San Francisco, California: Inclusionary Zoning Expands the Below-Market-Rate Housing Stock

Home >Case Studies >San Francisco, California: Inclusionary Zoning Expands the Below-Market-Rate Housing Stock

San Francisco, California: Inclusionary Zoning Expands the Below-Market-Rate Housing Stock

1400 Mission Street is a 15-story condominium building in San Francisco’s South of Market neighborhood developed by Tishman Speyer to comply with the city’s Inclusionary Housing (IH) program. The building was required as a condition of approval of the developer’s 656-unit luxury condominium project, Lumina. The second-largest offsite affordable housing development constructed under San Francisco’s IH program, 1400 Mission Street demonstrates how other jurisdictions can use flexible inclusionary zoning to increase their stock of affordable housing. The project was a finalist for the 2015 Jack Kemp Excellence in Affordable and Workforce Housing Award from the Urban Land Institute.

Workforce Housing in Tandem with Market-Rate Housing

Construction of Lumina, a 4-building condominium complex overlooking San Francisco Bay, began in 2013. Under Section 415 of the city’s zoning ordinance, which sets out the IH requirements, developers of market-rate multifamily housing of 10 or more units have 4 options to contribute to the housing stock affordable to low- to middle-income households at below-market-rate (BMR) rents or sales prices. To meet its obligation, Tishman Speyer could pay a fee to the Citywide Affordable Housing Fund, reserve 12 percent of Lumina’s condominiums for households making no more than 90 percent of the area median income (AMI), build a number of offsite ownership units equal to 25 percent of Lumina’s units that would be affordable to households making no more than 90 percent of AMI, or undertake some combination of unit construction and fee payment. Section 415’s options are typical of the inclusionary zoning rules that have been adopted by approximately one-third of California cities.

With sale prices for Lumina’s 656 units ranging from just under $1 million up to $49 million, Tishman Speyer decided its most feasible option was to build the required BMR units offsite. Because it chose to build offsite, Tishman Speyer was obligated to provide 167 ownership units — 25 percent of Lumina’s units — priced for moderate-income households. This choice was relatively unusual; since 1992, the majority of developers with IH obligations chose to build onsite units, whereas only 25 percent elected to pay the fee in lieu of construction and 5 percent chose the offsite option.

The Tenderloin Neighborhood Development Corporation (TNDC), a nonprofit housing provider, offered to sell Tishman Speyer a site on Mission Street two miles from Lumina. The developer purchased the land for $4.25 million, and TNDC assisted with the entitlement process. Construction began in summer 2013, and the first homeowners moved in in October 2015.

Workforce Housing at 1400 Mission Street

1400 Mission Street contains 190 BMR units on 14 floors, with commercial uses occupying the ground floor. Although Section 415 required only 167 condominiums, TNDC had obtained a Notice of Special Restrictions on the property in early 2013 that required construction of a 10- to 15-story building containing ground-floor commercial space and up to 190 workforce housing units. The maximum of 190 units allowed Tishman Speyer to add 23 middle-income BMR rental units to increase the building’s revenue.

The 167 condominiums required by Section 415 include 4 studio, 52 one-bedroom, 94 two-bedroom, and 17 three-bedroom units. They are priced to be affordable to households earning 90 percent of AMI, but households with incomes of up to 100 percent of AMI are eligible to purchase the units. In San Francisco’s highly competitive housing market where even middle-income households have difficulty finding affordable housing, sales prices range from $225,105 to $327,577. The rental units — a studio, 13 one-bedroom, 8 two-bedroom, and a three-bedroom unit — are affordable to households earning no more than 150 percent of AMI. Monthly rents range from $2,664 to $3,780.

Amenities include a second-floor courtyard with a children’s play area and a roof terrace on the 11th floor. Environmental features include construction complying with Green Point standards and rooftop solar panels. The development offers bicycle storage, and is close to bus and rail lines. The building has contributed to the neighborhood’s overall development, and the Urban Land Institute praised the development’s contribution to the area’s walkability. “When we first started working on the project, there was a vision of how we could be part of a place-making exercise, and that has really come to fruition with 1400 Mission,” says Don Falk, chief executive officer of the Tenderloin Neighborhood Development Corporation.

Although Tishman Speyer manages the building, the Mayor’s Office of Housing and Community Development, administrator of IH, sets the sales price and other details for each BMR unit. Only first-time homebuyers are eligible to purchase the units, and they must meet income restrictions, obtain financing through an approved lender, and work with a HUD-approved housing counselor through HomeownershipSF to demonstrate housing and credit readiness. A lottery for the ownership units produced 355 eligible applicants. As of September 2016, 159 of the units have been sold and are occupied, with the 8 remaining units expected to close in the following month.

Financing and Affordability

Tishman Speyer secured private financing for 1400 Mission Street’s entire $65 million development cost. Several factors helped maintain affordability for the target moderate-income households. The site’s development restrictions lowered the land cost to only $4.5 million. Because 1400 Mission Street lacks expensive amenities such as a fitness center, pool, or screening room, homeowner association dues are inexpensive for the area, ranging from $335 to $501 per month. In addition, the building’s energy-efficient features reduce utility costs. The building’s parking arrangement also contributes to the units’ affordability; because Tishman Speyer built only 42 parking spaces and leases them separately, the developer was able to reduce the price of each unit by $20,000.

Moving Forward with Inclusionary Zoning

Since establishing inclusionary requirements in 1992, the city has gained 3,821 new affordable housing units. Maria Benjamin, director of the homeownership and below-market-rate programs at the Mayor’s Office of Housing and Community Development, characterizes 1400 Mission Street as a “huge success” for IH that added a substantial number of BMR units to the city’s stock. The program continues to enjoy public support; in June 2016, 68 percent of San Francisco voters approved Proposition C, a referendum raising the percentage of BMR units required of developers to the pre-2012 level of 25 percent. The San Francisco Office of the Controller now estimates that IH will contribute 5,903 additional BMR units to the city’s housing stock by 2031.