“Can Developers Afford San Francisco’s Escalating Affordable Housing Requirements?”

SF Business Times, May 18, 2017

San Francisco's new deal over affordable housing requirements is raising concerns that housing production will slow significantly.

Lawmakers agreed on Wednesday to require new market-rate projects to provide 18 percent affordable onsite rentals or 20 percent affordable onsite condos, down from the current 25 percent level. These levels are the highest requirements in any city in the United States.

However, the percentage will rise by 1 percent in each of the next two years and continue to increase annually by 0.5 percent afterwards.

"We negotiated an aggressive increase in the first two years. That was very important for us," said Supervisor Jane Kim, who pushed for a higher affordability level with colleague Aaron Peskin.

Business groups and developers are concerned that continued escalations could come as the economy slows, leading to a reduction in both market-rate and affordable housing production. Already, the number of the housing proposals has slowed since June, when voters passed the 25 percent requirement, according to planning data.

"It's already something that could depress housing production," said Micah Weinberg, president of the Bay Area Council Economic Institute, a research firm backed by the region's largest business group.

"There's reason to be concerned as it creeps higher, especially as we enter into an economic slowdown," he said. "You produce not only a greater supply of housing, but more affordable units if you have the right percentage."

The city will re-examine the affordable housing rate within three years, said Supervisor Ahsha Safai, who was part of a more moderate negotiating bloc that included Supervisors London Breed and Katy Tang.

"If the economic conditions start to slow down, we have the ability to hit pause" on escalations, said Safai. "We didn't want to do anything that would slow down the market and stop the creation of housing."



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"It's a compromise," said Tang. "Everyone has stability for the next couple years. We don't want these negotiations to stall much-needed housing."

Three areas of the city will remain at the current 25 percent level pending further study: The Mission, Tenderloin and a smaller stretch of Western SoMa along 6th street. The Mission has been the city's fiercest battleground for new market-rate projects and also has the only unsubsidized market-rate housing project with 25 percent affordable units: Lennar's 1515 South Van Ness Ave. The city is in the midst of studying Mission Action Plan 2020, which may change the area's affordable housing requirements.

"In my district, I'm always going to push for more" benefits from developers, said Kim, who represents the Tenderloin and SoMa.

The city's largest affordable housing developer group supports the deal.

"Overall, we are quite pleased where this landed," said Peter Cohen, co-director of the Council of Community Housing Organizations, whose members are nonprofit developers as well as tenant advocates and community groups. "We are trying to maximize how we can get affordable housing money out of the private market."

Developer Eric Tao, CEO of AGI Avant, participated in multiple marathon negotiation sessions that exceeded six hours this week. He said developers would support the deal because the 18 percent level was found to not slow housing development in a study by the controller's office.

"At the end of the day, we're going to stand by it because it's at the limits of feasibility...We're not going to fight," said Tao. "To the maximum extent we can, we're going to try to insure that we can develop affordable housing. That means no ballot box fights, no political land use making."

"It's to ensure over the life cycle, over 10 to 20 years, housing can be built," said Tao.

"I don't think the entire development community will support this," said developer Jesse Blout, principal at Strada, who was also part of negotiations. "The enlightened developers will recognize that this is as good as it was going to be. The trade of being on the edge of feasibility in exchange for peace in our time is worth it."

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