TO: HONORABLE MAYOR
AND CITY COUNCIL
FROM: Nanci Klein
Chris Burton
Jon Cicirelli
Erik L. Soliván
John Ristow
SUBJECT: See Below DATE: November 20, 2024
Approved
Date:
11/25/24
COUNCIL DISTRICT: Citywide
SUBJECT: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
RECOMMENDATION
(a) Accept the following recommendations to create a temporary Multifamily Housing Incentive Program to a specified set of development proposals:
(1) Adopt a resolution listing those projects eligible for the temporary Multifamily Housing Incentive Program as outlined in Attachment A.
(2) Adopt a resolution reducing the Inclusionary Housing Ordinance in-lieu fees to $0 for projects eligible for the temporary Multifamily Housing Incentive Program that include at least 5% of units onsite at up to 100% area median income, and excluding projects otherwise eligible for the incentive that have an existing Affordable Housing Compliance Plan that includes onsite affordable units unless the Housing Director approves an alternative in accordance with the provisions of the temporary Multifamily Housing Incentive Program.
(3) Approve an ordinance adding Section 4.46.039.13 to Chapter 4.46 and adding Section 4.47.098 to Chapter 4.47 of Title 4 of the San José Municipal Code to provide:
(i) A 50% reduction of the Commercial, Residential, and Mobile Home Park Construction Tax and a 50% reduction of the Building and Structure Construction Tax to the first 1,500 units in projects eligible COUNCIL AGENDA: 12/10/24
FILE: 24-2305
ITEM: 8.2
HONORABLE MAYOR AND CITY COUNCIL
November 20, 2024
Subject: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
for the temporary Multifamily Housing Incentive that also obtain a City building permit by December 31, 2025; and
(ii) A 25% reduction of the Building and Structure Construction Tax for up to 8,539 additional units in projects eligible for the temporary Multifamily Housing Incentive Program.
(b) Adopt a resolution amending Exhibit A of Resolution No. 78733, adopted on August 7, 2018, which sets forth the Schedule of Parkland Fees charged pursuant to Chapters 14.25 and 19.38 of the San José Municipal Code, to establish a new permanent per unit Parkland In-Lieu Fee for multi-family residential projects that have five units (or more) in Multiple Listing Service District 7B (North San José – south of State Route 237) at $22,600 per unit.
SUMMARY AND OUTCOME
Approval of recommendation (a) will create a temporary multifamily housing incentive program for a limited number of projects, as described and defined further below, that are generally non-high-rise, high-density multifamily entitlements in growth areas in the City. This incentive program includes a waiver of the Inclusionary Housing Ordinance (IHO) fees for projects providing 5% of units at up to 100% area median income, unless a higher amount of onsite affordable units was already committed to previously. The incentive also provides a 50% reduction in the Commercial, Residential, Mobile Home Park (CRMP) and Building and Structure (B&S) construction taxes for the first 1,500 units that also obtain a City building permit by December 31,2025 and a 25% reduction in the B&S Construction Tax for up to 8,539 additional eligible units.
Approval of recommendation (b) will update the Parkland Schedule of Fees to align the fee for high-density multi-family projects in North San José (MLS 7B) to $22,600 per unit, which is equal to the Downtown San José fee for multifamily housing types, while keeping all other fee rates at the same level.
BACKGROUND
On June 18, 2024, the City Council extended and modified the Downtown Residential High-Rise Incentive Program. This program applies exclusively to residential high-rise development located in the Downtown Planned Growth Area defined in the City’s Envision San José 2040 General Plan. The program includes a reduction in the City’s two primary construction taxes (CRMP and B&S), a deferral of payment of these taxes to final inspection, and a reduction in the IHO in-lieu fees. Additionally, modifications in June 2024 included a further reduction to the parkland in-lieu fees beyond the current permanently discounted rate for high-rise residential in Downtown. The program is divided into three phases, with taxes and fees increasing incrementally in each subsequent phase allocated with a specific number of units up to total of 10,000 units.
HONORABLE MAYOR AND CITY COUNCIL
November 20, 2024
Subject: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
In addition to extending and modifying the Downtown Residential High-Rise Incentive Program, the City Council directed staff to study additional strategies for promoting housing construction aimed at growth areas defined in the Envision San José 2040 General Plan, with an emphasis on those projects with project applications that were deemed complete by the Planning, Building, and Code Enforcement Department by the end of June 2022. City Council further directed staff to explore potential changes in parkland in-lieu fees and associated private recreation credits for development in North San José in the real estate multiple listing service (MLS) district 7B.
