On February 16th, the SF Supervisor’s Rules Committee held a remarkable hearing that was intended to examined a proposed charter amendment for the June ballot, but offered instead a wide-ranging examination of the City’s housing market. The topic was a ballot measure sponsored Supervisors Jane Kim and Aaron Peskin that would raise the Inclusionary Housing Ordinance on-site rate from 12 to 25 percent.
The Mayor’s Office of Economic and Workforce Development (OEWD) presented detailed, though preliminary, economic feasibility analyses of what impacts the measure would have on future housing development. Their results are not encouraging to those who believe that increasing overall housing supply is essential to addressing our housing affordability crisis. Of key interest at the hearing were slides presented by OEWD analyzing impacts on three fundamental metrics to housing development: returns on cost; land values; and the value of the in lieu fee.
Returns on Cost. The slide below uses a hypothetical seven-story mid-rise (Type III) rental project as an example. OEWD’s analysis showed that increasing the Inclusionary rate to 25 percent significantly lowered the financial returns on the costs incurred to build a project to below-industry-standard rates of return. This means that with current construction costs and realistic rent prices, it could become impossible to attract investors to borrow the funding necessary to build rental housing of this type. In fact, many of SFHAC’s members said exactly this in their public remarks.
Land Values. The slide below uses a similar example to examine what effect the 25 percent Inclusionary rate would have on the “residual land value”. That is, how does the cost of providing increased affordable housing affect what the developer is willing to pay for a piece of land? Similarly, would it affect the willingness of a landowner to sell the land to a developer for this project? OEWD’s results also show a significant reduction in the value of land, as much as 40 percent less. This means that a developer would have to offer a lower price to purchase a given property to achieve an acceptable return. Conversely, a landowner would be much less willing to accept a lower offer from a housing developer than either keeping an existing retail use, like a laundromat or parking lot, or selling it for another use such as building offices.
Value of the In Lieu Fee. The slide below tries to predict what Inclusionary Ordinance choice a developer would make under the proposed 25 percent on-site rate. Recall that, by law, developers are allowed to choose whether to build their affordable housing on-site, pay an in lieu fee, or build it off-site. Historically, the overwhelming majority of developers choose the first two options. Keep in mind, the Kim/Peskin charter amendment would raise the inclusionary in-lieu fee requirement to 33 percent. However, the express purpose of the proposed charter amendment is to deliver more on-site affordable housing. Would it? OEWD’s analysis shows clearly that, in almost all circumstances, its effect would be to make paying the in lieu fee much more financially attractive than building on-site affordable housing – exactly the opposite of what was intended by the ballot measure.
The SFHAC believes that Supervisors Kim and Peskin are right to push for policies that would increase the delivery of permanently affordable housing – this must become a top City priority. However, based on the evidence from City’s own preliminary feasibility analyses, we are deeply concerned that the measure could actually result in a sharp decrease in production of both market-rate and affordable housing. This well-intentioned measure deserves deeper study to determine whether it will worsen the housing affordability crisis, something we cannot afford.