Despite uncertainty, some developers in San Francisco’s hot micro markets commit to affordability push.
THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN OCTOBER OF 2016
By Jacob Bourne[dropcap]I[/dropcap]n June of 2016, 68-percent of San Francisco’s voters approved Proposition C, setting into play a new hurdle for developers and residential investors looking to kickstart projects in the city. The rule now requires projects with over 25 residential units to either pay impact fees, commit to allocating 25 percent of units as affordable, or to create off-site affordable units. The impact fees and off-site development were a staple of such provisions for years across the region. Though the measure grew out of concerns about the lack of affordable housing and displacement of longtime residents in San Francisco neighborhoods such as the Mission, the passing of Prop C has also ignited worry that the 25 percent affordability requirement will be a barrier to the creation of sorely needed new housing.
“Some projects are able to move ahead with the requirements, which gave the false impression that all projects can move ahead, but it’s not the case,” explained Tim Colen, executive director, San Francisco Housing Action Coalition. “Permit applications for projects are falling like a rock. Developers are spooked.”
District 8 Supervisor, Scott Weiner, who’s also running for State Senate, supported Proposition C but thinks the decision to adopt an affordability percentage requirement should have been based on an economic feasibility study, and remarked that the Board of Supervisors jumped the gun by setting the requirement at 25 percent without deeper analysis.
“I strongly support our inclusionary housing requirements,” said Weiner. “Market rate housing should help to fund subsidized housing. I also think that our goal should be to maximize the number of affordable units. The focus shouldn’t be on percentages—people don’t live in percentages they live in units. Some are focusing on percentages instead of focusing on yielding the largest number of units. The percentage point was set blindly, and if it results in fewer units built because it’s not economically feasible, then we’re shooting ourselves in the foot.”
In September the Office of the Controller along with Blue Sky Consulting Group, Century Urban LLC and Street Level Advisors released the Inclusionary Housing Working Group Preliminary Report, which recommended affordability requirements be set at 14 to 18 percent for rentals and 17 to 20 percent for condos, with a yearly increase of 0.5 percent for 15 years.
“It’s a time of great uncertainty,” added Colen. “I’d say the report’s numbers are more feasible, but there’s very little political appetite to adopt something much lower than 25 percent, so I’m not optimistic. I’m not sure they can backtrack now, but the current requirements skew the market towards the luxury end at the detriment of more modest projects.”
Many developers are waiting to see what, if any action will be taken by the Board of Supervisors now that the feasibility study has been completed, but with the election nearing, Colen doesn’t expect that anything will happen until next year. In the interim, some projects that submitted completed applications prior to January 1, 2016 are subject to a “grandfather clause” allowing them lower affordable housing percentage requirements. Projects with more recent applications have already seen modifications such as a reduction to 24 units or shifting to hotel uses. Other developers such as Lennar Multifamily Communities (LMC) and Shorenstein Residential, LLC have been able to adapt projects by taking alternate routes.
In the Mission, LMC’s plans have been approved for a mixed-use residential project at 1515 South Van Ness Street, just north of Cesar Chavez Street in San Francisco. The proposal is for 55 studios, 39 one-bedrooms and 64 two-bedrooms for a total of 157 rental units. The ground floor of the six-story building will have 5,300 square feet of commercial space broken down into 1,100 square feet of retail and 4,200 square feet of subsidized trade workshops devoted to local artisans and makers who will rent the spaces at below market rates. Amenities include a bike repair shop, co-working spaces, fitness facility and roof top lounge. LMC is aiming to break ground in the third quarter of 2017 for a construction period likely to last 22 months.
“The plan was unanimously approved by the Planning Commission,” said Peter Schellinger, vice president of development, LMC. “Things are going to shake up in the next couple months as our CEQA document was appealed. It was a blanket, unspecific appeal. We’re hoping to get before the board about the appeal in October or November.”
The approval was contingent upon an agreement to allocate 25 percent of the housing units as affordable for low to moderate income tenants, based on the requirements and pressure from local community groups.
“We believe the Mission is one of the top sub-markets for residential development,” commented Schellinger. “Our view is that mixed income housing is a way forward to address the affordability crisis. The market will really dictate what’s feasible. As it relates to the Mission, we’re comfortable making that commitment to 1515 South Van Ness, because we recognize that the Mission is one of the best sub-markets in the country right now. If we’re going to make this type of commitment, it’s going to be for this community. This is a special property. We are excited about the opportunity and developing in the Mission.”
The project meets the new affordability requirements with a package break down offering 15 percent of the units for renters earning 55 percent of AMI and 10 percent for those at 100-percent AMI.
“We didn’t ask for anything—we proposed a development plan that was consistent with the Eastern Neighborhoods Plan,” continued Schellinger. “We committed to doing what was required under Prop C. Eighteen percent is probably the number that is more feasible across every sub-market but then, every sub-market is different.”
In the Tenderloin, Shorenstein has taken the route of helping create affordable units off-site in the wake of negotiations with the City and neighborhood groups over its mixed-use residential project at 1066 Market Street. The 12-story, 304-unit building featuring studios to two-bedrooms, a lounge, fitness center and 5,000 square feet of retail, was originally going to provide 36 affordable units, a number deemed insufficient by the Tenderloin Neighborhood Development Corporation, which appealed the project’s approval.
Shorenstein purchased the former post office at 101 Hyde Street and transferred the property to the City along with a $6.5 million donation to a nonprofit affordable housing developer to create an 85-unit, 4,920 square foot ground floor retail development, featuring 100-percent affordable homes. The agreement allows Shorenstein to build all market rate units for its 1066 Market Street project.
Though some developers are finding ways to move projects forward, Alan Mark president of The Mark Company stated that a number of projects are currently in a state of limbo putting developers in a quandary.
“When you factor in the cost and timing for entitlements, coupled with the high cost of construction, a 25-percent affordable housing requirement results in projects that are not economically viable,” Mark offered.
With the feasibility study in circulation, Kristy Wang, community planning policy director at SPUR is more hopeful about where things might be headed saying, “I think in terms of the big picture, to-date the discussions with City staff have been more nuanced, which is refreshing. I hope that the political discussion will continue to be more nuanced and less polarizing.”