ANALYSIS
Context and Current Housing Production Performance
The City received an allocation of 62,200 units for its 6th Cycle Housing Element, which is for the period of January 31, 2023 to January 31, 2031. While San José has seen some modest production of affordable housing in the last several years, the City has continued to underperform in housing production, particularly in the last calendar year for multifamily housing market rate (above moderate income) housing. No multifamily market-rate project over 20 units started construction in calendar year 2024. The Figure below shows the number of multifamily units that have started construction since 2019.
Only one project per year has started construction since 2020.
Figure
1,217
207
366
782
336
0 -
500
1,000
1,500
2019 2020 2021 2022 2023 2024
Market
-
Rate Multifamily Units
Starting Construction
HONORABLE MAYOR AND CITY COUNCIL
November 20, 2024
Subject: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
Staff compiled a comprehensive impact analysis for the Multifamily Housing Incentive Program that sampled six projects from the list of eligible projects. The analysis sized the waiver of IHO fees, construction taxes, and park impact fees and applied the scale of City fees and tax adjustments to the financing pro forma for each of the projects. In summary, the numerical analysis demonstrated that fee and tax reductions would not catalyze many projects forward as current economic conditions, specifically, the high cost of land, labor, and inflationary pricing of materials and project financing, are barriers to project feasibility.
The economics shaping project feasibility for the new construction of multifamily market- rate housing continue to present an extremely challenging environment nationally and in San José. This is confirmed by the data in the above Figure and low permit activity.
While the staff recommendations do not catalyze the feasibility of many market-rate housing development projects, they do signal to project investors that San José is taking measured actions to support the production of housing units by leveraging its fee programs. As economic conditions rebound, the incentive program will enable projects to potentially start earlier in any recovery period than they may otherwise have without the incentive program.
1. Proposed Multifamily Housing Incentive Program Parameters
Project Eligibility and Criteria: Attachment A contains the list of projects eligible for the proposed Multifamily Residential Incentive Program. The list contains 34 projects with up to 10,039 units – 7,530 market-rate and 2,509 affordable units.
The eligible projects in Attachment A meet the criteria defined below, with some exceptions as noted. The recommended criteria generally align with the parameters suggested by the City Council in June 2024. The recommended approach to the Multifamily Housing Incentive Program simplifies program administration across multiple departments. It also makes understanding the maximum foregone revenue implications in future years easier.
• Density: Eligible projects have a density exceeding 50 dwelling units per acre, equivalent to the minimum density in the Envision San José 2040 General Plan Transit Residential land use designation. While this density generally represents projects with approximately five stories, projects may be able to meet this density with four stories.
• G eography : Eligible projects are generally located in a Planned Growth Area (e.g., Urban Village) as defined in the Envision San José 2040 General Plan. There is one exception to this where an approved project is proximate to a growth area, the 1050 Saint Elizabeth project, but meets all other criteria and is in an area with other existing multifamily housing.
HONORABLE MAYOR AND CITY COUNCIL
November 20, 2024
Subject: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
• Application Submittal Timing: Eligible projects were deemed complete by the Planning, Building, and Code Enforcement Department by the end of December 2022. While the City Council directed June 2022, extending the completed application timeframe to December 2022 allows the inclusion of one additional project in North San José that meets all other criteria, the 210 Baypointe project.
• P rogram Horizon: Projects remain eligible until the expiration of the planning permit, including any extensions. Generally, this is two years with up to two one-year extensions for a total of four years from the initial entitlement.
• M odification of an Eligible Project: Eligible projects may be modified and remain eligible for the Multifamily Housing Incentive Program under certain conditions. A project must submit an application for modification of the project to the City by December 31, 2025. To remain eligible, the modification must result in a project maintaining a density of at least 50 dwelling units per acre. The modified project must obtain a building permit 18 months after planning approval of the modified project and pass a first inspection six months after building permit issuance to remain eligible for the program.
Waiver of Some IHO R equirements for Projects that Provide Affordable Housing: The IHO requires residential development to provide 15% of housing units on-site that are affordable to income-qualified buyers or renters. The IHO also provides multiple other development options to satisfy its affordable housing obligation. This includes options such as building affordable units offsite equal to 20% of the total number of units or paying an in-lieu fee per square foot. There are numerous other options for compliance, including mixed compliance options and land dedication, among others.1
The current IHO program also has two in-lieu fee amounts depending on a project’s geography. For mixed compliance projects, the in-lieu fee in the “Strong Market Area” is currently set at $21.74 per square foot and the in-lieu fee in the “Moderate Market Area” is currently set at $13.80 per square foot. The Strong Market Area includes the areas of Central and West Valley.
