TO: HONORABLE MAYOR
AND CITY COUNCIL
FROM: Erik L. Soliván
SUBJECT: See Below DATE: August 10, 2026
Approved
Date:
8/19/26
COUNCIL DISTRICT: Citywide
SUBJECT: Alternative Financing Recommendations for Affordable Housing Production and Preservation
RECOMMENDATION
Adopt a resolution authorizing the Housing Director, or his designee, to implement the following mixed-financing frameworks, subject to the requirements of the applicable funding sources and all applicable laws, for the purpose of producing and preserving housing at all affordability levels in the City of San José:
(a) Gap Financing Program and Inclusionary Housing Ordinance; (b) Private Activity Bonds and Master-Lease Financing;
(c) Production Incentive Programs and Master-Lease Financing; and (d) Master-Lease Financing and Inclusionary Housing Ordinance.
SUMMARY AND OUTCOME
This memorandum responds to the City Council’s direction by presenting four specific alternative financing models that will allow the City to offer financial options for the production and preservation of housing across affordability levels in furtherance of the City Council Focus Area of Building More Housing, as defined below. These financing models provide additional financing approaches that may be utilized in a market- constrained environment to advance housing projects and incorporate more affordable rents across a spectrum from 40% Area Median Income (AMI) to 110% AMI.
With the City Council’s approval, the Housing Director, or his designee, will be authorized to utilize these alternative financing models, subject to the requirements of the applicable funding sources, all applicable laws, and any required City Council COUNCIL AGENDA: 9/1/26
FILE: 26-894
ITEM: 8.1
HONORABLE MAYOR AND CITY COUNCIL
August 10, 2026
Subject: Alternative Financing Recommendations to Spur Affordable Housing Production
approvals to implement the described alternative financing models to reduce administrative delays. Project and financial oversight and accountability measures remain in place via City Council funding approvals.
BACKGROUND
The City is committed to developing innovative strategies with existing tools to move more quickly and effectively produce and preserve affordable housing at a variety of income levels across San José.
As identified in the December 8, 2025, Cost of Residential Development Study, 1 while
several lower-density housing product types may be financially feasible in today’s market conditions, most higher-density product types are not. To make progress on the City’s Regional Housing Needs Allocation goals of 62,200 homes by 2031, the City must address market and cost factors within the City’s control that increase project feasibility.
The City Council Focus Area of Building More Housing calls for providing alternative financing programs to support housing at all income levels,2 including, most recently, the April 6, 20263 memorandum authored by Mayor Matt Mahan, and Councilmembers Campos, Tordillos, Cohen, and Ortiz. This direction advanced the ideas put forth in the March 10, 2026 Information Memorandum4 on cost-burden households and alternative financing strategies.
Historically, the City’s primary funding and financing models have included five key tools: Gap Financing Program, Private Activity Bonds (PAB), Master-Lease Financing (MLF), Inclusionary Housing Ordinance (IHO), and Production Incentive Programs (PIP). As detailed in the March 10, 2026 Information Memorandum, each tool offers unique eligibility requirements, challenges, and opportunities.
Currently, 81% of cost-burdened households at or below 50% AMI live in City- subsidized, rent-stabilized, or income-restricted housing units. San José has extremely
1 https://sanjose.legistar.com/View.ashx?M=F&ID=15012880&GUID=97432B01-73A0-456E-8529- 63BCC688226E
2 Heard by the Community and Economic Development City Council Committee on December 15, 2025, Item 3.4,1.; instructed by the January 27, 2026 memorandum authored by District 5 Councilmember Peter Ortiz; heard by Committee on February 23, 2026; heard at City Council on March 24, 2026; and instructed by the April 6, 2026 memorandum authored by Mayor Matt Mahan, Councilmember Pamel a Campos, Councilmember Anthony Tordillos, Councilmember David Cohen, and Councilmember Peter Ortiz.
