Proposition J - Workforce Housing

What it does

The measure would do four things:

1. Establish a "Workforce Housing Program," providing incentives (additional height and density, and timelines for public review to qualifying projects in two neighborhoods: the Central Waterfront and Downtown) to produce housing at a level affordable to qualifying people. To protect the character of existing residential neighborhoods, the incentives would not apply to any land in the residential housing (RH) zones.
2. Remove floor area ratio (FAR) limits on all residential projects in the Downtown (C-3 office zoning districts), and change Transfer of Development Rights rules on some downtown parcels.
3. Advance $2 million from the General Fund to pay for environmental review of the new downtown zoning rules, the Central Waterfront plan, and other neighborhood planning areas, and require that this $2 million be reimbursed to the General Fund from fees charged to developers who build in these areas.
4. Encourage the Planning Department to redo its Central Waterfront plan in such a way that the plan meets criteria spelled out in the measure, notably that the new plan provide for at least 4,000 new housing units and associated open space and recreational facilities for the new residential population.

Why it is on the ballot

The San Francisco Chamber of Commerce developed this measure. SPUR was consulted as the Chamber developed the ordinance, and it in fact includes many ideas that SPUR has proposed over the last decade.

Pros

Those who support this measure state:

• There is a very serious shortage of housing at all income levels and all price points in San Francisco. We know what the status quo is going to get us: a city in which immigrants, young people, and families with children are not welcome. This measure is an attempt to make some changes.
• There is, today, essentially no program to create middle-income housing in San Francisco. This measure is a pragmatic, modest first step to recognize this housing need.
• It is not appropriate to spend tax dollars to subsidize middle income housing when people with much fewer resources are still in need; therefore, the voluntary nature of this measure is a creative solution to try to encourage middle income housing--which the market is not producing on its own.
• While the prices of the units will still be high, a two-bedroom unit would be brought down dramatically, allowing thousands of middle income families to be able to purchase housing in the city, who would otherwise be unable to do so and be forced to move to the suburbs.
• The draft Central Waterfront Plan is a failure. It contemplated only 1,500 units in an area that could contain many more. The voters need to send a message to the Planning Department that land use and transportation decisions must be better coordinated--and that the land along the new Third Street light rail line is a great location for new housing.
• New residential development Downtown is necessary to create a 24-hour neighborhood and supplies housing within walking distance of the City's greatest concentration of jobs. It will at last add residents to downtown and contribute to making this a real neighborhood not just a daytime commuter workplace.
• The Better Neighborhoods planning process and Eastern Neighborhoods planning process are both stalled because of the failure of the City to fund environmental review. This measure will break the logjam and get those plans, which have been developed with great amounts of public input, underway.

Cons

Those who oppose this measure state:

• Many members of San Francisco's workforce earns substantially less than the level incentivized by the program; this program "gives away" too much for too few residential units.
• In prioritizing only ownership units, the proposition distorts market functions in determining what kind of units should get built. The decision about whether to build ownership or rental units should be left up to developers' reading of market demand.
• The measure fails to consider incentives for other public benefits such as public open space, street furnishings, community function spaces, etc., and public costs such as the need for new infrastructure or schools to serve new housing developments. While curtailing public discussion of what benefits incentives should be offered for, it is also removing substantial public input from the review process of these projects.
• Prop. J is "ballot-box planning." If other neighborhoods realize that they can be rezoned (up or down) in a city-wide vote, rational procedures for planning will be thrown out the window as everyone scrambles to rezone their neighborhood at the ballot.
• It overrules the input of neighborhood residents by putting their neighborhood plan up for vote by the whole city, giving them no special channel for input, and removes many of their existing controls on the planning process through area-wide EIRs and restrictions of conditional uses and public hearings.

SPUR's analysis

The measure grows out of attempts to solve the long-term, seemingly intractable escalation of housing costs, as well as a more specific frustration with the lack of housing for people who earn too much for affordable housing, but not enough to buy a home in the current market.

