On July 25, the Board of Supervisors passed on first reading the “Housing Fee Reform Plan” legislation (see previous posts here and here). The Board is expected to hold a second reading and finally pass the legislation in September after returning from summer recess.

The legislation consists of two ordinances. To help jumpstart housing production in the City, the inclusionary housing ordinance reduces inclusionary housing percentages and fees for certain new and pipeline projects of 25 or more units, and provides a temporary 33% reduction in the amount of other development impact fees for new and pipeline projects that can meet certain timing deadlines. The impact fee reform legislation establishes a 2% fee escalation rate, locks in the types and rates of impact fees at project approval, and reactivates an expired fee deferral program.

As discussed at the Board, market factors such as construction costs and interest rates will largely determine whether the legislation can unlock new housing. Developers of both housing and commercial projects should take note of the impact fee reform legislation, which makes major changes to San Francisco’s fee regime, but has received less attention than the inclusionary housing ordinance.

The Planning Commission had recommended eliminating development impact fees for changes of use, and applying the inclusionary housing percentage reductions to smaller, 10-24 unit projects. These changes were not adopted by the Board, but the Land Use and Transportation Committee created a copy of the inclusionary housing ordinance by duplicating the file, allowing for further discussions and potential amendments to that ordinance in the fall.

 

The “Housing Fee Reform Plan” legislation, which we reported on previously, is heading back to the Board of Supervisors next week. On Monday, July 24, the Board’s Land Use and Transportation Committee will consider the two ordinances, which cover inclusionary housing changes and impact fee reform. Committee Chair Melgar has deemed the ordinances urgent and has requested that they go to the full Board as committee reports the following day, Tuesday, July 25.

Most attention has been paid to the inclusionary housing legislation, which reduces inclusionary percentages for pipeline and new residential projects with 25 or more units, to 12% on-site for pipeline projects, and 15% on-site for new projects approved between November 2023 and November 2026. On July 13, the Planning Commission recommended approval with modifications to apply the inclusionary reductions to smaller projects, along with other timing and technical changes. These changes can be considered by the Board next week.

After the original introduction of the impact fee reform legislation, Mayor Breed introduced a substituted version that revised the impact fee waiver provisions for downtown projects containing certain non-residential uses. In the prior version of the ordinance, these projects were eligible for impact fee waivers for a three-year period if they were in the C-2 District, were between 20,000 and 200,000 square feet, were on vacant or underdeveloped sites, contained no residential uses, and contained all of the following uses:  hotel, restaurant, bar, outdoor activity, and entertainment. In the substituted version, projects in the C-2 and C-3 Districts are eligible, the project size and vacant/underdeveloped site requirements have been eliminated, and a project need only contain one of the non-residential uses mentioned above. In addition, the substituted version eliminates the requirement to have no residential uses in the fee waiver-eligible project.

Whether this change will help spur broader investment in downtown projects is unclear, as the impact fee waiver only applies to the area of a specific non-residential use. For example, an office project with a ground floor restaurant would only receive a waiver for the restaurant, and not the office, square footage. The Planning Commission has also recommended approval of the impact fee reform ordinance, with a proposed modification to eliminate all development impact fees for changes of use throughout the Planning Code. If implemented by the Board, this would be a significant change and could remove one barrier to certain conversion projects.

We will provide a further update after the Board’s expected actions next week.

In furtherance of Mayor London Breed’s “Housing For All” Executive Order issued in February (see earlier post here) and San Francisco’s daunting directive to produce 82,000 new housing units over the next 8 years (see earlier posts here and here), at the June 27, 2023, Board of Supervisors hearing, Mayor Breed and Board President Peskin introduced two pieces of legislation, together referred to as the “Housing Fee Reform Plan.” To reduce financial roadblocks to “pipeline,” or already approved but unbuilt residential projects, and to incentivize new projects, the legislation would temporarily reduce inclusionary housing requirements and would reduce and reform other City development impact fees, including through reactivation of a dormant impact fee deferral program. The proposed Housing Fee Reform Plan comes on the heels of the City’s other efforts to incentivize Downtown commercial to residential adaptive reuse projects. (See earlier posts here and here.)

Key provisions of the legislation, which is expected to be considered at the Planning Commission on July 13 and at the Land Use and Transportation Committee shortly thereafter, are as follows:

Inclusionary Housing Legislation (legislation here)

For pipeline residential and live/work projects (both rental and ownership) consisting of 25 units or more that have been finally approved, but have not obtained a building permit or paid development impact fees prior to November 1, 2023:

1. 12% on-site inclusionary requirement (8% low-income, 2% moderate-income, 2% middle-income).
2. 16.4% in-lieu fee or off-site inclusionary requirement (9.4% low-income, 4% moderate-income, 3% middle-income).
3. Separate provisions would apply to projects located in areas with specific affordable housing requirements, providing a proportional reduction to those requirements.

For new residential and live/work projects (both rental and ownership) consisting of 25 units or more that are finally approved between November 1, 2023 and November 1, 2026:

1. 15% on-site inclusionary requirement (10% low-income, 2.5% moderate-income, 2.5% middle-income).
2. 20.5% in-lieu fee or off-site inclusionary requirement.
3. Separate provisions would apply to projects located in areas with specific affordable housing requirements, providing a proportional reduction to those requirements.
4. Newly approved projects must obtain a First Construction Document within 30 months of Final Approval.

For both pipeline and new projects that meet the specified timeframes, a temporary fee reduction program would provide a 33% impact fee reduction for most fees (not including inclusionary housing fees) assessed on or before November 1, 2026.

Impact Fee Reform Legislation (legislation here)

The Housing Fee Reform Plan also includes various reform measures intended to provide more certainty regarding fees, as follows:

1. Establishes a 2% annual escalation rate for development impact fees, not including inclusionary fees.
2. Locks in the types and rates of applicable development impact fees, generally protecting against new fees and increases to existing fees between Planning Commission project approval and issuance of building permits.
3. Reactivates the expired fee deferral program, to allow project sponsors to defer 80–85% of development impact fee payments (not including inclusionary housing fees) from building permit issuance to no later than the first certificate of occupancy (typically a TCO).

We will continue to monitor these pieces of legislation and the City’s other housing production plans and Downtown revitalization efforts.