2 Staff recommends that eligible projects may pay a $0 in-lieu fee if the project includes at least 5% of affordable units onsite up to 100% of the area median income. As authorized by the Housing Director, projects eligible for the proposed Multifamily Housing Incentive Program with an existing Affordable Compliance Plan may retain eligibility. Staff recommends this modification as a tool for increasing on-site affordable units, project financial feasibility, or to foster the development of additional housing units in the project. In addition, the Housing Director may modify an existing IHO Compliance
1 IHO webpage with further detail on compliance options: https://www.sanjoseca.gov/your- government/departments-offices/housing/developers/inclusionary-housing-programs 2 IHO “Strong Market and Moderate Market Areas”:
https://www.sanjoseca.gov/home/showpublisheddocument/72161/637556456535530000
HONORABLE MAYOR AND CITY COUNCIL
November 20, 2024
Subject: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
Plan of an eligible project to apply the Multifamily Housing Incentive Program benefits as stated in the IHO Ordinance.
Reduction of Construction Taxes: The City charges two major construction taxes for new residential developments. The CRMP Construction Tax and the B&S Construction Tax are charged based on the valuation of the new construction. Given their size, these are two taxes typically included in residential incentives or tax reduction programs.
The CRMP Construction Tax is a general tax that is unrestricted in its use, but is typically allocated in the Traffic Capital Program for transportation-related work, projects, and improvements, including complete streets, pedestrian safety, and traffic calming projects. The CRMP Construction Tax is charged at a rate of 2.42% of building valuation for residential.
The B&S Construction Tax funds are received in a special fund within the Traffic Capital Program that, by law, are restricted to support infrastructure along major roadways. The B&S Construction Tax is charged at a rate of 1.54% of building valuation for residential.
Staff recommends a two-phased approach with respect to the reduction of construction taxes for eligible projects. Phase 1 is a 50% reduction of the CRMP Construction Tax and a 50% reduction of the B&S Construction Tax for the first 1,500 units on the eligible projects list that also obtain a City building permit by December 31, 2025. Phase 2, starting January 1, 2026 is a 25% reduction in the B&S Construction Tax only for up to 8,539 units on the eligible projects list. This phased approach is recommended to balance catalyzation of housing production with reduced revenue for transportation- related programs and initiatives.
Deferring the Timing of Payment of Taxes and Fees: Eligible projects will pay taxes and fees prior to the issuance of the first Certificate of Occupancy. This could be either a Temporary Certificate of Occupancy or a Certificate of Occupancy, depending on the project. The shift in the timing of payment for fees is consistent with recent California legislation, Senate Bill (SB) 937 (Weiner), that shifts the timing of payment of fees for certain residential development. Additional information on SB 937 is included in the below “Additional City Council Recommendations Consideration and Follow-Up” section of this memorandum. To defer payment of the eligible construction taxes and to comply with subsidy hearing requirements, staff will bring forward project completion agreements to be executed by the City Manager or her designee with project applicants.
Table 1 provides a summary table of the proposed Multifamily Housing Incentive Program.
HONORABLE MAYOR AND CITY COUNCIL
November 20, 2024
Subject: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
Table 1: Summary Table of Proposed Multifamily Housing Incentive Program
PARAMETER
PROPOSED PROGRAM
CONCEPT
CURRENT
OBLIGATION
DENSITY/
HOUSING TYPE
Development with net density of 50
dwelling units per acre or more.
(Approximately five-plus stories.)
N/A
GEOGRAPHY Planned Growth Areas throughout
the City, with one exception.
N/A
CONSTRUCTION
TAXES
Phase 1
50% reduction
CRMP Tax and
B&S Tax for first
1,500 units that
must also obtain
a building permit
no later than
December 31,
2025.
Phase 2
Starting January
1, 2026, 25%
reduction in B&S
Tax for up to
8,539 additional
units
CRMP Tax charged at
2.42% of building
valuation
B&S Tax of 1.54% of
building valuation
INCLUSIONARY
HOUSING
$0 in-lieu fee and 5% of units at up
to 100% area median income
Strong Market: $49.99
per square foot OR 5%
of units at 100% area
median income and
$21.74 per square foot
Moderate Market:
$21.74 per square foot
OR 5% of units up to
100% area median
income and $13.80 per
square foot
TIMING OF
PAYMENT
Paid at first Certificate of
Occupancy
Paid at building permit
issuance
PROGRAM
HORIZON
Expiration of valid entitlement –
maximum two years, plus two one-
year extensions = four years from
initial entitlement
N/A
HONORABLE MAYOR AND CITY COUNCIL
November 20, 2024
Subject: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
2. North San José Parks Fee Realignment
Population growth created by new residential development creates demand for new park facilities and increases the use of existing parks and recreational facilities. Park impact fees are monies residential developers pay to the City to offset the cost of providing and improving the City’s park system. These are commonly referred to as “park fees.” The fees are charged from a City Council-adopted Parkland Schedule of Fees and Credits.
