There is not enough affordable housing being built in the city of San Diego. Lenders and banks are not lending as much, apartment owners are not caring, and builders are not building as much, since it is not as remunerative to build for income-constrained households. This worsens the disconnect between the economics of the housing stock and the demographics of the families it is meant to serve, as shown by a recent Harvard University study on apartments. In San Diego, less than ten percent of the rental housing stock is affordable. With new federal tax policies, things could get worst.
A home is not just a luxury that anyone can live without. It is a social necessity. Yet cities and states don’t build housing, they plan for it and permit it, and then are dependent on private developers to build it at the rents or prices that yield them the highest returns. This is where inclusionary housing comes into play: by allowing the private sector to competitively perform at its’ optimal level within a uniform regulatory framework that achieves societal goals.
Inclusionary housing uses the planning and zoning process to create affordable housing and foster social inclusion within the marketplace. Since inclusionary zoning programs do not require direct subsidy dollars to create affordable homes and rentals, they are a market-based solution for affordable housing, according to Fannie Mae. Inclusionary zoning ordinances are most effective in strong markets with optimum development incentives, and they are able to produce affordable housing that would not otherwise be built, according to the Urban Land Institute. Over 170 thousand affordable apartments and homes have been created through inclusionary programs nationally, according to an estimate by the Lincoln Institute of Land Policy.
So what can the city of San Diego do to ensure that more homes down the pipeline are affordable?
It is time to revisit the City of San Diego’s inclusionary housing ordinance. Residential builders have been challenging these ordinances in many cities statewide, until most recently claiming that these were “unconstitutional takings,” despite the crisis of affordable housing, and their popularity in being adopted by 170 cities in California. The city of San Diego inclusionary housing law was amended in 2006, after a settlement between the city and builders. The California Supreme Court ruled in favor of the constitutionality of these ordinances in California Building Industry Association v. City of San Jose, and in 2016, the US Supreme Court declined to review the homebuilders’ appeal. The court decided that these inclusionary set-asides are more similar to land-use restrictions, like setbacks, rather than a fee or exaction.
The San Jose decision affirmed the legality of affordable housing set-asides required by cities in the sale of homes. However, an appellate court decision – Palmer/Sixth Street Properties L.P. v. City of Los Angeles – created uncertainty for local governments to apply them to rental housing, by ruling that the rent restrictions were preempted by the 1995 Costa-Hawkins Rental Housing Act. Fortunately, as part of the housing legislative package last year, Governor Brown signed Assembly Bill 1505 (Bloom) to fix the Palmer problem. State law now explicitly allows a city to adopt an ordinance that requires as a condition of the development of residential rental units, certain set-aside of affordable units, and also requires alternate means of compliance, such as in-lieu fees, land dedication, off-site construction, or acquisition and rehabilitation of existing units. The legislation was supported by housing advocates and labor unions across the state, including the State Building and Construction Trades Council; it was opposed the San Diego County Apartment Association.
Here are four elements of the City of San Diego’s current Inclusionary Housing ordinance that need improvement:
- Require inclusion: The baseline should be an onsite requirement to build, and alternatives should discourage not building onsite. The original intent of the 2003 ordinance required “At least ten percent (10%) of the total dwelling units in the proposed development shall be affordable to targeted rental households or targeted ownership households…” and then stated that the requirement to provide affordable units could be met in alternative ways such as payment of an in lieu fee.In fact, the City of San Diego already had an onsite inclusionary requirement of 20% (set-aside land or units) with no in lieu of fees for the North City Future Urbanizing Areas. That requirement is still the law today. (SDMC Section 143.0450(d)). The 2011 amendment reversed the intent by requiring the fee with an option to build the units. Other cities are going for onsite requirement. The city of San Jose, which already requires 15% of for-sale housing to be set-aside, wants to extend this requirement to rental, rather than charging a fee as it does currently. Measure JJJ of Los Angeles adopted by voter initiative in 2016, imposed a 15% inclusionary requirement for density increases, and 20% inclusionary for zoning use changes.
- Require higher inclusion: State law allows cities to set any inclusionary requirement. However, a requirement above 15%, allows the state to intervene if the city’s housing production goals are not being met. It is therefore likely that 15% will be the norm for newly adopted ordinances.
- Plug the loopholes: Fees in lieu of building the units should reflect the costs to build the units. The method of calculation of the fee is laid out in the Implementation and Monitoring Procedures from the SD Housing Commission. It is based on the median prices for home sales and average size of homes being sold, rather than the actual cost of construction of a comparable new unit. Home sales are just a small snapshot of the housing market and fluctuate from macroeconomic factors many of which are irrelevant to the construction of apartments. This is the reason why inclusionary fees fell almost 25% (from $9.36/sf in FY2017 to $7.03/sf in FY2018 year, despite increasing costs and rents. Under Measure JJJJ of Los Angeles, the alternate methods of satisfying the requirements are:
- building offsite (between 1-1.5 times the number of units depending on distance);
- acquiring at-risk affordable units and converting them to non-profit, Community Land Trust, and/or tenant ownership; or
- an in lieu fee equivalent to 1.1 times the required amount of on-site affordable units, multiplied by an affordability gap that is to be determined by a study which will be produced by the City of Los Angeles and adjusted on a biennial basis. Inclusionary fees that actually reflect the gap between market-rate and affordable-rate provision not only remove the economic incentive for developers to avoid building the units, but also augment the Affordable Housing Fund that can pool together resources and build more projects.
- Create good quality jobs. Projects subsidized by inclusionary funds should have job quality standards for local residents, so that we are not accelerating the demand-supply cycle for subsidized units by paying people less. The city of San Diego does not currently require the payment of prevailing wages on affordable housing funded construction even though the use of city funds for most other projects, including infrastructure, requires the payment of prevailing wages. Prevailing wage requirements also include the use of apprentices for a fifth of all hours worked. The City of Los Angeles requires prevailing wages, and skilled and trained workforce for affordable housing. Alameda County just adopted 30% local hire requirements for all large Measure A1 projects and is targeted at disadvantaged workers in areas of high unemployment.
There is a moral imperative to act, in the face of our unprecedented homelessness crisis, and it’s direct conflict with new development. But the crisis on the streets is only the tip of the iceberg of the deeper struggle that thousands of individuals and families face in the continuum of hardship. This continuum extends from those struggling to make rent payments, to being evicted, to doubling up on families and friends’ couches, to living in cars, to being homeless. At some point in the future, we need to have a serious discussion of a statewide inclusionary housing policy with matching state funds, that create a standard baseline and make it feasible for market-rate developers to start building housing that is affordable for all Californians.
 I estimate about 25,000 units in the City of San Diego are “affordable,” with a variation in enforceability, from public housing, to private covenants, to voluntary agreements, to evolving laws that govern them (like Single Room Occupancy hotels). San Diego Housing Commission’s Housing Resource guide lists 164 apartment projects with a total of 15,869 units. However, if one views “affordability” as paying up to a third of household income on housing costs, independent of the underlying regulatory enforcement, then 44 percent of the rental stock would fall into this category. Based on the 2015 Census, 148 thousand renter households, out of a total of 265 thousand renter households in the city of San Diego, are paying more than a third of their income on rent. Of these, 72 thousand are paying more than half their income on rent, and are considered severely cost burdened.