Fair fees for rich developers

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EDITORIAL The information that emerged from the Board of Supervisors’ Land Use Committee on July 12 was mind-bending: According to a new city report, private developers will not even consider going forward with a big housing construction project unless the profit margin is at least 28 percent.
Think about it: Without a guaranteed profit about three or four times larger than what most normal businesses strive for, the developers won't pour an ounce of concrete. And they still complain that the city wants them to build more affordable housing.
As housing activist Calvin Welch pointed out at the hearing, it used to be illegal in most states to charge that much interest on loaned money. The word for it was usury.
And in much of the construction industry, profit margins are far, far slimmer than that. On big public-works projects, like the Bay Bridge retrofit and the construction of the new terminal at San Francisco International Airport, the margin was designed to be about 5 percent.
As Steven T. Jones reports on page 15, this information, which has received very little press attention, ought to be the strongest boost yet for advocates of what's known as "inclusionary housing" legislation — rules that would require developers building market-rate housing units to set aside a percentage of those units for sale or rent at levels that are affordable to nonwealthy San Franciscans. The current law requires that 12 percent of the units in any project have to be priced below market rate. (That goes up to 17 percent if the affordable units are built somewhere off-site or if the developers simply pay a per-unit fee into a city low-cost housing fund.)
Sup. Chris Daly, who has long been an advocate of inclusionary housing, forced the developer of One Rincon Hill, a high-rise condo project, to hike the affordable-housing share to 25 percent last year — and that convinced him that the city's legal requirement was too low.
So now the supervisors are looking at increasing the levy, and as part of the discussion, a task force operating under the Mayor's Office of Housing hired a consultant to look at industry finances and standards. If the report is correct, and 28 percent margins are considered a minimum in San Francisco's private-sector housing market, then the rather modest increases the supervisors are looking at (a hike from 12 to 15 percent of below-market-rate units and some tighter rules for enforcement) are eminently reasonable. In fact, the legislation isn't nearly ambitious enough.
Suppose the city mandated 25 percent below-market-price units in all new housing projects of more than, say, 20 units. Would the developers really walk away, saying that profits of, say, 20 percent just weren't enough? Somehow, we doubt it — in fact, we suspect there are plenty of builders out there who would be more than happy with that level of return. And suppose the market for high-end, million-dollar condos — which clearly aren't serving the unmet housing needs of the city anyway — started to dry up. So what? San Francisco doesn't need more housing for the very rich. In fact, the overall impact of these luxury housing projects on the city is almost certainly negative — that sort of housing tends to drive out blue-collar industry and is already turning parts of the city into a bedroom community for Silicon Valley.
Daly argues that without these new market-rate projects, very little affordable housing will be built. And he has a point. Government subsidies and nonprofit programs are immensely valuable, but there's never enough public cash to meet the stratospheric need for affordable housing in San Francisco.
But there's no reason for the city to be held hostage by developer profits that exceed all reason. At the very least, the board should approve Daly's proposals — and should look seriously at jacking up the requirements even more. SFBG