“Inclusionary housing program” is a bureaucratic term that seems to invite mental drift. And when the Board of Supervisors’ Land Use Committee considered updating the program’s standards July 12, there was enough mind-numbing economic and regulatory minutiae to sedate the standing-room-only crowd.
But there were also diamonds in that jargony rough. For one thing, San Francisco is now poised to finally force housing developers to spend more of their astronomical profits on housing that sells or rents for far less than the city’s equally obscene housing market dictates. And that’s been made politically possible by an unlikely deal that has downtown developers such as Oz Erickson, affordable housing activists including Calvin Welch, the market-friendly Mayor’s Office of Housing, and progressive Sup. Chris Daly all on the same side.
In the process, a city-commissioned report has lifted the financial veil from big-money housing development in San Francisco, revealing that those who build the biggest high rises require a profit margin of at least 28 percent — or a take-home profit of about $250 million — before they’ll take on a project.
“It used to be illegal [usury to seek such high interest on loaned money], so 28 percent is a sobering number,” Welch said at the hearing.
The public good likely to come from this ordinance — if the current compromise can hold for a few more weeks — is a fairer system for getting people into below-market-rate (BMR) units, policies designed to encourage more housing construction for a wider income mix, and ways to involve more developers and phase in the program so as not to disrupt ongoing projects.
But before we get too deep into the program’s details, let’s take a step back, because the backstory of how we got to this compromise is an intriguing tale with important political implications, particularly for downtown’s current public enemy number one: Chris Daly.
The story really began last summer when the developers of those big new luxury high-rise condos known as One Rincon Hill were trying to get their final approvals. Daly and many of his constituents were concerned that this lucrative project didn’t include enough community benefits or BMR housing.
So the supervisor stepped in and negotiated with the developer a $120 million deal with a huge low-cost-housing element. In the end, the developer agreed to provide affordable units equivalent to about 25 percent of the project.
That’s more than double the city’s current inclusionary housing requirement, which mandates that 12 percent of the units be available below market rate. The requirement rises to 17 percent if the units are built off-site, and developers can pay the city a fee in lieu of doing the actual construction.
The deal got Daly thinking: If the Rincon developers could afford 25 percent, then others probably could too. So he used some of the developer’s money he’d extracted to fund a study looking at how increasing the mandates to 20 and 25 percent would impact housing construction in the city.
Last fall, the Planning Department and Mayor’s Office of Housing assembled a technical advisory committee — made up of cochairs Erickson and Welch and a mix of for-profit and nonprofit developers plus community representatives — to work with the study’s consultants.
Daly put his efforts in the form of an ordinance last October. Sup. Sophie Maxwell also had introduced legislation to strengthen the inclusionary housing program, which has been combined with the Daly legislation. And Sup. Jake McGoldrick last fall introduced legislation to apply the program to buildings of five or more units (it now applies to buildings of 10 units and more), and his ordinance is now being considered along with the Daly-Maxwell legislation.
“This is about housing for everyday people in San Francisco,” Daly said at the July 12 hearing, which was attended by the three supervisors, city staff and consultants, top developers, and a large crowd of housing activists wearing “Housing Justice Now” stickers.
That volatile mix produced a surprising amount of unanimity and compromise (although the Land Use Committee ultimately decided to push the matter back a week to work out some details). Just a few days earlier, when the consultants’ numbers first came in, the measures had seemed headed for an ugly showdown between the progressives and downtown.
The report by Keyser Marston Associates analyzed how much the city can ask for before developers just say no. It was a wake-up call in many respects, showing that San Francisco developers and their financers expect at least 18 percent profit margins for small projects and more than 28 percent for big ones.
For starters, that means that no private developer will build new rental housing in San Francisco, because the profits aren’t high enough. The report also says that developers will avoid putting affordable units in their luxury condo towers; it makes more economic sense to build them off-site or to pay into the city fund instead.
Doug Shoemaker of the Mayor’s Office of Housing (MOH) said his office has learned a lot from the study, particularly about how the in-lieu fee could be adjusted to make BMR housing construction a more attractive option for developers.
“It’s created a bias for developers to just pay the fee,” Shoemaker said, noting that his office increased the in-lieu fee by 15 percent on July 1 and indicating that further increases could be on the way. In fact, one requirement of the ordinance is for the MOH to regularly update fees to reflect evolving market realities.
Yet there was also a potential kiss of death in the report, which ran the numbers and found that developers wouldn’t pursue projects that met the 20 to 25 percent inclusionary housing standard that Daly was seeking.
