How SF lets developers cheat Muni and affordable housing out of millions

June 9, 2014, 48 hills

When the Planning Department allows property zoned for Production, Distribution, and Repair – also known as PDR — to be converted illegally into offices, San Francisco loses more than precious light-industrial land. The city also forfeits hundreds of thousands, if not millions, of dollars that would have gone to Muni and affordable housing.

That’s because new development—not only new buildings but also development that involves a change from a lower intensity use, i.e., PDR, to a higher one, i.e., offices—is supposed to trigger development impact fees.

Impact fees are charged on new development to offset the costs of public infrastructure and services that are created by new workers in those buildings.

And there’s evidence that city planners are repeatedly letting developers off the hook for those costs.

Developers are also using a little-known provision in the planning code to get discounts on the fees they have to pay to convert industrial buildings to office – providing, critics say, an incentive to wipe out what’s left of the city’s workspace for blue-collar jobs.

In three buildings alone, 48hills has found, the discounts and illegal conversions may have lost $1.7 million in Muni subsidies alone, and millions more in affordable housing money.

Impact fee rates are set differently for each land use type, based on the demand generated by that use. So for example, office development pays more than PDR, because it is a more intensive land use that attracts more people – and thus generates greater demand on housing and public infrastructure.

The two most important such fees are the Transportation Impact Development Fee and the Jobs-Housing Linkage Fee. The logic: New office buildings attract new employees who need Muni service – and put a heavy demand on the housing market, driving a need for more affordable housing.

Now questions are being raised about whether the Planning Department is discounting TIDF and Jobs-Housing impact fees when property owners seek to retroactively legalize an illicit PDR conversion into office or to legally demolish PDR space and build new offices. 

Eliminate PDR, save developers money

The development impact fee issue came up at the Planning Commission’s February 20 hearing on the proposal to demolish a two-story, 27,646-square-foot industrial building at 81-85 Bluxome Street and replace it with a five-story, 65-foot tall office building of approximately 55,000 square feet. The Planning Department recommended approval of the project.

In calculating the TIDF and Jobs-Housing impact fees, the planner assigned to the project, Brittany Bendix, did some math: She subtracted the lower fees that would apply for the existing PDR zoning from the higher charges for new office space. According to a controversial provision of the City Planning Code, the developer should only pay the difference between the existing use and a new one. This “netting out” saved the developer (and thus cost the city) hundreds of thousands of dollars.

Speaking at public comment, land use attorney Sue Hestor called the Planning Department’s disposal of TIDF and the Jobs-Housing fee a “farce.” Noting that she’d helped to formulate both programs in the course of a “long struggle in the early Eighties,” Hestor objected to reducing the impact fees by subtracting the PDR fees. That practice, she said, effectively gives property owners “credit for demolishing PDR.”

The city’s administration of impact fees was again questioned at the Planning Commission’s May 1 hearing on the proposed legalization of 80,000 square feet of PDR-zoned space at 660 Third Street, most of which  has been used for high-end offices since the late Nineties. In calculating the TIDF and Jobs-Housing impact fees, the planner assigned to the project, Rich Sucré, netted out the PDR fees from the higher office charges.

During public comment, Council of Community Housing Organizations Co-director Peter Cohen declared that Planning had “deeply discounted the [PDR-into-office conversion] fees for transit and housing, our two biggest infrastructure needs right now. What,” Cohen asked, “are the parameters for modifying fees on actual uses today?”

Speaking next, Hestor again objected to the netting out of PDR fees. She also raised another objection. Stating that the building had “already been converted illegally to office without payment of fees,” she asked, “Why the hell were the fees not imposed as this building was converted?….If the Planning Department shines on the obligation to pay fees as you are doing right now, no one will pay them.”

Hestor urged the Planning Commission “not to go on automatic pilot” and green light the staff recommendation but rather to “take its role seriously” and “resolve the issues” at hand.

On February 20 the commission mostly disregarded that advice and approved Planning Department’s recommendations, including the netted out fees, for 81-85 Bluxome.

