While the city of San Diego has been involved in using Downtown redevelopment dollars to finance housing in the edge communities, the effort needs to be more policy driven and coordinated to truly achieve a greater social good — more quality affordable housing.

Downtown’s residential growth has been amazing the last five years with 4,300 recorded sales of new homes. But that’s not where developers of urban-style housing are looking now, nor is it where the city’s housing opportunities lie. Builders are looking to other areas for several reasons, including:

• The increasing supply of new housing units available Downtown, coupled with a growing inventory of homes on the resale market.
  
  
• The 16 cranes operating in 92101 today are building more than 3,000 new units.
  
  
• The more than 1,600 sales closed Downtown last year was a record and likely the peak of the market.
  
  
• Construction costs that may rise between 5 percent and 15 percent this year and particularly hit hard true highrise condominium projects.

Downtown’s growing residential inventory is likely to flatten condominium pricing for the foreseeable future. That and rising costs of construction will challenge the feasibility of some future projects.

The effect will be to shift the housing action to the communities at Downtown’s urban edge, including Bankers Hill, Hillcrest, North Park, Golden Hill, Barrio Logan, City Heights, the College area, as well as farther out to the emerging downtowns of National City and Chula Vista. We hope the redevelopment bug will even catch in the older “suburban” communities like Clairemont, Linda Vista, Serra Mesa and San Carlos.

Public Financing Needs

The city of San Diego recognizes the development potential of these communities. Over the past five years the Centre City Development Corp., as well as the city Redevelopment Agency, have devoted substantial funds to the development of rental, senior and student housing throughout San Diego’s urban community.

CCDC alone has directed almost $65 million to housing subsidies to develop nearly 2,200 units. Of that money, $35 million has been spent to underwrite 625 units outside of Downtown. Some of these projects are already built while others are in the pipeline.

Add to this total the activity of San Diego’s Redevelopment Agency which contributed $89 million to develop 5,100 units, of which more than 1,400 units are categorized “affordable.”

The source of CCDC’s funding is tax increment, the difference between the property tax of the base year, when the redevelopment area was formed, and the property tax of the area as it redevelops with newer and pricier buildings. Of this tax increment revenue, CCDC must use 20 percent on affordable housing. State law also requires that a minimum of 15 percent of the units built in a redevelopment area be affordable housing units, available to those whose income is up to 120 percent of the area median.

In 2002, in response to the City Council declaring a state of housing emergency, the Redevelopment Agency created a $55 million fund entitled “Notice of Funding Availability (NOFA)” to offer assistance in financing new affordable housing projects citywide. About $40 million of the fund was from CCDC.

The largest projects subsidized, totaling 350 units, are outside Downtown, with three in City Heights and one in Barrio Logan.

These funding sources are great opportunities to begin the next, and arguably more important, cycle of urban development: creating more affordable housing in the edge communities where a larger portion of San Diego households can purchase. Social posturing aside, the reality is that most people cannot afford to live in swanky new highrises in Downtown San Diego.

Infill Is The Key

“Infilling” the urban edge communities is San Diego’s growth future. The Redevelopment Agency funds are helpful, but imposing an array of additional incentives would be even better, including:

• Zoning for density.
  A doubling of the density would impact the prospective housing counts in the communities. Government could use the density bonus selectively by encouraging more density along the transit corridors, near trolleys, freeways, buses, etc.
  
  
• Selling density.
  Perhaps government could “sell” density in the form of zoning or Floor Area Ratio (FAR) increases to developers, a method of creating fees for public coffers, ultimately a way to pay for required infrastructure improvements. In return, government could expedite or even insure the project, creating certainty.
  
  
• Relocating subsidized units.
  While many developers must provide 15 percent of units for “below market rate” housing, instead of requiring these units to be built on site the city should provide Downtown builders an incentive to look off site. The houses could rise in the urban edge communities and may result in adding more affordable housing; land costs less outside of Downtown. This is tricky, since CCDC also is required to stay within state law guidelines that mandate a certain amount of affordable housing within a redevelopment district.
  
  
• Create a public employee bonus.
  Use incentives to attract public employees to these new projects. The program could be a kind of substitute subsidy to pension-starved employees. The private sector already understands this concept. Barratt, for example, offers a 2.5 percent discount to public safety employees.

Everyone Can’t Live Downtown

The urban edge communities need density, people and dynamic business and culture.

It costs about $250,000 per unit to subsidize below market rate housing in a Downtown high-rise. We acknowledge including moderate-priced housing in towers achieves a social objective of integrating persons of different means and cultures. Nevertheless, the greater social good is achieved by helping to catalyze new infill development in the older, less prosperous communities, and creating greater numbers of affordable units in what should become similarly desirable neighborhoods.

The argument has been made that Downtown employees need to live Downtown. This is weak because so many communities exist on the extended edge of Downtown, most nicely served by public transit.

The key point is that great amounts of public money are involved in tax increment, public financing, bonding and reservation of below market rate housing, as a condition of entitlement. Why not put these programs together, backed by a strong city policy, to achieve a truly integrated program of public incentives to redevelop our urban edge communities?

Gary H. London is president of The London Group Realty Advisors Inc., providing real estate consulting and economic analysis. Check him out on the Web at www.londongroup.com or e-mail him at glondon@sandiegometro.com.