Fight begins over city's plan to expand affordable housing Friday, September 7, 2007 By Sharon Simonson The largest city in Silicon Valley could force home and apartment builders to sell or rent a portion of the units in every new development at below-market-rates under a newly proposed policy. Led by San Jose Councilman Sam Liccardo, council members Madison Nguyen, Nora Campos and Judy Chirco have circulated a memorandum asking their fellow council people to join them in directing city staff to study a new "inclusionary housing" proposal and report back. In particular, they are interested in exploring three approaches, all of which would expand the city's current affordable housing requirements, which today affect one-third of the San Jose land mass. Under at least one prospective scenario, developers building new, for-sale homes or apartments anywhere in San Jose would be required to sell at least 20 percent of the for-sale housing units or to rent no less than 20 percent of apartments at less-than market rates. Debate on the effects of such policies is fierce. Some argue that they in fact cut housing production and thereby raise home prices overall -- exactly the opposite of the desired outcome. The passions the discussion invariably elicits were in full evidence Sept. 5, when a meeting of an obscure committee of the San Jose City Council drew a standing-room-only crowd at City Hall after it agreed to take up the matter. The merits or demerits of expanding the so-called "inclusionary" housing requirements were not even on the agenda. Rather, before the council's so-called Rules Committee, which determines if and when issues go before the full city council, was simply the question of what process San Jose might undertake were it to decide to even tackle the issue and how much staff time and money would be involved. That distinction did not stop speaker after speaker from spewing predictable rhetoric. Champions for lower-income people implored committee members to speed discussion toward a desirable end, while proponents for business and homebuilders counseled caution and more lengthy debate. Liccardo fell on the side of speed. "Time is of the essence," he said, not only because people are struggling now but also because state and federal money, funds that could be used to leverage local investment, could fall away. In particular, he said, the city could lose money to enhance local mass transit if it doesn't promote high-density and affordable housing near proposed and existing transit stations. Others, including San Jose Vice Mayor David Cortese, wanted the discussion to be folded into the current update of the city's master land-use plan. The housing issue is an integral part of that consideration, Cortese argued. But the route would likely delay adoption of any new affordable-housing requirements for at least two years. Councilmember Pete Constant made perhaps the most telling observation of the day. He reminded his fellows that when the city of San Jose sought to speed high-density, high-rise housing development in downtown several years ago, it eliminated the inclusionary housing requirement for a period of time. "This (proposal) is the opposite," he noted. During that moratorium period, three high-rise residential towers with nearly 800 homes total were approved in downtown San Jose. That's about a fourth of the housing production permitted countywide in a slow year and about a fifth in a more robust one. Housing developers and commercial real estate brokers say uniformly that inclusionary policies depress land values and that the market-rate units in a given development have higher prices to make up for the lost income on the below-market rate homes. That essentially transfers the burden of a society-wide problem to land owners and buyers who purchase homes or lease apartments at full market rates. When for-sale housing demand is weak and home prices are falling -- conditions present today -- some housing, particularly projects with affordable requirements attached, simply doesn't get built. "Philosophically, we support cities that promote affordable housing, but from a purely financial point of view, the affordable homes in any project are a cost-burden, and as a developer you work that into the project as a cost like any other cost," says Drew Hudacek, a vice president with Regis Homes of Northern California Inc. Another problem with for-sale, below-market-rate housing is that it is typically deed-restricted, meaning that owners of an affordable unit can sell only to another income-challenged family at less than market rates. That deprives them of the full benefits of housing appreciation, a chief source of wealth creation in the United States. In addition, not enough affordable housing is built to meet demand, meaning that the policies create a lottery system of sorts. Steve Delva, a division president in Northern California for Standard Pacific Homes, says a better solution to the region's housing crisis might be a small tax imposed when properties sell. The money collected could be set aside to help with down payments or other costs. "If we truly think we need more affordable housing -- and I think we do -- that's a way for the larger community to help pay for it, not just making it the responsibility of the land owner or the new home builder," he says.   SHARON SIMONSON covers real estate for the Business Journal. Reach her at (408) 299-1853.