San Francisco was already facing a thorny challenge over the next eight years — a state housing goal of some 82,000 new homes, more than half of them below market rate — when the city’s top economic watchdog said two weeks ago that our key method to fund affordable housing must be curtailed, at least for a few years.
The conclusions from the city controller highlighted a complex tug-of-war between private developers and City Hall that relatively few San Franciscans understand, but which exerts tremendous influence.
It’s called inclusionary housing, and broadly speaking, it sets aside a certain percentage of units in new developments to remain affordable. The system also lets developers pay into a funding pool for affordable housing.
At the height of the last building boom, the Mayor’s Office of Housing and Community Development estimated developers were paying in an average of $20 million annually.
It gets much more complicated, and with the city desperate for all kinds of housing, fast, it deserves more explanation.
It’s also important to understand how it came to be: San Francisco inherited the inclusionary system from previous generations.
They advanced it not by endorsing its merits, but because, after blowing up most alternatives, they were left with no other choices to fund affordable housing.
Controlling ourselves
San Francisco has a seemingly endless smorgasbord of committees, boards, and commissions, and most toil in obscurity. The Inclusionary Housing Technical Advisory Committee is usually no different.
But on March 10, the controller’s office came to that committee with a report that said the city’s affordable housing requirements are too high and recommended chopping them by a third, roughly, or housing development in SF might go the way of gas furnaces.
Lower the hurdles to development for a while, the analysis cautioned, or else very little will get built.
Here’s the current rule: New SF housing developments must dedicate at least 21.5 percent of new units as affordable to a range of incomes, from below the poverty line to incomes that in most other places would be considered comfortably middle class. Some projects must have a mix of affordable units as high as the equivalent of 33 percent. (More about “the equivalent of” in a minute.)
The controller says those percentages now make projects “infeasible” — too expensive to justify the cost of development — in the current economic climate, even if extra incentives known as density bonuses sweeten the deal for developers.
The analysis suggests knocking requirements down to between 12 percent and 29 percent, but that still might be too high for a large swath of buildings. Condos “generally above eight stories” and any buildings designed for rentals “would not be feasible at these inclusionary levels,” meaning SF may have to cut the rate even more.
SF chief economist Ted Egan, who helped present these findings to the committee, tells The Frisc “we didn’t hear any major objections” from its members, noting that the lower numbers “come as a surprise to no one” given the downturn in the housing market. (The controller’s office is obligated to advise the city on affordable housing development every three years, Egan notes; this update was delayed by the COVID-19 pandemic.)
Egan says the committee will meet again in April and potentially vote on recommendations for the Board of Supervisors, which decides where to set inclusionary levels. With SF facing record-breaking state mandates for new housing, and several board members already skeptical of the city’s plan, the idea of requiring less affordable housing in new construction is likely to go over as well as a fireworks demonstration aboard the Hindenburg.
That said, there’s never a good time to pitch San Francisco on less affordable housing, seeing how ”affordable housing” is one of its great political shibboleths. But SF, like America at large, has struggled for nearly 200 years to find reliable solutions to the problem of housing-related poverty — almost always with mixed results.
Tenements and red lines
Starting in the 19th century, per San Francisco historian Fergus Bordewich, a surge in immigration rapidly transformed many American cities into teeming melting pots.
“One outcome of this new, cruelly congested kind of city was the first American slums,” writes Bordewich, with “no public sewage system, little police protection, and no restriction on the number of people who could be packed into a single dwelling” after opportunistic landlords converted larger buildings into cramped tenements.
“Prior to the 1930s, the federal government was removed from the housing debate […] with the expectation that local governments and private charities should address such matters,” a 1985 Department of Housing and Urban Development report notes. But the status quo was neither relieving poverty within low-income neighborhoods nor lifting any significant number of people out of them.
In 1936, during the mire of the Great Depression, Atlanta’s Techwood Homes became arguably the nation’s first public housing project. The Housing Act of 1937 came next, with an expansion 12 years later authorizing the U.S. Housing Authority to develop more than 800,000 units nationally.
The goal was to bureaucratize housing insecurity out of existence, or at least control for the minimum quality of life that even the poorest Americans could expect.
When faced with the dilemma of inclusionary housing — demand too much from developers and scare them off, but ask too little and the public gets taken for a ride — SF hasn’t found the right balance.
But within a few decades it became clear that neither grand ambitions nor federal expenditures could entirely negate human folly. Richard Rothstein’s epic 2017 historical work on housing, The Color of Law, points out that cities quickly bent public housing policies to create segregated new neighborhoods and push Americans of color out of their existing neighborhoods, in conjunction with “urban renewal” schemes.
For example, the SF Housing Authority built thousands of new homes at Hunters Point in the 1940s and initially handed out tenancies on a “non-discriminatory, first come, first served basis,” Rothstein writes, but switched to segregating Black renters to certain areas. (We still see the impact of these decisions in SF’s demographics today.)
Over decades, the quality of public housing degraded, and President Richard Nixon placed a moratorium on new federal public housing in the ’70s. With the Section 8 voucher program, the feds pivoted to the private sector for housing relief.
