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"A compromise is an ugly baby," said Rick Gentry, president of the San Diego Housing Commission, which runs subsidized housing programs for the city. "It's always got something that'll displease someone."
For more than two decades the city of San Diego’s been charging people who build new commercial buildings — offices, warehouses, hotels, malls, etc. — a fee that it uses to build subsidizes housing units.
It’s officially called a “linkage fee” — because it’s based on the “link” between the demand for subsidized housing created by low-wage jobs that typically take place in those buildings — but we’ve decided to call it the affordable housing fee to give a better sense of what it actually does.
The City Council will vote Monday on whether to raise the affordable housing fee. Between Council members who’ve previously supported an increase, and new Council members who said they support an increase while campaigning, the proposal seems to have enough votes to pass on a party-line split, with the five Democrats in support.
Here’s everything you need to know about the affordable housing fee dispute ahead of its Monday vote.
Yes, It’s a 500 Percent Increase. Sorta.
Opponents of the increase — Councilman and mayoral candidate Kevin Faulconer, the Chamber of Commerce, the San Diego County Taxpayers Association and members of the local building industry — have repeatedly said the Council’s vote would increase the fee by 500 percent or more.
That’s true. Moving the fee from where it’s set today to where it would be set if the Council votes yes represents an increase of around 500 percent.
To be exact, it would be a 401 percent increase for office space, a 639 percent increase for hotels, a 675 percent increase for retail space, a 417 percent increase for research and development space, a 376 percent increase for manufacturing space and a 744 percent increase for warehouses.
But that’s only part of the story.
The fee, when it was implemented in 1990, was set at 1.5 percent of construction costs for each type of space. It was supposed to be regularly updated based on changes in construction costs by a vote of the City Council.
That only happened one time. In 1996, the City Council voted to cut the fee in half — from 1.5 percent of 1990 construction costs, to 0.75 percent of 1990 construction costs — to try to encourage more commercial building.
Since then, the affordable housing fee hasn’t been adjusted. The current fee charged to developers is 0.75 percent of 1990 construction costs.
Two years ago, the City Council was asked to double the fee, bringing it back to its original 1.5 percent of 1990 construction costs. The Council voted that down on deadlocked 4-4 vote.
This time around, the San Diego Housing Commission — which handles subsidized housing programs for the city — is suggesting the Council return the fee to 1.5 percent of current construction costs, just like it was set at back in 1990.
Construction costs have increased since the fee was implemented. That’s why making the change to base the fee on today’s construction costs — even though that’s the same structure as when it was first implemented — results in such a large increase.
Legally Justifying the Fee
Cities charge developers all kinds of fees on new projects. They’re called exactions.
But to be legally justifiable, the city needs to show the fee charged is meant to offset a project’s effect on the surrounding area. That’s called a nexus.
So a city can charge a housing project a fee to help offset the effect new residents are going to have on streets, sidewalks or streetlights in the immediate vicinity, for instance.
When the city implemented the affordable housing fee, it needed to demonstrate that new commercial buildings create jobs that pay wages below what it costs to live in San Diego; since those buildings create jobs that strain housing affordability in the city, the people who build those buildings need to help pay to provide subsidized housing units.
It needed to demonstrate that nexus all over again now that it’s trying to raise the fee.
Importantly, though, the nexus isn’t based on actual jobs that will take place in the actual buildings being built by actual builders.
Instead, it uses hypothetical buildings and assumes they’ll have a typical mix of jobs associated with that type of building. We explained the rationale here.
But opponents of the plan haven’t just said raising the fee is a bad idea. They’ve also said they think new case law, and new state law, have made the fee illegal.
The limits of a legal nexus have traditionally been defined by two Supreme Court cases that gave a nexus test its name: the Nollan-Dolan Test.
But this year, the Supreme Court decided a new case, Koontz vs. St. Johns River Water Management District, that told courts to impose a stricter standard. Now, cities can’t just show a basic logical framework justifying the fee. They need to painstakingly demonstrate the relationship between a project’s effects and the fee the city’s charging.