The Parkland Schedule of Fees and Credits is based upon the estimated land value and the number of persons per household, as published in the United States Census, and City Council adopted resolutions. Park fees can be modified annually and be adjusted to reflect current land values. The fee can increase or decrease in a way consistent with current market rates for land.
The City refers to real estate MLS areas to help calculate the land values that provide the base of the park fee. There are 15 MLS areas in San José. These areas generally align with recognizable areas of the City, such as North San José and Downtown San José. North San José is defined as the area north and west of Interstate 880 and south of State Route 237 and is in MLS district 7B. Downtown San José is in MLS district 9.
Park fees have not been fully updated to reflect current land values since December 2017. The current park fee rate for multifamily projects with five or more units in North San José MLS 7B is $41,600 per unit. The next highest per-unit fee applicable to the same category of multifamily elsewhere in the City is in Downtown San José, with a rate of $22,600 per unit.
3 Due to the limitations posed by the North San José Area Development Policy, multifamily development in North San José was extremely limited following an initial large development wave in 2011. However, since this development policy has been retired, there is now an opportunity to construct new multifamily residential in North San José. The City further provided additional opportunities for new multifamily development in North San José through actions related to the updated Housing Element. Two new zoning overlays were created and applied to various sites in North San José to provide additional opportunities for new housing development.
Staff recommends that the fee level for multifamily housing projects that have five units or more in North San José be permanently realigned with the fee for the next highest MLS district in the City, Downtown San José MLS district 9, to support housing production in North San José. The fee adjustment will only apply to projects or those portions of projects that have five or more multifamily units in MLS 7B. The fee adjustment equals a 45.67% reduction from the existing fee rate.
3 Current fee levels set in Resolution No. 78474
HONORABLE MAYOR AND CITY COUNCIL
November 20, 2024
Subject: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
Park fees can be further reduced by credits given for affordable housing units and through the provision of privately owned and maintained on-site recreational amenities.
Each qualifying affordable housing unit receives a 50% per unit park fee reduction. On- site recreational amenities can further reduce the total amount of park fees due by up to an additional 50%. All park fees and credit programs are listed on the Parks, Recreation, and Neighborhood Services Department “Developers” webpage4.
Staff does not propose any additional modifications to parkland in-lieu fees nor any changes to affordable housing or private recreation credits. New residential development in North San José will continue to be able to obtain private recreation credits and affordable housing credits just as in other areas of the City.
3. Compliance with San José Municipal Code Title 14
Chapter 14.10 of the San José Municipal Code sets “Minimum Labor Standards for a Private Construction Project Accepting a City Subsidy.” Chapter 14.10 defines a subsidy to include any “reduction, permanent suspension or exemption of any fee or tax” that applies to single or multiple projects. Construction projects receiving a City subsidy are required to pay all workers employed on the construction prevailing wage rates and are subject to other provisions, such as requiring apprenticeships and local hire, among others. There are exemptions to the definition of a subsidy that include the reduction of a fee or tax that is applied uniformly across all private construction projects within a specific subcategory of use, e.g., high-rise residential, when the City Council determines, based on specified criteria, that construction of the projects is not financially feasible. The specified criteria are as follows:
A. City Council must determine that a fee or tax reduction is not a subsidy supported by findings following a public hearing;
B. City Council’s findings must be supported by the evidence presented at the public hearing, including a study analyzing whether construction within the subcategory of use is financially infeasible;
C. The financial feasibility study must be performed by a consultant qualified to provide real estate analytic services selected and retained by the City using its normal procurement process; and
D. City Council must use reasonable efforts to conduct the hearing within 90 calendar days following the completion of the financial feasibility study.
