When longtime supervisor and current Board president Aaron Peskin launched his mayoral campaign this spring, he promised a “Marshall Plan” for housing, teasing a new way to subsidize homes for San Francisco’s middle-income earners using “little to no public funds.”
Despite relatively well-paying jobs, many city workers and residents can’t afford homes here. So-called missing middle housing is notoriously tough to build. Affordable housing developers tend to prioritize homes for low-income renters, while standard developers prefer homes for wealthier tenants who can pay sky-high market-rate rents.
“The market alone cannot meet the needs of San Franciscans,” Peskin said at a board meeting last week.
Also last week, after three months of speculation about its contents, Peskin’s legislation emerged. It won the blessing of a supervisors’ committee, and is up for a full board vote today.
Update 7/16/24: With very little discussion, the bill passed unanimously.
Two housing organizations that often don’t see eye to eye also endorsed the bill, as did a supervisor, Matt Dorsey, whom Peskin just last week butted heads with over a different housing issue.
This relative housing harmony is for a public financing plan that Peskin says won’t raise taxes. It needs six votes to reach Mayor London Breed’s desk, and eight to withstand a veto. (There’s no indication yet of her position.)
While it may have political momentum, the plan can still fizzle if it doesn’t get two more things: A green light from the state, and the cooperation of one of SF’s least-noticed elected officials.
Bonds, not taxes
For San Francisco to thrive, it needs housing for teachers, small business owners, restaurant, healthcare, and service workers, and many others who don’t qualify for low-income subsidies but can’t afford market-rate rents.
More housing for them is baked into San Francisco’s plan for more than 46,000 new affordable homes by 2031. More than 13,000 of these homes should be priced for moderate-income households making between 80 and 120 percent of the city’s median income.
For an individual, that’s about $83,000 to $126,000 a year. Affordable housing rents are pegged at 30 percent of the monthly income for the household. Anyone paying more than that for housing is considered “cost burdened,” according to the federal government.
Under pressure from state regulators, city lawmakers including Peskin passed the city’s new housing plan in 2023. But SF has already fallen behind on its goals: only 6,000 units total have since received the green light, and only 739 of them are homes priced for moderate-income tenants. The state last week enacted a penalty that lets developers bypass much of the city’s approval red tape.
Fewer regulations are one approach to unclogging the housing pipeline. Peskin himself agreed in 2023 to a temporary reduction in the amount of affordable units that the city requires that market-rate projects include.
Peskin’s workforce housing plan comes at the problem from a different angle, with public debt financing. The twist is that, unlike many bonds voters must approve, Peskin’s plan wouldn’t raise taxes.
Think sewers and roads
The city would sell bonds to private investors, funnel the money directly to developers, and pay back the loans with the cash flow from future rents. The city has long issued tax-exempt bonds to pay for infrastructure work – think sewers and roads. Peskin’s plan treats affordable housing as infrastructure.
Because SF would own the homes, it would be spared property taxes. (Government buildings are tax-exempt; imagine the bill that City Hall would run up.) Although private developers would build and manage the homes, the city would still technically own them.
Some building costs are unavoidable, such as materials and labor. But eliminating property taxes makes development cheaper, and that savings can translate into lower rents for tenants. That’s the hope, at least.
Tax-exempt housing bonds would be a first for San Francisco, but Brett Bolton, vice president of the DC-based trade group Bond Dealers of America, tells The Frisc that bond buyers are familiar with this asset class. The approach is common in many cities, “in particular [for] low-income and multi-family housing bonds,” says Bolton.
Unlike big general bonds that require taxpayer approval, city lawmakers can tailor these smaller bonds to the needs of developers and projects. Each one would require a Board of Supervisors vote.
(A huge $20 billion bond to raise money for regional affordable housing will be on the ballot in all nine Bay Area counties this November.)
Both the Housing Action Committee, a YIMBY-friendly advocacy, and the Council of Community Housing Organizations, which is skeptical of market-rate housing, praised the proposal.
It’s “the right idea at the right time,” HAC executive director Corey Smith said at last week’s board meeting. CCHO policy director Charlie Sciammas called it “part of a shared agenda to create a more robust, just, and inclusive affordable housing system.”
