San Francisco’s $50 Billion Affordable Housing Problem

In case you’re wondering how San Francisco’s housing crisis is going, there’s a new TV series in which Anthony Mackie travels a post-apocalyptic wasteland and fights a 300-pound killer clown because someone promises him an SF condominium — and this doesn’t feel like a totally implausible scenario.

The good news is that the city has committed to try to produce some 5,700 new affordable homes per year through 2031 under its new Housing Element, a blueprint required by the state every eight years. As The Frisc previously reported, that tally would be more housing than SF has created in any recorded year ever.

So help is on the way … ostensibly. But one question critics like Board of Supervisors president Aaron Peskin often raise is how SF is supposed to pay for all this. Peskin voted for the new Housing Element in January, as did all of his colleagues, but he also called it a nearly impossible task.

In SF, a single affordable unit can cost as much as $1.17 million to build. Using that top rate would pin a total price tag on the current goal (roughly 46,000 homes over eight years) at more than $53.8 billion, or some $6.7 billion annually. “People want a lot of things from government, and they’ll say yes, yes, yes when you ask them about it, but when you say you need to raise the revenue, it’s no, no, no,” says Maria Echaveste, president of the Opportunity Institute, a Berkeley-based equity nonprofit. “The population believes you can get everything for a very small price.”

What does it look like to raise that kind of money for housing, and where could it come from? Let’s Math Blaster our way through the problem.

Local funding

San Francisco doesn’t build affordable housing by itself. It’s also not required to spend local tax revenue on it. But it has several sources, including some tax money, that help fund affordable homes.

One is a Housing Trust Fund, passed by voters in 2012, which along with development fees provides most of the Mayor’s Office of Housing and Community Development (MOHCD) budget. The trust fund replaced SF’s old redevelopment agency, which was nuked by California Gov. Jerry Brown in 2011.

MOHCD’s budget is only a couple hundred million dollars a year, good for supporting loans and other costs related to affordable housing, but a far cry from the annual $6.7 billion or so needed to create the affordable housing promised by 2031.

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For comparison, that $6.7 billion is more than the city spent on Muni, the airport, parks, ports, public utilities, SFPD, the fire department, the district attorney’s office, sheriffs, the Department of Public Works, and the Department of Emergency Management in 2022, combined. (The city’s next two-year budget clocks in around $14.5 billion per year.)

One tax boost that SF voters approved for housing in 2020 is a stark example of the difficulties of local funding. The expanded tax on sales of large buildings reels in more than $100 million a year, but it didn’t pass with a two-thirds majority, so the mayor is allowed to use it for general purposes, prompting an annual budget fight.

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SF could consider new taxes or tinker with existing taxes to drive more money toward housing. But as UC Davis professor of land use Chris Elmendorf notes, “It’s a fair question whether the city should be increasing spending on housing at a time when its fiscal picture is so bleak,” with shortfalls projected and many key sources of tax revenue in dire straits.

Then there’s debt. SF could float a modest $300 million bond on the March 2024 ballot. If approved, the money would be yet another drop in the bucket. In 2019, SF voters green-lighted a $600 million bond, which at the time was expected to create about 2,800 new homes. Costs have only gone up since then.

The all-inclusive approach

If public money isn’t involved, San Francisco still has a mechanism for affordable funding that relies on private development. The inclusionary housing system continues to be SF’s primary way to produce subsidized homes.

In recent years, about 21.5 percent of new market-rate buildings had to be set aside for affordable units. Or, in lieu of building onsite affordable units, developers could pay fees into a city fund. This summer, however, SF lawmakers lowered the threshold to 12 percent for certain buildings and 16 percent for others (or 15 and 21 if paying into the fund), acknowledging a lower rate might encourage construction during these doldrums.

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These lower rates are only locked in for three years. Still, they make SF’s affordable goals even more distant. At 16 percent, for example, generating 46,000 affordable units purely through this system would mean approving about 241,500 market-rate homes, growing the city’s housing stock more than 69 percent.

