SJ Has a New Fee on Commercial Development to Pay For Housing

Commercial developments in San Jose just got a little more expensive to build, but the extra costs will go to new affordable homes in the city, where homelessness is on the rise.

City officials voted 7-4 to approve a new commercial linkage fee at about 12:40 Wednesday morning, as the council meeting stretched past the usual midnight cutoff.

Elected officials settled on a fee that represented a compromise: it was lower than what some in the labor and affordable housing communities had hoped for, but higher than the recommendation by city staff.

“I commend my council colleagues, community organizations, and business partners for working together to find middle ground on a solution that will generate millions of dollars annually for affordable housing, while ensuring that job-creating projects can move forward,” Mayor Sam Liccardo said in a statement Wednesday.

The fee comes as the city balances two realities seemingly at odds with each other.

On the one hand, San Jose, like most California cities, faces a looming recession and budget deficit caused by Covid-19. Officials say the 10th largest city in the country would benefit from economy-boosting projects, like new office building developments.

But every commercial development—offices, retail, hotels and warehouses—also brings jobs and therefore more demand for homes in a region already feeling the weight of a crushing housing shortage.

The linkage fee is meant to increase the cost of the commercial properties so the city can use that money to get more hard-to-finance affordable housing. The questions is: how much can the city charge without scaring away developers altogether?

Councilors attempted to find that balance when they offered downtown office developers with projects larger than 100,000 square feet the chance to choose their own fee.

Developers can now choose to pay the fee all at once for $12 per square foot, in phases, for a total of $15 per square foot. Or, they can build or buy affordable housing in the city.

Some housing advocates on Wednesday celebrated that San Jose had finally followed in the footsteps of most of its Santa Clara County neighbors by adding a linkage fee.

“It was a long time coming, and it is an important win,” housing nonprofit, the nonprofit SV at Home wrote in a letter to supporters.

But not everyone thought the agreement was a good deal.

Jeffrey Buchanan, public policy director at local think-tank Working Partnerships USA said he was “disappointed” in the vote.

“The mayor and council majority sided with corporate developers looking to pad their profits over Black and brown families, who will have to live with the impact of these projects on rising rents and the threat of displacement for years to come,” he said.

How it Works

Developers will now pick from three options to pay their commercial linkage fee.

In the first option, developers can pay $12 per square foot all at once when the city certifies the project is ready to have tenants move in, known as a certificate of occupancy.

If a developer wants to break up its linkage fee payments, it’ll pay a total of $15 per square foot. The first payment of $5 per square foot would be due when the project gets its certificate of occupancy. The remainder would be due when tenants start moving in.

The last option is to build or buy affordable homes alongside the approved commercial development to offset the housing impacts of the project.

Large projects in other parts of the city will pay $5 per square foot. Smaller commercial projects would pay $3 per square foot, though the first 50,000 square feet would be free.

Retail developments won’t see any extra costs “due to increasing vacancies brought on by the COVID-19 economic crisis,” according to city officials.

That’s a decision supported by SVO, Silicon Valley’s largest chamber of commerce.

Eddie Truong, SVO’s director of government and community relations, told San Jose Inside ahead of the vote that charging additional costs to the already struggling bricks-and-mortar retail industry would be “out of touch.”

For background on the long-debated linkage fee—and all the controversy that came with it—here’s a handy explainer.

Janice Bitters is managing editor for Metro Silicon Valley. Email tips to [email protected]. Follow her on Twitter at @janicebitters.

5 Comments

  1. It’s really sad that the council doesn’t seem to want to do anything unanimously anymore, everything is about attacking the other side. I really respect Jimenez for “crossing the aisle” on this one and putting the issue of affordable housing over factionalism. The rest of the council is going to have voting against affordable housing fees on their record, and that can go on a mailer – they’re the ones who have to spin it.

  2. Thanks to Ms. Bitters for the expository reporting here and in the linked background piece. It certainly clarifies a lot about the latest proposals to tax commercial developers to help fund affordable housing.

