Affordable Housing: Death by Entitlement

Gensler, Forge Development Partners, San Francisco

By W. Charles Perry

“Affordable Housing” has now joined the ranks of “negative income” and “unbiased opinion” as a world-class oxymoron in the California vernacular. In 2016, our fearless leaders in Sacramento attempted to solve the housing problem with Senate Bill 1069 that allows the creation of Accessory Dwelling Units (ADUs) in garages, attics, and other under-utilized space in existing homes and apartment buildings without having to meet all of the zoning, planning, building, public works, and fire department constraints that throttle the construction of apartments at anything approaching affordability.

Not to be outdone by our august Senators, the Board of Supervisors in San Francisco instituted a study of how they might create not-only affordable housing but rent-controlled housing. They identified roughly 60,000 locations for ADUs within a city of roughly 800,000 residents. The hosannas and halleluiahs rising from the huddled masses queuing to rent $4,000 per month one-bedroom apartments could be heard all the way to San Jose. However, the administrative poohbahs who actually run The City (and would rather chew their legs off than be hobbled by their duly-elected political overlords) had different ideas as to the meaning of “affordable.”

As investments go, this ain’t a bad deal. But affordable it is not.

Before we start our trip down the rabbit hole, I ask you to imagine for a moment that you manage an LLP that owns a small apartment building, say 5 to 15 units. One day, your business connections in Sacramento and San Francisco tell you that you can convert all of your apartment’s parking & utility space to additional apartments without complying with current density limits, floor area ratios, and parking requirements. Seriously.

You, being wise in the ways of the world (and city hall), hire an architect to design the ADUs and head down to city hall for a pre-design meeting to make certain you are not hunting snipes. Your architect has a tete-a-tete with the plan checkers in the planning, building, and fire department and is told that all is well except for one little detail: you need a variance for an “existing non-complying” condition such as inadequate setback. Six months, two public hearings, and thousands of dollars in fees later, you have your variance in hand.

Next, your architect develops the full plan set and returns to the planning department to formally submit the plans for approval. You learn that the folks in historic preservation want you to use windows, doors, and building façade treatments that match the glorious period architecture … wait for it … of 1968. Hare-Krishna Maha Mantra! Say goodbye to $20,000.

But wait, there’s more. To be allowed to exceed the density limits, floor area ratios, and parking limits, you must sign an agreement with The City Attorney and record it with the County Assessor in which you waive your rights under the Costa-Hawkins statute and agree these apartments will now and forever be rent controlled. Not only did your costs just increase, but your long-term ROI just took a nose dive.

Now, the fun really begins. The folks in public works want you to survey their sidewalks, rebuild them to comply with ADA standards (yes, even in The City of Seven Hills), file minor encroachment permits, and record easements for the two inches that your building overlaps The City’s property line. Urban Forestry wants you to add two trees to the sidewalk. And until you comply, your permit to build affordable housing will languish in the bureaucratic doldrums. Anyway, what’s another $10,000 between friends?

By the time your plans get passed to the building department for a review of anything remotely involving public safety one year has passed. With a bit of luck, your design team has done their job well, and your plans sail through the system (yes, every bureaucracy has its bright spot).

Onto the fire department you go to wait for what (hopefully) will be your final review. And you wait. And you call. And after three months you learn that the fire department plan checkers are backlogged, but, with the payment of an expediting fee, your plans can be reviewed and returned next week (can you say “Baksheesh”?). All this to learn that they want standpipes throughout your building, new fire sprinklers for the entire ground floor (maybe two floors), and a new alarm system throughout your building. This for the small price of $80,000. By the way, SB 1069 prohibits requiring fire sprinklers. But I mean really, who can put a price on safety?

To serve the new fire suppression system on your plans the Public Utility Commission must add a new fire service and a new domestic water service for $30,000. Again, SB 1069 prohibits requiring new utility service connections. What the heck … it’s only money … your money.

PG&E then decides that you need to relocate all of your gas and electric meters to the front of your building, upgrade the capacity of your gas & electric power service, relocate your electric conduit to a subterranean vault, and relocate your gas supply pipe above your building’s foundation. Just how PG&E got standing to require a service upgrade no one knows. Perhaps it has something to do with the $2 billion penalty they just paid for torching 35 homes and burning 8 people to death in San Bruno. Anyway, another $50,000 takes flight.

Oh, I forgot to tell you. You must seismically retrofit the ground level of your building to bypass the planning limits. Add another $150,000 to your bill.

By the time your bids arrive, your affordable housing is costing between $250,000 for multiple one-bedroom apartments and $350,000 for a single one-bedroom apartment. Add the cost of a seismic retrofit, and your cost can reach $500,000 for a single one-bedroom apartment. By the way, that $4,000 per month / $48,000 per year in rent you were hoping to get is actually closer to $3,000 per month / $36,000 per year without a pool, gym, Starbucks, and Whole Foods as part of the amenities. As investments go, this ain’t a bad deal. But affordable it is not.

The success of the program speaks for itself. Of the 60,000 units targeted for construction by the politicians, 600 were built in the first year of the program. At this rate, San Francisco will solve its affordable housing problem in the next century.

Articles published in our Contributor section do not necessarily represent the views of The Registry or Mighty Dot Media, Inc. They represent a selection of topics chosen for the value of their editorial perspective. We welcome feedback and alternative positions on topics, and we will consider publishing those, as well.

West Coast Commercial Real Estate News