Here’s where San Jose may lose thousands of homes because of ‘builder’s remedy’

San Jose stands to lose more than 4,000 new housing units if developers in Northern California’s largest city move ahead with a legal mechanism allowing them to scale back their projects, a Mercury News review found — an outcome that policymakers and housing experts say they never expected.

Angered by the move, city leaders are exploring their options for how to push back on developer proposals seeking to downsize a slew of residential projects under the “builder’s remedy” — a provision in state housing law meant to penalize cities that fail to meet state-mandated housing goals and allows property owners to push through projects of virtually any size.

Developers argue that today’s high interest rates and exorbitant construction costs make high-density housing in San Jose financially unfeasible and are turning to townhome-style projects.

Of the 19 builder’s-remedy applications submitted to San Jose’s planning department, eight seek to produce housing at a density less than what is supported by the zoning. If approved as is, the city would lose 4,177 new housing units — a situation that is drawing the attention of state legislators.

Those familiar with state housing policy said this is the first time they have seen builder’s remedy applications calling for less housing instead of more.

Assemblymember Alex Lee, whose district includes both San Jose and parts of the East Bay, said he “remains open” to feedback and a conversation about a legislative effort to stop developers from scaling down projects through builder’s remedy.

“We’re trying to usher in more pro-housing policies,” said Lee in an interview. “Not more pro-profit policies.”

The largest reduction in housing would come from a development planned at the Berryessa Flea Market, originally slated for up to 3,450 units and is now, through builder’s remedy, being proposed at 940 units. The revision also calls for millions of square feet of commercial space to be scaled down to just 45,000. Critics say the revised plan is especially detrimental to the area because the flea market is right next to the neighborhood’s BART station, which could suffer a steep drop in ridership.

Other builder’s remedy applicants are submitting plans that would use a fraction of the development space for which the parcel is currently zoned. To the northwest of the flea market lies 150 River Oaks Parkway, a plot of land zoned for a maximum of 1,428 units. Developers are requesting 143 units on a 5.7-acre property that’s currently home to a tech office.

At the heart of the debate is how much wiggle room the city has to accept or reject the builder’s remedy submissions because it has yet to receive the state’s approval of its housing plan. In June, the City Council approved the plan, but it was rejected by the state in August. The city’s proposal submitted to the state calls for 62,200 homes to be built by 2031, with half at affordable prices.

In its response to San Jose, state officials said they denied the city’s proposal in part because of concerns from community members over inadequate public input. In addition, the state said the city needs to have more specificity as to how certain sites will be realistically developed.

On top of the builder’s-remedy penalty, San Jose could also lose out on affordable housing and transportation dollars.

The city will be resubmitting its plan to the state in the next week, according to officials.

Chris Burton, who heads San Jose’s planning department, said the city would process each of the builder’s-remedy applications “on an individual basis.” He wouldn’t definitively comment on whether the city would ignore applications if its housing plan is eventually approved by the state.

“The conditions of each change and vary,” he said about the applications. “We’ll have to consider what the general plan envisioned on the site, but at the same time, ensure that we’re staying within the regulatory framework of state law.”

UC Davis Law Professor Christopher Elmendorf, considered one of the preeminent experts on California land use policy, said the issue could trigger lawsuits if the city rejects the builder’s-remedy applications. Elmendorf believes that developers would likely prevail in a lawsuit because of recent court decisions — meaning even if cities approve their own housing plans, they carry no weight without the state’s blessing.

The study found that in every single test case of housing projects across the city, developers would lose out on hundreds of thousands of dollars per unit. Constructing affordable housing has become extraordinarily expensive, too, with prices jumping 24% in the last year, from $757,900 to $938,700.

The study also found that the city’s options to reduce costs for developers are limited. Even if San Jose wiped away all of its fees associated with starting a housing project, it would only make a minor difference in costs.