Daly and his housing activist constituents understood that the report — which was issued just five days before the hearing — would likely translate into a mayoral veto of the legislation, allowing Mayor Gavin Newsom to claim it would hurt the city’s economy and housing needs.
“What we were confronted with last Friday was political death,” Welch said.
So Daly lowered his requirement to 15 and 20 percent respectively and agreed to compromises that grandfather in projects now in the pipeline and ease up the standards on projects that work within their current zoning.
“We do support the compromise,” Matt Franklin of the MOH told the Guardian.
But for Daly the legislation is about more than percentages. For example, it also creates standards for marketing the BMR units to prevent fraud, allows lower-income residents to qualify for them, and requires off-site BMR units to be within one mile of the project.
Daly, a tough former housing activist known for sometimes taking strong and unbending progressive stands, told the Guardian that this deal is consistent with his approach: “Yes, I’ll push the envelope, but that doesn’t mean I won’t take a good deal.”
The July 12 hearing demonstrated that this was a deal being grudgingly accepted by all of the usually polarized sides.
“We, by and large, support this legislation,” Erickson — the Emerald Fund developer and San Francisco Planning and Urban Research Association board member who cochaired the committee — said at the hearing. He also added, “I think it’s doable. I think it’s not going to kill development.”
Yet he also emphasized that the development community is giving all it can: “Fifteen percent was a compromise and we were very reluctant to see it go from 12 to 15 percent.”
Welch also said the compromise was painful for housing activists, who were hoping to get more BMR units out of market-rate housing developers and were astonished at the huge profit margins that are expected by developers and those who finance their projects.
“I think we have been successful at coming up with public policy that meets the needs of developers and low-income residents,” Welch said at the hearing.
Later he told the Guardian that the inclusionary housing update is designed to promote the kind of housing — BMR units for those making just less than the median income — that is also being created by the controversial practice of evicting tenants from apartments and converting those units into condos.
“What this does is help prevent the rental stock from being converted by [tenancies-in-common],” said Welch.
Developer Mike Burke took issue with the criticism of developers at the hearing. “It’s not a guarantee of a 28 percent return. It’s a fair return based on a substantial risk.”
Yet housing activists note that developers already anticipate delays and other financial risks when constructing their financial models, so many developers actually make more than 28 percent on their projects, a fact that the consultant’s report acknowledged.
Eric Quesada of the Mission Anti-Displacement Coalition called on city officials to adopt as tough a standard as possible, using that as a starting point to a broader discussion.
“We need to dig deeper to look at what the goals of San Francisco are for housing,” he said. “This is the ceiling of what we need.” SFBG
EDITORIAL You read the academic journals these days, or peruse economic-development Web sites, and everyone seems to be talking about sustainable urban economics. It’s as if the mantra that was first put forward by Jane Jacobs, David Morris, and a few others a quarter century ago is very much in the mainstream today: Cities function best with diverse economies dominated by locally owned businesses, with money circuutf8g within the community. Cutting-edge restaurants talk about serving locally grown food. Beverage savants want local beer and wine. Just about everyone — including the mayor and the San Francisco Chamber of Commerce — wants to participate in a program called Shop Local.
It’s a wonderful, encouraging trend — but if it’s going to make any real difference in this city, it has to become a lot more than lip service. Consider: •Just as Mayor Newsom was proudly signing on to a Shop San Francisco program, the mayor and the supervisors were busy approving plans to allow Home Depot — an anticompetitive out-of-town corporation that destroys local small business and undermines the entire concept of a strong local economy — to build a giant store on Bayshore Boulevard.
•It’s taken legal action by Sue Hestor and the neighborhood leaders to derail (for now) the mayor’s plans to build high-end condos all over the eastern neighborhoods — threatening hundreds of locally owned businesses.
•Downtown business leaders and the groups they fund still push for policies that hurt most of the businesses in the city — and too many small-business people still go along.
Here’s the reality: Supporting small businesses — and moving San Francisco toward a sustainable economy — requires a lot more than a slogan. The people who are behind the Shop Local movement know that. They’re promoting a wide range of national and local policies designed to change not only attitudes but the direction of public policy.
San Francisco, a progressive city known for its wonderful, lively, unique neighborhoods, ought to be a national leader in the battle. But others (Philadelphia, for example) are moving way ahead. This city is still stuck in an ancient (and regressive) economic mind-set.