The feasibility of multifamily residential development was analyzed in the latest Cost of Residential Development report summarized in Attachment B - City Council Memorandum on Cost of Residential Development from City Council Study Session
4 Parks, Recreation, and Neighborhood Services Department “Developers” webpage
HONORABLE MAYOR AND CITY COUNCIL
November 20, 2024
Subject: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
October 26, 2023 - that was presented and discussed with the City Council at an October 2023 Study Session. Due to time, cost, and staff resources, a complete update of the cost of development prior to consideration of these recommendations was not possible. However, staff requested and obtained a conceptual feasibility analysis review from the consultant responsible for the 2023 report that discussed current feasibility at a high-level in the present conditions included in Attachment C – Strategic Real Estate Advisory Services: 2024 Conceptual Feasibility Analysis Review. A comparison of the 2023 and 2024 analyses of cost of development is included in Table 2.
Table 2: Cost of Development Conceptual Feasibility Analysis 2023 vs 2024
Issue Consultant 2023 Analysis
(Attachment B)
Consultant 2024 Analysis
(Attachment C)
a. Whether the construction of Private
Construction Projects in the specified
Subcategory of Use are Financially
Infeasible.
“The conceptual feasibility analysis indicates
that none of the prototypes support positive
estimated residual land value in any of the
submarkets. These results suggest a
challenging environment for ground-up
residential development projects similar to
the prototype projects in the selected
submarkets.” (Attachment B; pg. 13)
“…there is no indication or evidence that the
challenging residential development
economics observed in the 2023 analysis
have improved.” (Attachment C; pg. 8)
b. The reason(s) for any conclusion that
construction of the Private Construction
Projects in the specified Subcategory of
Use is Financially Infeasible.
“The conceptual analyses’ findings indicate
that similar to the findings in 2022,
residential development economics are
challenging under current market conditions.
Since the last analysis was prepared, the
cost of construction has continued to
increase, while rising interest rates have
increased capital costs, along with target
returns for achieving feasibility. Rental rates
and condominium sale prices have
increased since the last analysis, but the
magnitude of these increases is insufficient
to offset the effect of higher development
costs.” (Attachment B; pg. 2)
“While many financial and non-financial
factors affect feasibility, key drivers of
HONORABLE MAYOR AND CITY COUNCIL
November 20, 2024
Subject: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
Issue Consultant 2023 Analysis
(Attachment B)
Consultant 2024 Analysis
(Attachment C)
economic feasibility include hard costs,
target returns on cost, rental rates, and sale
prices. Market research regarding changes
in these drivers since the 2023 analysis
indicate that these drivers have not changed
in a manner that would materially improve
residential development feasibility.”
(Attachment C; pg. 8)
c. The anticipated duration of any
condition(s) making construction of the
Private Construction Projects in the
specified Subcategory of Use Financially
Infeasible.
“Engineering News Record and TBD
Consultants publish indices which track
construction costs quarterly in the Bay Area.
Both indices reflect major increases in cost
since 2014 and even more significant
increases since 2020. Since 2014, the total
increase has been over 200%. Between the
first quarter of 2020, when the COVID-19
pandemic began, and the second quarter of
2023, the latest available data, TBD
Consultants estimates an increase of 27%.
To a limited extent, these hard cost
increases have been offset by rental rate
and sale price growth, but construction cost
growth has outpaced rental rate and sale
price growth.” (Attachment B; pg. 14)
“According to TBD Consultants Bid Index,
which tracks construction costs in the Bay
Area, hard costs between the third quarter of
2023 and the second quarter of 2024
increased approximately 2%. While data for
the third quarter is not yet available, initial
indications suggest that costs will either
remain flat or increase slightly.”
(Attachment C; pg. 5)
d. The estimated size of the financial gap
between the Private Construction
Projects in the specified Subcategory of
Use being Financially Infeasible and
financially feasible.
The 2023 report showed a negative residual
land value ranging from $323,000 per unit to
$435,000 per unit for rental projects in
submarkets throughout the City.
HONORABLE MAYOR AND CITY COUNCIL
November 20, 2024
Subject: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
Issue Consultant 2023 Analysis
(Attachment B)
Consultant 2024 Analysis
(Attachment C)
“…there is no indication or evidence that the
challenging residential development
economics observed in the 2023 analysis
have improved.” (Attachment C; pg. 8)
e. Options for making the construction of
the Private Construction Projects in the
specified Subcategory of Use financially
feasible, including the following:
i. Providing the proposed fee or tax
reduction without requiring the payment
of prevailing wages;
ii. P roviding the proposed fee or tax
reduction along with requiring the
payment of prevailing wages; and
iii. Any additional options, other than
the proposed fee or tax reduction, that
would make the construction of the
Private Construction Projects within the
specified Subcategory of Use financially
feasible, provided that any such options
must comply with all applicable laws and
regulations, including the City's current
General Plan.