“Why is there discounting?”

It was a different story on May 1. After a motion to follow Planning’s recommendation to approve for 660 Third Street failed for lack of a second,

Commissioner Gwyneth Borden wondered “why there is a discounting” of impact fees for a PDR-into-office conversion. “To be clear,” said Commission Chair Cindy Wu, “is there a special fee per square foot that’s allocated for a change of use?”

You’d think the arithmetic behind these fees would be laid out step-by-step in the Planning Department’s Executive Summary of these proposed conversions, but it’s not.

For that reason, as well as the fact that the numbers in the Planning Code (Tables 413.6A and 413.6B) haven’t been updated for 2014, it took me more than an hour to figure out how the Jobs-Housing fee for 660 Third Street had been calculated. The current figures appear in the Citywide Development Fee Register, which is posted on the Department of Building Inspection website because DBI is responsible for collecting the fees. To compound the confusion, the Register refers those who want to calculate “credit for existing uses” to check the outdated Planning Code tables.

Responding to the commissioners’ questions about the netting out of PDR fees, Sucré said, “It’s not a discount.” His boss, Planning Director John Rahaim, repeated that claim, adding that “if there’s an existing use, there are certain impacts associated with that use.” The fee “is simply addressing the additional impact” of the new use—in this case, the “net difference” between the higher impact of office and the lesser impact of PDR. This, Rahaim said, is “standard operating procedure.”

It’s also what’s mandated by Planning Code Section 411.3(c)(2):

 When calculating the TIDF for a development project in which there is a change of use such that the rate charged for the new economic activity catgeory is higher than the rate charged for the existing economic activity category, the TIDF per square foot rate for the change of use shall be the differences between the rate charged for the new use and the existing use.

I can’t find a comparable passage in the Planning Code about the Jobs-Housing fees. But Tables 413.6A and 413.6B indicate (after a fashion) that with a change of use from PDR to office, PDR fees are to be subtracted from the office fees.

Here’s the difference between TIDF and Jobs-Housing fees on 660 Third Street when the PDR fees are netted out and when they’re not:

                                   With PDR Netted Out (as per Planning Department calculations)

Transit Impact Development Fee:              @ $6.10                $  488,000

80,000 gsf Office @ $13.21 minus

80,000 gsf PDR @ $7.11

Jobs-Housing Linkage Fee:                       @ $7.02                $   561,600

80,000 gsf Office @ $24.03

minus 80,000 gsf PDR @ $17.01

 Full Office Impact Fees

Transit Impact Development Fee            @) $13.21                $1,056,800

(80,000 gsf)

Jobs-Housing Linkage (80,000 gsf)       @) $24.03                $1,922,400

The difference: $1.9 million. That’s money the developer keeps and the city loses.

Hestor’s consternation at the Planning Code’s provisions for netting out is understandable. As she intimated, no such policy appeared in either the original 1981 TIDF ordinance or the original 1985 ordinance, which created the city’s Office Affordable Housing Production Program.

The 1981 TIDF ordinance, enacted as new Chapter 38 of the San Francisco Administrative Code (now Section 411 of the Planning Code), stated that the

fee shall be calculated on the basis of the number of gross square feet of office use added by the new development, multiplied by the per-square foot rate…(Section 38.4)

The maximum rate was set at $5 a square foot. Nothing about netting out prior non-office uses.

The 1985 ordinance that created the city’s Office Affordable Housing Production Program, the predecessor of the Jobs-Housing Linkage program, was added to the Planning Code as Section 313 (now Section 413). Section 313(f) stated:

The amount of the fee which may be paid by the sponsor of an office development project in lieu of developing and providing the housing required…shall be computed as follows:

Net addition gross sq. ft. off. space X $5.34 = Total Fee

Again, not a word about netting out.

My research indicates that the Board of Supervisors added netting out to the TIDF ordinance in May 1984. I’m still trying to determine when they added it to the Jobs-Housing program; in any case, it’s there now.

