Financial Health Page Read Money for Clean Industry

The Greening of Light Industrial Land

II. KEY FINDINGS AND RECOMMENDATIONS FINDINGS

Finding 1: The overall strength of the economy is the most important factor affecting General Fund revenue.

The most important source for sustained municipal revenue growth in San Jose is a strong,
competitive local economy that is generating jobs and rising incomes while fostering private sector investment. This leads to growth in major revenue sources, including sales taxes, property
taxes, Redevelopment tax increment revenues, the City’s utility taxes, and franchise fees.
Effectively, in order for San Jose to be fiscally stable, the City must remain economically vital.
This economic vitality is related to both the local economic conditions and to the overall strength
of the regional, national, and international economies.

A total of 56 percent of General Fund revenue is currently generated from buildings and their
occupants. Building-related revenues (property taxes, franchise fees, utility taxes, permits, and
licenses such as the business license) account for 37 percent of General Fund revenue. An
additional 19 percent of the City’s revenue is generated by people and companies who occupy
the buildings in such forms as sales taxes and transient occupancy taxes. Given these basic
characteristics of the City’s revenue sources, it is in San Jose’s best fiscal interest to keep its
employment base growing.

Cost challenges are as important as revenue challenges to the City’s fiscal health. Employee
salary and benefits are 70 percent of the City’s General Fund budget. Over the last three years,
the aggregate of employee salary increases has outpaced the growth in City revenues. The City
also faces steep increases in health insurance costs and worker compensation expenses. Finally,
the City faces a severe spike in costs for employer contributions to retirement funds, driven
primarily by lower investment earnings than those that were achieved during recent boom years.
In this context, the revenues and costs associated with individual, small-scale development projectsare unlikely, at the margin, to have significant fiscal implications—whether positive or negative—for the City. The exceptions could be very large-scale projects, a significant number of
conversions in one specific area, or a significant number of land use conversions that accumulate
over time.8

Finding 2: Land use decisions will affect the City’s economic competitiveness and
prosperity, as well as its ability to implement the Economic Development Strategy.

The Economic Development Strategy puts an emphasis on four areas that have direct land supply implications:

• Remaining competitive as a home for Driving Industries, including young companies, growing
businesses, and established firms that operate nationally and internationally from a San Jose
base.

• Preserving and creating mid-tier jobs in Business Support Industries such as
Transportation/Distribution, Building/Construction/Real Estate, and Industrial Supplies and
Services, as well as in Health Care and the Civic sector.

• Continuing the emphasis on developing housing, especially new housing types in a variety of
neighborhood settings.

• Developing retail to its full potential to maximize revenue impacts and neighborhood livability.
In order for the City to implement the Economic Development Strategy, land supply clearly needs
to be available for employment uses. Suitable lands need to be planned for both Driving
Industries and Support Industries. But land also needs to be made available for other uses (e.g.,
housing, retail, and civic uses) that provide for a balanced community and help sustain long-term
economic vitality. For example, the cost of housing is the single-most important issue that
threatens to undermine the competitiveness of San Jose and Silicon Valley. As a result, nearly 60
percent of San Jose’s land area with the Urban Service Area is currently planned and used for
housing.

As illustrated in this report, there are some opportunities to mix employment with housing, civic,
and other uses in compatible, exciting new neighborhood forms in the active employment lands.
But for some other types of businesses it will be important to be separated from housing, civic,
and institutional uses due to their potential to create negative impacts on adjacent uses.

Finding 3: The City’s economy can be broken down into three broad groupings
of industries: Driving Industries, Business Support Industries, and Household-
Serving Industries.

Driving Industries, which account for about one-third of San Jose’s job base, tend to sell their
goods and services to customers outside of the region, bringing in significant revenues that are
spent locally and help drive the San Jose economy. Business Support Industries, which include
slightly less than one-third of total employment, sell their goods and services to other companies
within the local economy, including Driving Industries. Household-Serving Industries provide
goods and services to City residents. They include more than one-third of total employment, with
the retail sector alone accounting for almost 15 percent of the City’s total jobs.9

Finding 4: San Jose’s active employment land plays a disproportionately important role in the City’s economy.

San Jose has approximately 13,000 acres of active employment land (the Evergreen and North
Coyote lands are not included in this figure because they are not currently “active” due to the
large number of vacant acres in these areas). The active employment land represents only 13
percent of the City’s total land area but contains 54 percent of the City’s total employment and 72
percent of the City’s total employment in the Driving Industries. In the case of some individual
employment sectors, the share is even higher.

Finding 5: The 13,000 acres of active employment land can be divided into subareas with very different characteristics.

This study defines 20 different employment subareas that are further divided into four different
categories based on their employment and land use characteristics. These subareas vary widely
in their development patterns and the business types they serve. For example, some subareas
clearly support Driving Industries because of their location, infrastructure, building stock, and
market position, while others have a much higher concentration of Household-Serving Industries,
which serve the needs of local residents. The chart on the next page classifies the four types of
subareas into groupings that have been defined on the basis of employment characteristics:
• Subareas where Driving Industry employment predominates;
• Subareas where Business Support Industry employment predominates;
• Subareas with a mix of Driving Industries and Business Support Industries;
• Subareas where Household-Serving Industry employment predominates.
Although the subarea classifications are based on the relative concentration of employment by
industrial sector within a given subarea, the report also examines each subarea’s share of the
City’s total employment in a particular sector, which in some cases is significant.
The fiscal implications of development also vary by subarea, as shown by the four subareas that
were tested in the fiscal impact model. The results are discussed in subsequent findings. 10
Type 1: Subareas Where Driving Industry Employment Predominates.