"To provide additional context, sensitivities
were prepared to analyze the potential effect
of 5% variations in hard costs, soft costs,
rental rates, and sale prices by construction
type. The results of these sensitivity
analyses, which are summarized in Exhibit
C, indicate that 5% improvements in hard
costs, soft costs, rental rates, and sale
prices do not bridge the feasibility gap for
any of the prototypes." (Attachment B; pg.
16)
“Compared with the research findings that
informed the 2023 analysis, in the third
quarter of 2024, the four drivers to be
evaluated are similar to or less favorable
than they were in the third quarter of 2023”
(Attachment C; pg. 2)
Based on finding the previous sensitivity
analyses would remain valid to show that
projects would remain infeasible under the
options outlined in part e.
f. The consultant's preparation of the
required study will include the
opportunity for stakeholder input.
Meetings with development community
members were held on September 28 and
October 12, 2023 to review the assumptions
and findings in the initial report. The Housing
Department also engage developers on
individual basis to collect and refine the data
underlying the recommendation.
HONORABLE MAYOR AND CITY COUNCIL
November 20, 2024
Subject: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
4. Additional City Council Recommendations Consideration and Follow-Up
City Council action at the June 18, 2024 meeting also directed staff to provide a preliminary high-level assessment of the cost implications of the City’s regulatory framework. Staff provided an update on this work to the Community and Economic Development Committee as part of the status report on the Development Fee Framework in April 2024.5
The objective of the Development Fee Framework is to provide developers and the public a transparent view of how development impact fees are calculated and administered so it is easier to estimate and understand fees without changing any existing fee programs. This work to establish and formalize the Development Fee Framework was also included as a strategy P-10 in the Housing Element and entitled Standardize and Streamline Permitting, Fees, Applications. An interdepartmental working group is developing policy objectives that could inform the establishment of a future City Council policy. This work is anticipated to be considered by City Council in 2025.
In September 2024, Governor Newsom signed into law SB 937 that shifts the timing of payment of fees for “designated residential development projects” to a Certificate of Occupancy. Effective January 1, 2025, SB 937 defines “designated residential development” as those projects as: (1) 100% affordable housing; (2) SB 35/SB 423 State Streamlined Housing Projects; (3) projects approved through Assembly Bill 2011 6;
(4) low barrier navigation centers; (5) projects approved through the provisions of SB 4 that allow for affordable housing on the lands of faith-based uses or certain public universities; (6) the project is eligible for state density bonus law, or (7) the project includes 10 or fewer units.
This shift in the timing of payment of fees in SB 937 for these designated residential projects aligns with the goals and draft policies within the Development Fee Framework.
Shifting the timing of payment helps residential development lower upfront costs. Staff continues to work on efforts to implement SB 937 and the Development Fee Framework as means to provide streamlining and costs savings related to the regulatory environment.
5 April 2024 Staff Report on Development Fee Framework:
https://sanjose.legistar.com/View.ashx?M=F&ID=12856106&GUID=00242C40- 7E3F-4E84-B0AE- FC0876E33DED
6 Information Memorandum: Analysis of Senate Bill 6 and Assembly Bill 2011:
https://www.sanjoseca.gov/home/showpublisheddocument/112540/638531176363100000
HONORABLE MAYOR AND CITY COUNCIL
November 20, 2024
Subject: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
EVALUATION AND FOLLOW-UP
Should City Council approve the staff recommendation, staff will monitor the ongoing performance of the Multifamily Housing Incentive Program through the Housing Catalyst Team Work Plan that is provided annually to the Community and Economic Development Committee and City Council. Staff also plans to bring forward a complete update of the Cost of Residential Development to City Council in spring 2025.
COST SUMMARY/IMPLICATIONS
Multifamily Housing Incentive Program
The full fiscal impact of the proposed Multifamily Housing Incentive Program will not be completely understood until developments begin to move forward and we are closer to the last entitlement expiration dates outlined in Attachment A. Pursuant to California Government Code Section 53083, the City must disclose information related to any fee waiver over $100,000 through a public hearing, and pursuant to City Resolution no. 77135, must also disclose any fee waiver over $1,000,000 through a public hearing.
These disclosures must include detailed information on the estimated total amount of expenditure of public funds or revenue lost, and project tax revenue resulting from the project. Staff will bring back these disclosures for individual projects in conjunction with the required Project Completion Agreement.
