Report: Affordable housing fee hike could discourage new office development

Amended proposal for increase heads toward full board vote

Some city officials want to raise a decades-old fee on newly-built office space to fund affordable housing, but a city economic analysis report released Monday warned it would cause less building and job growth.

However, Supervisor Matt Haney, who introduced the legislation to raise the fee, said that’s not exactly a bad thing when considering the winners and losers of office development.

The so-called Jobs-Housing Linkage Fee, which dates back to 1996, is meant to fund housing construction to offset the demand for housing that new office employment creates.

Developers turned out at Monday’s Board of Supervisors Land Use and Transportation Committee hearing to call for a lower fee, a phased in approach and tiers for different types of development. They also called on the committee to slow down the proposal.

But Haney and Supervisor Aaron Peskin voted to send the fee hike proposal to the full board for a vote next week after amending it to phase in the increase over two years.

Supervisor Ahsha Safai, who also sits on the three-member committee, opposed it. Safai shared the concerns expressed by developers and business advocates.

“I am a little bit worried about a number that goes up that does not necessarily correlate into new office development,” Safai said. “I am a little bit concerned about the final number. But I am 100 percent in support of raising that number.”

Peskin said that “the question is how much the market will bear.”

“I am willing to test what Supervisor Haney has before us,” Peskin said.

Haney said with the fee office development will continue but in a “smart way” to help counter displacement and better address the scarcity of affordable housing.

“We have deep inequality,” Haney said. “We have more and more people who are homeless. We have more and more people who are being displaced who are living further away and having to commute here. People are struggling in this city. What we have in front of us here is an important part of the solution.”

The initial proposal would have raised the fee on all new office development from $28.57 to $69.60 per gross square foot; for new laboratory space, the fee would rise from $19.04 to $46.43.

Haney’s amendments Monday lower the fee to $57.14 for office projects that had their approvals from the Planning Department before Sept. 10, when the proposal was introduced. For projects submitted between Sept. 11 and Jan. 1, 2022 for approval, the fee is $63.37 fee, according to the amendments, and projects that come after Jan. 1, 2022 would pay the fee of $69.60.

Affordable housing developers and progressive board members said the fee hike was long overdue and necessary to address a trend in The City where low and moderate income households have declined while higher income households increased. The proposal was bolstered by a new report by a budget analyst that highlighted the imbalance between the types of jobs created versus the types of housing The City has produced.

The legislation has the support of seven supervisors, meaning it would take one more backer to ensure it could survive a possible mayoral veto. Supervisors Vallie Brown, Rafael Mandelman, Catherine Stefani and Safai have yet to sign on to back it.

The Mayor’s Office did not return a request for comment.

Carl Shannon, senior managing director at Tishman Speyer, which develops office buildings in San Francisco, said that “the jobs-housing linkage fee needs to come up, but we need to do that in moderation.”

“We failed to build enough housing in this city both at market rate and affordable housing, but to increase this fee too much or too quickly will drive jobs to Oakland or to the Peninsula,” Shannon said. “Do we really want to push the fees where we push the employers out of San Francisco, where we get none of the benefits?”

The office development fee is expected to generate an additional $8 million to $9 million more a year, for a total $20.2 million to $21.2 million a year, according to an economic impact report released Monday before the hearing by City Controller’s chief economist Ted Egan.

The legislation requires that 10 percent of the fee revenues go to acquisition and rehabilitation of housing, 30 percent for development of supportive housing and 60 percent for the construction of permanently-affordable housing.

The report said that The City builds on the average about 430,000 square feet of office space annually, which the higher fee would reduce to about 290,000 to 305,000 square feet annually.

“The proposed fee increase would represent roughly a 6 percent increase in office development costs, and lead to a 0.2 percent reduction in citywide office space – equivalent to between 125,000 and 140,000 square feet per year, on average,” Egan’s report said. “Currently, this represents a direct loss of 520 to 585 office jobs, and between $61 million and $87 million in office construction spending per year.”

Egan’s report also said that “we project the proposed legislation will result in a net job loss of between 1,275 and 1,500 jobs, representing between 0.1 percent and 0.2 percent of all jobs in The City, on average over the next 20 years. The impact on the city’s GDP is likewise projected to be negative, to the tune of $280-$330 million, in today’s dollars.”

The report also found that “housing prices are projected to decline by 0.1 pecent-0.2 percent, but this is due to a proportional loss of personal income and population, not because housing would become broadly more affordable.”

It’s possible there could be changes made to the proposal.

Haney told the San Francisco Examiner that “I’ll continue conversations with everyone leading up to the board meeting.”

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