The Land Use and Transportation Committee of the Board of Supervisors is now scheduled to consider compromise inclusionary housing legislation on June 12^th, following a continuance at the Committee’s June 5^th hearing. As shown in our summary comparison chart, the legislation would generally retain existing grandfathering protections as to the total percentage of affordable units for certain pipeline projects, but would make many other major changes to the City’s existing program.

The most significant change would be to the required percentage of on-site affordable units for large projects (25 or more units).  The proposed percentages are 18% for rental projects and 20% for ownership projects, as compared to 25% under existing law.  The legislation would also adjust income level restrictions for affordable units.  In large rental projects, affordable on-site units would need to be provided as follows:  10% low income (affordable to households earning 55% of Area Median Income (“AMI”) or less); 4% moderate income (affordable to households earning 80% of AMI or less); and 4% middle income (affordable to households earning 110% of AMI or less).  A similar affordability breakdown would be set for on-site large ownership projects, but with higher permitted AMI levels.  Overall, the legislation marks a partial shift toward providing workforce housing under the City’s inclusionary housing program.  The overall affordable percentages for large projects would increase by 1% annually for two years (low income), and then by 0.5% annually (moderate/middle income), until affordable percentages reach 26% for ownership projects and 24% for rental projects.

The legislation includes a neighborhood affordability component, which would require maximum rents or sales prices for on-site affordable units in both large and small projects to be at least 20% below median rents or sales prices for units in the surrounding neighborhood, defined according to the Planning Department’s Neighborhood Groups Map.  This could lead to significant variation in affordable rents and sales prices across neighborhoods.

The City would also impose an affordable housing fee on any additional units obtained by a project sponsor through compliance with the State Density Bonus law, unless an Environmental Evaluation (“EE”) application was filed for the project by January 1, 2016.

For project sponsors choosing either the in-lieu fee or off-site options for large projects, the affordability requirement would be 30% for rental projects and 33% for ownership projects, creating a new distinction between rental and ownership projects.

The legislation would also apply a new, City-wide unit mix requirement to all projects containing 10 or more units, not just to the inclusionary affordable units within those projects.  It mandates that at least 25% of the total units include two or more bedrooms, and at least 10% include three or more bedrooms.  The unit mix requirement would not apply to projects with an EE on file by January 12, 2016, HOME SF projects providing 30% of on-site units as affordable, projects within areas or Special Use Districts imposing a stricter unit mix requirement, or certain specified housing types (e.g., SRO units, student housing and senior housing).  Project sponsors could seek waivers or modifications of the unit mix requirement through the Conditional Use process or, where applicable, the Section 329 Large Project Authorization process.

As reported in our prior blog post, Assemblymember Phil Ting (D – San Francisco) introduced amendments to the State Density Bonus law (AB 915) that would specifically require all local jurisdictions to impose their local inclusionary housing requirements on density bonus units, unless the jurisdiction expressly exempts them by ordinance.

AB 915 was recently amended to (1) only apply in San Francisco and (2) grandfather density bonus projects with an application on file or processed before January 1, 2018. “Application” is not defined in AB 915, but where that term is used in the existing State Density Bonus law, it refers to the density bonus application itself.

The Assembly’s Committee on Local Government passed AB 915 by a 6-3 vote on May 10, 2017, and the bill is now before the full Assembly.

On the local level, imposition of inclusionary housing fees on density bonus units is currently being considered by the San Francisco Board of Supervisors as part of their deliberations on the Affordable Housing Bonus Program and competing inclusionary housing ordinances.  We summarize that legislation in “Wading Through the Flood of New Housing Legislation.” Whether inclusionary housing fees can be imposed on density bonus units may ultimately depend on the success of AB 915.

Having trouble keeping up with the seemingly endless torrent of new housing laws?  You are not alone.  Here is our summary of the key pending State and San Francisco legislation aimed at increasing housing/affordable housing production:

Proposed State Legislation

SB 35 (Wiener)

State Senator Scott Wiener has introduced amendments to SB 35 that would create a streamlined, ministerial (i.e., not triggering CEQA) approval process for certain infill projects in localities that fall short on regional housing needs assessment (RHNA) production goals.  We summarize the legislation and next steps in “Wiener’s Streamlined Infill Housing Approvals Legislation Continues to Move Forward.”