The IHO Fee for any residential developments adding 20 or more units is $21.74 and up to $13.80 per square foot per rental unit in Strong Market Areas and Moderate Market Areas, respectively, under mixed compliance. Housing Department analysis of the value of IHO fee waivers in some currently entitled multifamily projects proposed results in a higher per unit number of affordable units developed from the waiver than the total value of units supported by the collection and redistribution of the fee based on the recent historical per unit average subsidy from the City ($275,000/unit) to affordable unit development.
Construction taxes fund a significant portion of the Traffic Capital Improvement Program, which in turn funds transportation programs, staffing, and local match for grants. The potential forgone revenue associated with both Phase 1 and Phase 2 totals approximately $7.3 million, $3.4 million for Phase 1 and $3.9 million for Phase 2. Other City funds will be utilized to backfill most of the Phase 1 foregone revenue estimated at $2.7 million, primarily leveraging eligible funding from Community Development Block Grant funds, leaving a total reduction in the anticipated Traffic Capital Improvement Program budget of $4.6 million. A higher ongoing reduction to construction taxes, without a commensurate backfill, would result in cuts to transportation and safety projects and programs, staffing, and/or local match funding for State and federal grants.
HONORABLE MAYOR AND CITY COUNCIL
November 20, 2024
Subject: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
A reduction in B&S Construction Tax is recommended for the majority of units on the eligible projects list due to the restricted nature of B&S funds versus the CRMP funds.
The B&S Construction Tax is restricted in its use and is focused on funding infrastructure-related initiatives on major collector and arterial roadways. Based on the last entitlement expiration dates outlined in Attachment A, the expectation is that revenue impacts would be experienced starting in the 2029-2030 fiscal year and going forward, and will be evaluated as part of the development of the 2026-2030 Traffic Capital Improvement Program. However, it is important to note that all revenue estimates are re-evaluated annually and are subject to change based on market conditions and actual private development construction, including residential, commercial, and industrial projects.
Staff estimates the City could receive $6.8 million in ongoing, annual property tax revenue with the construction of approximately 10,000 new multifamily units. The City will also generate an annual utility user tax, a business tax, and a sales tax in mixed-use projects. While difficult to estimate, indirect revenue will also be generated through the purchase of goods and services throughout the City by each new resident living in these developments.
North San José Park Fee Realignment
Park Impact Fees are one of the most significant sources of funding to the City to support the design, building, and improvement of San José’s public park system. North San José has many park needs, including the design and development of the Agnews regional park, Baypointe Park, and portions of the Bay Trail. Cost estimates for these three projects are $89 million.
None of the currently entitled or planned projects in North San José MLS 7B are listed as potential revenue in the 2024-2025 Budget
7. However, Parks, Recreation, and
Neighborhood Services Department staff depend on estimates of future park fee collections to pay for staffing and administrative costs, and to pair long-term planning and park construction efforts with funding needs. The current projected net park fee collections for six residential development projects on file is $81.5 million, with net collections reduced to $42.6 million following the fee realignment.
COORDINATION
The memorandum was coordinated with the City Attorney’s Office and the City Manager’s Budget Office.
7 City of San José Budget Documents: https://www.sanjoseca.gov/your-government/departments-offices/office-of- the-city-manager/budget/budget-documents
HONORABLE MAYOR AND CITY COUNCIL
November 20, 2024
Subject: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
PUBLIC OUTREACH
Multiple online stakeholder meetings were conducted with the development community, advocates, and leadership from the South Bay Labor Council, Working Partnerships USA, Nor Cal Carpenter’s Union, and Santa Clara and San Benito Counties Building and Construction Trades Council. These meetings occurred in September, October, and November.
Developer/development community meetings occurred on September 16 and 26, 2024, and staff presented to the San José Chamber of Commerce’s Land Use Committee on November 21, 2024. Staff hosted an online meeting for housing, transportation, and parks advocates on September 17, 2024. City Council District 4 hosted a public online meeting on October 28, 2024, with staff presentations on the proposed Multifamily Housing Incentive Program and the proposed re-alignment of the North San José MLS 7B parks fees. Recordings of those meetings are posted on the Fees that Support Parkland Development webpage8.
This memorandum will be posted on the City’s Council Agenda website for the December 10, 2024 City Council meeting.
COMMISSION RECOMMENDATION AND INPUT
No commission recommendation or input is associated with this action.
CEQA
Statutorily Exempt, File No. PP17-005, CEQA Guidelines Section 15273, Adjustment to Fees, Rates and Fares without changes to or expansion of services.
