A proposal to build 91 units at 2100 San Pablo Ave. was abandoned last year after the city increased inclusionary housing per project from 10% to 20%. Changes this week to a Berkeley fee related to affordable housing could give developers more pause about building in town, some say. Image: RGArchitecture

Berkeley, already among the most expensive places to build in the East Bay, just raised the price tag for developers who do not include affordable units on site.

Earlier this month, the Berkeley City Council postponed its vote on the fee change until it could review a new analysis reflecting all existing fees, the cost of 100% union labor, current land costs and rent rates, and the cost for underground parking. That was not provided Tuesday night, but council voted anyway to put the new fee into effect.

Some say the increase will mean more affordable units will be built around town as new projects are constructed. Others say it’s the nail in the coffin that will turn developers away from Berkeley for good — or at least until conditions become more favorable, with lower fees or a speedier review.

It already costs nearly $500,000 per unit to build apartments in downtown Berkeley, according to a prior analysis from development consultant Mark Rhoades. That’s significantly more expensive than any surrounding city, by a long shot, he’s said. Others argue that Berkeley is also a significantly more desirable location, which should help bridge that gap due to higher rents and demand.

Officials voted Tuesday night, with eight in favor and Councilwoman Lori Droste abstaining, to increase a fee linked to affordable units from $34,000 to $37,000. Council also changed the formula for how the fee is calculated so it’s based on the total project rather than just the market-rate units, as it was previously.

Under the prior policy, developers of new market-rate housing in Berkeley could either build 20% affordable units on site, or pay a $34,000 fee for every market-rate unit in a project. That money goes into the Housing Trust Fund and the city can use it to build affordable housing in other parts of town. Prevailing urban planning wisdom advises that it’s generally better to mix market-and below-market-rate units into the same project, although other types of development — such as the supportive homeless housing project in the pipeline on Berkeley Way — can leverage Trust Fund dollars to go much farther.

State law says cities cannot require developers to build affordable units, but cities can charge a fee if they don’t. In Berkeley, it’s called the “affordable housing mitigation fee,” and it has been a controversial topic on council for years. That’s due to competing philosophies about affordable housing policy in general and also different interpretations of related data. Set the fee too high, and developers won’t pay. Set it too low, and no one will mix affordable units into market-rate projects.

Kate Harrison said in mid-June that her proposed changes to the mitigation fee are minor. Photo: Emilie Raguso

Council members who support the fee, put forward by downtown Councilwoman Kate Harrison, said the change is modest and won’t have a negative impact. They say developers can still pay the old amount, $34,000, if they pay it years in advance. According to Councilwoman Droste on Tuesday night, however, no developer has ever paid early to take the prior city discount.

Harrison said the consultant who did a 2015 report she largely based her increase on took a new look at the old numbers recently and found they had understated parking costs, and overstated borrowing costs. She said the 2015 study also did not factor in new average fees per unit of $3,000 from Berkeley Unified, or new fees to be paid to promote the arts, approved last year by council and under consideration for their own increase.

But Harrison said her proposal is sound because a March 2016 analysis said Berkeley could go up to a “marginally feasible” fee of $45,000. Harrison described her $3,000 bump to $37,000 as “completely within the feasible range.”

“We’re not anywhere near going off a cliff on this,” she said. “I know we’ve gotten a lot of letters saying this is going to stop the construction industry in its tracks. I don’t believe that.”

She said that’s because project applications continued to come in last year after council increased the percentage of affordable units per project from 10% to 20%, and boosted the mitigation fee — if those units aren’t included — from $28,000 to $34,000 per market-rate unit.

That fee change went into effect less than a year ago, on July 12. Since then, nine medium or large projects totaling 465 units have been submitted to the city. None have yet gotten before the city’s zoning board for a use permit vote, however.

Projects in the pipeline: A Berkeleyside review

By this time last year, according to a Berkeleyside analysis of zoning board agenda minutes, the board already had approved 327 new units, in three buildings of at least 4 stories, and a 16-story hotel downtown. Over the same period this year, the only large project to be approved by the board — since the council majority, and its appointees, swung to the left — was a 6-story group housing complex at Telegraph and Haste (“housing for 238 people in 161 bedrooms,” and no parking) set to be student housing.

The zoning board had, until this year, been on an upward trend in terms of units approved annually in mixed-use buildings of at least 4 stories: 353 in 2014, 476 in 2015 and 509 in 2016. The board also has approved 25 live-work units since 2014, though those don’t technically count as residential development under city code. All 1,363 of those units were approved before the November election.

To be fair, the newly-composed board hasn’t voted down any large mixed-use projects, either. That’s because none have been scheduled for use permit votes since the election. Several large developments — including the 18-story tower proposed at the Walgreens site on Shattuck, 155 units with extensive retail space and a large parking garage at 1900 Fourth (the Spenger’s parking lot), and 39 units at 2556 Telegraph (“The Village”) — have received comments during preview sessions or environmental reviews, but use permit votes have not been scheduled.

