The Mercury News: San Jose to consider extending subsidy for residential high rises

by Thy Vo
September 20, 2019

SAN JOSE — The San Jose City Council on Tuesday will consider extending a subsidy that proponents contend is critical for plans to build nine residential high rises downtown in a city that desperately needs more housing.

The subsidy — a 50 percent cut of construction fees for market-rate downtown housing towers — was enacted in 2007 and is set to expire in June 2021. The city also waives affordable housing impact fees.

Unless the incentive is renewed, developers have indicated seven of the projects may not get built, according to city officials and business representatives.

“The City has recognized that we won’t get high-rise apartments built if we don’t reduce the city’s fees on this uniquely difficult construction type,” Mayor Sam Liccardo said Thursday in a written statement. “We face a straightforward choice: either reduce fees and get housing built, or we sit on our hands and hope for some miracle to solve this housing crisis for us.”

The nine projects that qualify for the subsidies would produce 3,240 market-rate residential units. Two of those projects are under construction — the 630-unit Miro Towers project across from City Hall and 260-unit The Graduate project near San Jose State University.

The incentive, which applies to buildings 12 stories or higher, currently cuts construction fees by half and allows developers to delay paying them until after a building opens, rather than when a permit is issued. It also exempts qualifying developers from paying the $17-per-square-foot affordable housing impact fee and slices park fees by 50 percent.

Labor and affordable housing groups held a press conference in front of City Hall on Thursday to criticize the program as a giveaway to developers to build luxury housing. They held signs highlighting developers’ campaign contributions to Liccardo with messages such as “stop pay to play.”

South Bay Labor Council Executive Director Ben Field said he’s “highly skeptical” that developers need the fee waiver, noting the Miro Towers project is almost complete. The fees should go to important needs that directly benefit residents, he said.

“We’re not saying don’t subsidize under any circumstances,” he added. “We’re saying (residents) should get money for affordable housing and transportation.”

Waiving affordable housing impact fees for those nine projects would save the developers $54.5 million, according to a March 2019 city report.

Asked if there was a type or level of subsidy he would support, Field did not specify.

An hour after the labor group’s press conference, the Silicon Valley Organization held its own to warn that developers would go elsewhere if the city doesn’t cut fees, pointing to high construction costs throughout Silicon Valley.

Michael Lane, deputy director of the affordable housing group Silicon Valley at Home, said the subsidy will enable 3,240 units of new housing to come online.

“Our area median income is high, so if we don’t provide this type of housing, they’re out there cannibalizing existing housing supply and making it hard for low-income people,” Lane said.

Scott Knies, executive director of the San Jose Downtown Association, said developers applied for loans and financing by relying on the subsidy to help pencil out their projects.

He accused the coalition of labor and housing groups, Silicon Valley Rising, of politicizing this issue to further an unrelated ballot initiative.

“The ugly insinuation that downtown isn’t doing enough in terms of affordable housing, that’s hogwash,” Knies said.

A city-commissioned study by Strategic Economics said high construction costs mean typical high-rise developments in downtown San Jose are not financially feasible and would generate a 4.13 percent profit margin for developers, short of the 5.25 percent most strive for.

It could be a few years before the market reaches favorable conditions for high-rise residential projects, according to the study.

Since the program started, 1,522 residential units have been completed using the subsidy, with an additional 1,043 under construction or soon to begin, according to city staff. Any high-rise residential project built downtown in the last 10 years benefited from some kind of fee reduction or financial incentive, said Chris Burton, deputy director of business and economic development.

Because developers receive the financial incentives once their projects are built and occupied, the city needs to extend the expiration date for most of these projects to take advantage of the program, Burton said.

“Given the timeline to construct projects, which is 30 to 36 months, it would be very difficult for them to finish up the process and deliver those buildings within those time frames,” he added.

If renewed, the incentive would stay in place until December 2023.

Barring additional delays, even without a reduced fee extension, both the Miro Towers and The Graduate projects likely will be able to take advantage of some of those other financial incentives, Burton said.

Miro Towers, which was delayed for several months after heavy rains flooded the construction site, is on track to still receive an exemption for affordable housing fees, and The Graduate project likely will qualify for a 50 percent reduction in construction taxes, Burton said.