San Jose waives key building fees to spur downtown housing highrises

SAN JOSE — A frozen pipeline for housing tower development has prodded San Jose leaders to waive some fees to spur the construction of thousands of new homes downtown.

The San Jose City Council has voted 9-0 to ditch multiple fees temporarily that the municipality charges and agreed to apply the waivers to the next 10,000 housing units that receive a building permit and pass a government inspection, within specified timelines.

Sky-high interest rates, soaring costs for labor and fast-rising prices for building materials have coalesced to balloon the costs to construct a modern residential tower in downtown San Jose.

This forbidding economic landscape has come into view at a time when San Jose political leaders are under pressure to meet California mandates for housing construction in the Bay Area’s largest city.

“The cost of construction downtown is too high,” San Jose Mayor Matt Mahan said before the City Council voted Tuesday night. “It just doesn’t pencil.”

Housing towers in downtown San Jose and residential projects in other parts of the city must overcome a “feasibility gap” as a described in a memo prepared by Blage Zelalich, a deputy director with the municipality’s Economic Development Office.

From 2020 through 2023, housing development costs rocketed 30% higher in San Jose, according to the memo crafted by Zalalich. Over roughly the same period, asking rents for apartments rose 8%.

City officials identified 14 housing towers that have all been approved but have yet to begin construction. If built, the apartment highrises could produce 4,078 homes.

The two largest highrises in the San Jose pipeline are:

— Bo Town housing tower at 409 South Second Street, a project that could produce 540 units. An alliance of global mega-developer Westbank and San Jose-based local developer Urban Community is developing this highrise.

— Echo residential highrise at 147 East Santa Clara Street, a 415-unit development that is being developed by San Jose-based Urban Catalyst.

In the first phase of the incentive program, 100% of city construction taxes and 50% of the parks fee will be waived for the first 1,000 housing units that land building permits and inspection approvals.

In the second phase, construction taxes will be cut by 50% and park fees will be reduced by 30% for the next 1,000 units to receive the requisite building and inspection approvals.

In the third phase, construction taxes would be reduced for the final 6,000 units.

San Jose officials hope this three-phase program will entice developers to construct 10,000 housing units in the city’s downtown.

One project that could actually begin construction if San Jose gives final approval for the enactment of the fees is the Bo Town highrise in the city’s hip and trendy SoFA district, in the view of Gary Dillabough, a Westbank ally in San Jose and a principal executive with Urban Community.

“Hopefully in the next few months, certainly by the end of this year,” the Bo Town highrise would break ground, Dillabough told the City Council — as long as the fee waivers are in place

Westbank and Urban Community have scouted aggressively to land construction financing for the Bo Town tower. The expeditions to secure funding have been nearly futile.

“We went to 28 lenders for Bo Town,” Dillabough said. “We got back one proposal. Just one.”

Without the incentives from the fee waivers, towers such as Bo Town will languish, Dillabough warned.

“Bo Town will sit on hold for a while” without city-backed incentives, Dillabough said. “Six, 12, 18 months. Lenders are telling us we are close to getting this out of the ground. Incentives like this get things going.”

Some union leaders spoke before the City Council vote and criticized the plan to slash fees for developers.

Will Smith, business representative for San Jose-based Local 332 of the International Brotherhood of Electrical Workers, said the city’s previous fee-reduction programs had failed to prod developers to build downtown San Jose projects in a big way.

“We have yet to see those cranes going up in the air,” Smith said, referring to construction equipment that typically operates at a highrise. “I don’t see any purpose to this other than stuffing money into the pockets of developers.”

Developers, however, don’t wish to simply sit on the land they had bought for future development. Westbank and Urban Community have spent $300 million buying properties in downtown San Jose, Dillabough estimated.

“If we get 2,000 units out of the ground, that will show momentum is starting to build,” Dillabough said. “We need to send a message to the financial markets” that “we are open for business” in downtown San Jose.

Westbank and Urban Community have invested $300 million in downtown San Jose, including property purchases, Dillabough estimated.

“That $300 million is burning a hole in our pocket,” Dillabough said.

Mayor Mahan maintained the incentives could also bolster the San Jose State University plan to redevelop the old Alquist State Building downtown, potentially adding thousands more residential units.

“We don’t have the unilateral ability to force the market to build highrise residential,” Mahan said. “It’s quite likely that our big bet as a city in addition to the experience economy over the coming decade will be residential high-density.”