The Morning Report
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Monday, April 03, 2006 | The San Diego City Council will decide Monday whether to agree to a settlement with the local building industry that will lessen the fees levied on developers who don’t include affordable housing within their residential projects.
Known as the inclusionary housing “in-lieu fee,” the surcharge has gradually increased since it was implemented three years ago and is slated to triple in July. Builders argue that they should be charged the fee in the early moments of the project – a proposition that would save them cash because of the looming deadline – rather than when the building permit is ultimately issued.
Builders say rolling back the fee will save them money and some of the heartburn that comes with planning a real estate development, but critics note that the switch will hurt housing affordability within the city.
The fee is paid by developers when they do not set aside 10 percent of a project’s residential units for affordable housing. The receipts are stored in a citywide trust fund that pays to construct affordable housing.
The language of the city law governing inclusionary housing reads that the fee is to be paid by builders “at the time the application is deemed complete.” The city’s interpretation varies with the local building industry’s read of the law – namely, which application the ordinance is referring to.
The local building industry claims the city misinterpreted its own inclusionary housing law, which was passed in 2002, and has wrongfully been levying the in-lieu fee when a developer’s building permit is completed. Builders argue that the city law says the fee should be assessed at the time a developer submits the proposed sketch of the development, known as a tentative map, which can be years before a project’s approval and thusly less expensive and easier to budget.
The builders’ read of the law would significantly reduce the amount that is paid into the affordable housing trust if the developer’s tentative map is approved by July, when the in-lieu fee is estimated to triple in cost.
For example, a pending 15,000-square-foot condominium project that has a tentative map approved before July and a building permit approved afterward could hypothetically cost a developer $105,000 to $150,000 in fees under the city’s interpretation. The developers would pay $37,500 under Monday’s proposal, if the council approves it.
“If you’re trying to budget for your project and make it all work, you’re going to want the certainty of what your costs will be,” said Matthew Adams, a lobbyist for the Building Industry Association of San Diego, the local trade group for real estate developers that sued the city over its in-lieu fee collection practices.
The council will be asked Monday to ratify an out-of-court compromise on the BIA’s 2003 lawsuit, just three months before the gigantic spike in the surcharge’s cost.
Under the tentative agreement, the city would agree to adopt the BIA’s interpretation of the law and charge developers when a tentative map is filed. However, if the developer doesn’t begin construction within three years, the fee would be reassessed.
The city law phased in a fixed and relatively cheap in-lieu fee for the first three years of the inclusionary housing program. The fee has gradually risen from $1 per square foot in fiscal year 2004 for projects that are larger than 10 units to $2.50 per square foot this year.
In July, the fee will be based on a formula that is estimated to land somewhere between $7 and $10 per square foot. A higher in-lieu fee means developers will have less incentive to pay the fee and be more likely to build affordable housing as part of their projects. To date, developers have overwhelmingly chosen to pay the fee rather than build affordable units onsite.
Developers of 176 of the first 200 projects subject to the law paid the in-lieu fee, according to the San Diego Housing Commission.
Affordable housing advocates say the pending compromise is unnecessary and should be turned down.
Tom Scott, executive director of the San Diego Housing Federation, said allowing developers to pay a lower fee will weaken the incentive to build the affordable housing onsite. Additionally, Scott said in a letter Thursday to the council, the compromise will decrease the amount that is collected for the affordable housing trust fund.
“The question then is why even consider this change if it reduces the number of affordable units?” Scott wrote.
An “affordable” unit has a for-sale price that is affordable for a household earning the area’s median income. For apartments, the rent must be affordable for a household earning 65 percent of the area’s median income.
Council President Scott Peters said at his weekly press briefing Thursday that he thought the compromise would stick, but added, “I anticipate a much bigger discussion on whether to have an in-lieu fee (altogether).”
The council hearing will be held Monday at 2 p.m. at council chambers on the 12th floor of the City Administration Building at 202 C Street.
Please contact Evan McLaughlin directly at