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Nearly One-Fourth of Funds Meant to Bankroll Affordable Housing Went to Other Causes

Developers must incorporate some low-income units into their projects or pay a fee to help build them elsewhere. A VOSD analysis of Housing Commission spending shows the fee collections have helped build units but also paid for other programs and costs that weren’t solely affordable housing.

The Housing Commission invested $1.3 million in inclusionary housing fees in the downtown Hotel Churchill project, which also relied on other funding streams to support 72 affordable housing units for formerly homeless people. / Photo by Dustin Michelson

Over the last 15 years, San Diego developers have handed the city about $120 million to satisfy a policy meant to help combat a shortage of low-income housing.

The city has put that money toward more than two dozen housing projects, helping to subsidize more than 2,000 affordable-housing units. Another 775 new homes are in the works thanks in part to developer fees associated with the city’s so-called inclusionary housing program.

But not all the fees collected from market-rate developers who opted to pay up rather than build affordable homes themselves have subsidized actual homes.

A Voice of San Diego analysis reveals nearly a quarter of the roughly $85 million in inclusionary funds doled out by city housing officials over the last 15 years have supported programs to aid first-time homebuyers and homeless San Diegans, or covered administrative costs at the San Diego Housing Commission, rather than simply bankroll the housing the policy aims to deliver.

Jeff Davis, a top Housing Commission official, defends the non-housing investments, which the city’s inclusionary policy allows. He says they have helped the city respond to a range of housing challenges.

“(The inclusionary fund) is an essential resource to address the interrelated continuum of housing options the city of San Diego needs,” Davis wrote in a statement to VOSD.

But the VOSD analysis, based on a review of fee collections and Housing Commission spending, sheds light on the outcome of a policy progressives in the city want to bolster to force more brick-and-mortar development for low-income San Diegans.

VOSD’s analysis of inclusionary fund spending and projects does not include a high-rise at 16th and Market streets built after the City Council agreed to allow developers behind the massive Ballpark Village project to take a different approach to addressing the affordable-housing mandate. Rather than write a check to the city, the developers gave homeless-serving nonprofit Father Joe’s Villages more than $20 million to subsidize 134 affordable units.

The 15-year-old inclusionary policy was designed to compel market-rate developers to incorporate affordable-housing units in their projects. A 2009 court ruling forced the city to rework the policy, making it easier for developers to pay fees instead.

The current inclusionary policy gives developers a choice: Reserve 10 percent of the units in their projects for low-income renters, or instead pay a fee. The fee is often referred to as the in-lieu fee, because developers pay it in lieu of building affordable units.

Now, buoyed by a new state law that allows steeper mandates, City Council Democrats and labor leaders want to rework the policy to force more affordable housing production in market-rate projects, limit instances where developers can opt to pay fees and increase charges for builders who decide to pay.

Any changes could impact the amount of cash flowing into the Housing Commission to fund solely affordable-housing projects and other programs – as well as on city decisions on how to use those fees.

The Housing Commission this year plans to spend another $48 million in inclusionary funds, a total boosted by an explosion in developer fees and building in recent years. The agency has also approved another $11.7 million in fee-supported loans for affordable-housing projects.

Most – but not all – of the inclusionary cash has been funneled to housing developments.

Inclusionary funds have provided a percentage of funding for about 30 affordable-housing projects over more than a decade. These projects serve families making up to 65 percent of the median income, about $63,250 annually for a family of four.

In the last five years, the Housing Commission says inclusionary funds have typically covered 6 to 9 percent of the total cost of affordable housing projects and have been matched with other funding sources.

The city’s inclusionary housing ordinance, approved in 2003, says city officials should prioritize affordable housing projects in their annual budgets. It also gives the Housing Commission discretion to spend inclusionary funds on other things if the City Council signs off.

The Housing Commission has indeed used the cash for other things.

Here’s a breakdown of how the Housing Commission has doled out inclusionary funds:

Former San Diego State planning professor Nico Calavita, who advocated for the 2003 inclusionary policy, said he never considered the possibility that those funds might finance things other than housing projects.

“There was no discussion about how the money would be spent because the assumption was the money would be spent on building affordable housing. Period,” said Calavita, who has extensively studied inclusionary policies elsewhere.

