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Friday, October 22, 2021

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News + PoliticsThe Agenda, March 28-April 3, 2016: Why developers can't...

The Agenda, March 28-April 3, 2016: Why developers can’t cry poverty

Measure to increase affordable housing heads for first challenge

Most of the city seems to be on Spring Break this week; the supes aren’t meeting, most of the commissions aren’t meeting, and the public schools are closed. But the City Planning Commission will be in session Thursday/31 and will hear the proposal by Sups. Jane Kim and Aaron Peskin to double the amount of affordable housing that private developers have to provide.

The legislation is complicated, and includes different provisions for grandfathering in projects that are already in the planning pipeline. You can read all the details here. But the bottom line is that projects that now only have to offer 12 percent below-market-rate units would have to offer 25 percent, and that number could be changed any time by the supervisors.

Sup. Jane Kim and Aaron Peskin are moving to increase the city's affordable housing mandates
Sup. Jane Kim and Aaron Peskin are moving to increase the city’s affordable housing mandates

There’s also a mandate that the city controller do a study on how much these developers can actually afford to pay – and if it’s done well, it will add a lot to the debate.

Oz Erickson, chair of The Emerald Fund and a big local developer, testified last year that all of these fees for affordable housing and transit and child care were eating into the profit margins so much that soon these big housing projects wouldn’t pencil out any more.

Erickson doesn’t like fees piled on fees, but there’s a reason the city has to do it this way: With the support of most of the big landlords and developers in the state, California passed Prop. 13 in 1978, and since then, it’s been impossible to collect fair property taxes from large landlords.

In the old days, people like Erickson paid fair taxes, and then the supes and the mayor divided the money up for things like Muni, police, fire, and other services. The federal government taxed rich people like Erickson at a reasonable rate, and gave some of that money to cities to build affordable housing.

Now Erickson and his pals pay some of the lowest income taxes of any major industrialized nation, and the federal government doesn’t spend money on cities any more. So there’s no way to provide decent public services without using these kinds of fees.

And by the way, the evidence so far is that the developers are doing just fine.

If you want data that’s only a year out of date (and probably underestimate developer profits), there’s a city study on the transportation impact fee that looks at how much these companies have to pay to the city and what they walk away with.

If you love these sorts of things the way I do, you can read the full document here. If you just want to get to the point, scroll all the way through the 85 pages to appendixes C1 and C2.

They show, that despite all the fees the city puts on developers, the “return on cost” – that it, the profit – for commercial development in San Francisco is between 19 and 29 percent.

Let’s pencil that out for a moment.

A developer builds a project that costs $100 million. In the end – AFTER all the fees, AFTER financing costs, AFTER every other penny out the door – the developer walks away with between $19 million and $29 million profit.

And Oz Erickson is pleading poverty.

Let’s also remember: This affordable housing measure is actually very moderate. If you just take the city’s own studies on the impact of market-rate housing, building luxury market-rate buildings with anything less than 40 percent affordable housing makes the city’s housing crisis worse.

The commission meeting starts at noon, Room 400, City Hall.

 

And while we discuss housing and homelessness, allow me to make a note: Just a few weeks ago, the mayor’s homeless czar, Sam Dodge, told the supes that there was no way to open more homeless navigation centers anywhere in the city for at least six months.

Then Sup. David Campos announced he wanted to declare a state of emergency, and polls showed that homelessness was the top concern of the populace – and what do you know? Now there’s going to be a new navigation center by June on Market Street, and another maybe this summer on Port land.

 

The insightful and timely movie about building fires and displacement in the Mission, The Other Barrio, is back for an encore performance at the Roxie Saturday/2. If you missed it the last time around, you should absolutely go this week, to see the movie and hear from the people who made it about the crisis in the Mission. You can buy tickets here. Do it now; I suspect this will sell out again.

Tim Redmond
Tim Redmond has been a political and investigative reporter in San Francisco for more than 30 years. He spent much of that time as executive editor of the Bay Guardian. He is the founder of 48hills.
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26 COMMENTS

  1. RR592: You have the gist of my comment above.

    My point was that Tim Redmond’s original post did not recognize that the report’s double-digit returns (19%, 29%) were realized AFTER periods of 24-55 months (emulating Redmond’s all-caps). The TSF survey of expert opinion that generated assumed returns for hypothetical prototype projects was stated in the report as a total, not annual, rate of return. An unwary reader of Redmond’s post might think that a 29% annual return was being assumed; no – the annualized rate would be more like 5.57%. Adjusting for duration and other sources of risk, not every potential developer would pursue such a project. There are other fish in the sea.

  2. It’s not free, it’s not given away. You are not giving any context to this except the context of unlimited profit.

    How much of your income can the government take for free? 20%? 30%? … Or 50-60%? In some countries that is the going max tax rate and their is no revolution and in fact those countries prosper.