    It would have helped a great deal to contextualize what the City has done with respect to taxing housing developers (as opposed to commercial developers) for the purpose of funding affordable housing historically. For example, see https://www.sanjoseca.gov/Home/ShowDocument?id=45048 and https://www.sanjoseca.gov/your-government/departments/housing/developers/affordable-housing-impact-fee.

    From my perspective, the important questions raised here are:
    1) how much has the Inclusionary Housing Ordinance and the Affordable Housing Impact Fee on housing development brought into City coffers on an annual basis since its inception?;
    2) how much is the commercial linkage fee expected to bring in on an annual basis?
    3) what is the cost of building an affordable unit in the City?;
    4) how much affordable housing has the City actually created on an annual basis and how have they done it?

    These would be very interesting questions to address in a simple way with supporting evidence.
    From what I can gather, the affordable housing taxes and fees from both housing and commercial developers do not (or will not) amount to much at all–a few tens of millions annually, perhaps–and certainly far less that what metro-Portland will take in from the income and profits taxes they voted to impose in May. These consist of a 1% tax on income above $125,000 per year for individuals and over $200,000 for couples plus a 1% tax on profits from businesses with gross receipts greater than $5 million per year. It was expected before the COVID-19 crisis the new taxes would yield approximately $250 million per year (that’s a quarter of one billion dollars) in additional revenues that would be dedicated to addressing homelessness. Experts estimate that 90% of residents and 94% of Portland-area businesses would be exempt from the new tax which will “sunset” in ten years (see https://www.seattlepi.com/local/politics/article/Portland-area-voters-approve-taxing-the-rich-to-15283824.php).

    Given higher incomes in the San Jose area, as well as significant large businesses located here, such a tax would certainly produce a hefty yield. Taxing excess extreme and excess income and profits is the easiest, fairest and least costly (to working people) way of funding affordable housing (and other social goals). It is very interesting and suggestive that San Jose politicians and leaders come off as both small-minded and compromised when comparisons to other Democratic-run cities are made.

  3. Thanks to Ms. Bitters for the expository reporting here and in the linked background piece. It certainly clarifies a lot about the latest proposals to tax commercial developers to help fund affordable housing.

    It would have helped a great deal to contextualize what the City has done with respect to taxing housing developers (as opposed to commercial developers) for the purpose of funding affordable housing historically. For example, see https://www.sanjoseca.gov/Home/ShowDocument?id=45048 and https://www.sanjoseca.gov/your-government/departments/housing/developers/affordable-housing-impact-fee.

    From my perspective, the important questions raised here are:
    1) how much has the Inclusionary Housing Ordinance and the Affordable Housing Impact Fee on housing development brought into City coffers on an annual basis since its inception?;
    2) how much is the commercial linkage fee expected to bring in on an annual basis?
    3) what is the cost of building an affordable unit in the City?;
    4) how much affordable housing has the City actually created on an annual basis and how have they done it?
    These would be very interesting questions to address in a simple way with supporting evidence.

    From what I can gather, the affordable housing taxes and fees from both housing and commercial developers do not (or will not) amount to much at all–a few tens of millions annually, perhaps–and certainly far less that what metro-Portland will take in from the income and profits taxes they voted to impose in May. These consist of a 1% tax on income above $125,000 per year for individuals and over $200,000 for couples plus a 1% tax on profits from businesses with gross receipts greater than $5 million per year.

    It was expected before the COVID-19 crisis the new taxes would yield approximately $250 million per year (that’s a quarter of one billion dollars) in additional revenues that would be dedicated to addressing homelessness. Experts estimate that 90% of residents and 94% of Portland-area businesses would be exempt from the new tax which will “sunset” in ten years (see https://www.seattlepi.com/local/politics/article/Portland-area-voters-approve-taxing-the-rich-to-15283824.php).

    Given higher incomes in the San Jose area, as well as significant large businesses located here, such a tax would certainly produce a hefty yield. Taxing extreme and excess income and business profits is the easiest, fairest and least costly (to working people) way of funding affordable housing (and other social goals). It is very interesting and suggestive how small-minded and compromised San Jose politicians and leaders appear to be when compared to other West Coast Democratic-run cities.