Will slashing affordable-housing quotas jumpstart 1000s of stalled units?

Despite misgivings, the Planning Commission approved a controversial ordinance that temporarily allows developers to rework stalled projects to include significantly fewer affordable housing units than they originally committed to. 

The ordinance, proposed by Supervisors Aaron Peskin and Ahsha Safaí, now goes to the Board of Supervisors for final approval. 

Peskin and Safaí called it a necessary move to jumpstart some thousands of units stuck in the project pipeline. Builders, facing high costs for labor, construction, and land, haven’t and won’t break ground until a project is financially feasible, they argued. Removing affordable housing requirements, or inclusionary housing, may help. 

While macro-economic conditions are out of local officials’ hands, there are “levers that we can control, in terms of incentivizing people to build,” Safaí said. “This is one of the ways we can do that.”

If passed, any project in the city’s pipeline with 25 or more units approved before November 2023 that hasn’t secured construction documents can be reworked. It’s a stark difference, in some cases: For example, the ordinance allows developers to make just 12 percent of their units on-site affordable. At present, the requirement is 22 percent. 

According to the planning department, some 7,800 in the pipeline now could be eligible. 

The ordinance also carves out a discount for new projects approved between November 2023 and November 2026, as long as they acquire construction documents within two and half years. The Planning Department estimates 91 projects under review could qualify by 2026, meaning some 10,411 units could receive discounted rates.

But discussion at Thursday’s commission meeting reiterated that it’s unlikely that slashing the inclusionary requirement alone is enticing enough to immediately get the 69 projects stuck in the pipeline up and running again. A report released earlier this year by the City Controller and a technical committee modeled different housing types, and showed that, under these economic conditions, no rental housing made a profit — not even a 100 percent market-rate building, or no affordable units at all.

“Essentially you can dial that [inclusionary] requirement all the way down to zero and still not have feasibility,” chief economist Ted Egan said at Thursday’s meeting. 

So what housing types would financially benefit if the ordinance’s lower inclusionary rates were adopted? Egan pointed to a chart that showed feasible projects in green: Just low- to mid-rise condominiums, or ownership buildings. 

Given that San Francisco is a majority renter town, and the city needs big projects like high-rises to chip away at a state-mandated goal of building 82,000 new housing units, this raised eyebrows for some commissioners. 

“It makes me uncomfortable that what we’re doing will help ownership units, but not necessarily rental units,” said Commissioner Sue Diamond, who, ultimately voted in favor of the legislation. “I’m worried it’s not going to produce what we need … we’re going to a lot of trouble for very little green.” 

This isn’t surprising to developers. One builder Mission Local interviewed in March argued cutting the inclusionary fee isn’t nearly enough; all extra costs like development impact fees should be completely eliminated, and transfer taxes like should be reduced, they said.

But commissioners acknowledged a concept floated repeatedly in these discussions: 20 percent of zero is zero. Citing that the impact is greater when there’s “no production,” Commissioner Gabriella Ruiz ultimately supported the ordinance.

Impacts on affordable housing?

Thursday’s ordinance called into question whether San Francisco risked further debilitating its affordable housing tools as the state demands more than 46,000 affordable units be built by 2031. 

While inclusionary housing is far from the only affordable housing tool at the city’s disposal, it has, if in smaller batches, reliably added to the overall affordable housing stock on the private market’s dime, and usually much quicker than larger 100-percent affordable housing. It’s common that developers opt to pay an in-lieu fee to fulfill that requirement, which has amounted to millions of dollars that help pay for 100-percent-affordable housing. 

“I’m not in favor of further reducing” the inclusionary, said Commissioner Derek Braun. He didn’t want the rates to “go too low,” in case economic conditions improve within the next three years, but acknowledged the dozens of stalled projects. He called it “tricky.”

The ordinance could translate to a big loss of affordable units. Presently, a 100-unit building needs to include 22 affordable units, build 30 units off-site or pay a fee equal to 30 percent of the project to go into an affordable housing pot. Under the ordinance, a 100-unit building can include just 12 units, build 17 off-site units, or pay a fee equal to 16.4 percent of the project. 

That’s ten fewer affordable on-site units than required presently, and almost half of the fee. 

Similarly, for projects submitted between 2023 and 2026, a 100-unit building developers need to include 15 affordable units, 21 units off-site, or pay a fee equal to 20.5 percent of the project. That’s seven fewer on-site units than required presently, and two-thirds of the fee. 

That’s the point — today’s standards don’t make financial sense, Peskin and Safaí emphasized. “In the right market, we want to be as aggressive as we can, and build as much affordable housing as the market can allow,” Safaí said. But “you can’t get any units at all if no one is building.” 

Resolution: Inclusionary Housing and Development Fee Reduction

The Vote: 5 to 1

For: Commissioner Derek Braun, Commissioner Sue Diamond, Commissioner Joel Koppel, Commissioner Gabriella Ruiz, Commission President Rachael Tanner

Against: Commissioner Theresa Imperial

It’s been done before. In 2016, Peskin said he and Jane Kim, just as controversially, passed a law that raised the inclusionary rates, when the economy was better. “We were losing hundreds if not thousands of affordable housing units” with a lower rate, Peskin said. “The inclusionary deserved to be increased.”

Peskin and Kim also passed a charter amendment enabling city leaders to adjust the rates, and established a technical committee tasked to monitor the economic effects every three years. The latest report, reviewed again Thursday, suggested dialing down inclusionary rates. 

Meanwhile, city leaders are pursuing an affordable housing bond next March to better fund 100-percent affordable housing buildings. Because those buildings are larger, those projects tend to deliver hundreds more affordable units than inclusionary housing. 

“We acknowledge that [lowering inclusionary] is going to build less affordable housing, but the real solution is 100-percent-affordable housing construction,” Peskin said. “The inclusionary housing program, while it’s been good and important, it’s not going to be the be-all-and-end-all.”