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Don’t Believe the Hype: Affordable Housing does NOT depend on Market Rate Development

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Market-rate developers and some of their cheerleaders at City Hall have started a new myth to justify the continuing tsunami of luxury housing development: that affordable housing is dependent upon market-rate development. The argument goes that the fees paid by market-rate developers are an essential “revenue source” for affordable housing and without them our affordable-housing supply pipeline might come to a standstill. Nonsense.

That myth conveniently ignores the fact that inclusionary fees on residential development are not even at the level of the “nexus” to simply mitigate the demand for new affordable housing that is generated by the market rate housing. The City’s Residential Nexus sets the mitigation level at between 25 percent and 30 percent if the affordable units are provided on-site, or between 33 percent and 43 percent if those units are provided off-site, allowing the primary project to be fully built out as luxury housing. So, the 17 percent to 20 percent in inclusionary fees, which the developers are touting, DON’T EVEN PAY FOR THE MITIGATION of market-rate housing impacts, let alone “produce” any net new affordable housing.

And the fee structure set by The City is remarkably low, compared to the actual cost to provide those units. This is because The City actually set those fees based on a lower construction cost than the typical luxury tower, and then capped our ability to raise those fees in the city charter with the 2012 Prop C measure. How much can a market-rate project actually pay to mitigate the impact of its development? For proof, we can look at what a developer negotiated earlier this year in the Transbay Redevelopment Area, where the fee cap does not apply. That developer agreed to pay nearly four times the inclusionary fee that developers pay elsewhere in The City, much more in line with real costs and the actual nexus.

Moreover, The City’s housing production data shows how false the argument is that somehow affordable housing is dependent upon market-rate development. In 2011, at the low-point of market-rate housing production, The City produced (i.e. paid for) 207 affordable housing units, which was 59 percent of all housing built that year! While market-rate development was stalled because of a lack of finance capital from investors (who seem to refuse to finance any construction unless they can be guaranteed at least 25 percent returns on their investment), The City with its public funding sources continued to invest in affordable housing production. By contrast, there were 3,454 housing units built in 2014 of which 490 were affordable housing units, a mere 14 percent of total production. In other words, the “housing balance” was terrible. Affordable housing on balance got worse, not better, as the real estate market boomed. With market-rate housing not even paying its way to mitigate the affordable housing demand it creates, this outcome is not a surprise.

Where does that funding for affordable housing really come from? By its very nature, affordable housing means that tenants pay low rents. Bank loans, paid back by that monthly rental income, are a much smaller part of financing affordable housing than in market-rate projects. Instead, affordable developments depend on higher equity investment (think of it as a much higher “down-payment” portion), most of it being from private investors receiving federal tax credits. These federal investments, however, have to be leveraged by our local city investments, of which the market-rate developer fees are only a small part, one that varies greatly depending on the booms and busts of the economy — the bulk comes from property tax increment, hotel and business taxes (the Prop C Housing Trust Fund), and jobs-housing linkage fees on commercial development.

Another flaw in the myth is the argument that market-rate developers are part of an affordable housing solution by “feeing out” on their inclusionary housing requirement. At the same time, those same City Hall and development boosters contradict themselves by making a big deal out of “mixed-income” development. And yet that is precisely what the inclusionary housing program does and why below-market-rate (BMR) units are essentially aimed at moderate income households: people making salaries from clerks to teachers who are also priced out of “the market.” That was the vision of the inclusionary housing requirement, not a simple “in lieu” fee payment program, and yet there are some who celebrate the fees that come from developers when they DON’T build BMRs for moderate income households. The contradiction is profound.

This myth about affordable housing being dependent on fees from market-rate development is a clever but inaccurate distraction. If these same mythmakers really cared about the connection between market-rate development and affordable housing production, they would be promoting an enforceable housing balance requirement (linking the amount of market-rate housing to the amount of affordable housing), and they would be working hard to increase the percent of inclusionary housing, and the in-lieu fees, to accurately reflect the true nexus of impacts created by market-rate development. But that’s not really what they are interested in, is it?

Peter Cohen and Fernando Martí are co-directors of San Francisco’s Council of Community Housing Organizations.

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