AB 915 (Ting)

On March 15, Assemblymember Phil Ting introduced new amendments to the State Density Bonus law.  The amendments would require a local jurisdiction to impose local inclusionary housing requirements on density bonus units, unless it adopts an exemption by ordinance.  As discussed below, local legislation proposed by Supervisors Safai, Breed and Tang would impose inclusionary housing requirements on density bonus units in the form of  an “in-lieu” inclusionary housing fee.  We discuss this new State legislation in “Ting Legislation Seeks to Pave the Way for Fees on Density Bonus Units.”

Proposed San Francisco Legislation

Competing Inclusionary Housing Ordinances (Safai/Breed/Tang and Peskin/Kim)

Board of Supervisors members have introduced two competing inclusionary housing ordinances.  The Safai/Breed/Tang ordinance comes closer to reflecting the City Controller’s recommendations and would also substantially increase the percentage of inclusionary housing units that are targeted for middle-income earners.  By contrast, the Peskin/Kim ordinance would maintain inclusionary housing percentages and income level distributions that are closer to existing requirements.  Both ordinances would add new complexity to the existing scheme by distinguishing between requirements for ownership and rental units and changing, among other things, income level distribution requirements, the basis for fee rate calculations, and unit mix requirements, with an emphasis on larger, family-focused units.  The Safai/Breed/Tang ordinance would apply the new unit mix requirements project-wide, with certain exceptions.  It would also extend the “in-lieu” inclusionary housing fee to density bonus units.  Read our analysis, including a comparison chart of the two ordinances, in “Competing Inclusionary Housing Proposals Introduced at the Board of Supervisors.”

Affordable Housing Bonus Program (Tang)

Supervisor Tang introduced an ordinance that would consolidate existing and add new density bonus programs to local law to encourage the production of affordable housing.  The Affordable Housing Bonus Program (AHBP) renames the existing 100 Percent Affordable Housing Program and adds three new components:  1) the HOME-SF Program, 2) the Analyzed State Density Bonus Program (ASDBP), and 3) the Individually Requested Bonus Program (IRBP).

The HOME-SF Program would provide development incentives, including up to two additional floors, in certain zoning districts.  To qualify, projects would need to include at least 30% affordable units on site.  Projects would generally be required to meet the minimum affordable housing percentages under the inclusionary housing ordinance, and provide additional units affordable to middle income households to achieve the 30% total.  The ASDBP would implement the current State Density Bonus law, but only within certain zoning districts.  It would allow up to a 35% density bonus for projects that include 12% or more inclusionary housing units, as well as incentives, concessions and waivers selected from a menu prepared by the Planning Department and its consultants.  Projects with 30% or more affordable units are eligible for priority processing.  The IRBP, which would apply in more zoning districts, would provide modified incentives and density bonuses to qualifying projects that do not meet the criteria for the ASDBP.  We summarize this legislation in “Affordable Housing Bonus Program Takes Shape in San Francisco.”

The Bottom Line 

What does this mean for market-rate residential projects?  It’s all about the definitions and qualifying criteria, which vary by legislation.  The local ordinances add complexity to an already complicated scheme, and more than ever, the calculation of benefits vs. exactions is site-specific.  It remains to be seen whether what is finally adopted provides sufficient incentive and certainty to produce more density and higher levels of affordability.

If the Wiener legislation passes, certain projects would qualify for expedited processing and would not be subject to CEQA review.  Under the competing inclusionary housing ordinances, local affordable housing requirements may change, and could increase or decrease from existing requirements.  Depending on the nature of the development project (where it is located, if it is 100% affordable, and if not, how many affordable units are proposed and at what income level, etc.), the project may qualify for one of four density bonus programs in the Tang ordinance, as well as priority processing.  The Ting legislation would require local jurisdictions to impose inclusionary housing requirements on density bonus units, as proposed by the Safai/Breed/Tang ordinance (the “in-lieu” fee discussed above), unless the density bonus units are specifically exempted by local ordinance.

