Decisions on Housing Types Affect Future Tax Revenue

Unfortunately, not all housing developments create the same economic value in areas assigned to the Redevelopment Authority (RDA). Last week, the council approved financing for an affordable housing development on North 4th Street in a RDA area. Since the housing developer is a non-profit, the development is exempt from paying property tax.

In addition, the fees that are paid for a market-rate development—road paving fees and park fees, to name two—are exempt from this project as well and all other projects like them. (Point of clarification, this project was entitled prior to the Council cutting the park fee requirement in half for affordable housing. I remain committed to my support of 100 percent park fees for affordable housing developers).

Locating affordable housing in an RDA area creates a lost opportunity for tax increment revenue for RDA ,since projects are exempt from property tax. As a result this type of housing does not fund ongoing city services in non-RDA areas that the new residents will require (usually at a higher rate than market-rate housing). It also shortchanges the RDA because RDA needs the tax increment from the increase in property value which then could be invested towards economic development. This housing development is a financial loss and therefore I voted no.

One way to fix this is to require that affordable housing be built by a for-profit developer so it would be subject to property tax. We would still provide affordable housing but it would help to carry its own weight in paying for city services.

At the same meeting, the Council agreed to a multi-year exemption for four north San Jose housing developments from the citywide inclusionary housing policy, which may bring in over $1 billion in private-sector spending. The current San Jose inclusionary policy has been blocked in the short term for apartments only by the Palmer court case. These developers would commit to start their housing projects by September 2011 to qualify for the exemption; however they want to make sure the exemption would not change half way through construction if the State Legislature passes a law to circumvent the Palmer case. This is an example of how an inclusionary housing policy raises the cost for the developer and inevitably increases the price for the market-rate units.

The short-term benefit would be thousands of construction jobs and city planning jobs for these 4,000 housing units that were approved as part of the Vision North San Jose plan ,where the city already has public infrastructure like roads, sewers, street lights, etc. The long-term benefit is that these housing developments are market rate and pay property tax. When the construction is complete the property is reassessed and that increase in value creates millions of dollars in tax increments to fund the RDA each year—ideally to be spent on economic development.

These market-rate developments will also provide 100 percent park fees, creating large parks since they are all high-density developments and the park fees are paid on total amount of units. More housing units per acre equals more park fees.

Tomorrow night Council will consider a new policy (I support) allowing these apartment developments to donate maintenance services for parks so there would be no cost to the City, but enabling residents to enjoy a well-maintained park. They will also pay 100 percent of the road paving fees.  If a city has a RDA to create tax-increment revenues, then ideally each parcel in that RDA area should be strategic for revenue growth.

Please consider attending the Veterans Day parade in Downtown San Jose this Thursday. The ceremony is at 11am and parade is at noon.  1919 was the first Veterans Day event in Downtown San Jose and it is an opportunity to honor those who have served in our military.

30 Comments

  1. Pier,

    Do you not understand that taxes stemming from additional housing in San Jose are insufficient to pay for the incremental infrastructure – safety officers,schools, libraries, etc.?  The fact that roads, sewers and streetlights are in place is just a small piece of the equation. 

    It appears as though you’re just fine with San Jose being a bedroom community, while industry locates in adjacent cities.  Too, with the RDA sucking up the tax increment – money which should rightly be used to supplement the ongoing project costs – we as taxpayers and citizens will get nothing out of it, as those millions of dollars will be dumped down the bottomless pit called Downtown.

  2. >  Last week, the council approved financing for an affordable housing development on North 4th Street in a RDA area. Since the housing developer is a non-profit, the development is exempt from paying property tax.

    Well, well, well.

    What have we here:  YET ANOTHER instance where the statist ruling class exempts ITS special interest clients and voting blocs from taxes, and shifts the taxes to the TAX PAYING MIDDLE CLASS!!!

    Add that to other parasitical takers, it it becomes clearer and clearer that a smaller and smaller group of producers is paying for an ever-increasing class of “takers”.

    1. Tax exemption for developers of “affordable housing”. 

    2. Tax exemption for urban “open space land trusts” for “green space.  Removes thousands of acres of property from the tax rolls.

    3. Taxpayer subidies for environmental activist groups for bringing lawsuits under the “Clean Air Act” and other laws to oppose development and oil drilling.  A clear tax incentive to advocate ONE SIDE of a public policy issue and drive up the costs of providers of goods and services who benefit consumers and the public.