PUBLIC SUBSIDY REPORTING
This item itself does not include a public subsidy as defined in section 53083 or 53083.1 of the California Government Code or the City’s Open Government Resolution. Staff in the City Manager’s Office of Economic Development and Cultural Affairs will bring forward each eligible project for a required individual public hearing in accordance with City Council Resolution 77135 and California Government Code Section 53083.
8 Fees that Support Parkland Development webpage: https://www.sanjoseca.gov/your-government/departments- offices/parks-recreation-neighborhood-services/in-the-works/fees-that-support-parkland-development
HONORABLE MAYOR AND CITY COUNCIL
November 20, 2024
Subject: Multifamily Housing Incentive Program and North San José Parks Fee Realignment
/s/
NANCI KLEIN
Director, Economic Development
and Cultural Affairs
/s/
CHRIS BURTON
Director, Planning, Building, and
Code Enforcement Department
/s/
JON CICIRELLI
Director, Parks, Recreation, and
Neighborhood Services Department
/s/
ERIK L. SOLIVAN
Director, Housing Department
/s/
JOHN RISTOW
Director, Department of Transportation
For questions, please contact Blage Zelalich, Deputy Director, City Manager’s Office of Economic Development and Cultural Affairs, at [email protected] or (408) 535-8172 or Jerad Ferguson, Principal Planner, Planning, Building, and Code Enforcement Department at [email protected]
or (669) 223-1160.
ATTACHMENTS
Attachment A:List of Eligible Projects for the Multifamily Incentive Program Attachment B: City Council Memorandum on Cost of Residential Development from City Council Study Session October 26, 2023
Attachment C: Strategic Real Estate Advisory Services: 2024 Conceptual Feasibility Analysis Review
Attachment A: List of Eligible Projects for the Multifamily Incentive Program Mark
et-Rate Projects
Project Address Developer Last
Entitlement
Expiration
Units
1 498 West San Carlos Urban Catalyst 12/14/2028 278
2 4300-4360 Stevens Creek Fortbay/Perry Hariri 8/30/2028 407 3 14200 Union Weingarten Investors 11/2/2028 305
4 1312 El Paseo de
Saratoga/1177 Saratoga Sand Hill Property 11/29/2029 772* 5 205 Dupont Miramar Capital/Perry Hariri 5/4/2028 689
6 700 Saratoga Avalon Bay Communities 3/17/2027 247
7 905 North Capitol Hanover 6/29/2028 345
8 1298 Tripp; 1325/1347
E. Julian ROYGBIV 11/29/2029 913
9 70 N. 27th HC Investment LLC 5/31/2029 198
10 1530 W. San Carlos Urban Villas LLC 6/28/2029 237
11 1520 W. San Carlos Vivji Mani 7/12/2029 256
12 1050 Saint Elizabeth Evershine XVII LP 4/19/2029 206 13 West San Carlos and Sunol Republic Urban 5/4/2028 263 14 1065 S. Winchester A&Z Development 10/25/2028 70
15 1073 S. Winchester A&Z Development 8/25/2027 61
16 605 Blossom Hill Republic Urban 8/9/2028 239
17 1197 Lick/Tamien Station Republic Urban 12/9/2026 434 18 681 E. Trimble Hannover Company 8/14/2028 1318
19 210 Baypointe Summerhill Homes 10/22/2028 292
*Revised number of project units pending City Council approval. T otal 7533 Af
fordable Projects
Project Address Developer Last
Entitlement
Expiration
Units
1 802 S. First Maracor/Pacific West 10/12/2028 166
2 124 N. 15th Santa Clara Housing
Authority 9/2/2027 103
3 1371 Kooser Affirmed Housing Group 8/24/2028 191
4 525 N. Capitol Community Development
Partners 9/1/2028 160
5 771-797 Almaden Resources for Community
Development 1/28/2028 99
6 2315 Canoas Garden Santa Clara Housing
Authority 4/20/2028 559
7 1135 E. Santa Clara Green Republic Blossom
Hill LLC 8/9/2028 89
8 70 Kentucky Place Charities Housing 11/9/2029 55
1 9 501 Almaden Satellite Housing 9/1/2028 53
10 1135 E. Santa Clara Allied Housing 10/9/2026 91
11 2315 Canoas Garden Sand Hill Property Co 1/10/2028 237 12 995 E. Santa Clara First Community Housing 9/23/2028 74 13 2920/2928 Alum Rock Charities Housing 9/1/2028 83
14 934-948 E. Santa Clara Milestone Housing Group 8/8/2029 103 15 71 Vista Montana Charities Housing 3/21/2029 446
T otal 2509
2 Attachment B
Attachment C: 2024 Conceptual Feasibility Analysis Review