Stay tuned, we will continue to track the legislation as it proceeds…

We reported in December that State Senator Scott Wiener marked his first day in state office by introducing legislation (SB 35) to address barriers to housing production. Senator Wiener has introduced amendments to SB 35 that would create a streamlined, ministerial (i.e., not triggering CEQA) approval process for certain infill projects in localities that (1) fall short on regional housing needs assessment (RHNA) production goals, or (2) fail to provide annual housing production reports to the State for two consecutive years before the infill project’s application. SB 35 has been passed by the Senate Transportation and Housing Committee, and is now before the Governance and Finance Committee for further consideration.

What Qualifies Under SB 35?

Under the current version of SB 35, certain multifamily and accessory dwelling unit projects would qualify for a streamlined, ministerial approval process if they meet various criteria, including being within a locality reporting RHNA housing production shortfalls or failing to provide annual housing production reports.

The percentage of affordable units and required affordability levels vary depending on the type of RHNA housing production shortfall reported by the locality. If the shortfall is for households earning below 80% of area median income (AMI), then the majority of project units must be affordable to those households. If the shortfall is for “above moderate-income households” (i.e., households earning above 120% AMI under the current RHNA schedule), then 10% of project units must be affordable to households earning below 80% AMI. Shortfalls for moderate-income households (i.e., households earning between 81% and 120% AMI) aren’t addressed in the current version of SB 35.

If a local inclusionary housing ordinance requires a greater percentage of units to be affordable to households earning below 80% AMI (more than 10% of project units in the “above moderate-income households” shortfall scenario, or more than 50% of project units in the “below 80% of AMI” shortfall scenario), that local ordinance would set the floor for the required percentage of affordable units needed for SB 35 streamlining eligibility.

Very generally, the remaining criteria require an eligible project to be:

1. located on a qualifying urban infill site zoned for residential or residential mixed use development with at least two-thirds of the square footage designated for residential use;
2. consistent with objective zoning and design review standards, including the State Density Bonus Law;
3. outside of certain sensitive areas (e.g., coastal zone) and certain high-risk areas (e.g., floodways); and
4. not located on a site with an existing historic resource or certain existing housing (e.g., rent controlled units or units occupied by tenants within the past 10 years) that would be demolished.

In addition, a qualifying project must be subject to certain enforceable prevailing wage requirements. If the project includes subsidized units, those units must remain subsidized for 45 or 55 years, for ownership and rental units, respectively.

The State Density Bonus law has been in effect for almost 40 years, but it has required a prolonged housing crisis to push San Francisco to adopt a local implementing ordinance.  Last year the Board of Supervisors adopted the 100 Percent Affordable Housing Program for affordable housing projects, but was unable to agree on a program for market-rate projects.  Supervisor Katy Tang has now introduced legislation that would consolidate existing and add new density bonus programs to local law.

The Affordable Housing Bonus Program (AHBP) renames the existing 100 Percent Affordable Housing Program and adds three new components: 1) the HOME-SF Program; 2) the Analyzed State Density Bonus Program (ADSBP), and 3) the Individually Requested Bonus Program (IRBP).

HOME-SF Program

The HOME-SF Program seeks to increase affordable housing production, especially housing affordable to middle income households.  It provides incentives to sponsors of housing projects that set aside at least 30% of on-site units as affordable, including the minimum percentage and income range required under the inclusionary ordinance, and reaching the 30% threshold by providing units affordable to middle income households (defined here for ownership as an average of 120% of Area Median Income (AMI), equally distributed at 90%, 120% and 140% of AMI, and for rental as an average of 80%, equally distributed at 55%, 80% and 110% of AMI).  The legislation limits the zoning districts to which the HOME-SF Program applies, and among other things, excludes the RH-1 and RH-2 Zoning Districts.  It is not available where a project would demolish, remove or convert residential units, or is seeking a density bonus under one of the three other programs.

Eligible projects must establish that the project will not result in certain specific environmental impacts, will provide a unit mix that includes a higher percentage of larger units designed to accommodate families, and will include certain ground floor active uses. A qualifying project would be eligible for certain incentives, including up to 20 additional feet of height that may be used for up to two additional stories, and an additional height of up to 5 feet at the ground floor in certain cases.  Projects under this program would require conditional use approval, with some specified limits on the Planning Commission’s ability to modify the project.

