San Jose OK’s $32 million in downtown high-rise fee waivers

Over the past decade-and-a-half, San Jose has offered to waive more than $45 million in construction-related fees for developers planning to build high-rise downtown apartments — consideration that, according to city ​​leaders, is needed to help transform the downtown core into a dense and vibrant urban center.

But the success of the program and whether developers could and should fund the projects without the added incentives remains up for debate.

On February 15, San Jose-based Acquity Realty will become the latest development company to participate in the program. He is seeking a waiver of approximately $4.39 million in fees for his 21-story mixed-use project, known as the Carlyle, which will feature 290 market-priced rental units, 7,603 square feet of retail and 123,479 square feet of office space. space.

If approved, Acquity’s project will be the 11th downtown skyscraper deemed eligible for a fee waiver, although half of those projects have yet to begin construction.

City records reveal that since 2007, only four high-rise housing projects totaling 1,552 units have been completed under the city’s waiver program, nearly 1,000 units fewer than previously reported by the Bureau. economic development of the city. A fifth project – a 643-unit residential development known as Silvery Towers – is nearing completion.

Of the approximately $45 million in approved waivers, only about $25 million has been captured at this point, as projects must be completed for developers to benefit.

Despite generous incentives, a handful of approved projects are still struggling to materialize, including a site that is heading for auction and seizure and another that was recently bought out after the first developer failed to comply. its development agreement with the city.

One of the program’s biggest supporters, Mayor Sam Liccardo, acknowledged in an interview that the waiver offers had yet to produce the desired number of housing units, but noted that he was not ready to end it.

“Until we see more (high-rise housing developments) come out of the ground, we can’t take our foot off the accelerator, especially given the rapidly rising construction costs across the Bay Area.” , did he declare.

The idea of ​​providing incentives for the construction of high-rise buildings is not new.

In 2007, the city launched the waiver program by reducing the park’s impact fee. Since then, city leaders have extended the program’s expiration deadline three times while increasing incentive levels for developers. Today, the program proposes to waive 50% of construction costs and 100% of those associated with affordable housing.

A 2019 study commissioned by the city found that building a high-rise residential building downtown would not be financially feasible without the incentives. According to the study, downtown skyscrapers would only generate a profit of around 4%, well below the 5.25% sought by most developers.

“San Jose strives to be as dense as possible, but because skyscrapers are very expensive to build right now, they just can’t be built,” said Nanci Klein, director of the Office of Economic Development. from the city. “He needs a push on the goal line.”

Yet critics like the South Bay Labor Council and Working Partnerships USA see the program as merely a way to increase developer profits while failing to better protect workers.

Jeffrey Buchanan of Working Partnerships USA called the program a “troublesome exercise” in awarding millions of dollars in grants to a handful of wealthy, well-connected developers.

“A small handful of developers have received these grants over the years and if you look at campaign disclosures you’ll see that the same handful also tend to be among the biggest donors to council races and political action committees. for the San Jose races,” he said.

Acquity Realty recently donated $10,000 to Liccardo’s new political fundraising committee and an authorized maximum of $1,400 to council members Matt Mahan and Raul Peralez, both mayoral candidates.

Over the next year, the city council is expected to again assess whether to expand the program to encourage developers to move these projects beyond the goal line. Since fees aren’t officially waived until their projects are built and occupied, the city needs to extend the January 1, 2025 expiration date for those that won’t be completed by then.

The Carlyle Project, located at 51 Notre Dame Avenue, is set to open this summer on a 0.67-acre site just two blocks from downtown’s popular San Pedro Street.

Acquity Realty President Dennis Randall took some heat for his earlier comments about the project’s expected profitability.

In an interview from December 2020 with investment service Crowdstreet about the Carysle development, Randall said “we don’t need tax benefits per se to fund this project”.

Asked about the statement recently, Randall told this news agency that he was referring to federal tax credits and noted that the project still relies on city fee waivers.

“It will be a profitable project but it is also very difficult to arrange financing,” he said. “If the city did anything other than what we expected, it would be a very bad thing. Raising costs by $4-5 million would have a significant chilling effect on the eventual funding of this project.

Given the high tax benefits these projects have provided to the city, county and local schools, Liccardo said the fee reductions “are a good deal.”

“As a community, we have to adjust to market realities that high-rise development is extremely difficult in a high-cost area like South Bay,” he said. “And, if we’re trying to achieve many of our environmental goals, many of our urban vitality goals, and for the fiscal good of the city, that means the city has to cut red tape and cut costs.

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