San Jose Councilman Urges City to Hasten Long-Delayed Commercial Linkage Fee Study

With San Jose lagging behind its goal of building 25,000 new homes from 2018 to 2023, downtown Councilman Raul Peralez wants to speed up a study exploring the feasibility of charging a commercial linkage fee to help pay for below-market-rate housing.

In a memo issued on Sept. 18 and coming up for discussion at Tuesday’s City Council meeting, Peralez notes that him and his colleagues approved the study in December last year and have yet to see the results. In March, the council asked that staff return with the findings as soon as possible—or by January 2020 at the latest.

Now, however, city staffers say the study probably won’t be ready until next June. Peralez called news of this latest delay “more than disappointing.”

More than 35 million square feet of new commercial development in San Jose is in the pre-development or construction phase, he noted. And roughly 9 million more square feet of new commercial development is being added to the pipeline. Without a decision on commercial linkage fees, Peralez said, every one of those projects represents a potential lost opportunity to generate desperately needed cash for affordable housing.

The D3 rep raised his concerns as part of a discussion scheduled for Tuesday about the city’s 35-point Housing Crisis Workplan. Seven of those 35 items have already been completed, and a number of others—such as the developing anti-displacement strategies and updating downtown zoning requirements—are still in the works.

A commercial linkage fee has been debated at length by multiple generations of council members. Almost exactly a year ago, the council came a vote away from studying the feasibility of such a fee—a legal prerequisite for adopting the policy—when one of its longtime champions, then-Councilman Don Rocha, skipped the meeting to attend his daughter’s volleyball tournament.

Mayor Sam Liccardo, who historically opposed even studying a commercial linkage charge, actually voted in support of it that fall day. And when it finally came up for a do-over a couple months later, he voted for it again.

The time since has presumably been spent studying the issue. A so-called commercial linkage fee has been tried in other cities. But before San Jose or any city can enact such a fee, it must first conduct a nexus study to determine the extent to which jobs created by new commercial development attract workers who need below-market-rate housing.

With Liccardo at the helm last December, the city council finally approved moving forward with the study for completion by January 2020. During the previous housing crisis work plan update, which took place earlier this year, city officials said they were still on track to meet the January deadline. Now, they say they’ll need yet another several months from that already extended due date.

“At the rate that we are growing, without a decision on a commercial linkage fee, we are missing out on an opportunity to generate revenue that will offset the increasing affordable housing demand,” Peralez said in the memo he released last week on the matter. “Without an ongoing source of funding to balance the impacts of our economic growth, we fall further behind in hitting our affordable housing goals and in those five months, we could lose out on potentially millions.”

Peralez is asking city officials to get back on track and finish up the study by January.

In his own proposal, Liccardo directs city staff to start issuing communiques to developers about the prospect of having to pay a commercial linkage fee starting in 2020. “Recognizing that real estate development requires some basis for cost certainty to assess whether projects can attract financial investment, I propose adding language to approved planning permits citywide that developers may be required to pay a commercial linkage fee,” he said about his rationale for the noticing requirement.

Liccardo and Peralez also weighed in on a discussion coming up as part of the same Tuesday agenda item about the Diridon Station Area Plan, a blueprint for growth around the transit hub where Google plans to build its new global headquarters. Both the mayor and downtown councilor separately proposed carving out a certain number of homes for extremely low-income households in the planning area.

As part of a deal San Jose struck with Google over its planned mega-campus, at least 25 percent of housing developed in the Diridon Station area is supposed to be below market-rate. Liccardo and Peralez say they now want to make sure that 45 percent of that below-market-rate designation is reserved for extremely low-income households—in other words, those earning less than 30 percent of the region’s median annual salary.

“We must ensure that the benefits of this new development—and the new housing that’s ultimately built serves residents of all means and incomes,” Peralez said of his recommendation. “Extremely low-income households have been particularly burdened by the impacts related to new development in our city.”

City officials are also slated to present an update on recent permitting numbers for new homes. A report prepared for the occasion shows that 1,925 units received planning approvals from January to June this year, and that another 1,301 units got building permits and 605 earned approval for tenants to move in.

“Overall, in the first 18 months of the five-year goal, 30 percent of the city’s 25,000-unit goal is already entitled, under construction, or completed,” San Jose Housing Director Jacky Morales-Ferrand, Economic Development Director Kim Walesh and Planning Director Rosalynn Hughey wrote in a summary of the city’s progress. “Over a quarter of the affordable housing goal is also entitled, under construction or completed. In order to meet the aggressive five-year target, continued strategic focus must be placed on efforts to streamline the development of housing.”

Issuance of building permits for backyard cottages have also been on the rise. In the first six months of 2019, nearly 15 percent of building permits issued went to homeowners constructing secondary units on their properties. That number—191 to date—tops the amount of backyard cottage building permits last year, and puts San Jose ahead of a goal to build 1,000 new backyard homes over the five-year period covered by the work plan.

Housing officials also tracked how many projects nabbed permits but never moved forward with construction. They found that 70 percent of mid-rise projects got built compared to 50 percent of low-rises and, un surprisingly to anyone who’s been paying attention to construction trends, just 25 percent of all high-rises.

“While a high-rise project requires more upfront resources to entitle, the entitlement cost is a minor percentage of the construction cost of the project,” Morales-Ferrand said. “Thus, these projects may be proposed and receive approved entitlements, but lack guaranteed funding for construction resulting in a lower percentage of high-rise projects proceeding to construction.”

The San Jose City Council meets at 1:30pm Tuesday inside the council chambers at City Hall, 200 E. Santa Clara St. in San Jose. Click here to read the entire agenda. 

Grace Hase is a staff writer for San Jose Inside and Metro Silicon Valley. Email tips to [email protected]. Follow her on Twitter at @grace_hase.

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