As the nation grapples with a housing shortage, cities must balance efforts to build new homes and achieve affordability goals with economic realities. That lesson has come to San Francisco, where planning commissioners and supervisors have come to understand that the city’s approach to encouraging affordable housing needs to change. San Francisco’s current inclusionary housing policy — created under sunnier economic conditions — requires developers of market-rate housing to include some units for lower income people or pay an in-lieu fee to help build affordable housing elsewhere. It’s time for these and other city-imposed costs on housing development to be recalibrated to reflect changing economic conditions.
In May, San Francisco’s city controller released a housing feasibility report showing that building even-market-rate housing in San Francisco is not currently financially feasible. Although a variety of factors beyond the city’s control impact economic feasibility, the evidence is abundantly clear that the city’s current inclusionary housing requirements aren’t producing the desired outcomes, namely, more affordable housing and mixed-income communities.
If San Francisco needs to change these requirements, how should it do so?
Reflecting Economic Realities to Get Housing Built
In a rare display of consensus, the city’s Inclusionary Housing Technical Advisory Committee (TAC) — composed of market-rate and affordable housing developers and advocates, as well as housing finance experts — has advanced a proposal to adjust San Francisco’s housing policy to better reflect economic realities. In short, the TAC unanimously recommended the following changes:
- Capping the on-site inclusionary housing requirement — currently 12% to 15% — at 5% of any project’s total number of units (10% if the Board of Supervisors place no affordable housing measure on the November 2026 ballot)
- Eliminating the inclusionary housing requirement for housing projects with fewer than 25 units to incentivize smaller-scale “missing middle” housing like fourplexes and duplexes
- Eliminating the middle-income affordability tier in the inclusionary housing requirement to focus on low-income households
- Applying the same inclusionary requirement to both rental apartments and condominiums
- Setting the in-lieu fee percentage higher than the on-site unit requirement to incentivize on-site units
- Eliminating in-lieu fees on units that qualify for California’s State Density Bonus Law (which allows developers to build in excess of local zoning limits, provided a percentage is designated for affordable housing)
- Reducing impact fees (one-time charges levied by local governments on new residential construction to mitigate the direct demand on public infrastructure and services) by 67%.
SPUR’s Take
SPUR generally supports the proposed package because it aligns with our housing goals: increasing affordable and market-rate housing, protecting communities vulnerable to displacement, and supporting city policies that reflect economic conditions and that are grounded in evidence and feasibility. Current city-imposed requirements have not proven to be an effective means of producing affordable housing. As a result, SPUR supports the TAC’s proposed inclusionary measures and fee reductions.
Inclusionary Housing Requirements
Market-rate housing production and affordable housing creation are complementary, not opposing, goals. Therefore, the city should calibrate housing requirements based on the percentage of affordable units that a given project can realistically support. Public benefits will not materialize if requirements are so economically onerous that projects never move forward.
Due to the current economic climate, SPUR strongly supports recalibrating the inclusionary housing policy. While inclusionary housing is important, it’s equally vital to establish realistic requirements for housing projects, or the city risks sacrificing affordable housing funding. The idea is that realistic, evidence-based inclusionary housing requirements may ultimately produce more affordable housing than higher, aspirational requirements that sound appealing but never materialize. Good policymaking should respond to current market conditions. Therefore, SPUR supports capping the inclusionary housing requirement at 5% of any project’s total number of units and eliminating it for housing projects with fewer than 25 units.
Current inclusionary requirements include low-, moderate-, and middle-income affordability tiers based on area median income. The TAC proposed eliminating the middle-income affordability tier of the inclusionary housing requirement, thereby focusing it on lower- and moderate-income households. While middle-income housing remains critically important, SPUR supports this recommendation because there simply aren’t enough public subsidy resources to cover all of these income levels.
In-Lieu Fees and Impact Fees
Inclusionary requirements are just one part of city-imposed project costs. Policymakers must consider the cumulative burden of these costs, including in-lieu fees and impact fees, because each additional layer of policy affects project feasibility.
An exactions-based approach doesn’t work well, especially in current market conditions. By 2025, total housing production had fallen to half of 2020 levels. Inclusionary housing fee revenues have also declined significantly over the past six years. Before the pandemic, inclusionary fees generated more than $20 million annually. Since 2020, these annual revenues have averaged just more than $2 million. In the last couple of years, the City of San Francisco recorded negative net fee revenues due to project cancellations and fee refunds.
Relying on development exactions not only depresses housing production but also fails to produce reliable affordable housing revenue. Accordingly, the TAC tied its recommendation to reduce inclusionary fees to a separate affordable housing measure aimed at creating a larger, more stable pool of funding for affordable housing. In November, San Franciscans will most likely have the chance to vote on this charter amendment to expand the city’s Affordable Housing Trust Fund.
SPUR supports eliminating inclusionary fees for small-scale affordable housing projects and fees for density bonus units, which undermine the state program specifically designed to create a public benefit — housing — and run afoul of state law.
SPUR agrees with the TAC that imposing higher fees on condominiums than on rental apartments provides little public benefit and thus supports the committee’s proposal to charge both the same fees. Both types of housing are needed, and we don’t believe one type is inherently more deserving than the other.
Higher In-Lieu Fee Versus Higher On-Site Affordable Unit Requirement
SPUR sees value in both in-lieu fees and on-site affordable units and believes each can advance affordability goals when properly calibrated. On-site units fulfill the vision of integrating lower-income households into market-rate housing and have more immediate, visible benefits. On the other hand, in-lieu fees and off-site compliance options can create more affordable housing than an on-site unit by leveraging additional funding sources and supporting larger, 100% affordable housing with on-site services.
Some policymakers have justified charging higher in-lieu fees in neighborhoods vulnerable to displacement than in other areas, ostensibly to preserve affordability. However, this theory raises two important questions that might warrant future research: First, should higher-resourced neighborhoods that have historically excluded affordable housing be subject to different requirements, or should all areas of the city have uniform requirements? Second, are geographically differentiated higher fees achieving their intended policy goals? If higher fees in certain areas hinder overall development, the unintended consequences are likely to be fewer affordable units and increased displacement pressures.
What Happens Now
The controller’s report provides ample evidence that the status quo isn’t working and that San Francisco needs to craft evidence-based housing policies. The takeaway is that housing policies yield public benefits only when housing can actually be built. Feel-good requirements that make housing infeasible just stand in the way of creating both affordable housing and market-rate housing.
The TAC’s recommendations, now sponsored by Mayor Lurie and supervisors Melgar, Dorsey, Sherrill, and Sauter, are a pragmatic course correction to realign housing policy with real-world economics. While some may view the recommendations as reductions in public amenity fees or affordable housing requirements, that simplistic interpretation misses the larger point. The aim is to create a San Francisco where housing can be built again, mixed-income communities can grow, and public policy is tied to outcomes and evidence, not dreams and aspirations. The TAC recommendations are a step toward the vision of a city that can serve as an affordable beacon of hope, diversity, and inclusion.