But that doesn’t necessarily let the owners of illegal PDR-into-office conversions off the hook for full office impact fees—at least not as far as the TIDF is concerned.

Section 411.3(d)(1)(B) of the Planning Code says:

A credit for a prior use may be given only if the prior use was active on the site within five years before the date of the application for a building or site permit for the proposed use.

Planning director misses the point

At the Planning Commission’s hearing on 81-85 Bluxome, Hestor said that a T-shirt business that long ago occupied the building had been her client. Her remark elicited the following exchange between Borden and Rahaim:

Borden: “If the use is currently not operating, if it hasn’t been a T-shirt factory for I don’t know how many years, is the impact still the same?”

Rahaim: “It has to do with the permitted use on the site. PDR could have gone in there without paying any impact fees.”

Borden: “Not whether or not it’s operating.”

Rahaim: “That’s right.”

No, it isn’t. As per Section 411.3(d)(1)(B), if the T-shirt factory or any other PDR use had not been operating at 81-85 Bluxome for more than five years, the project should not have gotten the credit for the prior, lower intensity PDR use and should have paid full office impact fees.

To confirm that interpretation, on I asked Zoning Administrator Scott Sanchez: if a building is zoned for PDR but was de facto converted to offices more than five years before the property owner has applied for a change of use to office, is the PDR impact fee still netted out, or does the de jure PDR zoning prevail?

Sanchez replied:

If the use was illegally converted more than 5 years ago then the prior use credit in Section 411.3(d)(1) would not apply to a permit to legalize the current use.

Under the heading “Site Description and Present Use,” the staff report for 81-85 Bluxome said nothing about the current tenants. But Brett Gladstone, the attorney for the property owner, stated in a letter to the Planning Commission that “The building’s last [i.e., current] legal use is classified by the Planning Department as industrial; however, the building is currently being used as office by six different tenants.”

In other words, it’s been converted to office space. Without a conversion permit. And according to Sanchez, that means there was no PDR on the site and thus the developer should not get that credit.

Unlike 660 3rd Street, 81-85 Bluxome is in a zoning district, Mixed Use-Office, that allows general office use. Nevertheless, any change of use needs to be authorized by the Planning Commission, and impact fees need to be calculated. And any new office space is supposed to be counted against the annual allocation set by Prop. M, the 1986 growth-limit law.

With the PDR fees netted out, the TIDF for 81-85 Bluxome was set by the Planning Department at $529,986.94. If it had been found that no PDR had been active on the site for at least five years, and the project had been charged full office impact fees, the property owner would have been liable for $895,190.60—a difference of $365,203.66.

Last October the Planning Commission approved the legalization of 123,700 square feet of PDR into offices at 665 Third Street. The representative of the building’s owners blithely told the commission that the building had been occupied by office users long before the current SLI zoning was enacted in 1990.

As with 81-85 Bluxome and 660 Third, the staff reports contained no references to the Planning Code provision that cuts off netting out for PDR at five years before a current application for a change to a higher intensity use. Instead, the planner netted out the PDR fees, imposing a TIDF of $722,408. Full office Transportation Impact Development fees would have amounted to $1,634,077—a difference of $911,669.

A full 22 months before the October 24, 2013 meeting when the project came before the commission, Planning knew that office had been in continuous use for five years before the application for a change from PDR. In a letter dated January 12, 2012, the owners’ lawyer, Harry O’Brien of Coblentz, Patch, Duffy, and Bass, told the department:

“The evidence demonstrates that the existing office uses were regularly operating on a continuous basis throughout that two year period [January 19, 2007 to January 19, 2009]. Furthermore, the office spaces in the Building are currently in office use and are not accessory to another use.”

If the Planning Commission approves the $558,000 TIDF that staff has recommended for 660 Third Street instead of the full office fee of $1,056,800—the item was continued from May to June 12—the amount lost to the city’s transit from these three projects alone will be $1,745,673.