Analyzed State Density Bonus Program (ADSBP)

The ADSBP is based on the State Density Bonus Program, and offers a specific menu of incentives, concessions and waivers analyzed by the Planning Department and its consultants. Like the HOME-SF Program, the legislation limits the zoning districts to which the ADSBP applies. Among other things, it excludes the RH-1 and RH-2 Zoning Districts, and is not available where a project would demolish, remove or convert residential units, or is seeking a density bonus under one of the three other programs. The project sponsor must establish that the project will not result in certain specific environmental impacts, and that it meets other criteria.

A qualifying ADSBP project that provides 12% or more of its units as on-site affordable units would be eligible for a density bonus of up to 35%, and various other concessions and incentives. In some cases, a height increase of up to two stories would also be permitted. Projects with 30% or more affordable units would also be eligible for priority processing.

Individually Requested Bonus Program (IRBP)

Finally, the IRBP is available to projects that generally comply with State Density Bonus law, but are not consistent with the pre-vetted menu of concessions, incentives and waivers offered in the ADSBP, and therefore require individualized analysis. The criteria are similar to the ADSBP, except that it applies to a broader range of zoning districts (generally only RH-1 and RH-2 are excluded, except where the Code would allow 5 or more units on sites within those districts).

Qualifying projects are eligible for density bonuses up to 35%, as well as other concessions and incentives proposed by the City or the Developer that are appropriate for the project and will result in identifiable, actual cost reductions. In some cases, waivers from development standards may also be granted.

Amendments to the legislation were adopted at the March 13 Board of Supervisors Land Use and Transportation Committee hearing, and the legislation has been continued to allow time for additional public review.

Assemblymember Phil Ting (D – San Francisco) introduced new amendments to the State Density Bonus law on March 15, 2017 that would specifically require local jurisdictions to impose their local inclusionary housing requirements on density bonus units, unless the jurisdiction expressly exempts them by ordinance.

As mentioned in our recent inclusionary housing legislation blog post, local legislation proposed by Supervisors Safai, Breed and Tang would require that an “in-lieu” inclusionary housing fee be paid for any density bonus units, as recommended by the City Controller. As we previously reported, that requirement would be additive, meaning that millions of dollars of additional fees could be due for market rate housing projects with otherwise required inclusionary housing units provided on-site. As currently drafted, AB 915 authorizes the general approach in Supervisors Safai, Breed and Tang’s density bonus fee proposal and could open up the door to other options for satisfying local inclusionary housing requirements vis-à-vis the density bonus units (e.g., off-site and on-site).

This legislation joins the larger debate about the appropriate level of incentives necessary to encourage developers to participate in a local density bonus program. As discussed in a prior post, fees on density bonus units is one of the major issues expected to be discussed when the Board considers the competing inclusionary ordinances in the coming months.

Is the City another step closer to sorting out inclusionary housing requirements and implementation of Proposition C?  Board of Supervisors members have introduced two competing ordinances that seek to call the question regarding the City’s inclusionary housing priorities and requirements.

Very generally, the legislation introduced by Supervisors Safai, Breed and Tang comes closer to reflecting the City Controller’s recommendations regarding inclusionary housing percentages, summarized in our February blog post. It would also substantially increase the percentage of inclusionary units that are targeted for middle-income earners. By contrast, the legislation proposed by Supervisors Peskin and Kim would maintain inclusionary housing percentages and income level distributions that are closer to existing requirements.

As shown in our side by side summary chart, both ordinances would add new complexity to inclusionary housing requirements. For example, they would:

• Distinguish between requirements for ownership and rental units;
• Require rental units to remain rental for at least 30 years or meet higher requirements;
• Change income level distribution requirements;
• Revise the basis for the fee rate calculation; and
• Introduce new unit mix requirements, with an emphasis on larger, family-focused units.

Notably, the Safai/Breed/Tang legislation would apply the new unit mix requirements project-wide — not just to the inclusionary housing units — with certain exceptions.

