To:   HONORABLE MAYOR AND                   From:   Stephen Haase/Paul Krutko

                        CITY COUNCIL

 

   Subject:   See Below                                                    Date:   October 15, 2003

 

 

SUBJECT:     EXTENSION AND EXPANSION OF THE SPECIAL TENANT IMPROVEMENT PROGRAM

 

 

RECOMMENDATION

 

1)      Approval of an Ordinance amending Section 4.46.039.8 of Chapter 4.46 of Title 4 of the San Jose Municipal Code (SJMC) to extend the period during which the City suspends the collection of Building and Structure Construction Taxes imposed for the construction of special industrial use tenant improvements. 

 

2)      Approval of an Ordinance amending Section 4.46 of Chapter 4.46 of Title 4 of the San Jose Municipal Code (SJMC) to add a new section 4.46.039.9 to provide for the suspension of the collection of Building and Structure Construction Taxes imposed for the construction of office use tenant improvements in the Downtown Core.

 

3)      Direct staff to extend the Coordinated Plan Check Review process allowing for plan check fee collection deferral until permit issuance for tenant improvements for industrial and research and development uses in currently existing vacant buildings.

 

4)      Direct staff to expand the Coordinated Plan Check Review process allowing for plan check fee collection deferral until permit issuance for tenant improvements for office uses in currently existing vacant buildings within the Downtown Core.

 

 

BACKGROUND

 

On April 30, 2002 the City Council approved initiation of the Special Tenant Improvement (STI) Program.  The STI program includes the suspension of the Building and Structures tax, the Coordinated Plan Check Review process, and the deferral of plan check fees. The Program was designed to expedite tenant improvements on vacant buildings to make the space ready for earlier occupancy by suspending the Building and Structures construction taxes and deferring the collection of plan check fees.  The Program also provides San Jose with a competitive edge in a heavily glutted real estate market.  Since its implementation 16 months ago, this program has been highly successful and visible.  Thirty-six development projects, totaling approximately 1.5 million square feet with a construction value of $33 million have been processed through the program.  Staff estimates that approximately 2,800 employees will occupy the space renovated through the Program.  The developers and businesses that have used the process have been complimentary about the speed, efficiency, and cost effectiveness of the program.

 

To date the incentives have been available for tenant improvement projects in industrial and research and development (R&D) buildings.  Currently, the STI program suspends the Building and Structures Tax for industrial and research and development uses. The end date for the STI program is October 31, 2003.

 

The success of the program indicates that businesses are responding to the incentive program and that it makes a difference in choosing San Jose as a place to do business.  Staff recommends extending the current program by an additional 18 months and expanding the program to office uses in the Downtown Core.  Expansion of the program would provide the benefits of the suspension of the Building and Structures Tax, the Coordinated Plan Check Review, and the plan check fee deferral to office uses in the Downtown Core.

 

ANALYSIS

 

The Special Tenant Improvement Program is working well on at least two levels.  First, in the 16 months that the program has been in operation approximately 1.5 million square feet of vacant space has been occupied and approximately $33 million in additional investment has been made in San Jose.  As a result approximately 2,800 jobs have been created or retained and revenues have increased within the City.  Second, the express review process designed as a significant element of the STI program has gained the respect and appreciation of its users and has become a model for surrounding cities.  One success story of this program is Covad, a national broadband service provider that services 96 metro areas.  Covad is locating its headquarters to San Jose in November.  Because of the Special Incentive Program, 86,000 square feet of tenant improvements were permitted in two hours.  Covad is bringing 300 jobs to San Jose and is talking positively about the company’s experience.

 

The current sunset date for the STI program is October 31, 2003.  Economic indicators show that the San Jose area continues to lose jobs and has the second highest urban unemployment rate in the nation.  Collectively, Silicon Valley has over 60 million square feet of vacant space.  The STI program has a proven track record of expediting job location and capital investment in San Jose.  Given the success of the program and the continued economic downturn, staff recommends extending the STI program an additional 18 months and expanding the program to office uses in the Downtown Core.  Vacancy rates in the Downtown exceed 22% of available space.  There is roughly 7 million square feet of office space in the Downtown of that approximately 1.6 million square feet are vacant.  Adding jobs downtown is essential to drive activity at restaurants, retail businesses, and cultural venues.  Staff is proposing that all office uses seeking to locate in the Downtown Core (map attached) will be eligible to participate in the program. 

  

The proposed Ordinances would suspend the collection of the Building and Structure Construction Taxes for projects that qualify for this program.  For purposes of extension of the existing suspension for industrial use tenant improvements, the suspension will be in effect for all project submittals retroactive from November 1, 2003 until its sunset on April 31, 2005. The additional provision to suspend collection of taxes for the office use tenant improvements will become in effect from the effective date of the Ordinance until it sunsets on April 31, 2003.

 

The 18-month continuation of the existing tax suspension is expected to reduce Building and Structures Tax revenues by $275,000.  This estimate assumes that participation in the Program will remain at the same level as experienced during the first 16 months of the program.  This investment is expected to generate similar results of occupancy of approximately 1.5 million square feet of vacant space and $33 million in capital investment and 2,800 jobs.  The anticipated costs associated with expanding the Program to the Downtown Core in additional Building and Structure Taxes is $185,000.  This estimate assumes that the program will result in 250,000 square feet of occupied office space in the Downtown Core with an average of $50 per square foot of tenant improvement, representing private investment of $12.5 million.  This space would house approximately 830 jobs. The total cost for extending and expanding the STI program is $460,000.  Revenue raised through Building and Structure Construction Taxes is restricted to traffic capital uses.

 

The deferral of plan check fees will also be provided to projects that meet the eligibility requirements for the tax suspension.  The program will continue to allow plan check fees to be deferred until the time of building permit issuance.  If a permit is not taken out by a customer benefiting from this program, plan check fees will be due no later than 12 months from the application for the express plan check service.  The Coordinated Plan Check Review Fees to be charged under the Special Integrated Review for implementation of the STI program and are in accordance with the fee schedule approved by Council in June of 2003. The approval of the 2003 fee schedule was supported by the development community and the Chamber of Commerce development sub-committee. 

 

PUBLIC OUTREACH

 

The Special Tenant Improvement Program proposed extension and expansion is an item within the Mayor’s Getting Families Back to Work program. Requests to extend and expand the program were included in the testimony given by corporate representatives and developers to the City Council. Similar suggestions were made to staff during the outreach phase of the Economic Development Strategy both in interviews and focus groups.

 

COORDINATION

 

This memorandum has been coordinated with the City Attorney’s Office, the City Manager’s Budget Office, and the Redevelopment Agency.

 

CEQA

 

Not a Project

 

 

STEPHEN HAASE

Director, Planning Building

Code Enforcement

 

PAUL KRUTKO

Director, Office of

Economic Development