    The statists have invented zillions of sneaky and underhanded ways to get their hands in the wallets of middle class tax payers.

    When someone has their hand in your wallet, it’s hard to tell whether its a crook or a politician.

    • Hey, the nimrods of this state re-elected most of those folks who have their nhands in our pockets.  Go figure.

      “…it’s hard to tell whether its a crook or a politician.”

      Aren’t they synonyms?

  3. PLO, so far in this, and other posts, you have failed to address how the city will afford to pay for the services all these new housing developments will require. In a time when new housing – and especially so-called affordable housing – is the very last thing San Jose needs, City leadership continues to add additional burdens to the City’s infrastructure, budget and services – especially public safety (which you and the rest of your peers are in the process of gutting). In your post, you identify short- and long-term benefits to the city: jobs and tax money for RDA, respectively. Unfortunately, what you fail to acknowledge -and this is critical – is that ADDING RESIDENTIAL DEVELOPMENTS AT THE EXPENSE OF DRAWING NEW BUSINESS TO THE CITY HURTS THE CITY IN BOTH THE SHORT AND LONG TERM! When you are talking about money for the RDA, you are merely talking about a redistribution of income from the general fund to the RDA, in a very convoluted sort of way.

    When are you and your peers going to have the intellectual honesty to acknowledge that adding residential developments instead of increasing San Jose’s business tax base results in a NET DEFICIT because residential costs more for the city to support, because once residential housing is added, it eliminates the possibility of putting net income-producing commercial developments and because it slows the pace of appreciation of existing residential real estate.

    Lastly, at no point in time have you addressed how you and your peers intend to provide public safety services to an increasing population with fewer public safety resources. How about if you all spend less time coming up with additional ways to put San Joses budget further into the red and more time streamlining the budget, attracting new businesses and resolving the looming public safety crisis which you and several of your peers have helped to engineer.

    • He was actually for it before he voted against it. It isn’t his fault that the majority of the City Council (RDA Board of Directors) voted to approve the tax-free project.

      Don’t worry the cost savings of having fewer firefighters and police officers on the payroll will more than makeup for the lack of tax revenue generated by these projects. 

      Pier undersatnds that these “affordable housing developments” (translate engineered ghetto) typically require more “services” (Police more than any other) than their “affordable counterparts” (areas inhabited by taxpayers. Don’t worry unless you live there.

  4. To at this time, add tens of thousands of new housing units and residents in the near future, is insanity by our city council and mayor. It really doesn’t matter what is the will of the people. It really doesn’t matter to this city council and mayor if we show up at a council meeing and are allowed to speak for a moment or two. It doesn’t matter if most of the residents in an area don’t want to be annexed by San Jose. The northern portion of San Jose should be set aside for business only. That is what San Jose desperately needs, no more housing.

  5. If Pedro ran his produce mart the way the council runs the city he would, when sales tanked and inventory became more than he could handle, ask his suppliers to bring him more produce. He wouldn’t care that the additional inventory would drive down his prices, or that the workload would prevent him from controlling spoilage, or that his cash flow problems would worsen. He would go ahead with the orders because he knew his buying was keeping pickers and packers and truck drivers employed, and that they were good people, some of them customers. He would continue to stock up because he worried about the public’s eating habits and wanted to be ready when they decided to get healthy. And most of all, he would continue to buy because he wanted his display to be abundant, his business—and himself—to appear successful.

    If Pedro ran his produce mart the way the council runs the city he would very quickly go out of business and file for bankruptcy. He would learn that there is no tolerance in business for wishful thinking, reckless spending, unbridled altruism, or excessive vanity. He would learn that there is no tolerance in business for Pedro, a man who lives by his hopes, his heart, his ego; a man never cut out for sound planning, smart budgeting, or hard realism. He would come to see these values as inferior to his own; he would see them as cold and hurtful; he would see them as greed.

    If Pedro ran his produce mart the way the council runs the city he would, eventually, have no choice but to run for a seat on the council, a job where he could buy more than he should, try to solve problems he couldn’t, be worried where he shouldn’t, surround himself with grandeur, and, by taxing the hell out of greedy business owners, finally be the man he was meant to be.

    • Your analogy makes perfect sense, except that grapes are ten dollars a pound. 

      Silicon Valley housing prices are, even now, absurdly high.  This is not a case of excess homes that no one wants to occupy.  To judge by prices, there are quite a few people who want to live in them.