Opponents, calling themselves the Jobs Coalition and led by lobbyist Craig Benedetto, said the Koontz case makes the affordable housing fee legally questionable — and not just in San Diego, but anywhere.
Opponents have promised a legal challenge to the affordable housing fee if the Council approved the increase.
“We’re not trying to threaten anything,” Benedetto said. “If they’re challenged legally, and you lose that challenge, not only does San Diego’s [linkage fee] go down, they all go down.”
Opponents also point to Proposition 26, a 2010 voter initiative that said any fee, tax or levy imposed, increased or extended by a local government needed to be approved by a vote of the electorate.
But City Attorney Jan Goldsmith issued a legal memo this week responding to those legal questions, and said there wasn’t much to them.
He flatly said the fee increase doesn’t violate Prop. 26. That law has a clear list of exceptions to the requirement of a citywide vote, one of which is “a charge imposed as a condition of property development.”
He was less conclusive on the Koontz-based challenge, however.
He did say it was “not likely” that the fee faced greater scrutiny based on the new case, but also said Koontz didn’t specifically say there needs to be increased scrutiny on legislatively enacted fees, so “parties may raise the issue in future litigation.”
That clears the way for the City Council legally to approve the fee increase, but it also means the Jobs Coalition, if it goes through with its promise to challenge the increase in court, will do just as Goldsmith says, and force courts to further interpret the Supreme Court’s most recent ruling.
IBA Has Its Say
The City Council can now also make its decision with the help of the city’s independent budget analyst.
For one, the report says the city was wrong not to follow its own policy when it failed to adjust the fee on an ongoing basis after it was first put in place, and made the problem even worse when it cut the fee in half six years later.
It also says the currently proposed increases are “excessive.” And it says they aren’t any less excessive because the fee should have been around this level if the city had appropriately adjusted the fee over the years.
But it also says housing affordability in San Diego is a major problem, and addressing it will require a patchwork of solutions.
“As noted above, the linkage fees are an important source of funding for addressing, in part, the city’s affordable housing needs,” the report reads.
To that end, the IBA offers the Council four items for consideration.
1. Enact a scaled-back increase, similar to the one voted down in 2011.
The IBA supported the 2011 proposal and it says here that’s still a good move. It also wants the Council to implement the fee on July 1, rather than immediately, to give the market time to adjust.
2. Exempt industrial and manufacturing facilities to help spur growth in that sector.
Currently, the fee exempts development taking place in so-called Enterprise Zone – designated areas the city tries to increase growth by letting businesses claim tax exemptions – or for projects intended for government uses – schools, city halls, etc.
In a way, it’d seem the suggestion that carving out exceptions for certain industries encourages growth of those industries cuts against the claim by fee advocates, supported by the commission’s nexus study, that a fee kept below 1.5 percent of construction costs wouldn’t meaningfully affect development.
But the IBA says manufacturing and industrial markets are different than professional services like office and retail.
For one, manufacturing companies don’t need to locate here in the first place, and the city already struggles to attract them.
“While commercial development has the ability to pass costs along to consumers of their goods and services, industrial users typically do not because project location decisions are largely based on the costs of doing, which often cannot be directly passed on to consumers,” the report reads.
3. Let Developers Pay When a Project is Finished
The report urges the Council to consider letting developers pay the fee at the point that the project is completed and occupied, rather than when they receiver their initial building permits.
Letting developers begin to collect revenue before they pay the fee would take the sting out of the increase.
4. Ask for More Information from the Housing Commission
The Housing Commission has said the fee increase could result in 80 to 100 new subsidized units per year.
The IBA says the Council should push for more information. Specifically, the Council should ask if more projects will be completed, if more cost subsidies will be offered to qualifying households, what differences in delivering affordable housing exist based on different alternatives and to what extent subsidies for projects given to the Housing Commission are reinvested into new projects.
More Affordable Housing Fee Talk
Here are two clips of me and Voice of San Diego CEO Scott Lewis, along with Felipe Monroig, president of the San Diego County Taxpayers Association, and Susan Riggs, executive director of the San Diego Housing Federation, talking about the fee on a recent episode of “Politically Speaking.”
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