Inclusionary Housing Recommendations a Mixed Bag for Developers

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.