SJ Council Extends High-Rise Housing Incentives in Split Vote

Developers scrambling to finance high-rise apartments in San Jose will get a break on taxes for at least a few more years.

The San Jose City Council voted Tuesday to extend an incentive that gives builders a break on 50-percent-of construction taxes and a pass on a $18.26-a-square-foot affordable housing fee–as long as they meet certain criteria. Now, developers have until the end of 2023 to get their projects move-in ready.

But the decision didn’t come without a fight.

Councilors were split in a six-to-five vote, with disagreements over whether all nine projects currently in the pipeline should receive the tax break. Council members Sergio Jimenez, Raul Peralez, Magdalena Carrasco, Maya Esparza and Sylvia Arenas cast the opposing votes.

Nine developers stand to gain a combined $57 million in subsidies if the program gets re-upped for another few years.

Peralez, who represents downtown, led the charge on the losing side. From the dais, he cited concerns over a study which found that high-rise construction in the city’s core just isn’t financially viable right now.

The D3 councilperson wanted to exempt two types of projects–co-living developments and high-rises with a certain parking ratio–from the tax break unless they comply with San Jose’s workforce standards. Those standards, which the city enacted earlier this year, require developers that benefit from a city subsidy to pay prevailing wage and meet a certain threshold for local hires. However, the rules only apply when a fee reduction is issued across a certain subcategory of use. That means the tax break would have to be for all high rises developments, not just some of them.

But after a council decision earlier this year, the “dorms for adults” concept became a subcategory of its own under San Jose’s building code. Peralez says that means co-living developers shouldn’t be exempt from doling out prevailing wages because the projects are classified in a different subcategory.

“The [analyst] looked at all downtown high-rise projects under one big umbrella,” Peralez told San Jose Inside.

The council representative also wasn’t convinced that low parking ratios are a deal-breaker, especially since the city advocates for less car-centric developments. Reducing parking by half could save up to $24 million for some projects, according to Peralez’s estimates. He unsuccessfully pushed to have the analyst review the feasibility of building co-living developments or projects with low parking ratios.

Leading the charge from the other side, Mayor Sam Liccardo disputed his colleague’s logic and said Peralez was “cherrypicking” which projects should be subject to the labor standards or receive the fee reduction.

“It’s not up to me to decide which projects work, it’s up to the market,” Liccardo told San Jose Inside. “What the market has told us is that none of those projects will work because we haven’t seen a shovel hit the ground in nearly two years despite the biggest building boom in Silicon Valley’s history.”

But Councilman Johnny Khamis wanted to go bolder and cut the fees permanently. In a proposal he authored with Councilwoman Dev Davis, the pair called for the city to create a tax break for mid-rise development near transit corridors where high-rises were barred by San Jose’s 2040 General Plan.

“That is the way to spur development,” he said. “We really need to take a look at the fees involved. It’s responsible for driving up the cost of living in this area.”

Khamis and Davis, however, didn’t have the votes.

Jimenez questioned how long the city would need to cut taxes for developers. More than a decade ago then-Councilwoman Cindy Chavez and former Mayor Chuck Reed—polar opposites on the labor-business political spectrum—pushed the fee reduction. Jimenez said that was during the “worst of times.” Now in what he considered “the best of times,” San Jose was still making exceptions.

“Does the city have a responsibility to ensure developers are making a sufficient profit?” he questioned.

Councilman Lan Diep later responded to Jimenez’s inquiry, saying that the city’s responsibility was to “our citizens.” That means doing what they can to get housing built.

“We have a plan and a vision to build a vibrant San Jose,” Diep said. “That won’t be feasible until we get the critical density in our city.”

December 2016 marked the last extension of the policy before this one. And, at the time, six members of the current council joined a unanimous vote of approval: Liccardo, Peralez, Jimenez, Khamis, Carrasco and Chappie Jones. Carrasco on Tuesday said she wasn’t ultimately able to support it the second time around.

“I thought it was worth the effort to stir economic vitality, especially in the core of San Jose,” Carrasco said of her last decision. “[Now we need to] provide for families those good pay jobs that guarantee them to stay in the city that they love and work.”

The issue has widened the divide between labor and business factions, as evidenced by shots fired by political foes in dueling press conferences late last week.

In the days leading up to Tuesday’s vote, Silicon Valley Rising–a union coalition led by the South Bay Labor Council and nonprofit think tank Working Partnerships–accused business-friendly Liccardo of backing the tax break to boost profits for developers that support his political ambitions.

Meanwhile, business boosters such as the Silicon Valley Organization, Silicon Valley Leadership Group and the Santa Clara County Association of Realtors shot back, calling the attack a calculated hit. They charged labor leaders with trying to drum up controversy to raise the profile of a 2o20 ballot measure that would bar certain developers and lobbyists from donating to campaigns for city office.