There are many social, economic and institutional constraints to housing development at every price point in every neighborhood. The cost to purchase a house in the city is such that a mere 10% of families can purchase, compared with a national average approaching 50%. In general terms, we need to produce 3,000 new housing units each year just to keep housing prices stable--and more if we want to actually reduce prices. In contrast, we have succeeded at building an average of only 1,000 units a year for the last 20 years.

This may be contrasted with Chicago, which produces 15,000 units per year and Vancouver, which creates 10,000 units per year, both cities with vibrant growing economies. In each of these cities, as in every city across North America, it is many times more possible for middle income families to buy housing than in San Francisco, where it would seem our public policy is to drive out middle-class families.

The workforce housing measure addresses a largely unmet housing need.
 

Table 1: Housing Production by Income Category, 1988-1998

Workforce Housing Program

The idea of the "workforce housing" provisions of this measure is to create a voluntary program, in which developers get bonuses in exchange for setting aside a certain number of for-sale units for middle-income residents. The goal is to create housing that is below market rate, without spending any tax dollars to subsidize the units. The main elements of this program are the type of projects that qualify, the location of projects, and the incentives given to promote qualifying projects.

Qualifying Projects

Percent of Units

For projects to gain the benefits of the program, Prop. J requires that the new workforce housing units be included in addition to the city's current inclusionary housing requirement for low-income housing. It does this through a formula: the low income units plus the workforce units added together must equal 39% of the total units, leaving 61% for market rate units. Under existing Inclusionary Housing laws, the number of low income units required in a project varies, between 10% and 17% depending on a variety of factors. Therefore, if a workforce housing project contained 12% inclusionary housing units, it would also be required to include 27% workforce affordable units. The idea is that, if more low-income units are required, then fewer workforce units will be required, so that projects remain feasible. Prop. J contains one exception to this formula, a provision that allows for fewer workforce units if mortgage interest rates climb above 8%. This should maintain the incentive structure for workforce projects in the event that fewer San Franciscans are able to afford such units. To promote economic diversity within the Workforce Housing Neighborhood, the low-income units must be built on the site of the workforce housing project.

Income Level and Sales Price

To qualify for the program, a household's income must be less than 120% of Area Median Income (AMI). For one person (assume a one-bedroom unit), that is $76,860; for three people (assume a two-bedroom unit), that is $98,820. (See Table 2).

However, for purposes of calculating the allowable sales price, Prop. J assumes an income of 110% of AMI, along with a 5% down payment, 40% of income spent on mortgage payments, and market-rate financing. The only variable is what interest rate you assume. (Table 2 models three different interest rate assumptions.)

The bottom line is this:

• For a one-bedroom home, where the market price is about $450,000, the sales price of a "workforce unit" will be between $256,000 and $324,000, depending on the interest rate assumption.
• For a two-bedroom home, where the market price is approximately $544,000, the sales price of a "workforce unit" will be between $342,000 and $433,000, depending on the interest rate assumption.
   

Table 2: Workforce Housing-Purchase Price and Monthly Mortgage Payments Using HUD Income Limit Calculations for San Francisco PMSA 2003

Table 2 calculates the price a purchaser would pay for a 1-, 2-, and 3-bedroom dwelling at three different assumed mortgage rates. For example, the AMI for a single person is $64,050. Individuals earning $76,860 or less would be eligible for a workforce housing unit (Column A). That person could afford $28,182 in annual mortgage payments (C). Assuming an annual condo fee of $4,200 (D), property taxes of $3,540 (E), this leaves $20,442 available for mortgage payments (F). If mortgage rates are 5.25%, the maximum price for a workforce housing unit would be set at $324,734 (I). At 6.25% interest, that price drops to $291,236 (L) and at 7.5%, $256,458 (O). This compares with the actual average market rate price of $450,848 for all 1-bedroom units sold in San Francisco in 2003 (P). The same information is given for 2-, 3-, and 4-bedroom units.

Owner-Occupied

Prop. J requires that all units in workforce projects be owner-occupied; no rental units are incentivized by the program. Workforce projects can, however, include rental units within the project, but the rental units do not count towards the required percentage of Workforce housing units. Prop. J also prohibits projects that demolish rent-controlled units from receiving Workforce incentives. It does not affect other existing or proposed programs that construct affordable rental units.