As a result, it remains to be seen how the new board will vote when those permits are on the table. There are currently 19 Berkeley applications or pre-applications for nearly 1,200 units that could come before the board eventually, unless developers walk away or want to wait it out.

So far this year, six medium or large projects totaling 313 units have come in, according to a city log updated June 29. Last year, 684 units in nine projects were submitted, though some have reportedly been tabled already due to council policy changes that resulted in financial infeasibility. Several older applications linger, too: According to the city website, 190 units from four mixed-use projects submitted between 2013 and 2015 are still under review. Those include The Village project noted above, and 92 units proposed in a 12-story tower on Shattuck that has been before the Design Review Committee six times since 2015, with no return to the zoning board. Forty-four units at 3000 Shattuck, submitted in 2015, just had design review in mid-June (but no zoning board vote yet). And a 15-unit proposal submitted in 2014 doesn’t seem to have gone anywhere.

Councilwoman Maio: “I wish I felt more certain”

“I don’t want to make a mistake, and I know that’s the same thing for everybody else on this council,” said Councilwoman Linda Maio (file photo). Photo: Emilie Raguso
“I don’t want to make a mistake, and I know that’s the same thing for everybody else on this council,” said Councilwoman Linda Maio (file photo). Photo: Emilie Raguso

Bay Area cities have struggled in recent years to find creative ways to encourage developers to build as much below-market-rate housing as possible by setting standards for inclusionary units and creating fees and policies to help combat increasing gentrification. But fiscal analyses often lag far behind policy decisions, and interpretations of data vary widely among interest groups. In addition, the public demand for affordability can be at odds with economic realities. Take San Francisco, where voters last year passed a law to set 25% of a project’s units as affordable for developers who don’t pay the impact fee. Last month, SF city officials agreed to reduce that to 18% after an economic feasibility study said 14%-18% is the right amount in most neighborhoods, KQED reported.

Add to the mix the deep distrust, particularly in some of the most vocal neighborhood groups in Berkeley, of developers — who are often characterized as greedy and unscrupulous: shadowy, outside investors who prioritize the bottom line and skew their financial analyses to their own ends. On the flip side, in the past year or so, a number of young renters and advocates of density have spoken out more forcefully about what they see as the desperate need to address the housing crunch, urging city officials to build, build, build.

Some in the industry have said developers are already turning away from Berkeley to other cities that do more to encourage construction. In Oakland, a 5-story building in Temescal can get permits without a single public hearing. There, starting July 1, the multi-family affordable housing impact fee per unit will range from $9,250-$12,000, depending on the zone, or 5%-10% inclusionary units depending on the income threshold. Up in El Cerrito, as another example, there’s no requirement for affordable housing at all, or a public hearing for a 5-story building along transit lines. Emeryville has a $28,000 impact fee, based on total units, and only a 12% inclusionary option for those who don’t want to pay it.

Councilwoman Linda Maio said Tuesday night, before the vote, she was concerned about whether Berkeley’s fee change is justified given the lack of new data.

“Personally, I don’t want to make a mistake, and I know that’s the same thing for everybody else on this council,” she said. “I want to get as much benefit as we can for this crisis that we’re in — either money or inclusionary units…. But I wish I felt more certain about whether this formula’s going to work for us or whether it’s going to shut people out.”

Harrison has repeatedly said city studies have listed a maximum fee of $84,400, but failed to note that those studies said market conditions would in no way support a fee that high.

“The maximum fee identified by the nexus analysis per market rate unit is higher than today’s market conditions would allow in terms of financial feasibility for a project. Thus, in order to continue stimulating market rate housing production in Berkeley” the appropriate fee was $34,000, the 2015 study concluded. The 2016 study, too, identified the $84,400 fee as “not financially feasible.”

Wildly opposing views of what the fee increase will mean for Berkeley

In a letter to council earlier this month, consultant Rhoades said per-unit fees under consideration by council could increase in Berkeley by $12,700 — and that calculation was based on a mitigation fee assessed on market-rate units only. According to recent calculations completed by his office, each unit in a hypothetical 82-unit sample project downtown is already assessed fees of about $42,000.

“If the Council wants fewer homes and fewer fee dollars you should proceed with tonight’s fee increases — raise the cost of housing and have less of it,” he wrote to officials this week.

Rhoades did not speak at Tuesday’s meeting, but others who believe the fee may be damaging argued that, instead of raising it without good data, council should do more to increase density, especially around transit hubs. One said council is “gambling” with the needs of low-income residents. Putting the fee at a “marginal level” means some projects will pencil out and others won’t, said another.

Eric Panzer, who works with Livable Berkeley but spoke for himself, called it a “fatal misunderstanding or a lie” to say anything significant was updated in response to council’s request earlier in June. He recently wrote a 19-page paper to help council “refine its proposals to better serve the goals of ensuring greater housing choice and affordability.” He dinged the fee hike policy for “unsupported conclusions” and inattention to economic feasibility. Panzer closed his remarks by whipping open a black fan labeled “shade” to demonstrate his criticism of the proposal, then turned abruptly and left the podium.

