After years of struggling to get shovels in the ground for multifamily projects in San Jose, a recently enacted incentive program has begun to bear fruit, spurring the construction of a large housing project near Penitencia Creek as early as Monday while saving the developer millions in fees and taxes.
The City Council has approved a waiver for in-lieu fees and 50% of construction taxes — equaling $4.9 million — for the Hanover Co.’s 345-unit development at 905 N. Capitol Ave. that would not have been able to move forward without the housing incentives.
“Those are homes — places for people to live — (and) that’s less pressure on rents for everybody else,” San Jose Mayor Matt Mahan said. “It’s a great thing all around, but I think it comes with the recognition that we have to be able to right size our fees and processes and regulations and figure out how to be flexible and meet the market and allow that investment to flow.”
Rising interest rates and increases in labor and material costs have curtailed office and market-rate projects over the past few years, leading San Jose to lean on more incentive-laden initiatives. In the past year, the city has also passed office leasing incentives and extended the downtown high-rise program, which also waived some taxes and fees to help move developments forward.
But market conditions have particularly hampered multifamily developments. After averaging one new multifamily development per year, the city did not see a single construction start for developments over 20 units last year despite developers submitting plans for dozens of projects equating to the potential for several thousands of units.
To help kickstart housing projects and help them pencil out, the City Council approved the new multifamily incentive program in December, which aimed to apply the fee waiver for the first 1,500 units of projects in designated growth areas that had submitted complete applications by June 2022 and receive a building permit by the end of December 2025. The program also will apply a 25% reduction in those taxes for up to 8,539 units of eligible projects starting in 2026.
A city analysis found that 35 projects could qualify for the incentives.
Market conditions also have San Jose struggling to keep pace with its housing goals. According to its regional housing needs allocation, the city must plan for 62,200 units by 2031. That equates to the city needing to add about 7,775 units per year on average, but last year, San Jose only permitted about 2,666 units, sparking concerns.
The Hanover Co.’s seven-story project includes 328 market-rate and 17 moderate-income units on the 2.12-acre site near the Penitencia Creek Light Rail Station. The project also consists of 3,000 square feet of office space and will see the city receive $3.8 million in park fees.
Scott Youdall, a regional development partner at the Hanover Co., credited the city’s program with helping move the project along after it received entitlements in June 2022.
“When this project was originally entitled and approved, in the face of rising interest rates, we had not been able to get this project capitalized and started, but with the help of this incentive, we have been able to put the capitalization in place,” Youdall said.
The housing project will also create 498 construction jobs, 90% of which will have an annual salary of more than $60,000 annually.
District 4 Councilmember David Cohen said he had mixed emotions about the project moving forward, noting the amount of pushback from the community. Cohen said he felt the development was out of place in size and scope and would be the tallest building in the immediate surrounding areas. But he also acknowledged the tradeoff, especially with housing among the city’s greatest needs.
“This is one that’s not popular in the community, and I just wanted to acknowledge that up front,” Cohen said. “But it’s also really important that we get housing projects moving, and that’s why I was fully supportive of this incentive program when it came last year knowing full well that meant this project would move forward.”