Permanent Price Controls

Prop. J requires that workforce unit owners resell their units to persons in households whose income is less than 120% of AMI. Deed restrictions will enforce this requirement. Because the sales price is permanently restricted, these units will provide their owners with a form of "limited equity." The price controls apply for the life of the building.

Green Building

In addition to other criteria, qualifying buildings will have to meet "beyond standard" "environmental best practices." The requirements of Prop. J in this regard would be developed in the future by the City Planning Department and the Department of the Environment, but would start off being the existing State energy-efficiency requirements (commonly referred to as "Title 24") already administered by the Building Department and applicable to all construction.

Program Areas

The Workforce housing units can be created in two places: the Central Waterfront and Downtown. To protect the residential character of existing residential neighborhoods, the proposition explicitly excludes Workforce housing projects from being built on RH-zoned land. All measures of this ordinance apply only in those two workforce housing neighborhoods. None of the measures are applicable elsewhere in the city.

Incentives

"As Of Right" Permits
On zoned residential (R) parcels, other than RH parcels (that is, in residential mixed-use and residential-commercial districts), with a base height (and/or bulk) limit and additional height/bulk allowed as a conditional use, qualifying projects would be allowed to use the additional height/bulk. In addition, Workforce projects exceeding forty feet would not automatically be required to obtain a conditional use permit.

Extra Height

In the two workforce housing neighborhoods, qualifying buildings would be allowed to put residential units higher than the currently permitted maximum heights. In the Central Waterfront, projects could add an extra 15 feet up to 85 feet high. In downtown, projects get an extra 15 feet, on top of whatever height is currently allowable.

Higher Density

Prop. J releases all numerical limits on residential density (the number of housing units per square foot of lot area) for qualifying projects. Instead of regulating what can be built through restricting the number of units (density limits), the height and bulk regulations that define the allowable building envelope will control; developers are encouraged to optimize the number of units into the allowable building envelopes, subject to other limitations, such as parking requirements. These provisions have been developed through various neighborhood planning efforts including the Market and Octavia Better Neighborhoods plan. In essence, they encourage smaller, more affordable units instead of "monster homes."

Expedited and Restricted Review

As an attempt to create another incentive to get people to build these units, Prop. J proposes streamlining the permit review process for these housing developments. It defines timetables for project review on an expedited schedule: 30 days for the initial determination of completeness of a project, and 20 days for any additional reviews if the staff find the initial application incomplete. Consistent with the requirements of the state Permit Streamlining Act, it requires planning staff to make all their substantive comments in the first 30-day review. Subsequent departmental procedures will be established to determine which projects qualify for the expedited review.

Planning Commission hearings, if they are requested for qualifying projects, are also expedited ahead of other projects. The Commission is required to hold public hearings within 60 days of public noticing, and is prohibited from requiring any project modifications that might be requested by neighbors that would reduce project height and bulk. In essence, this provision is trying to guide public debate so that it focuses on design merit and how buildings affect the public realm, rather than cutting down the number of housing units. The public review process for qualifying projects is limited to "minor modifications in form."

In summary, the "workforce housing" provisions of Prop. J call for buildings that have roughly 27% housing for sale to people at 110%-120% AMI in the Central Waterfront and Downtown. These units would be built voluntarily, without tax subsidies. In order to entice developers to build them, the measure provides density bonuses and other incentives that are intended to offset the opportunity costs of selling units at below market rates.

New Downtown Rules

Current rules in Downtown restrict towers in the areas zoned for commercial towers (the C-3 downtown office zoning district) to a floor-area ratio (FAR) of 18 to 1. Towers can be higher than 18 floors by leaving some portion of their site as ground-level open space, or by purchasing the transferable development rights (TDRs) from other parcels.

Prop. J allows for residential use of C-3 zoned parcels, removes FAR restrictions, but requires that existing height and bulk requirements be adhered to. It requires preservation of existing ground-level open space and sets rules on residential floor plate size and dimensions for proposed towers. This seems to remove most of the incentives for qualifying workforce projects Downtown, as all residential projects would get these benefits. However, qualifying workforce projects would presumably still be able to receive expedited review and be exempt from the conditional use process.

