26 04 2017

Are the inclusionary proposals currently being discussed by the Planning Commission and Board of Supervisors a “giveaway” to developers? Let’s look at the numbers and see what the substantial differences in conveyed value are.


According to the Planning staff report “The Inclusionary Affordable Housing Program… has resulted in more than 4,600 units of permanently affordable housing since its adoption in 2002,” or an average of 328 inclusionary units per year.[1] If developers continue to build an average of 3,000 new units per year in San Francisco, the number of affordable inclusionary units could increase to between 500 and 750 units per year, depending on the final percentage chosen.


Not only are there differences in the total amount of affordable units, but also, by shifting income levels served, the total cost to developers and landowners is reduced considerably in the Safai/Breed/Tang proposal when compared to the proposal analyzed by the Office of the Controller, which used the current Prop C income split of “low” and “middle” income.


Here is the analysis for a rental project. The Controller used the current Prop C income levels, which result in an average of 72% AMI (Area Median Income), while the Safai/Breed/Tang proposal results in an average of 82% AMI.[2] A typical 100-unit project with 18% affordable units, and assuming 60% one-bedrooms and 40% two-bedrooms,[3] as analyzed by the Controller, would bring in an annual income of about $3,173,000, while a project of the same size under Safai/Breed/Tang would have an annual income of about $3,213,000.[4] The difference in value for a typical 100-unit rental project with 18% inclusionary, using a 4% cap rate, would be about $1 million in profit.


The difference in incomes served is even more stark for condominium projects. The Controller analyzed condo projects using the current Prop C income levels, which average 96% AMI, while the Safai/Breed/Proposal serves an average income of 120% AMI.[5] Using MOHCD’s assumptions and a 60/40 bedroom mix,[6] an average unit at 96% AMI would be priced at about $330,000, while an average unit at 120% AMI would be priced at $434,000. For a typical 100-unit condo project with 20% inclusionary, the added value to a developer would be over $2 million in profit.


Assuming that we continue to build about 3,000 new units each year, and that between 18-20% of these are inclusionary,[7] the total value conveyed to developers each year could be between $30-60 million, depending on how many are rental or condos, and how many choose to build units on-site rather than to fee out.


To sum up, the Safai/Breed/Tang proposal, could provide a windfall of up to $60 million into developers’ pockets as profit, unless it is amended. Another way to look at it is that instead of a giveaway, that annual $60 million cost savings to developers is value that could be recaptured by the public to continue to serve low income residents or to subsidize additional BMR units. Either way, the Commission and Supervisors have a clear decision to make: maintain the percent of low-income units while demanding a greater overall inclusionary percentage or vote for a giveaway to developers.

[1] Planning staff report for 4/27/2017 Planning Commission

[2] The Controller analyzed projects with 60% affordable units at 55% AMI and 40% affordable units at 100% AMI, which comes out to an average of 72% AMI. The Safai/Breed/Tang proposal has three tiers, evenly split at 55% AMI, 80% AMI, and 110% AMI, which comes out to an average of 82% AMI.

[3] The 60/40 bedroom mix was chosen based on typical construction trends per the Planning Department’s recent Family Housing Report. Note that the Safai/Breed/Tang proposal only mandates 25% two-bedroom units, and the Kim/Peskin proposal mandates 60% two-bedroom and larger.

[4] We assumed market rents at $4,000/month for one-bedrooms and $5,500/month for two-bedrooms, affordable rents per MOHCD’s schedule, operating expenses at $1,259/unit (less for affordable units), and 8% vacancy (less for affordable units).

[5] The Controller analyzed projects with 60% affordable units at 80% AMI and 40% affordable units at 120% AMI, which comes out to an average of 96% AMI. The Safai/Breed/Tang proposal has three tiers, evenly split at 100% AMI, 120% AMI, and 140% AMI, which comes out to an average of 120% AMI.

[6] MOHCD assumes 33% of income available for housing costs, taxes at 1.1826%, condo fees approximately $500 per month, 10% down payment and 30 year term.

[7] The Controller’s analysis, using their assumptions for income levels served, found that 18% for rentals and 20% for condos was a financially feasible target for inclusionary levels, without factoring in the use of state density bonus. The Controller found that much higher inclusionary levels were feasible if developers chose to take advantage of the state density bonus.