Very old numbers

Unlike the TIDF, the Jobs-Housing fee does not reflect whether a prior use was active on a site within a specified period time. “For the purposes of [Section 413],” Sanchez told me, “we refer to the last legal use regardless of the date it was last active.” So there’s currently no legal basis for challenging the netting out for this fee.

But there’s a different legitimate and perhaps legal objection to the way the Jobs-Housing fee is calculated: the rates are based on an analysis made almost 20 years ago.

Jobs-Housing impact fees are grounded in so-called nexus studies—in-depth research usually performed by a consultant that delves into the linkages among buildings, employees, households, income distribution, and housing demand by affordability level at a particular date.

The Planning Code states: “The required housing exaction shall be based upon formulas derived in the report entitled “Jobs Housing Nexus Analysis” prepared by Keyser Marston Associates in June 1997” (Section 413.1.D).

By contrast, the TIDF is based on a nexus study done in 2011.

The cost of building affordable housing – and thus the financial need the city can demonstrate – has risen dramatically since 1997. In fact, David Schnur, an affordable housing developer with the Community Housing Partnership, told 48hills that the price per affordable unit has at least doubled in that period.

In 2010 the Board of Supervisors passed an ordinance that requires impact fees to be evaluated every five years, starting on July 1, 2011.

To state the obvious: the Jobs-Housing fee numbers are wildly out of date.

And both the TIDF and the Jobs-Housing numbers are wildly anachronistic in another key respect: they assume office densities that are much lower than the worker-to-square-footage figures in the flexible, open offices favored by the tech industry.

The TIDF assumes an employment density of 276 square feet per employee. The Jobs-Housing Linkage fee assumes a density of 275 square feet per employee.

By contrast, the draft Central SoMa Plan, published in 2013, states:

With few private offices and mobile employees working at shared tables and workstations, the typical contemporary workplace environment can reach occupancy densities of more than one employee per 200 square feet, far denser than the historic high-rise density of one employee per 275 square feet (p. 33

And the new five-story office building at 81-85 Bluxome Street is going to have a density of one employee per 120 square feet, according to the letter that the owners’ attorney sent to the Planning Commission.

In its current form the site is greatly under-utilized [developer-speak for not yielding potential maximum return on investment]. Assuming average industrial Building Code occupancy levels of one person per 1,000 square feet, the building in its “as is” condition can support 27 employees with an industrial use, in a non-ADA compliant environment. As an office building experiencing occupancy levels of one person per 120 square feet, the “as is” structure supports 225 persons.

However, the new development (at almost twice the existing square footage), assuming the same one person per 120 square feet occupancy, could house a total of up to 522 persons, resulting in a 232% increase in San Francisco jobs[at this address] as compared to the current use.

Did the TIDF and Jobs-Housing impact fees imposed on 81-85 Bluxome, which netted out PDR from office, account for a 232 percent increase in employment on the site? No – not even close.

The referee isn’t paying attention

The City Planning Code cites the payment of the Jobs-Housing fee as “a condition of the privilege of development.” That’s an important phrase: It indicates that developers don’t have some divine right to build whatever they want, at any cost to the city. And the Planning Commission is supposed to be the referee here – the agency that makes sure that privilege is not abused, and that development decisions are not driven entirely by the need of private project sponsors to make an extra buck.

Right now, the commission is letting all sorts of dubious conduct occur with impunity. There’s no process for monitoring the status of industrial buildings to check for—and better yet, to prevent—illegal conversions. Planning staff don’t routinely provide the commission with a history of the use of a building before approving conversions. The fees that developers pay are out of date and don’t reflect costs on the ground. The “netting out” of PDR costs provides a perverse incentive to get rid of desperately needed space for blue-collar jobs.

They need to walk the hard talk they initiated in May 1 and see to it that the city’s laws are enforced. Asking hard questions is the necessary first step; doing the right–which is to say, the legal–thing is the next step.

And if the supervisors don’t take a hard look at how the laws can be changed and updated, the loss of PDR space – and the loss of millions to the city  – is going to continue.