Prop. J recognizes that owners of existing low-rise buildings on C-3 lots within the downtown core may no longer wish to sell their TDRs because they can build up to and above the existing height limit on their parcels in residential use. Because residential towers can be much smaller than commercial towers, small sites that were formerly uneconomical for tower development might fill their TDRs. For this reason, Prop. J requires ongoing study of the impact of Prop. J on the TDR market, recognizing that additional planning changes might be needed to permit office tower construction if TDR-supplying parcels fall in short supply. It schedules the Planning Commission and Board of Supervisors to consider new Downtown development rules upon completion of this study.

Funding for EIRs

Prop. J creates a $2 Million "Workforce Housing Program and Neighborhood Planning EIR Fund" advanced from General Fund revenues. This money is intended to help pay for the development of Environmental Impact Reports (EIRs) for the Central Waterfront, other neighborhood planning areas that have undergone "Better Neighborhoods" planning processes, and the study of the new C-3 residential tower on the Downtown TDR market. (Note that EIRs for a single neighborhood plan can cost upwards of $1 million today.) Area-wide EIRs will streamline development timeframes on new projects in all the proposed areas by certifying in advance what height, bulk, and density would have acceptable environmental impacts, or what mitigation measures would be necessary. Additionally, without having EIRs conducted for each project, public input would be focused on area-wide issues and would less likely be used as a tool to obstruct specific projects at the EIR stage.

Prop. J requires Planning to move rapidly to initiate seven EIRs that are needed but unfunded, stating they must begin by May 2004. It also provides that Planning can charge fees to residential projects that use these EIRs to reimburse the EIR fund and defray its ongoing costs. SPUR's investigation into this idea has shown that charging developers retroactively for the cost of neighborhood planning, rezoning, and environmental review is a legal, and politically viable way to pay for planning work.

Central Waterfront Planning

The Central Waterfront has been a heavily studied part of San Francisco. The Planning Department's "Better Neighborhoods 2002" program has been conducting extensive community planning in the Central Waterfront area for the past three years. Previous plans for the area have been issued by planners at SPUR, U.C. Berkeley, neighborhood commissions, and others. SPUR found that 8,000 to 10,000 units could easily be accommodated in the neighborhood. The University of California master's class led by noted housing architect and scholar Dan Solomon found sites for over 10,000; a neighborhood study recommended 5,000 units.

The area contains the under-construction Third Street light rail line, giving it ready access to Downtown and (future) Mission Bay jobs. Prop. J's findings state that the area "present[s] opportunities to build housing at increased densities along transit corridors in a way that can build vibrant communities over the next several years."

Prop. J creates a skeletal new plan for this area by laying out requirements for the Planning Department to meet in any adopted future Central Waterfront plan. These are stated briefly and would include:

• Recognition and inclusion of the "Workforce Housing Program" portion of Prop. J
• A minimum of 4,000 dwelling units, located near transit lines
• Recreation and open space as required by the General Plan, and additional neighborhood amenities

Other Issues

Prop. J is a complex measure. In recognition of this, it allows for amendments by a supermajority of eight Supervisors, and a partial sunset in 2013, at which point only a simple majority is needed to change the program.

The SPUR Board was unable to obtain the 60% majority needed to either oppose or endorse the measure.

This measure is difficult for SPUR. We do not like to undertake such complicated planning work at the ballot box. And we are concerned that this measure could unleash retaliatory ballot box zonings. On the other hand, we like many things about the substance of the measure. In fact, it enacts some ideas that SPUR has been trying to accomplish through the legislative process for almost ten years.

We find the criticism that the allowable income levels are too high to be off-base. The Workforce units will be below market rate by more than $100,000--and in some cases more. Without this measure exactly 0% of the units produced are going to be at that price point. Housing at this income range is not the whole picture, of course. We still need much more truly affordable housing. But Prop. J makes a real attempt to create middle-income housing that doesn't require us to spend affordable housing money on it.

Ultimately, SPUR is simply unable to sign on to a measure that enacts such diverse and complicated zoning and planning changes at the ballot. As an organization that believes in good planning, we could not support this process, no matter how worthy the goals.

SPUR takes "No position" on Proposition J.