There are a number of key things the city can do to turn that around and become a truly small-business–friendly place — and most of them go far beyond public-relations efforts and cutting through red tape. The basic approach to policy needs to change; here are a few ways to start:
•Stop allowing big chains to come into town. That’s not exactly rocket science, and it isn’t so hard either: Hayes Valley and North Beach both have "formula retail" laws that restrict the chains, and there’s talk of doing the same in Potrero Hill. But why does this have to be fought block by block? Why not a citywide ordinance that protects every neighborhood commercial district — and, more important, keeps the life-sucking big-box giants away from the city altogether?
•Make small, locally owned businesses part of the planning process. The city’s own (limited) studies have made clear that the type of development the mayor and the current city planning leadership has in mind would damage local businesses, particularly in the repair, distribution, and small manufacturing areas. That alone ought to be grounds to change directions. Why not a checklist for every new project that includes the question: Will this displace existing locally owned businesses? If the answer is yes, the project should be rejected.
•Take progressive business taxes seriously. There’s almost certainly going to be an effort this fall to change the city’s business-tax structure, with one of the goals being an increase in overall revenue. That’s great, and it ought to happen — but the tax rates have to be shifted too, so that a tiny local retail outlet doesn’t pay the same amount as the Gap. (Socking big-box outlets with a special tax or fee — possibly based on the fact that they are by nature car-driven operations — might be a nice way to bring in some cash.)
You can’t be friendly to small local businesses these days without taking sides in the national economic war — and that means coming out against the big chains. Until San Francisco does that, all the talk of supporting local merchants will amount to nothing. SFBG
EDITORIAL The San Francisco Chronicle has finally noticed what we reported a month ago: The Board of Supervisors has effectively put in place a moratorium on new market-rate housing on the east side of the city. We hear that city planners are looking for loopholes to undermine the temporary ban, but the intent of what the supervisors did is clear: Until there’s a detailed and valid review of how new high-end condos and lofts impact blue-collar jobs and low-income housing, the developers will have to let their demolition and excavation equipment idle.
Meanwhile, Sup. Chris Daly is moving to increase significantly the amount of low-cost housing that private developers have to build to win permission for future projects. Daly’s legislation is a good start and sets the right tone for the debate, but the board should go even further.
The Daly plan would apply to almost all new market-rate housing built anywhere in the city and would take effect whenever the moratorium ends. It would require most developers to offer 15 percent of the units of any project for less than market rates, and that number would jump to 25 percent if the affordable housing was built on another site. In other words, a builder who wants to put up 500 luxury condos in SoMa would have to build 125 affordable units somewhere else in the city.
That’s nice, but it’s not enough.
The city’s own general plan makes it clear that 72 percent of all new housing needs to be affordable to moderate- and low-income people. And the planning process for the eastern neighborhoods has still offered no proposals for how to make that happen.
At the same time, of course, the plans to intensely develop an area poorly served by transit and generally bereft of public infrastructure and open space utterly ignore the fact that it will cost hundreds of millions of dollars to create real neighborhoods (instead of clusters of heavily fortified, gated buildings).
Daly’s got the right idea: Developers are making a fortune building million-dollar condos in San Francisco, and they can well afford to give the city a whole lot back. But it’s worth taking a longer approach here and considering the price of bringing as many as 100,000 more people to SoMa, Potrero Hill, Dogpatch, the central waterfront, and Bayview–Hunters Point — and figure out who is going to pay for it.
Daly could start by asking for a detailed independent study of what it really costs a developer to build new condo units in the city and what the current profit margins are. Then take the city’s affordable-housing needs, the need for public-sector development, and the estimated new tax revenue and compare: Can fair taxes and requirements on the developers raise enough money to meet the city’s needs?
And, if not, we get back to the question this paper has been asking for over a year: Why are we building any new market-rate housing, anyway? SFBG
EDITORIAL The San Francisco Planning Department is having a little trouble dealing with the fact that — for the moment — no more condo developers can build high-priced units in the eastern neighborhoods. In the wake of a Board of Supervisors decision demanding an extensive environmental review of a condo project at 2660 Harrison St., planners have been ducking and weaving around the reality that the supervisors have effectively put a moratorium on market-rate housing projects — and on anything else that could displace blue-<\h>collar jobs (see “A Grinding Halt,” 3/22/06).
