Monday, April 17, 2006 | Three years since taking effect, the city of San Diego’s inclusionary housing ordinance has not yet met its goal of setting aside one affordable unit for every 10 homes or condos built.

About 7.1 percent of the affected homes or condos are affordable for a household earning the median income for the area, short of the 10-percent benchmark the city’s ordinance intends, according to a analysis based on data from the San Diego Housing Commission and the city’s Development Services Department.

In 2002, the council passed a law mandating that 10 percent of the units in all new housing and condo developments be affordable for households earning at minimum the median income for the area. The law, which went into effect in 2003, also gave developers the option of paying an “in-lieu fee” into a trust fund rather than build the housing.

Less than 4 percent of the projects affected by the law include affordable units onsite, meaning developers are deciding by an overwhelming margin to pay the in-lieu fee instead. Those fees are stockpiled in the trust fund, which pays for the construction of affordable housing, although the trust has also failed to equalize the out clause.

Officials, developers and affordable housing advocates are taking a close look at the law as a significant deadline requiring builders to pay higher in-lieu fees nears and the council considers changing its interpretation of the law at the estimate expense to the fund of tens of millions of dollars.

“We’re further ahead than we were before [the law],” Councilwoman Toni Atkins said. “If you’re wondering if it is meeting our intended goal, I’m not sure that it is.”

The goal of the city’s inclusionary housing law was to create “balanced communities,” where affordable units were available within every part of the town, not just the traditionally low-income areas of San Diego. Dotting the entire cityscape with affordable units will allow modest wage earners to live closer to their places of employment and break up the distribution of classes to certain pockets of San Diego, advocates of the inclusionary requirement say.

In the current San Diego market, only the top 8 percent of the region’s households can afford to buy an average priced single-family home, a Realtors group estimates.

Of the 9,179 units being built on market-rate residential projects, 126 affordable units were built within those projects and 523 units were paid for by the affordable housing trust fund, the analysis showed.

The inclusionary housing law was thrown into the limelight last week when the council decided to settle a lawsuit with the Building Industry Association of San Diego County. By a 5-to-3 vote, the council clarified the ordinance after the BIA sued over city staff’s interpretation, arguing that the city was incorrectly assessing the in-lieu fee further along in the development at a greater cost to builders.

Agreeing to the settlement could cause the trust fund to potentially lose out on between $9 million and $43 million. The council will hear this issue twice more before the change becomes codified and some hope council members reconsider the decision.

Officials and developers are also anxious to see how a change in the price of in-lieu fees affects the affordable housing trust fund, the construction of onsite affordable units and the entire housing market.

In-lieu fees have risen gradually over the first three years of the law, costing builders who file for a building permit this year $2.50 a square foot. However, in July the surcharge’s cost will be calculated by a complex formula that will boost the fees to $7.31 per square foot, nearly triple the expense for builders.

City leaders, developers and affordable housing advocates are all skeptical of the law given its performance, and their differing planning ideologies keep them split on whether the law will ever pay off.

Developers say the law is burdensome and ineffective. They say affordable housing is best achieved through increasing the supply of housing, but argue that public subsides through state and federal grants, housing bonds and the taxes captured through redevelopment are superior to the inclusionary housing law.

“Will [the law] collect money over the years? Yes. Is it effective in building sums of affordable housing? No,” said Sherm Harmer, president of Urban Housing Partners, Inc. and the chairman of the Downtown Residential Marketers and Builders Alliance.

Affordable housing advocates and developers are both critical of in-lieu fees, but stand divided on what exactly is wrong with it. Activists claim the fee should be repealed because it does not generate enough money to build affordable units. They want the city to force builders to include the housing onsite.

“It still isn’t high enough to push the result we’d like to see, which is to build all the units onsite,” said Richard Lawrence, co-chair of the Affordable Housing Coalition.

Lawrence said the city should eliminate the in-lieu fee. He points to the North City Future Urbanizing Area, where the standards are stricter. In the North City area, there is no in-lieu fee and builders are required to set aside 20 percent of the units for affordable housing.

“That shows it can be done,” he said.

Builders agree with Lawrence in one aspect, that the fees don’t play a significant part in getting affordable housing built. But they say the whole ordinance, and not just the in-lieu fees, should be repealed. The fees and the inability to capitalize on the affordable units that are set aside present an “unnecessary tax” that is passed on to homebuyers within that project, builders say.

Matt Adams, the BIA’s lobbyist, said the higher fees will present an unintended consequence. By raising the fees, fewer developers will want to build residential projects in the city of San Diego, straining the housing supply, he said. A lower housing stock means higher prices and less affordability, Adams said.

“You can look at inclusionary zoning as an abject failure of its stated intent,” Adams said. “It fails to achieve the objective that everyone thinks it should.”

Harmer, the developer, said the biggest setback for affordable housing in the city has been the city’s inability to bond, which has barred it from borrowing funds from Wall Street to loan to affordable housing developers. The city has been shut out of the public bond market since its credit rating was suspended two years ago, on account of errors and omissions found on its financial statements.

Observers on all sides of the argument agree that there is at least one component of the law has blunted the ordinance’s effect. The in-lieu fees collected in a specific planning area, such as the Peninsula Planning Area, can only be meshed with in-lieu fees that are also assessed within that area.

The result is that there are several dozen small pots of money that can be used all over town, but the multiple divisions within the trust have made it difficult to accumulate enough money in one area to build a substantial affordable housing project.

Please contact Evan McLaughlin directly at

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