The Back Story: High-Rise Fee Reductions

Last month, the Council unanimously voted to apply its longstanding policy on high-rise housing to reduce City fees on a residential high-rise project by nearly $4.4 million.

People often ask me why we reduce fees, and what the public gets in return.

Two answers: First, fees only get paid by builders that build. We cannot collect fees that are so high that lenders and investors decline to finance the construction of a project. Second, in the case of the project voted upon by the Council in February, the builder will pay more than $8.5 million in one-time fees for everything from parks to affordable housing to schools, and tens of millions in tax revenues over the course of the next several decades. Simply, we’re waiving fees for much a larger public benefit.

To be clear: fee reductions are not subsidies. I’ve consistently opposed public subsidies for investors and developers; for example, when Amazon asked cities nationally for tax breaks and public payouts, I wrote an op-ed in the Wall Street Journal with a simple, emphatic “no thanks.” In contrast, Google will build a seven-million-square foot urban village while also contributing thousands of affordable housing units and hundreds of millions in support for community non-profits — without a City subsidy. I oppose subsidies because our community has many needs for public dollars, and subsidies don’t make much difference in corporate decisionmaking.

But there’s a big distinction between giving public money to developers, and simply reducing city fees on a project. And that distinction makes a difference.

There are three reasons why fee waivers for high-density downtown housing makes sense: the critical importance of high-rise housing to San José, the financial infeasibility of the fees on these projects, and the net fiscal benefit to San Jose taxpayers. I’ll explain each reason in turn.

First, we need more housing. A lot of it. With a downtown high-rise, we can build 250 homes without raising a single objection from sensitive neighbors, all on a single acre of land. High-rise towers also have unique importance in our future. Environmentalists widely agree high-rise living provides big savings in energy, water, and green-house gas emissions over suburban single-family housing. Downtown residents produce much less traffic on our freeways, because high-density urban living promotes walking, transit, and biking. High-rises support the growing vibrancy of downtown by adding the “feet on the street” that represent residential customers for retail, restaurants, and amenities. There’s a fiscal benefit as well: unlike single-family housing, high-rises actually provide much more revenue to City coffers, and create only geographically compact demand for city services.

Here’s the problem: nobody has broken ground on a high-rise residential tower in a half-decade — despite the pre-pandemic building boom in nearly every other major US city. The unique challenges to building residential towers in San José — among the highest labor and land costs in the nation, a high-water table, an airport flight path that prevents heights above 30 floors, and the additional expense of steel construction — make it difficult for builders to get financing to start construction. Without the opportunity to earn returns from hundreds more units that they can build in cities allowing heights of 50, 80, or 100 stories, lenders and investors will simply look to fund developers in other cities. High costs and low margins scare them away, so projects sit on the design table, and never get built. Independent experts have concluded that if we impose standard City fees, we’re certain to prevent any construction. The proof? Compare our diminutive skyline to that of any of a dozen cities that are smaller in population than San Jose: Seattle, Denver, San Francisco, Miami, Boston, or Austin, for example. Our City doesn’t bat its weight in high-rising housing. So, our Downtown languishes.

Finally, the public gets much more in return fiscally for our forbearance on fees. In the case of the project proposed to the Council on February 15th, the presentation of City staff laid out all of the numbers. To be clear, if the project doesn’t get built, then the builder doesn’t get its $4.4 million fee break, and taxpayers don’t get anything in return. So, there’s nothing to lose if they don’t build. But if reducing fees helps to get a shovel in the ground, taxpayers see a big return, in two ways. First, the up-front fees paid by the builder to the City and our schools exceed $8.5 million:

Second, and more importantly, here’s what the public will receive every year for the next several decades:

Of course, property tax assessments jump if the building is sold, and even if it isn’t, the taxes still increase 2% under Proposition 13. So, this $2 million annual revenue will grow every year, and will generate more than $100 million for public coffers in forty years — a very, very conservative estimate of the life of any building.

Is a fee reduction worth it to the public? Absolutely.