More than a million units of public housing still exist in America, and in 2020, when Sup. Dean Preston proposed that SF create 10,000 new public housing units, nearly three-quarters of SF voters approved. (It’s an exception to the prevailing US attitude; as urbanist Alex F. Schwartz notes, “public housing is unpopular with everybody, except those who live in it and those who are waiting to get in.”)
Others are getting on board the new push for public housing (rebranded, perhaps not coincidentally, as “social housing”); even state Sen. Scott Wiener, who doesn’t often align politically with Preston. But short of a Marshall Plan for tens of thousands of public housing units, other sources of funding will be necessary.
Which brings us back to the inclusionary system.
Lottery with no jackpot
In the 1970s, as the feds abandoned the creation of subsidized housing to cities, California’s “taxpayer revolt” and Proposition 13 degraded the tax base that its cities might have used to fill the void.
San Francisco needed a new tool for the job, and the private market was basically the only force left to generate new homes at the needed scale. Public policy switched to “capturing market resources,” as urbanist Hala Saad Mekawy puts it. SF tinkered for years with various “urban speculation” schemes: Could commercial builders add housing for their workers in their office projects, for example, or might big employers themselves be induced to build housing? None of them stuck.
Eventually, the city decided to force developers to subsidize homes, launching an early inclusionary program in 1992 and overhauling it into the present system ten years later.
When a developer wants to build in San Francisco, the city demands that they also construct or at least finance a certain number of subsidized homes. The preferred outcome is to set aside units in the new building, which the city hands out through an intensely competitive lottery program. Hundreds or even thousands of renters jockey for a unit.
Applicants qualify based on area median income; in SF in 2023, that’s $97,000 before taxes for a single earner, or $138,550 for a household of four. (Affordable housing is sometimes priced up to 140 percent of AMI, creating the bizarre situation of San Franciscans with six-figure incomes in the running.)
If builders don’t want to include affordable units on-site, they can finance units in someone else’s project, typically 100 percent affordable run by a nonprofit. (They pay a premium to do this.) This option nets more homes in the long run, but since it means entitling and developing a whole new project, it’s the slower of the two.
The city does have other means to fund housing, such as housing bonds and a higher property sales tax, Prop I, that voters approved in 2020. (Prop I didn’t get quite enough votes to become dedicated to housing, however, and the mayor has been hesitant to automatically earmark it.)
While those approaches generate hundreds of millions of dollars, the city’s current affordable housing goals will cost billions annually. Only the private market is currently in a position to marshal that kind of cash.
In 1984, longtime urban planner Alan Mallach hailed inclusionary housing as “the best, perhaps even the only, currently available means by which residential integration can be actively fostered.” (“Inclusionary” was originally coined to counter the exclusionary effects of redlining and other racist policies.) Mallach’s enthusiasm wasn’t contagious. By 2019, only about 1 percent of U.S. cities were using the inclusionary system.
Even if City Hall heeds the controller’s new recommendations and chops the inclusionary requirements, SF’s program would still be one of the most aggressive in the country.
For all that, though, it never seems to produce enough housing.
House divided
San Francisco has consistently failed to meet the state’s goals for new affordable housing construction. In the previous eight-year cycle, which ended last year, SF only built 19 percent of its moderate-income goals — and with SF perhaps the hottest housing market in the country.
When faced with the dilemma of inclusionary housing — demand too much from developers and scare them off, but ask too little and the public gets taken for a ride — SF hasn’t found the right balance.
Meanwhile, San Franciscans of every political persuasion are constantly haggling over how to apply the program. “Somebody has to pay for it,” Nick Cammarota, general counsel for the California Building Industry Association, tells The Frisc, and says developers must raise the price of market-rate units to make up for the cost of subsidizing affordable homes.
Cammarota would like to see inclusionary levels around 10 percent. In 2010, his association sued the city of San Jose, calling its inclusionary housing model unconstitutional; the California Supreme Court ruled in favor of the city, and the US Supreme Court declined to take up CBIA’s appeal.
America’s earliest inclusionary housing proponents were on the political left and framed it as an effective tool to attack housing crises and fight back against racist housing policies. But in SF these days, the most liberal voices are the most skeptical about it.
“This myth about affordable housing being dependent on fees from market-rate development is a clever but inaccurate distraction,” two directors of the San Francisco Council of Community Housing Organizations declared in a 2015 post that decried “luxury housing.” (The authors of that piece, Fernando Martí and Peter Cohen, now sit on the city’s Inclusionary Housing Technical Advisory Committee.)
When asked about that essay, CCHO spokesperson Li Lovett strikes a more reserved tone today. “I think at this point there is more nuance,” Lovett tells The Frisc. “Inclusionary housing rules are important because those fees do contribute to a pot that can fund other projects.” Inclusionary shouldn’t be the only game in town, Lovett adds, but “I can’t say at this point what the final formula should be, it’s a decision of the collective.”
Inclusionary housing, attacked from both ends of the political spectrum, nonetheless provides a means for an awkward consensus, like roommates who don’t quite get along but who manage at least to keep the kitchen clean.
Short of turning back time to the days of robust federal housing development, or an overhaul of state tax policy — both unlikely given a divided Washington D.C., and California voters’ recent refusal to mess with Prop 13 — we only have a few tools to chip away at our housing deficit. When all you have is half of a hammer, you nail down whatever you can.