The latest installment is a March 31 memo from Paul Maltzer, the department’s chief environmental review officer, who concluded that yes, indeed, all developments in the vast eastern neighborhoods project area that could affect affordable housing or jobs would need detailed environmental review. That’s an admission, of sorts, that no more market-<\h>rate housing can be quickly approved, but it comes with a caveat: The memo states that projects will be evaluated on a "case-by-case basis" and leaves an awful lot of wiggle room. It also suggests that as soon as the city’s official broad-based environmental impact report on the eastern neighborhoods rezoning is completed, the floodgates will be opened again.
That EIR is on the fast track: Maltzer projects that a draft will be completed by late this summer and a final report by March 2007. But there’s a huge problem: An EIR has to evaluate a specific project, and the "project" — a rezoning of some 3,800 acres of the city — is pretty damn vague at this point. For example, there’s nothing about affordable housing in the scope of work that was put forward for the EIR.
So it’s entirely possible that the Planning Department will produce a report next spring that glosses over the biggest issues surrounding the future of the eastern neighborhoods — and that developers will use it as a green light to begin a new building boom that will forever change the city.
We’d like to hold a few facts to be self-<\h>evident: San Francisco doesn’t need more million-<\h>dollar condos for young single people who work in Silicon Valley. The city can’t build the equivalent of another good-size town, with a population of perhaps 100,000 new residents, in eastern San Francisco without massive improvements in infrastructure, particularly transportation. The costs of the new streets, bus lines, train lines, and pedestrian walkways will run into the hundreds of millions of dollars — and there’s nothing anywhere in any Planning Department document about who will pay for it.
And there’s nothing in the current proposals for the eastern neighborhoods that’s consistent with the housing element of the city’s own general plan.
The housing element is clear: San Francisco needs a lot of new below-<\h>market housing — housing for families with kids, housing for people who work in the city and make moderate wages, housing for people living on fixed (and not gigantic) incomes. Housing for teachers and firefighters. Housing for the people who change the sheets at the hotels and clean the bathrooms at the convention centers that keep the city’s biggest industry thriving. In fact, it says, 40 percent of all new housing needs to be affordable for low- and very-low-<\h>income people, and another 32 percent needs to be affordable for families with moderate incomes. That kind of housing simply won’t be built under the current plans — and that means any EIR the planners (or any private developers) prepare will be fundamentally flawed.
There’s a solution here, and if the Planning Commission won’t demand it, then the supervisors must: Any final EIR on the eastern neighborhoods has to consider not only the current rezoning plans but also an alternative that would bring the city into compliance with its own general plan. Asking planners to comply with their own plans shouldn’t be a radical notion. And until the Planning Department can explain how that might happen, this entire process — and all new market-<\h>rate housing — needs to be on hold, indefinitely.
As the Board of Supervisors was in the process of approving a measure to require a public hearing before converting rental units into condominiums – a measure Mayor Gavin Newsom has shamefully pledged to veto – Sup. Chris Daly told his progressive colleagues they shouldn’t be cowed by accusations that they are against home-ownership opportunities.
He’s exactly right. The city’s building new condos at a rapid clip, with more than 9,000 for-sale units in the pipeline right now, while rental units are disappearing. It’s more fair to accuse Newsom and his allies of being hostile to renters than to somehow say progressives oppose home ownership.
In fact, as Daly pointed out Jan. 10, the city isn’t even using existing tools to help tenants.
Six months ago, the San Francisco Tenants Union and Sup. Aaron Peskin unearthed a 25-year-old city law that could prevent many future condo conversions. Section 1386 of the city’s subdivision code, approved in 1981, requires city planners to reject condo conversions in which evictions or steep rent hikes have been used to clear the building for sale.
The law is a bit outdated – it requires landlords to provide only a five-year history of building occupancy. The supervisors should amend it to allow city officials to consider how a building was cleared out of tenants, whenever that occurred, and if Newsom wants to be seen as anything more than a fan of evictions and a shill for speculators, he should direct planning officials to start aggressively enforcing the law’s provisions.
That’s just one step the supervisors can take to deal with a mayor who seems unwilling to take even modest steps to slow the flood of evictions and the loss of rental housing. Newsom insists smaller condo conversions – ones involving fewer than five units – shouldn’t even be subject to Planning Commission hearings because that august body needs to save its time and energy for larger land-use issues.
So tenant activists and Peskin are pursuing with the City Attorney’s Office the possibility of requiring public notice for all condo conversions, of any size, which would give tenant activists the ability to appeal those permits to the full Board of Supervisors. It’s a good idea: If the poor, overworked planners are too busy to protect rental housing, and the supervisors want to take on the job, it will be hard for Newsom to say no.