    Similarly governments regulate prices of many things. Why?

    See? It’s not about maximizing personal profit. It’s about moving the society you live in along to a better place. So the person serving you coffee doesn’t have to commute multiple hours a day. So their kids can have a decent education so they vote in sensible ways. This becomes even more important when economical forces buoyed by max profit taking render strong distortions in local markets.

    It’s easy to think you do and can live in isolation, but that is tempting fallacy.

  3. You know, I *originally* thought you were a fuckwit. But now I think you’re just an inbred troll.

    See, I have the capacity to evolve in my thinking. You, on the other hand, are stuck in your backwards ways.

  4. What other business do you know can give away 50% of its product free to poor people and survive? Could grocery stores? Clothing stores? car dealerships? No, they could not, yet somehow the Einsteins here believe that home builders are immune from basic economic pressures and principles. Of course they can give away 50% of their product! why not???

  5. Ugh. 48 Hills practicing economics without a license again! Oz Ericsson doesn’t have $150 million in his bank account to build a high rise. he borrows that money from institutional investors, like public pension funds….you know, teachers, fire fighters, city hall workers, people like that. So when you say they can afford to take a cut in profits, anywhere from $19-$19 million, what you are saying is that the institutional investors must take a lower profit. The problem with that idea is that the investors just look elsewhere to invest and get higher returns. The California Teachers Association pension fund will not accept 7% returns on real estate investment even if it has 25% inclusionary! they don’t care. They want double digit returns and will invest in Dubai, Dublin or Dubrovnik, if they think they can get it there. When this 25% inclusionary bomb gets dropped, institutional investors will flee San Francisco and construction will stop….and that is Peskin’s master plan. To stop all construction because it means huge property value inflation for his friends and supporters; the white, wealthy, home owning classes of San Francisco.

  6. Well, if builders can’t afford public services, including affordable housing, then they can’t afford to build. If the only building that can be done is by the public subsidizing it (i.e. low-income people commuting for hours) then we’re better off without it.
    Personally I think the builders are bluffing, and they could do fine with 50% affordable. But they’ll howl for every penny of profit at risk, just the same.

  7. I really do think its a ‘no-build’ situation thats being proposed.

    25% “affordable” sounds like a lofty plan. But the deals are being struck to keep everything in the pipeline (cuz sometmes SF does not actually move the goal posts mid-game). But new projects are gonna get socked, and that really pushes the bar closer to the don’t-build/won’t-build area; which is the aim of the no-growthers.

    Lets see how many total “affordable” units get built once Kim & Peskin get their way. i’m guessing the total will be less even though the stated % is greater.

  8. Peskin should be required to put a navigation in his district, after all the residents voted for him.

  9. Well, the argument here is not about build vs. not build, it’s about the affordable units among those that do get built.
    It’s not a great solution either, basically the entire middle class would now have to jump through the same hoops which were previosly reserved for the indigent, but it’s better than nothing.

  10. Commercial / retail has no controls for ‘affordable’. The closest thing I can think to that is that some projects have space specified for a non-profit organization or a public plaza.

  11. But that both assumes that these considerations are not baked into the report, and also that there is a 3-year project as an available choice. Aside from the fact that a 5% annual return on investment is pretty decent in and of itself as compared to conservative investments in stocks, bonds, and mutual funds.

    This also doesn’t account for future profits of leased space: maybe instead of fretting over developers only getting 5% annual returns during construction, we should look at how quickly they get to 100% via office or residential rents.

  12. The city isn’t bankrupt. Looking for more cash for the Government we’re all unhappy with is pretty silly.

    And speaking of silly… calling it affordable housing and making people compete for units with those making 120k. Stop using the phrase until you’ve accounted for all those people making 40k….and even that’s still too high.

  13. I don’t understand all the fancy algebra either. But I think his point is that if a project has a profit of 30% but it takes 6 years from start to finish, then the annualized profit is about 5% a year.

    And when capitalists are looking to invest they tend to look at annualized returns for the purpose of comparing one project to another. So they would choose a project with a 30% profit that is done in 3 years over the same profit over a longer period.

  14. I tend to agree with hiker_sf there should be compromise in ALL districts in SF. Whats good for the goose is good for the gander… High end neighborhoods should not be “devoid” of large scale housing rebuilds, tear-downs, and redensification of their areas in the same manner as low-income areas. This goes for dealing with housing the poor, and the needy. The idea by campos for a facility at West Portal was immediately negated by community groups, but shows how in reality, we have quite a hill to climb to find proper and justifiable locations. I would suggest the parking lots around stonestown, or further northward near golden gate park finding a good sound option/location near the Presidio is not too far-fetched either….

  15. But there are many (most?) projects that are zoned for primarily ‘office towers’, and those for resid (plus, maybe, ground retail). Only a few projects are like “5M”.

