Tuesday, April 04, 2006 | The San Diego City Council voted Monday to give developers a break in the fees they pay toward the construction of affordable housing, ending a lawsuit filed by the local building industry claiming the city’s interpretation of its affordable housing fee was unfair.
The settlement, which passed by a 5-to-3 margin, could potentially cost the city’s affordable housing trust fund tens of millions of dollars, a Housing Commission official said. And the agreement, negotiated by Mayor Jerry Sanders, came despite the fact that the City Attorney’s Office believed it had a strong defense in court against the building industry.
Known as the inclusionary housing “in-lieu” fee, the surcharge is paid by developers when they do not set aside 10 percent of a project’s residential units for affordable housing on their site or within the same planning area of the city. The receipts are stockpiled in a citywide trust fund that pays to construct affordable housing.
The fee has been phased in at a relatively marginal cost since the law was implemented in 2003, but will nearly triple in July.
The conflict between builders and the city stems from the time during the building process that the fee is assessed. The Building Industry Association of San Diego County disputed the city’s practice of levying the in-lieu fee after a building permit was granted rather than when a sketch of the development, known as the tentative map, was complete.
The arrangement allows developers to submit tentative maps before July 1 and avoid the significant increase in the affordable housing fee that they would have otherwise paid under the city’s former interpretation of the law.
The agreement was struck between the Mayor’s Office and the BIA and requires the city adopt the building industry’s interpretation of the law. However, if the building permit is not approved within three years, the in-lieu fee assessed at the going rate.
Currently, builders are charged an in-lieu fee that equals $2.50 per square foot of space they build. In July, the cost-per-square-foot will be calculated using a formula that is estimated to equal $7 to $10.
For example, a pending 15,000-square-foot condominium project that has a tentative map approved before July would cost a developer $105,000 to $150,000 in fees under the city’s former interpretation. After the council’s vote Monday, developers of that project would pay $37,500.
San Diego Housing Commission policy advisor Todd Phillips said projects that are already in the city’s regulatory pipeline will net between $9 million and $43 million less for the affordable housing trust fund under the settlement.
The trust fund is currently $122 million short of the money needed to stay on par with the construction of market-rate housing citywide, Phillips said. Developers of 176 of the first 200 projects subject to the inclusionary housing law paid the in-lieu fee.
The council’s Independent Budget Analyst criticized the settlement.
“Adjusting the timing of the fee calculation will not only hurt the Inclusionary Housing Trust, but it will continue as a disincentive to opt to build new affordable units,” IBA Andrea Tevlin wrote in a memo Sunday.
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.
Assistant City Attorney Karen Heumann said the city was prepared to litigate the issue and claimed the city had a strong case. City Attorney Mike Aguirre said his office was not invited to participate in the compromise with the BIA, adding that his omission from settlement talks was “unusual.”
Council President Scott Peters and Councilmen Kevin Faulconer Jim Madaffer, Brian Maienschein and Tony Young voted for the settlement. Councilwomen Toni Atkins and Donna Frye and Councilman Ben Hueso voted against it
Madaffer said the council’s decision Monday will clarify the process for the city staff and allow the municipal government to avoid the uncertainty of litigation.
“There will be clarity, there will be understanding,” Madaffer said. “Are we willing to roll the dice today in the courtroom or move on with a compromise that most people in the discussions agree to?”
Frye said the city already compromised with builders by allowing them to pay an in-lieu fee instead of requiring them to include the affordable housing onsite. Further concession would not amount to a compromise but rather a “direct assault on affordable housing,” Frye said.
“It’s not time to give away more money to developers in the city of San Diego,” she said. “Given the fact the city of San Diego serious financial issues, it would seem that we would not just want to hand over to the Building Industry Association (millions of dollars) potentially.”
BIA attorney Jerry Livingston said the change will provide more certainty for builders when they budget their projects, but will not necessarily mean developers pay less because the rate of in-lieu fees will be tied to the housing market beginning in July.
“It’s not going to be going up every year. We all know how the real estate market works,” Livingston said.
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