SF Could Hit Developers with New Fees to Keep Nonprofits from Fleeing

Howard St.

The view from Howard Street looking east at a proposed 5M high-rise

December 12, 2014

Non Profits Splitting Town
A San Francisco Business Times article recently revealed a rather interesting statistic: Approximately a quarter of the nonprofits in the City packed their bags and left town between 2011 and 2013.

Business Times reporter Cory Weinberg interviewed Steven Wertheim, Project Manager at the San Francisco Planning Department, Peter Cohen, Co-Director of the Council of Community Housing Organizations and Cushman & Wakefield’s Research Director Robert Sammons to get their insights on this trend.

Among other things, Sammons said developers already feel the squeeze from the annual Prop. M office space cap, which could delay new projects starting in 2015. New fees would be a “slippery slope” to making office projects unfeasible, he said. Peter Cohen’s take on the situation is that he feels we are in the midst of  “a serious problem in the central city about nonprofit service providers getting displaced.”

By Cory Weinberg

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San Francisco developers looking to build office towers in parts of the South of Market neighborhood could for the first time have to pay extra fees to help create new space for nonprofits in the area.

The impact fees — aimed to help nonprofits that have started to flee the city because of high rents — could be adopted as part of the Central SoMa Plan. That zoning plan will set new zoning rules and add millions of dollars worth of land value to the 10.5 acres around the future Central Subway line. (The $1.59 billion subway line now under construction will run 1.7 miles from SoMa to Chinatown.) But the fee plan under consideration will likely be controversial in the business community.

“It’s a totally unprecedented move,” said Steven Wertheim, project manager at the San Francisco Planning Department. “What we’re trying to do is make sure that there’s new space for nonprofits moving forward as the community expands. That could mean that a new office building may have to have one floor be for nonprofits.”

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The planning department posted a series of policy papers on its website this week that outlined its current thinking as the Central SoMa plan develops. It also tried to show it was serious about getting 33 percent of the housing units built in the area to be within reach for low- and middle-income residents — giving voter-approved Proposition K the first sign of city enforcement.

Whether the new rules on nonprofits come to pass — and how much developers have to pay — will likely depend on an economic feasibility study that the City Controller’s Office will release early next year. Office developers across the city already pay about $24 a square foot to subsidize housing. “There’s only so much a project can give before it’s not profitable,” Wertheim said.

The fees would be similar to the rules that bind apartment and condo developers into building affordable housing units either on-site or off-site or subsidizing their construction. The new money would go toward helping nonprofits designated as “community facilities,” which are organizations such community centers, day care facilities or cultural facilities that directly serve the neighborhood.

Lending a Hand to Nonprofits
About a quarter of the nonprofits in the city left between 2011 and 2013, according to a city report last month. The Central SoMa planning area has a higher concentration than found in most areas of the city, but still holds only about 5 percent of the 2,000 nonprofits in the city that are considered community facilities.

California state law bans any city from instituting a rent control system for commercial buildings, so nonprofits are typically competing with for-profits like tech companies for space.

Efforts to lend an extra hand to nonprofits — particularly ones like recreation centers and child care facilities that directly serve the neighborhood — have gotten momentum this year. A task force convened by Mayor Ed Lee recommended a slew of fixes and subsidies in May to prevent nonprofits from getting displaced, including floating the idea of development fees. The issue got national attention this week when Bloomberg Businessweek wrote that “Nonprofits Can’t Afford San Francisco.”

Peter Cohen, co-director of the Council of Community Housing Organizations, said the signs that the planning department is prioritizing development fees shows that it is interested in taking the concept “down the field.”

“We have a serious problem in the central city about nonprofit service providers getting displaced. It hadn’t been accounted for in how the city does its planning,” he said. “It won’t singularly take care of the destabilization, but it could be a significant contribution coming on the developers’ dime.”

A ‘Slippery Slope’
Market-rate office developers likely will push back if that dime is too onerous on their projects. Those developers are eyeing the Central SoMa area because it will get rezoned to allow them to build taller towers and turn more properties from industrial to office buildings, jacking up land values.

The plan area now is home to massive office proposals like Forest City’s 5M project, which will add 871,900 square feet of office space to the blocks surrounding the San Francisco Chronicle building when it is completed over the next decade or so. More office developers will be attracted to the planning area because its “more or less flat, is easier to build in this area and is a logical extension of the financial district,” said Robert Sammons, research director at the real estate brokerage Cushman & Wakefield.

But Sammons said developers already feel the squeeze from the annual office space cap, which could delay new projects starting next year. New fees would be a “slippery slope” to making office projects unfeasible, he said.

“Where do you draw the line? How far do the for-profit players get pushed before they push back? That’s key here,” he said.

The planning department would also institute a mix of mechanisms to help nonprofits, including instituting development bonuses for office developers that protect existing community facilities. The plan could also incentivize developers to build new space for organizations that focus on production, distribution and repair, or PDR.

Giving Teeth to Affordable Housing Wishes
When voters approved Proposition K by a wide margin, they passed a measure that “attempted to ensure” that one-third of housing in the city is affordable. But it lacked regulatory enforcement. The planning department now appears to be taking up that goal as a mandate.

The Central SoMa plan will construct about 4,200 new housing units through rezoning. The plan will now try to figure out the right mix of carrots and sticks to make sure a third of those are affordable.

The policy paper on affordable housing that the planning department posted this week outlines proposals to increase the inclusionary housing requirements on developers building on upzoned sites, based on how much their land value has increased. The plan could also look to funnel all the in-lieu fees that housing developers pay into the Central SoMa area, instead of pouring them into the city’s general fund.

Wertheim said the planning department will have to wait until the city completes an economic feasibility study of the proposals, but added that it would make sense to raise affordable housing requirements on developers because of the increased land value.

A mayoral task force on inclusionary housing policies is also floating new legislative proposals for next year, such as allow developers to build more middle-class units and allowing for-profit developers to link up with nonprofit developers, the Business Times reported last month.

Cohen said that the planning department’s move to get more specific on what it could do to spur more affordable housing in the area is a step forward.

“What the city has done in past plans is, at a very aspirational level, talk about mixed-income and diversity of housing choices, and have had few actual mechanisms and no real strategy to get there,” he said. “You have to have a game plan built into the plan at the front end so you have more than just aspirations and cool ideas.”

Cory Weinberg covers real estate and economic development.

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