That’s not going to happen. SF built 8,078 new market-rate homes in the past three years. Even if more favorable conditions goose that number for the next three years, the affordable tally will be modest. (At 16 percent, SF would need more than 30,000 market-rate homes to approach 5,000 inclusionary affordable units.)

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There’s another small source of housing funds. Developers creating new office space pay so-called linkage fees, but even at the height of the building boom they only came out to around $20 million annually. And SF is about as far from an office boom as it’s ever been.

Even in good times, the city needs help from higher powers to fund affordable housing. And these are not good times.

State and federal funding

The next source, and a lucrative one, is the state of California. SF has relied on hundreds of millions of dollars annually from state grants and awards, which it passes along to affordable housing developers for new projects. The latest state budget earmarked some $5 billion for housing and homelessness, meaning even if SF swallowed the state’s entire housing budget, the city would still come up short of the $6.7 billion target.

What’s more, state funds are getting harder to come by. Post-COVID budget woes and the cost of construction are two reasons. But the state has also expanded its demands for local affordable housing, which means more projects are competing for the same pots of state money.

There are state and federal tax credits affordable developers can tap, which provide another significant piece of the funding puzzle. Since all these other sources only nibble around the edges of the problem, there’s talk of a funding feast next year. There are three bonds under discussion that could raise as much as $35 billion for Bay Area and state affordable housing in 2024.

It’s an historic figure. Since 1993, California voters have approved more than $166 billion in bonds, but only nine — about $10.5 billion worth — were housing-related. If all three are approved (a big if, given the fickleness of the electorate), it’s unclear how much would flow to SF. It could well be a bigger slice than anything the city has ever received, but it still wouldn’t cover the whole pie.

Future shock

Last year, the Planning Department projected that SF’s funding gap for affordable housing could grow to more than $2 billion annually by 2030. (Officials do not have a more recent projection.)

Skepticism about closing that gap is understandable. A rosier future requires the price of construction coming down, a business sector rebound, freer zoning citywide that entices market-rate developers to build more and pump more fees into the inclusionary system.

Meanwhile, the city has convened an Affordable Housing Leadership Council to generate plans for more funding, MOHCD spokesperson Anne Stanley tells The Frisc. Its final report isn’t due until the end of 2024. New tools under consideration include the federal government’s proposal for easier financing of new public housing, and “income rental projects via a Joint Powers Authority,” according to Stanley, although she cautions there’s been no commitment made.

Outside observers have suggestions of their own. UC Davis’s Elmendorf is promoting parcel taxes on newly upzoned lots as a modest revenue source for affordable housing. Michael Manville, UCLA professor of urban planning, says SF should consider developing “smaller units, like SRO hotels.”

“San Francisco back 75 to 100 years ago had a huge stock of affordable housing like that,” he says. “We moved away from allowing that kind of no-frills housing, but it was affordable and it was profitable. Some of it can be built for zero public dollars.”

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Manville is also quick to point out that, legally, there’s wiggle room with the 2031 deadline. San Francisco need not build the 46,000 affordable homes by then (or the 82,000 homes in total) to satisfy the state’s mandate. It only needs to change zoning to accommodate those homes and “affirmatively further fair housing.”

But such a half-measure would be damaging for a city that desperately needs that affordable housing built, not just made theoretically possible in more places. It would also be politically ugly for local housing hawks who’ve worked for years to force the city to build more densely, only to see their fiercely defended goals kicked like a tin can down the road.

And if the can were kicked, SF would be on the hook during the next Housing Element cycle — 2032 to 2040 — to make up for the shortage. Failing that, state regulators could strip the city of its local authority over housing. Today’s political leaders might not be around then to pay the consequences, but think how many San Franciscans would be forced out of town, or onto the streets, if the city couldn’t do what it has promised.