“San Francisco May Subsidize Middle-Class Apartments for the First Time”

SF Business Times, May 12, 2015

If voters approve Mayor Ed Lee’s $250 million housing bond in November, they will unlock a stream of cash that the city will use to subsidize rental housing units for middle-class residents for the first time.

Under the plan a new housing program would use a small slice of the bond money to pay real estate developers that are building new market-rate buildings to restrict some rental units for households that make roughly $100,000 to $140,000 a year.

The city already helps residents in that income bracket pay for down payments on for-sale homes – and there is, of course, rent control on older buildings. But this would be the first program using public money for new rental units. It may also throw a new income bracket into the frantic world of housing lotteries, where thousands of applicants vie for dozens of spots in new market-rate buildings.

City officials want to stem the exodus of residents who earn too little to afford new luxury housing but too much to take advantage of low-income housing programs. That’s a pretty large group – about 40 percent of the city, a report notes – who are getting whacked by rents that rose in San Francisco by 15 percent over the past year.

Market rents skyrocket due to housing production that hasn’t kept up with an infusion new residents, often with high-paying jobs. Meanwhile, the middle-income bracket has seen almost no new apartments built within its reach lately. The city saw only 19 percent of the 6,754 moderate-income units it needed over the last seven years actually built, according to the Association of Bay Area Governments.

The city must win two-thirds approval from voters for the bond to pass, which hasn’t happened since 1996 after two failed attempts last decade. Lee will ask the Board of Supervisors on Tuesday to approve an ordinance calling for the largest housing bond in the city’s history to go to the ballot.

Offering up a new program for middle-class residents also allows Lee to sell the bond to voters as one that would help “teachers, firefighters and construction workers,” as he did to reporters multiple times on Monday.

“They are in professional jobs but...they’re finding it extremely hard to still live here in the city,” Lee said. He also said several times that the city won't raise property taxes to pay for the debt.

Where does the bond money go?

In unveiling plans to reporters Monday, Lee said a bulk of the bond money would go to speeding up the development of massive public housing projects and low-income developments. Those programs already exist in the city's arsenal to reach Lee’s goal of producing 30,000 new units by 2020, with one-third as affordable to low-income residents.

But “the middle-income proposal becomes the shiny penny. Right or wrong, the administration will sell their package on the middle-income ticket,” said Peter Cohen, co-director of the Council of Community Housing Organizations, which advocates for the construction of low-income housing.

“You’re talking about giving public subsidy to market-rate developers to buy units at cheaper cost. If you go that direction, that’s a new terrain,” he added.

Despite its shininess, the middle-income piece is the smallest of the housing bond's priorities. It’s also a small ingredient in the mayor’s office’s complex recipe of housing production strategies overall.

The city says $50 million to $100 million of the bond money will go to the public housing projects, helping speed up a Sunnydale development to be finished in 15 years instead of 20, for instance.

A range of $100 million to $150 million would go to low-income housing by quickening the process for affordable housing developers. That money would also help the city buy existing rent-control buildings and affordable units to preserve them from getting converted to market-rate.

To help middle-income residents, the city expects to use $25 million to $100 million of the bond money.

Those dollars can pay for more units if the city helps preserve incoming market-rate units for middle-class renters instead of buying sites because land and construction costs have soared during the real estate boom. The high cost of land "is the number one issue now the mayor's office of housing is struggling with for providing affordable housing," Planning Director John Rahaim said last week.

Mayor’s office officials declined to say how many middle-income units the money would pay for exactly, but said the city would pay about $150,000 to $200,000 per unit to restrict them at moderate-income rents for perpetuity. Initially, that would likely pay for a few hundred units.

Tinkering away

The middle-class program also appears to be a bit of an experiment that may start out small. Another newer strategy to help housing affordability is the mayor’s “small sites program” that uses a small pool of money to buy existing rent-control buildings going on the market.

A task force convened by the mayor last year also proposed a few other strategies to help fund units for middle-income residents, such as letting market-rate developers build inclusionary units for that income bracket in a program dubbed the “dial.”

“There’s no silver bullet,” Rahaim said. “This is not just a California issue. New York, Washington D.C. and Seattle are experiencing this acutely right now. We may be entering an era where middle-income housing may be subsidized in some fashion.”

Of course, public subsidy for low-income housing is also in short supply, especially since California’s elimination of redevelopment agencies zapped $28 million a year that the city used for affordable units.

But there is some precedent for cities subsidizing middle-income housing, such as a 60-year-old New York program that offers “low-cost financing and property tax abatements to developers who agreed to cap their profits and submit rent increases for approval,” according to CityLimits.org. New York is also mulling a new program to subsidize units within reach of the middle-class.

The bond money the city spends on middle-income housing in new market-rate projects would be tacked onto the money developers already have to pay on affordable housing fees, or spend themselves constructing low-income units in their own projects under the inclusionary law.

For context, the city is planning on developer fees making up about a third of the $862 million going toward affordable housing over the next six years. Other majors sources include the city’s housing trust fund and general fund.

That $862 million would bulge to $1.1 billion for the city to use over the next six years if the housing bond passes.