Calavita said he doesn’t necessarily oppose the city funneling some money it collects from developers to homeless programs, for example. He just didn’t expect it would.

Yet inclusionary funds have supported a range of projects and needs.

Over the past 15 years, about 10 percent of inclusionary funds the Housing Commission has spent have covered administrative costs, including Housing Commission staffers, legal assistance and other overhead tied to the fund.

For example, Housing Commission spokesman Scott Marshall said, this year’s budget relies on inclusionary fees to help fund 11 staffers whose jobs are tied to the program.

The Housing Commission has also spent about $8.6 million in inclusionary fees on loans and grants to help more than 200 first-time homebuyers.

While affordable housing built under the inclusionary program must serve low-income families, the Housing Commission’s homebuyer loans can serve families at a higher income level. A couple collectively making up to $62,300 annually – 80 percent of the median income – could qualify for these programs, which include a deferred-payment, 3 percent interest loan and a grant that covers closing costs.

Davis, the executive vice president of the Housing Commission, said the home loan programs match up with the larger goal of the city’s inclusionary policy because they help families move on from lower-cost rental units, making them available for renters in need of affordable options.

“As rental housing units become available, they become housing opportunities for other low-income families and San Diegans experiencing homelessness,” Davis said.

Former Housing Commission CEO Betsy Morris, who led efforts to develop the inclusionary ordinance more than a decade ago, said policymakers also saw the home loan program as a way to build support for an inclusionary policy that drew fire from developers when it was proposed.

She said loans were included as a possible investment option for inclusionary funds when the policy was approved.

“We were trying to build up a constituency for this proposal, bring in the realtors and homebuyers,” Morris said.

At the time, housing advocates were particularly concerned about displacements of budget-strapped renters as a rush of apartment owners converted their units to for-sale condos.

In more recent years, as homelessness has escalated, the Housing Commission has also dipped into inclusionary funds to help combat that crisis.

In 2016, housing officials began budgeting an average of about $635,000 annually in transitional housing programs, which aim to provide services and temporary homes for homeless San Diegans for weeks or even months. Examples of funded programs include YWCA programs that separately serve domestic violence victims and homeless families.

And starting last year, the Housing Commission began budgeting more than $3 million a year for other homelessness programs, including efforts to encourage landlords to rent to homeless people, a program meant to aid newly homeless people and short-term rental assistance.

The Housing Commission ultimately ended up spending less than planned on temporary homeless housing and programs last year but envisions using $4.5 million in inclusionary funds to support homeless programs and transitional housing this year.

Calavita and others say they couldn’t have imagined such a dramatic investment 15 years ago.

Indeed, the landscape has changed dramatically. San Diego’s housing and homelessness problems have exploded.

Davis of the Housing Commission said the increased inclusionary investments in homeless programs and temporary housing have helped the city offer homeless San Diegans a path off the street in the absence of immediate permanent homes.

Housing Commission decisions to direct inclusionary funds to homeless programs also coincided with a major spike in inclusionary fee collections. Starting in 2015, the Housing Commission began pulling in more than $15 million annually in in-lieu fees – roughly triple what it had typically collected in years past. Much of the new cash was tied to a downtown building boom.

In 2017, in-lieu fee collections reached an all-time high of more than $25 million. Downtown builders dropped more than $15 million in fees that year.

Here’s a look at how fee collections have varied over the past decade:

This uptick in market-rate housing developments and increasing fee collections that came with them helped fuel San Diego progressives’ campaign to revise the inclusionary policy. They see it as an avenue to demand more affordable housing and resources to produce it.

City Council Democrats Georgette Gómez and Chris Ward have been particularly vocal. The two Council members issued a memo this summer calling for a policy update.

Gómez’s office has since hosted meetings with developers and housing advocates and ordered a consultant to assess the potential impact of requiring developers to build a higher percentage of affordable units in their projects. Gómez hopes to bring a proposed policy to the full City Council next year.

Ward, who is not directly involved in those conversations, said last week he thinks brick-and-mortar housing should be the foremost priority for future inclusionary dollars the city collects.

“I would expect going forward that we would employ those dollars for housing production,” Ward said.

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