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.

8 Comments

  1. Grace, the current Affordable Housing fee is $18.70/ sq. ft. and rises 2.4%/year. Also, does any of this impact the Inclusionary Housing Ordinance requirements, 20% affordable housing or pay the in lieu fee?

    It would be interesting to see the full gamut of fees/taxes in the table for the listed projects. What are the average current per unit entitlement fees & taxes to the City before even breaking ground? $60k, 80k, $100k? For every $50k in unit costs, investors need ~$3-400 in collectable rent, so the first $4-500 in rent is just covering ROI on city fees for new construction.

    • Hi Rocky, you are correct – I’ll update the story. The fee did rise above the $18 mark on July 1.

      Also check out the city memo, this answers your question: “In order to transition rental downtown high-rise developments between the AHIF and IHO, nine qualified rental developments choose to remain under the AHIF and then City Council adopted a resolution on June 26, 2018 authorizing a reduction in the Inclusionary In-Lieu Fee to $0 (per In-Lieu unit) for High-Rise rental developments if they obtain issuance of all Certificates of Occupancy on or prior to June 30, 2021. These downtown high-rise rental projects may elect to build affordable units on-site or they may elect to qualify for this reduction in the Inclusionary In-Lieu Fee to satisfy the project’s Inclusionary obligation.”

  2. Its all about Sam’s friends. The developers get off easy over and over while the tax paying residents are screwed with dirty streets. homeless campers and sub par police staffing. The liberal utopia of San Jose is becoming another crown jewel of the ghetto bay area!

  3. > “Does the city have a responsibility to ensure developers are making a sufficient profit?” he questioned.

    Dear Mr. Socialist Dumbbell:

    If the city wants developers to develop housing, the answer is HELL YES.

    If the city wants talking head politicians to promise pie=in-the-sky cheap housing plans that never get built, the city may freely ignore the profitability of developers.

    Do your constituents live in actual HOUSING, Mr. Socialist Dumbbell, or are your constituents happy to live in celestial pie tins?

  4. The Mayor is dooming downtown by continually exempting fees for developers. How about reversing the trend and increasing fees so the residents of these new developments can have clean streets, green space to play and relax and traffic calming measures. These developers could built in any other state or city and if they chose to do business here they need to pay like we all do. I wonder how many of them will be contributing to Sam’s future campaign. I hear from many folks that use this blog comments like “they can move elsewhere if they don’t like it or can’t afford to live here”. The same goes to the developers that don’t have enough money but want the residents to provide them with welfare. This is what this is. Welfare for the wealthy.

  5. Grace: the Slant Quotient on this story is troubling. A measure passes, and it takes SJI 10 paragraphs to quote or refer to someone who supported the bill and why they did. And that’s after 5 paragraphs giving the mike to somebody explaining the perspective of the losing side, Councilmember Peralez. This is upside down journalism: Why is the losing perspective so much more worthy of SJI’s editorial attention than the winning side? You name all the councilpeople who voted on the losing side, and only some of the winning side. Outside groups who opposed the measure (SV Rising) get mentioned and a quote before the outside business groups who supported the winning measure get mentioned (and, surprise! they don’t get a quote.) Honestly: this feels more like a Spotlight (funded by labor) story than an SJI story.

    • Hi Ellen, it takes space to explain some of these policy proposals (like Peralez’s). His memo was very complex and it was my goal to explain it in a dissectible way – just like I explained how the tax break worked. Going in depth sometimes takes more words.

      I’d also pose the question – why is the winning side more worthy than the losing side? Neither is more “worthy,” but one has to go first in the story. I explained Councilmember Khamis and Davis’ proposal on the other side to reduce the fee permanently. That proposal was a lot less complex so it took less space to explain. I encourage you to go read them both on the city’s website to see for yourself.

      Also I quoted 3 members on the losing side and 3 on the winning side. Neither business or labor leaders were quoted in this story, but I did embed a tweet from one side that came immediately after the vote. I mentioned labor leaders first in that section because they began the discussion last week, prompting business leaders to respond.

      • Grace: Your story is categorized as a news story. So when you ask the question “why is the winning side more worthy than the losing side?” it’s patently obvious: because the winning side becomes city policy. Which means it has impact on citizens. That’s news. The losing side may be intellectually interesting, it may take more time to understand, but it’s *less relevant as a news story* because it didn’t pass and has no impact. I would think this is kind of elementary. While it’s true you mention Khamis’ and Davis’ proposal, it’s way down in the story. And while you may quote losing/winning side equally numerically, you give “priority* to the losing side by placing it first and giving it more space. How you frame your stories, how you give priority to spokespeople, how much space you give to opposing sides–your readers notice these distinctions and it might do you and your editors some good to pay some more attention to how your implicit biases are informing your editorial decisions.

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