3 File: ROGC 26-191, Item #: C.3, Meeting Date: April 29, 2026, Item Title: Alternative Financing for Affordable Housing, Web
Link: https://sanjose.legistar.com/View.ashx?M=F&ID=15409467&GUID=8D1015E8-5E8F-48B0-8046- 339DBB98BE13
4 https://www.sanjoseca.gov/home/showpublisheddocument/129128/639088338106970000
HONORABLE MAYOR AND CITY COUNCIL
August 10, 2026
Subject: Alternative Financing Recommendations to Spur Affordable Housing Production
low housing vacancy rates across all housing types, and more housing supply is needed at all income levels, including housing restricted to households at or below 50% AMI. The average rental vacancy rate in San José has remained below the industry- ideal 5% threshold, with the Housing Department’s (Department) most recent quarterly report identifying an 18-year low of 3%.5
To further progress on production goals, and in response to the City Council direction, staff developed and utilized data-driven analysis of San José’s housing affordability landscape to develop new, alternative financing models.6
The proposed alternative financing models offer new uses for existing tools by mixing and matching programs innovatively to leverage a broader array of public-private partnerships. To achieve housing abundance for all income levels, as articulated in the City Council Focus Area of Building More Housing, these alternative financing models were developed to address four primary objectives:
1) Attract capital;
2) Link capital to land;
3) Foster public-private partnerships; and
4) Produce housing units across AMI levels from 40% AMI up to market-rate.
ANALYSIS
Given the vast and growing limitations on federal, state, and local resources, no single model will have sufficient resources to address the needs of housing cost-burdened families across the AMI scale. The City will need new and innovative funding models to achieve the principal goal of the City’s Housing Element to create an abundant housing stock across the full range of household incomes.
Crossing the financing streams in innovative ways to spur housing production can create new opportunities to build abundant and affordable housing stock while sustaining property tax yields.
Further, pairing the City’s incentive programs with specific, measurable production outputs can spur production efforts more quickly and cost-effectively than any single, standalone program.
Four concrete finance models, with information on their proposed structure, financing, project eligibility, an example project, and anticipated outcomes, are detailed below:
5 https://www.sanjoseca.gov/your-government/departments-offices/housing/data/housing-market 6 https://www.sanjoseca.gov/home/showpublisheddocument/129128/639088338106970000
HONORABLE MAYOR AND CITY COUNCIL
August 10, 2026
Subject: Alternative Financing Recommendations to Spur Affordable Housing Production
Finance Model #1: Combine Gap Financing Program and Inclusionary Housing Ordinance (IHO)
As a stand-alone program, the IHO functions as a reactive regulatory tool. As market- rate housing developments are submitted for entitling land for future production, an IHO compliance plan is submitted for approval. The means of financing market-rate unit production is a hindrance to reducing rent levels and thereby the AMI levels of the households served. An option for driving the AMI levels lower in a market-rate building is to provide a loan for construction or operating funds.
Structure: The City and developer negotiate the terms of increased IHO requirements, made financially feasible for the developer through Gap Financing Program financing.
Financing: Leverages existing Gap Financing Program.
Project Eligibility: This combined tool will only be effective for tower or wrap frame housing developments where the utilization of prevailing wage labor is already built into the financing model.
Example Project: The developer proposes an initial project with minimum IHO requirements: 5% unit set-aside for 60% AMI and 5% unit set-aside for 80% AMI. The developer seeks gap financing and agrees to 10% unit set-aside at 50% AMI, household incomes of $92,500 for a family of three.
Outcomes: This will secure deeper affordability levels, while also sustaining property tax yields. It is anticipated to increase production for units down to 50% AMI, fostering mixed-income developments.
Finance Model #2: Combine Private Activity Bonds (PAB) and Master-Lease Financing (MLF)
The PAB market is used to fund many forms of public infrastructure, including housing.
Traditionally, the use of PAB in housing has been combined with a 4% Low-Income Housing Tax Credit program to support the financing of a housing development. The City has traditionally only combined PAB with the Gap Financing Program to support the production of affordable housing, which requires multiple other capital sources to align uses to sources. In addition, housing developments funded by this approach are property tax exempt because the very low-income (40% AMI) and extremely low-income (30% AMI) households targeted do not produce sufficient rent revenues to pay property taxes. An alternative use of the PAB tool is to combine it with MLF. The IRS Code Section 42 regulating the use of PABs in housing developments places an AMI cap on 40% of the units at or below 60% AMI or 20% of the units at or below 50% AMI.
Therefore, 60% to 80% of units in an apartment building can be master leased up to 110% AMI utilizing City funding, creating a mixed-income building that may sustain property tax yields while allowing for broad affordability across the income scale.
