San Jose Offers Tax cut to “Unblock” Housing Construction

The City of San Jose has proposed a solution to “unblock” the multifamily construction pipeline, which had no market-rate project larger than 20 apartments break ground this year.

The City Council has approved a 50 percent cut in construction taxes for the first 1,500 units for projects in designated growth areas that applied by June 2022 and received building permits until the end of next year, the San Jose Mercury News reported.

The city will also apply a 25 percent tax reduction for up to 8,539 units of eligible projects beginning in 2026. It will also reduce park fees in North San Jose by nearly half and delay the payment of taxes until the receipt of a certificate of occupancy.

Some 35 projects, including 7,357 market-rate and 2,276 other units, could qualify for the incentives.

“I frankly would rather get the building into the ground, build the housing that we all agree is our No. 1 priority and have the recurring revenue to the city of property and sales taxes going forward,” Mayor Matt Mahan told the council.

“I don’t think we should think of it as a loss because, frankly, we got nothing this year. Literally nothing.”

High interest rates and a rise in labor and material costs have largely brought commercial and residential development to a standstill. So San Jose has turned to building incentives to help projects pencil out, according to the Mercury News.

The city has rolled out office leasing incentives for new tenants. It also extended its Downtown high-rise project, which offers a reduction in building and construction taxes for projects that obtain permits next year and receive a certificate of occupancy by 2029.

When city officials voted to extend the Downtown program this summer, they requested staff to look at other programs San Jose could use to “unblock” multifamily projects.

San Jose has a state-mandated plan to build 62,200 homes by 2031, which would average 7,775 units per year, according to its housing element blueprint.

But the city has struggled to keep up, with an average of one multi-family building breaking ground a year for the past few years. In the last fiscal year, San Jose issued permits for 2,666 residential units, including ADUs.

“You’re 5,000 units short just last fiscal year, so I don’t know how you’re ever going to meet state law to produce enough housing if you don’t take every action within your power to incentivize and induce housing production,” land-use consultant Erik Schoennauer told the Mercury News.

Housing advocates raised questions about details in the proposal, including waivers of in-lieu fees for projects that provide at least 5 percent of units for affordable housing. They said the fees are crucial to funding other affordable housing projects.

Steve Lynch, director of planning and entitlement for Palo Alto-based Sand Hill Property, said a few of its projects qualify for the incentives, including a 100-percent affordable housing development that stalled.

“We’ve done everything we can do to find dollars, and there are just no dollars available, so (if there is) anything that can be done to help stick some of these affordable projects, we need to do that here tonight,” Lynch told the council.

— Dana Bartholomew