Monday, March 22, 2010

Controller's Economic Impact Report: Transfer Fee and Fee Deferral Options for Developers

BOMA San Francisco Members:

Two pieces of legislation have been proposed that are intended to stimulate the local economy by encouraging private construction in San Francisco. Both pieces of legislation offer developers new options for how and when they pay fees to the city. Changes in the way fees are paid can lower the cost of development, accelerating the financial feasibility and construction of new projects that are currently not moving forward because of the depressed state of the residential and commercial real estate markets.

The San Francisco Controller's Office of Economic Analysis (OEA) projects that, if developers elected to use these options, the combined effect of the two pieces of legislation could stimulate the construction of as many as 75-80 housing units per year, over the next twenty years. This development will expand the San Francisco's economy by an average of $250 million per year, and create an average of 330 jobs, across all industries.

Both pieces of legislation intend to reduce development cost by deferring when fee payments are due. San Francisco requires developers to pay a fee for affordable housing, or build affordable housing, in proportion to the size of their project. One proposed ordinance gives developers the option to reduce their affordable housing requirement by 33%, in exchange for accepting a transfer fee on their property. The transfer fee would require all future sellers of the property to pay an additional 1% of the sales value to fund the city's affordable housing efforts. In effect, the transfer free option attempts to stimulate development by reducing the upfront cost of funding affordable housing, and pushing this cost on to future occupants. If property buyers accept this fee, the transfer fee option stimulates development. The OEA projects that, in time, the city will generate more affordable housing funding under the transfer fee option that it would under the current system, although funding will decline in the short term.

San Francisco also requires other fee payments, which fund the new infrastructure needed to serve new development. The second proposed ordinance allows developers to defer these payments until just before the new buildings are occupied. This will reduce developers' financing costs during the development process. The amount developers are required to pay will not change, and the city will not lose any fee revenue with this option. It will create a short-term reduction in fee revenue for the city, for approximately two years, before the deferred fees on the first affected projects are paid. However, the city has sufficient cash balances in its neighborhood infrastructure funds to continue two years of work at an average rate of expenditure.

The full report may be downloaded here.

BOMA San Francisco supports these measures and urges the Board of Supervisors to pass them without delay.

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