A small number of fee first programs require payment of fees but also offer developers the alternative of building on-site units in lieu of paying the required fee. In these cases, the programs are almost identical to traditional inclusionary housing programs but they are designed around a different legal rational.
San Francisco, California
In 2009, when California courts ruled that inclusionary housing violated a state ban on rent control, cities like San Francisco faced a difficult choice. The state’s rent control ban explicitly allowed voluntary agreements where developers agreed to long-term rent restrictions in exchange for public investment or benefits, like a density bonus.
Rather than convert to a voluntary program, San Francisco revised its inclusionary ordinance in 2010 to be a fee first program. Developers faced a mandatory linkage fee but had the option to avoid the fee by providing on-site units. While the fee is mandatory for all projects, the on-site option is only available to developments that also receive the kind of benefit that would qualify them for exemption from the rent control law.
Before this change, San Francisco strongly favored on-site production, and even though the revised approach was built around fees, they continue to strongly encourage on-site production whenever possible. Based on the findings of a nexus study, they set the fee at a level equivalent to 20 percent of a project’s housing units, but the onsite production requirement is only 12 percent for most projects.* Even though the legal requirement is the payment of a fee, the city’s data shows that more than 80 percent of recently completed projects have provided units on site.