So the plan has growing political appeal and insulates much-needed new housing from the ups and downs of the market. If it works, it’s a win-win; but there’s a potential problem waiting in the wings in the form of the tax man.
SoCal cautionary tale
Plans that classify housing as infrastructure are usually known as joint power authorities, and they’re new to California. The first one in the state was in Santa Rosa just five years ago, part of the bid to rebuild after devastating 2017 wildfires.
Since then, more than 40 joint-power deals totaling at least 13,800 units have been approved in California, according to a 2022 report from SPUR.
But there’s a catch: When a private body such as a housing developer uses tax-exempt public land for business, it can sometimes incur other taxes under a rule known as “possessory interest.”
We’re going to look to public officials to interpret the law in a way to maximize public benefit.”
housing action coalition executive director corey smith
The business is spared from paying property taxes, but it’s still taxed on the value that the location confers upon the business. For example, a rental car company at the airport is on tax-exempt government land, but must still pay a possessory interest tax on the value the advantageous locale adds to their bottom line.
Sometimes these deals hit snags. In 2023, the Los Angeles Times reported that middle-income residents in a joint-power apartment building in Pasadena, northeast of downtown LA, suddenly realized the sweet deal on their units might not be legal. They also might be on the hook for paying the possessory interest tax.
In 2023, California passed a law, SB 734, which specified that low-income housing is not a possessory interest conflict. But a question persists whether missing-middle homes up to 120 percent of the city’s median income, exactly the aim of Peskin’s plan, qualify as low-income under the law.
“Peskin’s legislation doesn’t address issues regarding the creation of a possessory interest for tenants with incomes above 80 percent AMI,” says Anne Stanley, spokesperson for the Mayor’s Office of Housing & Community Development (MOHCD), which oversees affordable housing in the city.
Nate Horrell, an aide to Peskin, tells The Frisc that homes under the legislation will qualify as lower-income housing because they’ll have certain protections, such as a 4 percent annual rent cap, to distinguish them from taxable market-rate homes.
The aforementioned Pasadena building was constructed years ago, bought by the city, and converted to subsidized housing.
Who has final say?
If the new homes don’t get that coveted tax-free status, developers are unlikely to bite. Stanley of MOHCD says state officials have yet to weigh in. “We’re not aware of any guidance from the state Board of Equalization clarifying possessory interest questions,” MOHCD’s Stanley adds, calling the issue “very much up in the air.”
BOE is the body that tries to ensure California counties all assess property taxes equally – hence the name. Spokesperson Peter Kim acknowledges there’s no law or guidelines for cities. There “have been some issues” in other cases, says Kim, “but every situation is unique” – hinging on legislative language and details of the developments.
Kim declines to comment on Peskin’s bill, saying he hasn’t read it. But he also deflects the expectations that Stanley has outlined, noting instead that final say should come down to San Francisco assessor-recorder Joaquin Torres. The assessor’s office sets property values, determining property taxes and thus a huge chunk of the city budget. “It really is up to the county assessor in the end,” says Kim.
Office of the Assessor-Recorder spokesperson Abby Fay tells The Frisc that every project will be a unique case: “Determining whether a possessory interest exists requires evaluating the facts and circumstances of a particular arrangement to determine whether and to what extent it meets the legal requirements.”
But Fay also puts some responsibility for clarification of the rules back on the BOE. Meanwhile, Peskin aide Horrell tells The Frisc that his boss conferred with the assessor when drafting the measure, and that Torres believes it’s possible to avoid tax hazards on a case-by-case basis.
Update, 7/16/24: After this story went live, we received a response to Horrell’s statement from Abby Fay: “The Assessor and assessor staff have been clear in every conversation about President Peskin’s legislation that our duties are governed by the laws set forth by the California Constitution and the Revenue & Taxation Code — and that we cannot provide advice on the application of state law to future or hypothetical facts. We will have to wait and see how the particulars shake out each time one of these projects is built and delivered before knowing how property tax laws will apply.”
Despite the uncertainty, at least one backer, Housing Action Coalition’s Corey Smith, is optimistic: “We’re going to look to public officials to interpret the law in a way to maximize public benefit.”