    Is the “affordable” component a req for Comm sq ft as well as resid unit count? As for parsing profits, I suppose thats always going to be a grey area, even as ‘profit’ is a grey area until everyone is paid off and RE sold/initially-leased.

  16. I think what he means to say is that until we have >40% “affordable”, we will continue to have a problem of less affordability and rising prices.

    However, the solution is NOT to not build any housing. If people continue to come – AND there’s no additional housing, where do you think they will go? They will put pressure on existing residents thru OMI, Ellis and less legal means. AND, the normal rotation of empty units will be priced out of the reach of ‘service’ workers (homeless, seniors, artists, etc).

    I’m beginning to think that maybe there is something to ‘gentrification’. But, again, not increasing supply does not negate the gentrification factor of increased populatoin to EXISTING stock, I doubt that there will not be, anytime soon, cheap places to live in Carmel and Monterey, where there used to be quite a few. And likewise now, San Francisco.

  17. Profits between commercial and residential are not easily separated out in the largest of projects, which will have residential, office, retail, hospitality, etc all included. Even when trying to separate them it gets murky. Example: where do you allocate the cost of things like the power plant, HVAC systems? The plumbing?

    RE using politics to ‘punish’, I feel like your phrasing reveals a certain bias, that affordable housing is for ‘those people’ who don’t belong in ‘your’ neighborhood. Hope I’m not reading into things too much, but in all honesty, concentrated affordable / low-income housing has been proven to be an urban-planning disaster. Among many other things, it’s a big factor in the development of home-grown terrorism in France and Belgium, where low-income muslim populations are segregated into old housing projects built in the 70’s and 80’s, creating entire generations that feel no connection to the rest of the city, and left out of the economic prosperity enjoyed by other Parisians.

  18. ‘I’m going to throw some hypothetical numbers around to find a way to justify my preconceived notion that developers aren’t making enough money on their projects, because I clearly know more than the people who composed a thorough report (who’s bias is also to underreport earnings)’

    – Chuck

  19. I think his point is that unaffordable housing (e.g. for engineers) creates demand for affordable housing (for service workers). So if you don’t have a balance you exacerbate the overall shortage (which ends up being met by people commuting from faraway suburbs).

  20. “the profit – for commercial development in San Francisco is between 19 and 29 percent.”

    Do you really mean “commercial”, or residential, development? Are profits similar for these two different forms?

    Additionally, it doesn’t make sense to say that building NO housing is going to contribute to more affordability. As long as commercial space continues to be let out or built, increasing #s of people will be demanding housing; the price of which will only increase with more demand for a static amt of housing.

    And trying to punish certain neighborhoods, like Sea Cliff or Pac Heights, by putting in “projects”, is not necessarily going to work if the divider is Supe District lines. Part of Sea Cliff is in D1, which could accommodate ‘projects’ by building on Geary Bldv. Pac Heights is in D2, which also includes parts of the Fillmo’ below Geary. St Francis Woods is in D7, which also includes vacant land along Alemany Blvd. Even Telegraph Hill has an out by being bunched with parts of Mid-Market in D3.

    Do we want to use politics to increase housing? or do we want to politics to punish.

  21. The 19% and 29% figures you’re throwing around would be better judged if you also included the time value of money. The Transportation Sustainability Fee (TSF) study does not appear to adjust for this consideration, based on Appendix A, page 9:
    http://www.sf-planning.org/ftp/files/plans-and-programs/emerging_issues/tsp/TSF_EconomicFeasibilityStudy_Spring2015.pdf

    For example the 29% return is assumed for a 400-foot residential high-rise in the Transit Center zone around the Transbay Terminal that took 55 months to build. (See Appendix Tables C-2a,b – last two pages of the TSF report.) Let’s assume the delay due to other forces (Save The Slums marches and so forth) was 0 months, so the 29% return came after 55 months. What is the annualized rate of return on this prototypical project?

    Assuming monthly compounding at some annual rate r, we have
    (1 + r/12) ^ 55 = 1.29
    A little algebra gives us the solution:
    r = ( [ e ^ ln(1.29)/55 ] – 1) * 12 = 5.57%

    The monthly compounding expression is useful to compare it to another prototype project also in the TSF report: a 45-foot low-rise mixed-use on Geary, assumed to return 19% after 24 months. Using the same algebra tells us:
    r = ( [e ^ ln(1.19)/24 ] – 1) * 12 = 8.73%

    Given that a hypothetical Geary project is shorter duration and higher return, one might surmise that there should be more of those projects in the pipeline than hypothetical Transit Center high rises. Does this inference from the TSF study’s hypothetical world match the San Francisco that you’re writing about?

  22. I think it is a good idea to look at all services for homeless, low income housing, housing projects and affordable housing by district. The burden should be shared and by not concentrating all of the solutions in the downtown area, we may see better results.

    It’s about time that Sea Cliff and Pacific Heights get their own version of ‘the projects.’

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