  6. >  an affordable housing development on North 4th Street in a RDA area.

    So, just what is the EXACT LEGAL DEFINITION of “affordable housing” that the city relies on to redistribute the tax burden?

    “Affordable” to who?

    Is the class of people who are ulimately the beneficiaries of “affordable housing” a “diverse” class, or do they disproportionatly include members of certain racial, ethnic, gender, sexual orientation, language, professional, unionized, political donor, or voter groups?

    How come the political class never spends any time fretting about “affordable taxes”?

    I pay more in combined taxes than I pay for housing.  I can’t afford the taxes I’m paying, and because my taxes are not affordable, I can’t afford my housing either.

  7. Focas all the job/housing in downtown only in order to make downtown pay off for all the investments made there.  Otherwise, it’s time to pay up and the whole city goes down with it.  It’s too late since all the projected invested by the redevelopment will be receiving bills soon.

  8. Pierluigi,

    I continue to find your weekly column interesting since these topics and details are not reported in the Mercury News. You continue to put yourself out there and take criticism for votes that the entire city council supports.  Appreciate that you share your perspective.

    The Bay Area will continue to grow and it is best to grow next to transit then building out towards Morgan Hill or the Central Valley.

    Finally, thank you for voting against the housing next to the creek that displaced the technology company a few months back even though the city council voted in favor.

    • Good point.  Life, liberty and pursuit of happiness.  That doesn’t mean everyone gets the American dream of homeownership.  Nothing wrong with renting.  Live within your means.  That includes moving to a less expensive place to live if your money doesn’t cover living expenses in CA & Santa Clara County. 

      The entitlement mentality gets us all in a lot of trouble.

  9. The repeated mantra in the comments here is that “more housing = less income.”  Is that really a rule?

    What I’m hearing from Pier is is that housing costs more than it brings in when city rules to promote “affordable” housing grant tax exemptions.  He votes against these developments.  The North San Jose developments are not getting these tax exemptions but are also not required to build a certain number of affordable units.  Since they’re not getting exemptions, he’s in favor of them.  What’s wrong with that? 

    It’s not like these apartments are instead of office buildings, therefore we get either housing or jobs.  There’s plenty of empty office space right now.  The problem is getting companies to fill them.  New apartments don’t have anything to do with it.

    If it isn’t profitable for the city to allow housing that will pay full taxes to be built, that means we need higher taxes on housing, something I’m sure no one here wants.

    • The issue here is that San Jose shouldn’t be adding any more housing. Period. My contention, and that of many others, is that City Council should preoccupy itself with attracting BUSINESS to the city. Period. Adding housing of any kind will push the city’s budget further into net deficit and require more services – espicially public safety and most especially police services. It will also depress the existing housing market further by creating more housing in an environment of reduced demand, thereby further decreasing tax revenues and worsening the net deficit problem. Adding business would do the opposite at every level.

      We don’t need further taxes on housing. We don’t need more housing – at least not for now. We need to change the city’s manner of doing business in such a way that it is easier for business to come to the city, succeed and remain in business. Doing novel and revolutionary things like simplifying San Jose’s tax/fee structure would do exactly that.

      • Everyone wants to see more businesses, and I agree that the council needs to do more to encourage them.  However, that’s not my question.  Can it be proved that the net effect of adding housing units that pay full taxes is to add to the city’s deficit?  If so, the only real solution is to raise taxes on housing.  If we tax businesses so much that they cover the deficit introduced by housing that pays full taxes, we should shift those taxes from business to housing.  That has the net effect you want and it’s fair.  Businesses should not be picking up the difference.

        If there’s a net gain to the city’s income due to these units, regardless of how much less that gain is than the theoretical amount we’d get from a business, they should be built.  Turning down income during a recession because someday in the future an office might go there instead seems like wishful thinking to me.

        • Actually, raising taxes on housing is not the only solution. The alternative is to encourage a much more subastantial business presence in San Jose with a reasonable tax structure and less labrinthine fee structure. This would help ensure a sufficient tax base to offset the net loss that housing represents. That housing costs more than business to support in terms of municipal services is well-established and documented. That’s why halting residential construction is a prudent thing to do. The best thing a city can do is determine the the ideal commercial/residential ratio, and take steps necessary to achieve that ratio. Unfortunately, San Jose has been miserable when it comes to finding that optimal balance, having driven major businesses out of San Jose and failed to attract new business to replace it.

