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The 9 Lives of the Linkage Fee

After years as a political loser, a proposal to increase development fees to boost affordable housing is back, and it might actually have the support to pass.

It’s the policy proposal that won’t go away.

Attempts to raise San Diego’s so-called linkage fee—a charge on nonresidential development to help subsidize low-cost housing—have come up empty time and again in recent years.

But the latest move to raise the fee – which is wending its way to the City Council – might actually have enough political wind at its back to get approved this time around.

The San Diego Housing Commission now expects the Council to vote on the increase on Oct. 15.

Opponents have consistently decried any increase as a jobs tax, said it would discourage businesses from expanding or relocating to San Diego and warned it tethers affordable housing money to an unstable market.

The city instituted the fee in 1990. By law, it needed to first establish a direct relationship between the new construction projects, and whatever the fee charged to them was marked to fund. In this case, the city needed to show commercial development creates jobs, and new jobs increase the demand for housing.

Six years later, the City Council cut the fees in half to help spur development, and they haven’t been touched ever since.

Studies in 2004 and 2008 recommending an increase in the fee to better fund affordable housing went nowhere.

Then, a 2009 city auditor report again called on the city to up the fees, arguing they were “outdated, substantially lower than comparable cities, and were not adjusted as required by the municipal code, resulting in an estimated underfunding of $2.79 million for fiscal years 2006 through 2008.”

After the auditor report, the San Diego Housing Commission created a task force to update the study.

Two years later, in July 2011, the San Diego City Council heard the newest recommendations, and voted down an increase on a 4-4 vote. Council President Tony Young cast the critical vote against the increase.

He’s since been replaced by Councilwoman Myrtle Cole, who said in her campaign she supported the increase; interim mayor Todd Gloria is an outspoken affordable housing advocate who voted in favor of the increase in the past. Along with the other three Democrats on the City Council, including mayoral candidate David Alvarez, the votes seem to be there to pass the increase.

The Housing Commission in August released another study suggesting it does just that.

And this time, it’s recommending a much more substantial increase than the city voted down two years ago.

When the fees were implemented, they were calculated as 1.5 percent of the construction cost in 1990 for different types of development, meaning there were different fee schedules for building offices, hotels, retail, manufacturing or warehouses.

In 2011, the commission recommended the fees gradually return to their 1990 levels. If the 2011 measure had passed, the fees would have increased 20 percent per year, beginning in 2013, until they finally reached their 1990 level in 2017.

At that point, the fee would have been tied to an index measuring the cost of building. That way the fee could be raised or lowered on a yearly basis without action by the City Council.

Compared to the current proposal, opponents of the increase — including the San Diego Regional Chamber of Commerce, the biotech trade group BIOCOM and all the major building and construction groups —probably wish they had just said “OK” back then.

The Housing Commission’s latest request would immediately bring the fees up to 1.5 percent of today‘s construction costs, instead of being pegged to the 1990 numbers.

That would mean an instant fee surge of up to 500 percent.

But it would also simply represent a return to where the fee was initially set when it was first implemented — 1.5 percent of current construction costs.

“It’s a different world we live in now compared to 2011,” said Colin Parent, director of policy at the Housing Commission.

The end of redevelopment took away $35 million in affordable housing funding. Federal budget cuts — thanks to sequestration — resulted in 700 fewer families who could take advantage of affordable housing within the city.

“There’s a situation where there’s a dramatically greater need for affordable housing funding,” Parent said.

The increased fees could provide between $8 million and $10 million in additional funding, given historical patterns.

The most recent study addresses the effect the increase would have on development in the city. It says an increase that keeps the fee at or below 1.5 percent of construction costs is in the sweet spot that could be absorbed by appreciation in land values in a two- to three-year period, meaning it wouldn’t have much effect on the cost of development.

“A fee increase will, generally speaking, increase development costs and reduce the price developers will pay for sites,” the study reads. “In our evaluation, the market will be able to adjust to (the recommended) change in a relatively short period.”

Erik Bruvold, a local economist with the National University System Institute for Policy Research, pointed to a 1997 study by the Public Policy Institute of California that looked into whether development fees are ultimately passed on to consumers.

“There’s always been a screwy logic to this that suggests it’s better to not have employment growth than to have employment growth because it somehow creates a demand for housing,” Bruvold said. “One might say the best solution to low-income housing is to create more jobs, which should over time drive up wages.”

That study found fees are usually only absorbed by land value appreciation when markets have low demand. That’s not really the case in San Diego right now.

Opponents have also pointed out the proposal would likely fund only some of the city’s affordable housing needs.

An alternative would wrap affordable housing funding into a potential citywide infrastructure bond.

The bond, and a potential tax to accompany it, has been discussed as a way to fix the city’s woeful streets, sidewalks, sewer lines, etc., and has been supported by Gloria and others.

Affordable housing advocates say there’s no need to choose. Since a linkage fee increase won’t haul in enough to magically fix the affordable housing problem anyway, the city might as well try multiple fixes.

Correction: A previous version of this story said Councilman Mark Kersey has come out in support of a large municipal infrastructure bond. To date he has only specifically supported the infrastructure committee’s effort to create a five-year plan for projects that might be part of such a bond.

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