HONORABLE MAYOR AND CITY COUNCIL
August 10, 2026
Subject: Alternative Financing Recommendations to Spur Affordable Housing Production
Structure: The City and developer negotiate the terms of additional affordable units in PAB-resourced development projects that will be supported through MLF.
Financing: Combines existing Low-Income Housing Tax Credit resourced affordable units with MLF.
Project Eligibility: Projects eligible under PAB, which requires 40% of the units at or below 60% AMI or 20% of the units at or below 50% AMI.
Example Project: The developer proposes a 200-unit affordable housing multifamily project financed with tax-exempt PAB issuance. 40% of units (80 units) are set aside at or below 60% AMI. Of the remaining 60% (120 units), the City negotiates a Master- Lease agreement for a portion, securing 20% of the total units (40 units) at 80% to 110% AMI with master leasing.
Outcomes: It will create mixed-income affordable housing developments combining deep affordability (at 50% to 60% AMI), moderate-income units (80–110% AMI), and market-rate units, while the market-rate units and MLF rent revenues allow such properties to remain on the tax roll, sustaining property tax yields to the City. The MLF revenue stream reduces the development risk profile in the capital markets, potentially lowering the interest rate on the bond financing. It is anticipated to increase production down to 50% AMI as well as across 80% to 110% AMI bands without requiring 4% Low- Income Housing Tax Credit or multiple gap capital sources, fostering mixed-income developments.
Finance Model #3: Combine Production Incentive Programs (PIP) and Master- Lease Financing (MLF)
PIP reduces housing development expenditures by waiving City taxes and fees applied to a project. The PIP tool is primarily applied to the construction of the housing development and has a smaller impact on the continuing operations, as rent levels are a primary driver of Return on Costs and supportable debt for a market-rate residential building. An alternative use of PIP will be to combine it with MLF, which will maintain the rent levels needed to achieve Return on Costs while buying down the AMI levels for the affordability of the units.
Structure: The model ties the incentive program, designed to spur production, to an increased number of moderate-income units. The City and developer negotiate the number of affordable units provided through MLF at the time of application for PIP tax and fee reductions.
Financing: Utilizes City funding for initial program investments. The City’s subsidy investment is anticipated to be repaid to the City upon exit from the ownership structure at the end of the agreement term.
HONORABLE MAYOR AND CITY COUNCIL
August 10, 2026
Subject: Alternative Financing Recommendations to Spur Affordable Housing Production
Project Eligibility: Projects eligible under the Multifamily Housing Incentive Program and the Downtown Highrise and Conversion Programs, emphasizing development in growth areas, including Urban Villages and Downtown.
Example Project: A multifamily project development in downtown seeks tax and fee waiver through the Multifamily Housing Incentive Program. The City negotiates an option for 10% units at 80% to 110% AMI via MLF in conjunction with granting Multifamily Housing Incentive Program waivers.
Outcomes: In addition to achieving both unit production and affordability of units, the property will remain on the tax roll, generating income for the City. The combination of PIP and MLF reduces the risk profile of the development in the capital markets, as the MLF will create a form of guaranteed revenues, thereby potentially reducing interest rates applied to debt financing. It is anticipated to increase production for 80% to 110% AMI, fostering mixed-income developments.
Finance Model #4: Combine Master-Lease Financing (MLF) and Inclusionary Housing Ordinance (IHO)
When IHO is combined with the proactive tool of MLF, a bridge between land and capital is created. Master leasing can serve as a guaranteed revenue stream for the proposed IHO units in the residential development. The developer of a market-rate housing project can increase the number of IHO compliance units offered, thereby increasing the revenue stream under MLF. Some housing developments can buy affordability down to 40% AMI for some units, fostering a mixed-income community, at varied affordability levels, while also sustaining property tax yields to the City.
Structure: This incentivizes developers to voluntarily increase IHO minimums in exchange for a public-private partnership, providing rental income for developers and moderate-income housing units for residents. The City and developer negotiate the terms of increased IHO requirements, making it financially feasible due to guaranteed rent via MLF.
Financing: Utilizes City funding for initial program investments. The City’s subsidy investment is anticipated to be repaid to the City upon exit from the ownership structure at the end of the agreement term.
Project Eligibility: All market-rate developments subject to IHO.
