How the Affordable Housing Fee Works - Voice of San Diego

Affordable Housing Fee

How the Affordable Housing Fee Works

Basically, the new fee doesn’t come close to paying for the effect on housing it says is created by new commercial buildings, and doesn’t pretend to.

The city of San Diego charges developers a fee on new commercial buildings, which it uses to help pay for subsidized housing units in the city. Advocates are asking the City Council to raise the fee on Nov. 4.

Since it was implemented in 1990, it’s been called a “linkage fee” – based on the “link” between building new commercial buildings, the jobs that take place there and demand for housing from employees who fill those jobs.

“Linkage fee” doesn’t convey any meaning on its own, so I’m going to stop using it.

Part of the Council’s vote would include changing the fee’s name to the “workforce housing offset,” but I’m not really sure that helps either.

From here on out, I’m calling it the “affordable housing fee.”

Here’s one question I’ve been asked repeatedly about the affordable housing fee: How does it count jobs that contribute to the need for affordable housing?

The basis of the fee stems from the legal logic that some of the jobs that take place in new commercial buildings – maids in hotels, receptionists in office space – will pay low wages, and people who work those low-wage jobs can’t afford housing in San Diego, so the builders should contribute to the effort to build more homes specifically reserved for those low-wage workers.

The city needed to establish that relationship through a nexus study when it first implemented the fee, and it must do it again now that it’s trying to raise the fee.

The new study, done by Keyser Marston Associates, a real estate advisory firm, on behalf of the city’s Housing Commission, outlines how it counts jobs to make that legal connection.

It takes a prototypical building of each type — office, retail, hotel, warehouse, etc. — and estimates the total employees working there, based on long-term averages. For office space, that means one employee for every 250 square feet of space.

Then it assumes those employees have jobs and compensation consistent with that building type, based on available data. So for a hotel, it assumes a typical mix of maid service, food service, office support and other positions, and it does the same for other types of buildings.

This also means tailoring the occupational mix for each building type to industries particular to San Diego.

And since housing affordability is based on total household income, it then uses Census data to translate the expected number of employees and their expected compensation into a number that reflects households of various sizes. In San Diego, there’s an average of 1.72 workers per household.

Then it breaks that into income groups, and looks at how many of the “very low-,” “low-,” and “moderate-” income households are associated with a given building.

Those income groups are based on San Diego County’s $75,900 median income for a four-person household. Very-low income is defined as those up to 50 percent the median, low income is up to 80 percent and moderate is up to 120 percent.

That means, for instance, very-low income is $33,050 for a two-person household, $37,150 for a three-person household and $41,300 for a four-person household.

At this point, the study has answered the number of households making up to 120 percent of the median income for each type of building. For office buildings, it’s 56 percent of all worker households in the building; for hotels and retail, it’s 93 percent and 94 percent, respectively. It’s 53 percent for research, manufacturing and industrial space and 72 percent for warehouse and storage.

The study then adjusts the number downward, based on an assumption that only 58.6 percent of jobs in San Diego are held by city residents. There’s no legal requirement to essentially limit the fee to households living in the city, but the study did so anyway as “one of several conservative assumptions incorporated into the analysis.” Ultimately, that means it’s factoring fewer workers into the study than it otherwise could.

It specifically says the city could choose to remove this adjustment to reflect a policy preference to encourage short commute times.

Finally, it multiplies that number by the cost of building a single affordable-housing unit to come up with the total cost associated with providing affordable housing units to the lower-income employees of the new building. This part reflects that the affordability gap is different for each income group and each housing type.

So here, the study shows the cost of affordable housing associated, per square foot, with each type of building. It’s $72.41 for office space, $66.88 for hotels, $92.28 for retail, $33.78 for research, manufacturing and industrial and $11.91 for warehouse and storage.

Those numbers represent the ceiling the city could legally charge developers to pay for affordable housing.

“The totals are not recommended levels for fees; they represent only the maximums established by this analysis, below which other requirements may be set,” the study reads.

Basically, that’s the total demand for housing that employees of new buildings can’t pay entirely on their own.

The study’s actual recommendation is that the fee be set no higher than 1.5 percent of construction costs.

That works out to $5.32 per square foot for office space, $4.73 for hotels, $4.96 for retail, $4.14 for research and development, $3.05 for manufacturing and industrial and $2.28 for warehouse and storage.

That’s the maximum level the study says can be absorbed by average land value appreciation comparable to inflation.

“The recommended maximums are based on (the study’s authors’) evaluation as to the fee increase that could be absorbed without a significant impact on development decisions,” the study reads.

Basically, the new fee doesn’t come close to paying for the effect on housing it says is created by new commercial buildings, and doesn’t pretend to. It pays for part of the issue, but stops short of charging more than what the study’s authors said would have a chilling effect on development decisions.

Clarification: This post has been updated to better clarify the study’s conclusion about the impact of the affordable housing fee on decisions to build.

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