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San Francisco faces $1.3 billion shortfall in quest to fulfill state housing targets

San Francisco would need an additional $1.3 billion in order to meet the state-mandated affordable housing production requirements set to kick in next year, according to a report from the Mayor’s Office of Housing and Community Development.

That’s just the start: The number swells each year, topping out at $2.4 billion by 2029.

While San Francisco is still working on its “housing element” — a housing production plan every California city is required to complete every eight years — city planners face a daunting task: how to create 82,000 new homes in the eight years from 2023 to 2030, including 32,000 that are affordable to very-low-income and low-income families. The housing requirements assigned to every city are known as Regional Housing Needs Allocation, or RHNA.

The looming affordable housing funding gap was the topic of a hearing Thursday at the Board of Supervisors Government Audit and Oversight Committee.

At the hearing, Committee Chairman Dean Preston questioned whether the city was doing enough to prioritize homes for working-class residents in a city where under 20% can afford market-rate rents — which reach into several thousand a month.

“What is clear is the existing strategies are not going to get us there,” he said. “In the best-case scenario, with traditional approaches, we chip away toward our goals but we certainly don’t get anywhere near them. New tools are needed.”

While San Francisco produces more affordable housing than any other city of comparable size — it currently has 11,000 units in its pipeline — its production of market-rate housing far outpaced its affordable-housing output in the current eight-year RHNA cycle. The city built 48% of its affordable goal and 151% of its market-rate goal.

The city is currently facing stern headwinds on both the creation of market-rate and low-income housing.

The Sister Lillian Murphy Community in San Francisco is an example of affordable housing coming online in San Francisco in 2022. The city says it does not have enough funding to push toward its affordable housing goals.

Samantha Laurey/The Chronicle

On the market-rate side, development applications have slowed to a trickle as for-profit builders have postponed or canceled projects because they don’t work financially. Market-rate projects generated $208 million for affordable-housing fees in the last five years.

On the subsidized side, soaring construction costs have added millions of dollars in costs to many projects, which puts San Francisco at a disadvantage when competing against other California cities for affordable-housing tax credits and bonds.

Lydia Ely, deputy director of the Mayor’s Office of Housing and Community Development, said that the city has little or no money beyond the projects that are already in the planning or construction phase.

She said that San Francisco is “disadvantaged” by a 2020 change in the way that California divides tax credits and affordable-housing bonds, the two programs that pay for most low-income housing construction. Before 2020, San Francisco could count on receiving the OK for all of its bond and tax credit applications. Under the new system, the city is losing out to cities that have far cheaper construction costs and land value.

She called the changes “the biggest threat to our production.”

“Those sources used to come as a right, over the counter,” said Ely. “Right now they are highly competitive and oversubscribed.

“Even though we are robustly pursuing all the local sources, we cannot expect those sources to grow significantly; it’s just too volatile, and the unknowns are too unknown,” she said. “Beyond the fact that we need more, we can’t anticipate what those sources will be.”

Ely said construction costs have risen 25% in the past two years, and every project that “is starting construction is needing a couple of million more” from the city.

Preston used the hearing to advocate that the city earmark all of the money generated by Proposition I for affordable housing. Prop. I, which Preston sponsored and which voters approved in 2020, increased transfer tax on properties over $10 million.

Preston said that voters “went and created $170 million of annual revenue general fund for affordable housing, yet we seem to be in a fight every year.”

Jeff Cretan, a spokesman for Mayor London Breed, said Prop. I is a general fund tax “not dedicated to any specific purpose by the voters.”

“The mayor and the board of supervisors make decisions how to allocate the general fund during the budget process, which kicks off in two weeks when the mayor introduces her proposed budget,” he said.

JK Dineen is a San Francisco Chronicle staff writer. Email: jdineen@sfchronicle.com Twitter: @sfjkdineen

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