New inclusionary housing ordinance delicately balances the city's affordable housing needs with the developers' demand for big profits
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"Inclusionary housing program" is a bureaucratic term that seems to invite mental drift. And when the Board of Supervisors’ Land Use Committee considered updating the program's standards July 12, there was enough mind-numbing economic and regulatory minutiae to sedate the standing-room-only crowd.
But there were also diamonds in that jargony rough. For one thing, San Francisco is now poised to finally force housing developers to spend more of their astronomical profits on housing that sells or rents for far less than the city's equally obscene housing market dictates. And that's been made politically possible by an unlikely deal that has downtown developers such as Oz Erickson, affordable housing activists including Calvin Welch, the market-friendly Mayor's Office of Housing, and progressive Sup. Chris Daly all on the same side.
In the process, a city-commissioned report has lifted the financial veil from big-money housing development in San Francisco, revealing that those who build the biggest high rises require a profit margin of at least 28 percent — or a take-home profit of about $250 million — before they'll take on a project.
"It used to be illegal [usury to seek such high interest on loaned money], so 28 percent is a sobering number," Welch said at the hearing.
The public good likely to come from this ordinance — if the current compromise can hold for a few more weeks — is a fairer system for getting people into below-market-rate (BMR) units, policies designed to encourage more housing construction for a wider income mix, and ways to involve more developers and phase in the program so as not to disrupt ongoing projects.
But before we get too deep into the program's details, let's take a step back, because the backstory of how we got to this compromise is an intriguing tale with important political implications, particularly for downtown's current public enemy number one: Chris Daly.
The story really began last summer when the developers of those big new luxury high-rise condos known as One Rincon Hill were trying to get their final approvals. Daly and many of his constituents were concerned that this lucrative project didn't include enough community benefits or BMR housing.
So the supervisor stepped in and negotiated with the developer a $120 million deal with a huge low-cost-housing element. In the end, the developer agreed to provide affordable units equivalent to about 25 percent of the project.
That's more than double the city's current inclusionary housing requirement, which mandates that 12 percent of the units be available below market rate. The requirement rises to 17 percent if the units are built off-site, and developers can pay the city a fee in lieu of doing the actual construction.
The deal got Daly thinking: If the Rincon developers could afford 25 percent, then others probably could too. So he used some of the developer's money he'd extracted to fund a study looking at how increasing the mandates to 20 and 25 percent would impact housing construction in the city.
Last fall, the Planning Department and Mayor's Office of Housing assembled a technical advisory committee — made up of cochairs Erickson and Welch and a mix of for-profit and nonprofit developers plus community representatives — to work with the study's consultants.
Daly put his efforts in the form of an ordinance last October. Sup. Sophie Maxwell also had introduced legislation to strengthen the inclusionary housing program, which has been combined with the Daly legislation. And Sup. Jake McGoldrick last fall introduced legislation to apply the program to buildings of five or more units (it now applies to buildings of 10 units and more), and his ordinance is now being considered along with the Daly-Maxwell legislation.
"This is about housing for everyday people in San Francisco," Daly said at the July 12 hearing, which was attended by the three supervisors, city staff and consultants, top developers, and a large crowd of housing activists wearing "Housing Justice Now" stickers.
That volatile mix produced a surprising amount of unanimity and compromise (although the Land Use Committee ultimately decided to push the matter back a week to work out some details). Just a few days earlier, when the consultants' numbers first came in, the measures had seemed headed for an ugly showdown between the progressives and downtown.
The report by Keyser Marston Associates analyzed how much the city can ask for before developers just say no. It was a wake-up call in many respects, showing that San Francisco developers and their financers expect at least 18 percent profit margins for small projects and more than 28 percent for big ones.
For starters, that means that no private developer will build new rental housing in San Francisco, because the profits aren't high enough. The report also says that developers will avoid putting affordable units in their luxury condo towers; it makes more economic sense to build them off-site or to pay into the city fund instead.
Doug Shoemaker of the Mayor's Office of Housing (MOH) said his office has learned a lot from the study, particularly about how the in-lieu fee could be adjusted to make BMR housing construction a more attractive option for developers.
"It's created a bias for developers to just pay the fee," Shoemaker said, noting that his office increased the in-lieu fee by 15 percent on July 1 and indicating that further increases could be on the way. In fact, one requirement of the ordinance is for the MOH to regularly update fees to reflect evolving market realities.
Yet there was also a potential kiss of death in the report, which ran the numbers and found that developers wouldn't pursue projects that met the 20 to 25 percent inclusionary housing standard that Daly was seeking.
Daly and his housing activist constituents understood that the report — which was issued just five days before the hearing — would likely translate into a mayoral veto of the legislation, allowing Mayor Gavin Newsom to claim it would hurt the city's economy and housing needs.
"What we were confronted with last Friday was political death," Welch said.
So Daly lowered his requirement to 15 and 20 percent respectively and agreed to compromises that grandfather in projects now in the pipeline and ease up the standards on projects that work within their current zoning.
"We do support the compromise," Matt Franklin of the MOH told the Guardian.
But for Daly the legislation is about more than percentages. For example, it also creates standards for marketing the BMR units to prevent fraud, allows lower-income residents to qualify for them, and requires off-site BMR units to be within one mile of the project.
Daly, a tough former housing activist known for sometimes taking strong and unbending progressive stands, told the Guardian that this deal is consistent with his approach: "Yes, I'll push the envelope, but that doesn't mean I won't take a good deal."
The July 12 hearing demonstrated that this was a deal being grudgingly accepted by all of the usually polarized sides.
"We, by and large, support this legislation," Erickson — the Emerald Fund developer and San Francisco Planning and Urban Research Association board member who cochaired the committee — said at the hearing. He also added, "I think it's doable. I think it's not going to kill development."
Yet he also emphasized that the development community is giving all it can: "Fifteen percent was a compromise and we were very reluctant to see it go from 12 to 15 percent."
Welch also said the compromise was painful for housing activists, who were hoping to get more BMR units out of market-rate housing developers and were astonished at the huge profit margins that are expected by developers and those who finance their projects.
"I think we have been successful at coming up with public policy that meets the needs of developers and low-income residents," Welch said at the hearing.
Later he told the Guardian that the inclusionary housing update is designed to promote the kind of housing — BMR units for those making just less than the median income — that is also being created by the controversial practice of evicting tenants from apartments and converting those units into condos.
"What this does is help prevent the rental stock from being converted by [tenancies-in-common]," said Welch.
Developer Mike Burke took issue with the criticism of developers at the hearing. "It's not a guarantee of a 28 percent return. It's a fair return based on a substantial risk."
Yet housing activists note that developers already anticipate delays and other financial risks when constructing their financial models, so many developers actually make more than 28 percent on their projects, a fact that the consultant's report acknowledged.
Eric Quesada of the Mission Anti-Displacement Coalition called on city officials to adopt as tough a standard as possible, using that as a starting point to a broader discussion.
"We need to dig deeper to look at what the goals of San Francisco are for housing," he said. "This is the ceiling of what we need." SFBG