Compromise in San Diego Results in Major Updates to Inclusionary Housing Policy

Kimberly Heaton

On December 10, 2019 the City of San Diego approved with a veto-proof margin proposed Amendments to the City's existing Inclusionary Housing Ordinance.  Championed by Council President Georgette Gomez, the new policy will require developers to include affordable units in their market-rate housing projects or pay a higher in-lieu fee for the City to build them off-site.  KMA was hired by the San Diego Housing Commission to assess the economic feasibility of the updated policy.

Originally established in 2003, the existing inclusionary regulations had required all residential development of two or more units to pay an Inclusionary Affordable Housing Fee (in-lieu fee), currently set at $12.73 per square foot (SF).  Alternatively, residential developers could elect to set aside at least 10% of units for households earning no more than 65% of Area Median Income (AMI) for rental or 100% of AMI for for-sale. 

Proposed changes introduced to the Ordinance last summer included the increase of the in-lieu fees to $22/SF and requiring new rental developments to make available 10% of total units to households earning at or below 40% of AMI.  Developers of new for-sale developments would have the option to pay the in-lieu fee or set-aside 10% of total units to households at or below 100% AMI or 15% of total units at or below 120% AMI.

The KMA June 2019 economic feasibility study assessed the impacts of the proposed changes to the Ordinance and found that the new requirements, combined with the proposed phase-in, incentives for on-site development, and range of alternatives, was economically feasible. 
However, these proposed amendments to the Ordinance, although approved by the City Council, were subsequently vetoed by Mayor Faulconer, citing opposition from business leaders who believed its requirements would result in decreased housing production.

A compromise proposal was put forth in October 2019 that increased the target household income for inclusionary units from 10% at 50% AMI to 10% at 60% AMI.  The compromise also increased the proposed in-lieu fee from $22/SF to $25/SF. The KMA analysis of the compromise proposal found it to be economically feasible, given that the proposal also offers developers a menu of options to comply with inclusionary obligations, including building off-site or off-setting the economic burden of inclusionary requirements through an affordable housing density bonus.  

In response to the recent approval of what had been a controversial update to the housing policy, the business community described as "more fair and balanced", with the local Building Industry Association (BIA) and NAIOP Commercial Real Estate Development Association offering support, along with the Regional Chamber of Commerce.  

The Mayor provided this statement: The whole point of updating this ordinance is to spur the construction of more affordable housing for San Diegans, and we shouldn't accept anything less," he said by email.  "The ordinance passed today is a true compromise and I look forward to signing it into law."