Example Project: The developer proposes an initial project with minimum IHO requirements (5% unit set-aside for 50% AMI). The City negotiates an additional 10% unit set-aside for up to 110% AMI, delivered through MLF agreement.
HONORABLE MAYOR AND CITY COUNCIL
August 10, 2026
Subject: Alternative Financing Recommendations to Spur Affordable Housing Production
Outcomes: In addition to achieving both unit production and affordability of units, the property will remain on the tax roll, generating income for the City. It is anticipated to increase production for 80% to 110% AMI and foster mixed-income development.
EVALUATION AND FOLLOW-UP
The Department will identify and pursue opportunities to pilot and test the above alternative financial models that will support the City’s ability to more quickly, effectively, and cost-efficiently deliver on production and preservation goals and needs.
In implementing these pilot efforts, the Department will coordinate with the City Attorney’s Office and the Finance Department as appropriate to evaluate the financial, legal, and operational considerations associated with each financing model and to ensure compliance with applicable laws, funding requirements, and City policies.
The Housing Director will report back to the City Council on specific project recommendations that utilize such financial models to seek the City Council's approval, as funding thresholds require.
Staff will evaluate projects utilizing alternative financing models and report findings back to City Council via an Information Memorandum by March 2027, using these pilot projects to evaluate in greater detail how each finance model may impact the total number of units and depth of affordability achievable, as well as how these policies may benefit or impact the existing pipeline of affordable and market-rate housing projects in San José.
FISCAL IMPACTS
The alternative financing models described in this memorandum will be subject to existing caps and limitations on financing tools.
As the Department identifies opportunities to mix financing tools to create the alternative financing models proposed in this memorandum, the Department will utilize existing resources. Current caps and limitations include:
• The federal government sets an annual ceiling at the state level on the amount of tax-exempt PABs that can be issued. The 2026 ceiling among bond issuers for California is approximately $5.3 billion. The City must seek an allocation from the California Debt Limit Allocation Committee prior to issuing tax-exempt PABs. • Gap Financing and Master-Lease Financing are reliant on the availability of eligible funding. As of August 10, 2026, potentially eligible available funding in the 2026-2027 Adopted Operating Budget includes:
HONORABLE MAYOR AND CITY COUNCIL
August 10, 2026
Subject: Alternative Financing Recommendations to Spur Affordable Housing Production
o $10.3 million in the Future Affordable Housing Development – 60% AMI Reserve in the Real Property Transfer Tax Fund (Measure E); o $34.2 million in the Housing Project Reserve and $4.3 million in Unrestricted Ending Fund Balance in the Low and Moderate Income Housing Asset Fund;
o $3.2 million in the Housing Project Reserve and $2.0 million in Unrestricted Ending Fund Balance in the Inclusionary Fee Fund; o $5.4 million in Unrestricted Ending Fund Balance in the Community Development Block Grant Fund; and
o $2.0 million in Unrestricted Ending Fund Balance in the HOME Investment Partnership Program Fund, for a total maximum available pool of $61.4 million. These amounts are subject to change as part of the 2025-2026 Annual Report that will reconcile ending fund balances and reserves based on actual year-end results for 2025-2026. Use of Community Development Block Grant and HOME funds is also subject to approval by the U.S. Department of Housing and Urban Development.
• Production Incentive Programs are limited to criteria approved by the City Council. For example, only the first 3,600 units to obtain permits under the Multifamily Housing Incentive Program and the first 7,000 units to obtain permits under the Downtown Area Revitalization Program are eligible for the deepest incentives.
COORDINATION
This memorandum has been coordinated with the City Attorney's Office and the City Manager’s Budget Office.
PUBLIC OUTREACH
This memorandum will be posted on the City Council Agenda website for the September 1, 2026 City Council meeting.
BOARD, COMMISSION, COMMITTEE RECOMMENDATION AND INPUT
No board, commission, or committee recommendation or input is associated with this action.
CEQA
Not a Project, File No. PP17-008, General Procedure and Policy Making resulting in no changes to the physical environment.
HONORABLE MAYOR AND CITY COUNCIL
August 10, 2026
Subject: Alternative Financing Recommendations to Spur Affordable Housing Production
PUBLIC SUBSIDY REPORTING
This item 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.
/s/
Erik L. Soliván
Director, Housing Department
For questions, please contact Banu San, Deputy Director, Housing Department, at [email protected] or (408) 975-4489.