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What Santa brought the developers

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High-rise buildings near First and Mission streets in San Francisco are seen April 28 2016. (Emma Chiang/Special to S.F. Examiner)
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Last Thursday at the Planning Commission, affordable housing policy in San Francisco took a giant step backward. For the very first time, a developer took advantage of a state density bonus law — a law that was intended to incentivize affordable housing — but in practice is becoming a big giveaway that allows developers to rack up bigger profits without providing a single additional unit of affordable housing.

Luckily, there is a clear way to correct for this giveaway — by setting our local affordable housing requirements, known as “inclusionary housing,” going forward at the appropriate level to recover the value of these giveaways.

The state density bonus law was written back in 1979 as a way to incentivize developers to build affordable housing. In exchange for building a certain number of affordable units, a developer would get a number of bonuses: additional market-rate units, or reductions in required parking, open space or setbacks.

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In some markets, however, we don’t actually need to give developers extra profits to get them to build affordable units. With our incredibly hot housing market, developers can easily afford to include affordable housing in their projects — and they have been doing that since we passed our original local inclusionary requirements in 2001.

In fact, not a single project in San Francisco has ever taken advantage of the state density bonus. That is, until last Thursday, when the developer for a 200-unit market-rate project at 333 12th St. claimed the bonus.

The problem with this state law is that it actually sets a lower standard than San Francisco’s current inclusionary requirements. Because of this, the initial intent of the law — to incentivize more affordable housing — is totally undermined. By providing exactly the number of affordable units they would have provided anyway, the developer at 333 12th St. is allowed to build 52 more market-rate units and zero additional affordable ones — drastically increasing their profits while giving nothing to The City or everyday San Franciscans in return. A project that was originally supposed to provide 18 percent affordable units will end up providing only 13.5 percent. The end result is effectively a reduction in the development’s contribution, a “value” to the developer in monetary terms of about $3.8 million. Talk about a giveaway!

Seems like Santa Claus came early for the developers, and he didn’t even ask if they had been naughty or nice.

Now that the very first developer has taken advantage of this bonus, a dangerous precedent has been set, and developers from here on out will want their own gifts from Santa Claus.

After Thursday’s Planning Commission hearing, Commissioner Myrna Melgar said, “It is an unconscionable giveaway. The City should not so easily stand aside and risk letting this impact on our city’s affordable housing policy become standard practice … The City really should do whatever it can, and quickly, to change our local policy to fix this problem before it escalates further.”

The hearing turned into a display of frustration, with the developer’s reps flatly, and smugly, telling commissioners there was nothing The City could do, and the commissioners one by one expressing their discontent with essentially being forced to approve a huge development that reduces affordable housing.

Commissioner Rich Hillis said during the commission’s deliberations, “It’s unfortunate that the application of a state law that’s to provide more affordable housing actually ends up with less affordable housing … to go from 18 percent we end up at 13.5 percent … I think we’d all say that’s a little odd …”

To be clear, increasing density of development is not the issue — that is a matter of good planning and design and appropriate fit. Instead, what is needed is a balance between market-rate development (with rents far beyond what the average San Franciscan can afford) and truly affordable housing. We need to uphold the initial spirit of the state density bonus law, which was based on the idea that developers could get more only in exchange for giving back more.

Moving forward, we do have an avenue for fixing this and preserving our local affordable housing policy. Currently, the City Controller is leading a process to assess the “feasibility” of the inclusionary percentages set by June’s Proposition C. The final meeting for this process is Monday and the recommendations that result will help set our inclusionary housing requirements for the foreseeable future.

In the controller’s initial report, published last month, they recommended a maximum of 18 percent inclusionary for rentals and 20 percent for condominiums, as an amount that could be easily supported by developer’s profits, and additionally suggested increasing this percentage over time at a set annual rate. However, as it is now, the controller’s calculations don’t include the state density bonus because this bonus has always been viewed as “theoretical” (since no developer had ever taken it). Well, this bonus is no longer theoretical.

With the precedent set by 333 12th St., it is very real — and it should, beyond a doubt, be included when determining how much affordable housing market-rate development can contribute to The City.

In fact, the controller has already acknowledged in preliminary recommendations that the state density bonus impact is “significant” and needs to be captured in setting the inclusionary rates. The 333 12th St. “case study” makes the answer quite clear: We need to increase the baseline inclusionary requirement by 7 percent to break even on the reduction caused by state density bonus. It is the only recourse The City has to recapture what the state has given away to developers. Let’s end the giveaways and remain true to the intent of San Francisco voters.

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

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