Next week, San Francisco voters will decide if they want to give the Board of Supervisors control over how much affordable housing private developers are required to build—thereby enabling the Supervisors’ plan to hike up the requirement higher than that of any other city in the country.
WHAT PROP C WOULD CHANGE
Right now, all new buildings with ten or more units are required to offer a portion of those units at below market rate. The requirement is 12% if the affordable units are within the building, or 20% if they’re built at another location. That rule is locked into San Francisco’s charter, which is kind of like the city’s constitution.
Prop C would take the rule out of the charter and puts it in the hands of the Board of Supervisors, making the rule more flexible. That way, the percentage of affordable housing can go up when the market is heating up, down when the market is strapped. Under Prop C, the first adjustment would happen immediately; the requirement would be hiked up to 25% for some buildings.
DEVELOPER OZ ERICKSON SAYS "IT WILL BACKFIRE"
Oz Erickson, of the real estate development company, the Emerald Fund says the proposition “sounds wonderful and if the housing were free [to build], it would be wonderful.” But, he says, developers won’t be sure that the rent from the market rate units will be enough to cover the cost of building the subsidized units. So, he predicts, they won’t build.
Erickson says he supports this kind of developer requirement, known as inclusionary housing. He helped design the policy back in 2002. But, he says the whole strategy for generating new affordable housing backfires if we make the requirement so high that building becomes impossible.
But, Supervisor Aaron Peskin, who proposed the measure, says, “the Board of Supervisors is committed to adjusting the percentages to make sure that we get the maximum economically feasible amount of affordable housing.”
Erickson, the developer, agrees that the number should be unlocked from the charter so that it can be flexible. It’s the initial requirement hike that he doesn’t like. But, the Supervisors have agreed to an economic feasibility study by the city’s Chief Economist. “We don’t want to push [developers] so far that they don’t build,” says Peskin. He promises that if the study determines 25% is too high, the number will be lowered.
SUPERVISOR PESKIN FIGHTS DEVELOPER INTERESTS
Peskin returned to the Board of Supervisors last November on a groundswell of concern about affordability in the city. While he has supported efforts to halt construction in the past, like the so-called ‘Mission Moratorium,’ he denies that Prop C is designed to induce a de-facto moratorium, calling the accusation a “hair-brained conspiracy theory.”
At the core, Peskin thinks this is about taking back political control from developers. “The fact of the matter is a handful of developers are fighting this because they’d like to make more money and I understand that but we just have a disagreement,” he says.
In other words, he thinks that when developers predict (or threaten) that construction will freeze—they’re bluffing in order to avoid the requirement hikes.
“I don’t think it’s that they’re necessarily bluffing,” says Carol Galante, the Faculty Director of theTerner Center for Housing Innovation at UC Berkeley. “Some projects are going to struggle under these new requirements and others are not, and that’s the challenge.”
Galante spent most of her career as an affordable housing developer, calculating these kinds of business costs. She says, if the developer doesn’t have a reasonable amount of certainty that rents will be high enough to cover costs and make a profit, the developer won’t build. There’s no strong-arming them into working with requirements they can’t afford.
If it seems crazy that developers are struggling to make a profit while real estate prices are so high, Galante says we should remember two things: First, when rent skyrocketed, eventually so did land and labor costs. Construction costs alone have doubled in the last five years. So, higher rent doesn’t necessarily mean more profit.
And, second, most of the money that projects make once tenants start paying rent—it doesn’t go to the developer. Most of it goes to the investors that put up the money upfront. Investors are a range of institutions representing many people’s savings investments. Developers take their profits after those costs and returns have been met.
Galante says if the affordable housing requirement is raised to 25%, the projects that are most likely to break ground are the super high-rent, luxury ones. The relatively moderate ones are the ones at risk of not getting built. “You end up with a barbell effect,” she says, “of having housing for the very wealthy and the very low income and there’s nothing in the middle.”
"25% OF ZERO IS ZERO"
Galante says she is less worried about the political battle with developers, and more worried about what happens if they can’t build. In her view, the risk of not building is two-fold. There’s the supply and demand argument that says, the less we build the worse the shortage—and therefore, affordability—gets. So, without building, “you aren’t ever going to bring overall prices down for the large majority of people.” (Galante and developer Oz Erickson credit the recent spike in construction with stabilizing San Francisco’s rent prices, as of March.)
The second risk is that San Francisco loses its means of generating new affordable housing. “25 percent of zero, is zero,” she says.
In this system, San Francisco depends on developers for a lot of its affordable housing. The public interest is yoked to the business interests. Whether that’s a good or bad thing—is a question bigger than Prop C. Prop C is about the number, 25 percent. And if it passes, expect a lot more haggling over that number. It’s a fight that’s not going away.
Check out the brand-new Housing Development Dashboard from Carol Galante and UC Berkeley's Terner Center for Housing Innovation.
About the dashboard: "The Housing Development Dashboard shows how local policies and development factors impact the odds that a housing development gets built. The Development Calculator focuses on the most important factors supported by the literature and local development experts. The methodology and default assumptions were vetted through conversations with area development experts, data collection, and analysis from January to May of 2016."