Palo Alto: A draft study was completed in October 2013 with a recommended $22-$44 per-square-foot fee for both rental and owner housing.

Mountain View recently implemented a $10 per square foot impact fee for new rental units in early 2013. City officials report no measurable impact on new development proposals.

"None," said Community Development Director Randy Tsuda. "In a market like Mountain View, the demand and developer interest is so high.”

Still, area developers question whether new fees in other areas could stifle production.

"If landowners decide not to sell because of the combination of costs versus revenue, then it’s just not going to get built,” said Robert Freed, president and CEO of San Jose-based apartment and home developer SummerHill Homes. “It’s a concern.”

Freed, also a board member for San Francisco affordable housing developer Bridge Housing, agrees that new funding in some form is necessary to address the dearth of housing at lower price points. He suggested more broad-based mechanisms to generate revenue.

“It is politically easy, if you will, to pin the fundraising side of the affordable housing equation to new development.” Freed said. “I think we ought to have a transfer tax on anybody who sells a piece of property. I think we should consider an addition to sales tax to create money.”

Matt Franklin, president of Foster City affordable housing developer MidPen Housing, argued that developers do play an outsized role in increasing housing costs.

"This isn’t some tax on the wealthy," he said. "There’s an economic nexus, a logic, that this activity — the office development or the luxury home development — is exacerbating the affordable housing crisis."

Franklin added that coordination at the county level could potentially alleviate some city fears about alienating developers.

"In San Mateo County there’s an effort afoot to do a countywide nexus study, so that all 21 municipalities in the county would have the same study to try to encourage them to move forward together," he said. "If everybody adopted a fee, you could take out one of the legitimate concerns people have."

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