September 2008

Funding for Public Amenities Falls Short in Eastern Neighborhoods Area Plans

By Lisa Tehrani

After eight years of analysis and debate by the San Francisco Planning Department and concerned citizens, the San Francisco Planning Commission approved the proposed Eastern Neighborhoods Area Plans early last month.  The proposed Plans will now be considered by the San Francisco Board of Supervisors, which is expected to green light them, though likely with some changes.  The Area Plans include new zoning designations in four Southeastern neighborhoods:  Central Waterfront, Showplace Square/Potrero Hill, Eastern South-of-Market, and the Mission.  Much of the new zoning would make land currently set aside for industrial use available for residential development, resulting in an estimated 7,500 new housing units.

As part of the planning process the Planning Department commissioned a study to determine how much it would cost to provide the public amenities – such as open space, educational facilities and transit improvements – that would be needed to service the new population prompted by the Area Plans.  Under state law, cities must demonstrate, through a “nexus” study, that there’s a link between new development and the need for additional public services in order to assess the developments an impact fee to pay for them.

The Area Plans’ nexus study recommended fees that City planners felt would dampen development activity:  roughly $21 per square foot for residential development and between $12 and $243 dollars per square foot for nonresidential development.  Based on estimates of the amount of fees developers would likely be willing to bear and still go forward with their projects, the Department ultimately proposed fees equal to $8 a square foot for residential development and $16 a square foot for nonresidential development. These fee levels would rise if a developer increases building heights by up to four stories over the height limits set for the area.

Based on its proposed fee levels the Planning Department estimates that new development will yield $150 million in total revenue, less than half the estimated $400 million needed to meet the open space, transit, child care, library, and educational needs prompted by the anticipated population increases in the four neighborhoods.

The Planning Department proposes that a mix of alternative funding sources be tapped to make up the quarter billion dollar public services deficit, including tax increment financing, community benefit districts – which would either divert tax revenues that otherwise would go to the City’s general fund; or assess fees on neighborhood businesses and residents – and grants from other government agencies, businesses and foundations.  However, the Department has provided little evidence to support the viability of these options.  “All of these funding mechanisms are good ideas, but they all have issues and the Planning Department does not offer a process on how to implement them,” said Tony Kelly, President of the Potrero Boosters Neighborhood Association.

According to the Planning Department, tax increment financing could yield up to $170 million over two decades.  However, this financing tool is only legally permissible in redevelopment areas; implementing it elsewhere would require a change to state law.  Ken Rich, Area Plans Program Manager, explained that the Planning Department is looking at Chicago as a model for tax increment financing.  The Board of Supervisors is expected to discuss the option as part of Area Plans hearings slated to be held this month.

Community benefit districts have been created along a few of the City’s commercial corridors to help pay for street beautification, among other public services.  However, the districts yield modest revenues, equaling a few hundred thousand dollars a year. Implementing this option would require ballot approval by the property owners that would be charged.  

The Planning Department is counting on grant funding to supply a large portion of the remaining community amenity costs.  Rich explained that the Department has already been awarded more than $1 million to examine transit effectiveness strategies.  Setting aside the relative small grant size compared to the potential need, Kelly counters that this study should have been completed before the Area Plans were adopted by the Planning Commission.

While the proposed impact fees would not generate sufficient revenues to pay for needed public services, Rich pointed-out that San Francisco charges a variety of fees and imposes a number of mandates that increase development costs.  In addition to impact fees, the Planning Department proposes that under the Area Plans new developments consist of 18 percent below market rate units.  In contrast, new residential development in other San Francisco neighborhoods are required to provide only 15 percent of their units at below market rates.  Building height limits would be allowed to increase one to two stories if a new building has 20 percent affordable units; and up to four stories if it has 22 percent affordable units.  If a developer chooses not to develop the affordable units they can dedicate sufficient land to the City suitable to construct 25 to 40 or more below market rate units.

Several years ago the Board of Supervisors adopted a policy specifying that new residential development in the Eastern Neighborhoods consist of at least 64 percent below market rates. The Planning Department’s proposal meets only half of that standard.

The Area Plans also include an incentive to develop middle income units, affordable to those earning 120 to 150 percent of the area median income. Under that provision 30 to 45 percent of units that are in a development would have to be available for middle income tenants. The percentage required also varies based on the height of the building.

Kelly is concerned that with inadequate impact fee revenues the neighborhoods could suffer.  “We are definitely the most deficient on open space and transit and the Board of Supervisors needs to figure out how to make the plans fully supported,” he explained.  “This is how you create a NIMBY [Not In My Back Yard] response by the public; this is how you make all the existing and new residents miserable. You have to have those improvements otherwise there is no reason to do the development.”

“The skepticism is understandable,” commented Rich, “but it remains true that this is the most ambitious effort we have done in the City so far. We have been very upfront about the gap that exists. The impact fees and grants get us a certain part of the way but we have been clear that we need another funding source to get us the rest of way.”