    • Devil,

      Your last paragraph hit the mark.  Yes, we need higher taxes on housing.  Read up on Mello-Roos tax assessments.  That’s where the particular project is assessed with an override to pay for incremental infrastructure.  That form of taxation has been used in the Central Valley for years.  And guess what – if that results in the price of the new homes being too high for buyers, the homes should not be built.

  10. Folks, before you bitch, whine and moan about this tax free project, remember.  For every $10 million spent on capital projects (like the new Whole Foods on Blossom Hill and Almaden expressway)  $2 million has to be spent on low income housing. 

    This is just a fact of the RDA.  If they don’t spend it, they won’t receive it.

    As we all know, low income costs the city more money in the long run than high income.  I forget if it was BS monitor that correlated low income’s inability to solve their own problems to high crime and services, but it was a good way to illustrate how these areas will long term cost us.

    Builders don’t like working on low income either, as this cuts into their profit margins.

    So the city has to make *extremely* lucrative deals to get any builder to so much as set foot on a low income project.

    I hope this clears up any misconceptions folks might have.

    • Robert,

      A quick and easy fix to the dilemma: if a given project is budgeted to cost five million dollars, reduce the number of units to a point where an amount equivalent to the present value of the full future stream of incremental infrastructure costs is impounded and reserved up front, before the project is even approved. 

      As each year passes, the trustee of the impound account pays the City for such incremental costs.  The result is a lower number of dwellings but, concomitantly, a project that pays it own way. An added benefit: the City does not receive the money in an upfront lump sum, for that would allow the politicians an opportunity to squander it on other things.

      • While you bring up a good strategy, another thing to take into consideration is the general plan, which forcasts a certain number of units by 2020.  In some ways, the councilmembers are bound to this, and have to vote the way they do.

        I think the general plan should be modified to take into account the cities ability to service these areas. 

        One of I hear time and time again revolves around the library built on Bascom Av, but never opened because they couldn’t afford adequate staffing.  (gee, unopened library, is that blight?)

  11. Unfortunately San Jose Leaders are addicted to residential development like the addict is to the high.  No matter the political, economic or social circumstances, San Jose just can’t say no to a housing development.  There is always a promise of jobs, or some other economic machination to justify the decision, but it hardly ever pans out.  Instead, our Jobs to Housing balance grows ever worse and we end up like person who dies of a thousand paper cuts.  Each residential approval seems harmless enough, but when added together over so many years, we wind up becoming the largest bedroom community in the entire United States.  I fear that the system that elevates candidates to Councilpersons in San Jose has residential development so ingrained in its fiber that we will never get a Council with the ability to actually deny a housing development.  Perhaps the next ballot should include a measure taking away that power from the Council and give it to the voters.  It appears too easy to convince a majority of 11 people that every housing project is worthy of approval.  Maybe the addict needs an intervention?

    • In the near future, perhaps the City Council should consider what may happen if they continue rubber stamping residential projects.  It would be a simple matter to add a measure to the next ballot, which requires that any and all projects(no exceptions!)pay for themselves in terms of all associated infrastructure costs. 

      Having Councilmembers roll over on damn near every project is no longer acceptable.  Who among SJI readers would support this sort of action?  I’d jump on the wagon in a minute!

  12. I would rather have smaller parks with people living in safe affordable housing than massive parks with homeless living in them.

  13. Libraries, community centers and other facilities also don’t pay property tax.  If tax base is most important, that bond measure to build the new branch libraries and community centers could have leveraged public dollars into private developments to get the facilities at a lower upfront cost (converting an empty storefront into a branch library). Same with community centers…have a developer bid on delivering housing, retail space and a community center as part of one project.

    Another suggestion, clustering…why does every service have to stand alone.  Why not connect with the county and state and combine multiple agencies into one service site.  Government clustering for citizen convenience.  Also…sprinkle in some retail spaces and even commercial and housing for real mixed use. Planners talk about this for developers, why doesn’t government do it themselves with their own projects.

    • Blair,

      To use a very non-PC term, the answer to your question is simply a matter of “rice bowls.”  Disturb one, and incur the wrath of a department head, staff members and the unions.

  14. There is nothing this city council and mayor does that could not be accomplished for a fraction of the price with a part-time city council and mayor without all the pay and benefits they receive. A part-time city council is perfectly able to approve huge affordable housing meausures and make poor choices just like our current council and mayor.