The Peskin/Kim legislation would generally retain existing grandfathering protections for pipeline projects, and projects over 120 feet in height would generally be subject to a 30% requirement for off-site or fee compliance, as compared to the existing 33% requirement. The Safai/Breed/Tang legislation would generally retain existing grandfathering protections for pipeline projects complying with the on-site option but would generally eliminate such protections for off-site and fee compliance, although the proposed percentages are generally equivalent to or lower than existing grandfathering protections. There is an exception: existing protections for projects with an Environmental Evaluation (EE) application on file prior to January 1, 2013 would be retained in all instances.

One key issue is how inclusionary housing requirements should interact with State Density Bonus law. The Safai/Breed/Tang legislation would require that an “in-lieu” inclusionary housing fee be paid for any density bonus units, as recommended by the City Controller. As we previously reported, that requirement would be additive, meaning that millions of dollars of additional fees could be due for market rate housing projects with otherwise required inclusionary housing units provided on-site. The Peskin/Kim legislation does not currently specify that the fee would apply to density bonus units, but it proposes to increase the on-site inclusionary percentage by 5% for buildings over 300 feet — even though the City Controller reported that he found no evidence to support a higher requirement for high-rise projects.

The legislation is currently on hold under the Board’s 30 day rule, and is expected to be debated at the Land Use and Transportation Committee in the coming months. In the meantime, the Planning Commission is scheduled to hold an informational hearing on the legislation on March 16, 2017. Planning Department staff has produced a detailed analysis of the legislation, including exhibits that detail how the ordinances would impact fees and inclusionary percentages.

The City is one step closer to sorting out inclusionary housing requirements and local implementation of the State Density Bonus law now that the City Controller has released its final recommendations to the Board of Supervisors. The good news for developers is that recommended on-site and in-lieu fee percentages are below Proposition C levels. On the other hand, an “in-lieu” fee for density bonus units is now being contemplated.

The legislation passed by the Board of Supervisors in the wake of Proposition C directs the Controller, working with an appointed Technical Advisory Committee (TAC) and independent consultants, to conduct a feasibility study and make recommendations to the Board of Supervisors.

According to those recommendations, the Controller would:

• Reduce the on-site requirement from 25 percent (generally) under Proposition C to 14 to 18 percent for rental projects and 17 to 20 percent for ownership projects, with an annual increase of 0.5 percent over a period of 15 years.

• Reduce the percentage requirement used for calculating in-lieu fees from 33 percent (generally) under Proposition C to 18 to 23 percent for rental projects and 25 to 28 percent for ownership projects, with an annual increase equal to 1.3 to 1.4 times the rate of the on-site increase — if the Board of Supervisors wants to avoid incentivizing payment of the in-lieu fee.

As noted in our December blog post, once inclusionary housing requirements are finalized, the City will need to determine how they interact with the State Density Bonus law. Notably, the Controller also recommends requiring an inclusionary housing “in-lieu” fee for density bonus units, which would be additive, meaning that millions of dollars of additional fees could be due for market rate housing projects with otherwise required inclusionary housing units provided on-site. To illustrate, a 100 unit building with 20 low-income units would qualify for the maximum 35 percent density bonus under the State Density Bonus Program, yielding a 135 unit building comprised of 20 low-income units, 80 market-rate units, and 35 market-rate bonus units. Assuming here that the 20 low-income units would meet the City’s forthcoming inclusionary housing requirements, the Controller’s approach would nonetheless apply the City’s in-lieu fee to the 35 bonus units.

The Board of Supervisors will ultimately decide whether and how to implement the Controller’s recommendations, which are currently scheduled to be considered by the Planning Commission on February 23, 2017.

As we previously reported, on November 8, 2016, the voters of the City and County of San Francisco passed Proposition W (Real Estate Transfer Tax on Properties Over $5 Million) increasing real property transfer taxes. Effective December 27, 2016, the Real Property Transfer Tax is raised as follows:

• From the current rate of 2% to 2.25% for properties with a value or consideration of at least $5,000,000 and less than $10,000,000;
• From the current rate of 2.50% to 2.75% for properties with a value or consideration of at least  $10,000,000 and less than $25,000,000; and
• From the current rate of 2.50%  to 3% for properties with a value or consideration of at least  $25,000,000 or more.

Download a copy of the Transfer Tax Affidavit here.