☆ Hotop: How to resolve SJ's Housing Preservation/Development dilemma

A balanced housing policy would set ideology aside and address the simultaneous benefits of re-development and preservation, while addressing the needs of the Missing Middle, growing local economic activity, expanding the tax/revenue base, and positioning San Jose to exit this nonstop housing shortage crisis. Local housing provider and concerned citizen Dean Hotop offers a thoughtful proposal re: how to get there in this Opp Now exclusive.

How Did We Get to Where We Are Today?

Historical records indicate that when San Jose first passed its Apartment Rent Ordinance (ARO, i.e., rent control), in 1979, 49,000 housing units would fall under control of the ordinance. That’s significant in today’s discussion of COPA because there are now only 38,000 of those original 49,000 housing units remaining.

That’s a 22% reduction in market rate housing units over a 44-year timespan. But where did those 11,000 units go, and what does this tell us about the future?

To clarify, the 11,000 units did not just disappear. In fact, many of them still exist as either a) re-developed additional rental housing units, which do not fall under rent control (pre-Ellis Act Ordinance) or b) Condominiums, via either conversion or re-development or c) deed-restricted, affordable housing units, now under ownership/management by Non-Profit Organizations.

Both sides of the political spectrum can argue that this “loss” of 11,000 units is a good thing. There is something for everyone to like about adding more housing units AND preserving existing ones as affordable. However, balance is the key between these two opposing policy choices. In a mere 20 years, COPA will create an additional 20% reduction of market rate housing units by shifting them to deed-restricted affordable units, under the current plans — with no balancing counter-policy.

Re-development vs. Preservation

Re-developing older, low-density housing units into new, modern, higher-density, energy-efficient housing units actually helps San Jose meet its state-mandated housing production AND climate/energy efficiency goals. This re-development also generates strong local economic activity, local jobs (construction, sales and services), sales taxes, and an increase in property taxes on the re-assessed new construction (this should make Prop 13 opponents happy).

On the flip side, preserving market rate units as deed-restricted, affordable housing (such as COPA) keeps the rents low for a select few residents and prevents displacement by not allowing these housing units to be re-developed. That’s good for those lucky renters who score such a housing unit.

There are, overall, both pros and cons to both of these solutions:

Re-development Pros:

  • More housing units developed by private investors

  • Modern building standards are an order of magnitude more energy efficient

  • Increases housing density where density already exists

  • Increases property taxes

  • Billions of dollars in local economic activity

Re-development Cons:

  • Some tenants will be displaced

Preservation Pros:

  • No tenants are displaced

  • Units are affordable forever under deed restrictions

  • All taxpayers contribute to the burden of funding these preservations and affordable rents

Preservation Cons:

  • Reduction of market rate housing units

  • Housing Units removed from availability for Middle-Class renters (“Missing Middle”)

    • COPA allows existing Middle Class renters to stay, but their rents will be raised based on income

  • Loss of Property Tax and other gov’t revenue (Non-Profits are exempt) 

  • All taxpayers must make up for lost revenue or accept reduced services

Finding A Path Forward

There appears to be a Yin and Yang relationship between re-developing and preserving existing rent-controlled housing units in San Jose. There’s something for everyone to like or dislike about both policies. And when too much focus is put on just one side without finding balance, we are led to bad policy-making decisions, which is where we are today.

What’s needed is a policy path that would find a balance between market forces and gov’t mandates, which would allow for preserving existing affordable housing AND increasing housing units — a path we are not on today.

As the San Jose City Council considers passing the COPA ordinance, it should take an equally serious look at the Ellis Act Ordinance and open up the free market to begin re-developing old, low-density, worn out, energy-inefficient housing units.

Repealing the Ellis Act Ordinance would open the door for thousands of new units to be built in San Jose and unlock billions of dollars in new economic activity in San Jose as property owners find the best and highest use for their land, all at no cost to taxpayers. Extra incentives (i.e., density bonus) could be used to encourage re-developers to address the needs of the Missing Middle by including basic units without the expensive frills and amenities. For example: making the property amenities (gym, pool, hot tub, etc.) an optional add-on monthly fee instead of being included in the base rent.

Thousands of jobs would be created, and millions of new property taxes would flow into local coffers. Measure E and newly acquired COPA properties could be utilized to address any displacement issues that may occur.

A Realistic Approach is Warranted

Realizing there will be little appetite to “go backwards” on previously enacted legislation, the following is an alternative to repealing the Ellis Act Ordinance:

For every unit preserved under COPA, allow a 1-for-1 exemption to the Ellis Act. Preserve AND produce. The exemptions would be cumulative and be handled through an annual lottery system, a la SF’s condo-conversion lottery. The Inclusionary Housing Ordinance would still apply, so either affordable units are built onsite or the in-lieu fees are paid. Relocation benefits could still apply to special needs cases only and tenancies greater than five years where the tenant’s rent is more than 10% below comparable average market rents. The minimum density increase could be set to 3.5x and a density bonus awarded for including additional below market rate units.

The Housing Department has a stated goal of preserving 380 units/year with COPA. That would open up 380 older units per year to re-development and produce a minimum net, 950 new units per year (1330 new, 380 old) — at no cost to taxpayers. At an estimated average cost/unit of $650,000, these re-developments would create $865M of new, local economic activity per year in San Jose and thousands of new jobs. The property tax base would also increase to more than offset the lost property taxes under COPA.

Re-developed older, low-density properties would be a giant stride forward for San Jose to meet its state-mandated housing production goals AND state-mandated energy efficiency improvements via modern building codes.

History has now shown that San Jose has gone too far with over-regulation of the housing industry, causing a loss of housing supply and opportunities for new supplies. Housing Production has been stifled to its lowest level ever. Fortunately, the recent local slowdown in demand, from job losses and out-migration, has prevented an even greater housing affordability tsunami — which is coming… in time.

For more from Hotop, check out the following articles:

Follow Opportunity Now on Twitter @svopportunity

Image by Zhu Bing

Lauren Oliver