Many other members of the public demanded as high a fee as possible to, the logic goes, basically force developers to include below-market-rate units on site because they can’t resist building in Berkeley.

“Charge as much as you can in fees in order to encourage people to do inclusionary housing,” one speaker told council. “This stuff about how the developers are going to go away, BS!” said another. “I’m watching my friends and neighbors who can’t afford to live here, they’re moving out,” said a longtime Berkeley resident who urged council to increase the fee.

Wrote Charlene Woodcock, in a June 15 letter to officials, “We elected a new council majority to deal with our housing crisis but they seem to be too timid or unwilling to oppose the pro-development interests even though Berkeley voters elected them to do so.… We need bold changes to reverse the huge oversupply of high-end housing that is crowding out long-time Berkeley residents who can’t afford the dramatically higher rents and house prices.”

Woodcock told council that “several of us” had consulted “a very experienced land-use attorney” who said Berkeley could also make significant zoning changes to alter already approved projects — to require zero-net energy use, and 40% low-income units or more — “until ground is broken.”

Jassmin Poyaoan, director of the Community Economic Justice Clinic at the East Bay Community Law Center in South Berkeley told council Tuesday night, of the fee increase: “These types of changes to the ordinance are what’s going to get us out of this crisis.”

Hahn: “This is a non-event”

“We don’t need a new study. It’s the same fee,” said Councilwoman Sophie Hahn (file photo). Photo: Emilie Raguso
“We don’t need a new study. It’s the same fee,” said Councilwoman Sophie Hahn (file photo). Photo: Emilie Raguso

Councilwoman Sophie Hahn said she agreed with Harrison’s characterization of the fee as modest.

“We’re not raising the fee. The fee is the same. We don’t need a new study. It’s the same fee,” she said. “Now you pay it at a different time. That is the only difference.” She did not mention the change in fee calculation, from market-rate only (80% of them) to 100% of a project’s units. Harrison’s proposal also automatically increases the updated fee every other year by pegging it to the California Construction Cost Index beginning in 2018.

“I don’t understand why so much has been made of this,” Hahn said. “This is a non-event.”

Councilwoman Droste disagreed, noting that some of the nation’s leading experts in affordable housing and displacement have come out against Harrison’s proposal. Those include, she said, “Barack Obama’s assistant secretary of housing and distinguished professor of affordable housing Carol Galante, the head of the Urban Displacement Project Karen Chapple, … State Senators Nancy Skinner and Scott Wiener, legendary school desegregationist Dorothy Walker, Greenbelt Alliance, Bay Area Council, the head of Transform, affordable housing developers, and dozens upon dozens of affected young people.”

She continued: “These experts also warned Council that, if our fees are 3-­6 times the amount of our neighbors, housing, including affordable housing, will leave Berkeley for greener pastures.” She called the conclusions of the prior fee studies “demonstrably false,” and said the information requested earlier this month has not been provided. Droste said it was dangerous to rely on a “marginally feasible” standard: “Any economist will tell you that marginally feasible is much different than being feasible,” she said.

She urged council to wait for a new feasibility study before making the proposed change, but her motion failed due to lack of a second. Other officials said they, too, look forward to reviewing updated analyses, but Droste was the sole official not to vote for Harrison’s proposal.

Councilman Worthington: “We really have to be careful”

“We really have to be careful about what additional things we add on,” said Councilman Kriss Worthington (file photo). Photo: Emilie Raguso
“We really have to be careful about what additional things we add on,” said Councilman Kriss Worthington (file photo). Photo: Emilie Raguso

Council did ultimately vote to have regularly scheduled reports on data assessing appropriate fee levels and project feasibility in the future. But the city manager said it will likely take 10-18 months to complete the next fee analysis. City staff is also working on a “pipeline” report focused on Berkeley housing development applications and projects, set to come back this fall. That pipeline data will be a recurring report to council as well.

Mayor Jesse Arreguín said he has met with representatives of the building trades and would like to investigate a possible fee discount for developers who use union and local labor. He wants the city to look at “policies in the peninsula” as a model for how that might happen. And Arreguín said he’s also looking into how Berkeley might make the approval process more predictable and expedient to incentivize development.

Councilman Kriss Worthington said he felt the public discussion about the fee change had gotten blown way out of proportion — with “hyper-inflated arguments on both sides, neither of which are true” — but noted that the city does need to be cautious going forward.

“If we keep adding on and adding on … we are going to kill the goose that laid the golden egg,” he said. Of the fee change, he added: “This is not the end of the world. This is just a tiny adjustment. But we really have to be careful about what additional things we add on and what modifications we make.”

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Emilie Raguso (former senior editor, news) joined Berkeleyside in 2012 and covered politics, public safety and development until her departure in 2022. In 2017, Emilie was named Journalist of the Year...