Finding 6: San Jose is projected to add approximately 141,000 net new jobs
between 2000 and 2020.

Based on ABAG projections, the City is expected to add 141,000 net new jobs over its 2000
level by 2020. This takes into account the jobs that have been lost since 2000, assuming a return
to the 2000 level by 2008 or 2009 and roughly 2.7 percent annual average employment growth
until 2020.

Finding 7: The vast majority of the net job growth in the next 20 years will
require construction of new space. The City will need approximately 50 million
square feet of new space to accommodate the projected increase.

Calculations based on the ABAG employment projections to 2020 show that 50 million square
feet of new space will be necessary to accommodate the roughly 141,000 jobs that will be
added after the City regains its 2000 employment level. It is likely that some new space will be
built even before all the currently vacant space is re-absorbed (in roughly 2008 or 2009), since
some the firms creating jobs before then will want to occupy new space instead of currently
vacant space due to their specific corporate requirements.

Finding 8: The estimated demand for new building space to accommodate
employment growth through 2020 translates into demand for approximately
2,700 acres of land for new development.

Although demand for employment land and new industrial/R&D/office space is currently slack,
the employment projections strongly suggest that it will pick up towards the end of the decade
when the supply of currently vacant space is expected to be absorbed.
Over half of the demand for new land—approximately 1,450 acres—is expected to be used for
the Driving and Business Support Industries, the primary uses in most of the active employment
subareas.
The demand for new retail space is also estimated to be significant (calculated at roughly 750
acres before considering Santana Row or the expansions at Valley Fair and Oakridge shopping
centers) as is civic uses (over 400 acres). However, this growth need not be fully or even
primarily accommodated in the employment subareas, as retailers and civic uses typically prefer
locations near residential development.

Finding 9: Employment uses are shifting towards a more efficient use of land,
and therefore, less land is projected to be necessary in the future to support
employment needs.

The above allocation of 1,450 acres for the Driving and Business Support Industries assumes
intensification in terms of both space per employee and building density, recognizing recent
market trends towards higher-density employment in response to changing industry requirements
and higher development costs. These are based on conversations with the City’s development
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community and appear to be realistic predictions of the direction that the market will move in the
future. However, such intensification is not necessarily reflected in existing City policy such as the
North San Jose Area Development Policy.

Finding 10: If land is used more efficiently in the future, as assumed in these
estimates, there should be more than enough vacant and underutilized land in
the employment areas to accommodate the anticipated growth of Driving
Industries and Business Support Industries through 2020.

The current supply of vacant land in the employment subareas is almost 1,600 acres. However, it
should be noted that roughly 20 percent of this land will never absorbed due to such factors as
small parcel size or other characteristics that render the land unsuitable from a development
perspective. Therefore, the amount of usable vacant land in the employment subareas that can
actually accommodate growth is assumed to be about 1,250 acres.
The Driving Industries and Business Support Industries—the firms for which a location in the active
employment subareas is most important—will require 1,450 acres through 2020, only slightly
more land than the usable vacant 1,250 acres present in the active employment subareas,.
Therefore, it is likely that much of the demand for new built space for these industries through
2020 can be accommodated on vacant land in the active employment subareas, although the
exact amount depends on market conditions, i.e., how closely the areas in which vacant land is
available align with the areas deemed desirable for the uses in question.
In the later years of the forecast period (i.e., closer to 2020), as suitable supplies of vacant land
dwindle, pressure is likely to increase to redevelop functionally obsolete buildings with more
intensive uses. This will lead to new construction on sites with older or marginal buildings within
the existing employment subareas.
Vacant planned employment lands that are outside the active employment areas (e.g., Evergreen
and North Coyote Valley) account for an additional 1,700 acres. While buildout of Evergreen
and North Coyote Valley is unlikely by 2020, these acres may represent alternative locations for
Driving Industries through 2020 and beyond.
The total of vacant and underutilized land in the employment subareas should meet the City’s
employment growth needs through 2020. However, this finding assumes more intense use of
land and building space and careful management of the land supply.

Finding 11: ABAG projects that approximately 63,000 new housing units in San
Jose are needed between 2000 and 2020 to satisfy projected demand.

Only about 27 percent of those units will be necessary to support demand for single-family homes
including attached townhouses, as the vast majority of demand will be for higher density
products. By the end of 2003, San Jose had issued building permits for 14,830 units (23
percent) of the 63,000-unit projection.16

Finding 12: Based on densities that are consistent with various residential unit
types found in the General Plan, approximately 2,900 acres of land is needed to
support the projected housing demand in San Jose.

This land estimate is based on the projection that roughly one-quarter of the required new units
are single-family homes, both detached and attached (townhouse) units. Despite their relatively
small market share, these units will likely account for roughly two-thirds of the total projected land
consumption.
San Jose currently has approximately 1,800 acres of vacant residential land with its Urban
Service Area (USA) and has created additional land supply for housing by designating
underutilized properties for residential use within the Downtown Core, transit corridors, and
Specific Plan areas (e.g., Midtown).

Finding 13: Of the 20 subareas under consideration, housing is clearly
appropriate in seven and under certain circumstances, it could be considered in
additional subareas.

Portions of the Downtown Core, Downtown Frame, North San Jose 6, and the Midtown portion of
Central San Jose 1 are already planned for high density housing and/or mixed use development.
These subareas may be able to accommodate even higher densities on existing planned housing
sites and/or add new high density housing sites.
Monterey Corridor 3, North First Street, and the Agnew site in North San Jose 2 could
accommodate future housing development based on the land use, employment, and fiscal
analyses. Under certain circumstances, housing could be considered in additional subareas (see
Recommendation 4 for additional discussion of the subareas.) Therefore, San Jose can meet its
future housing demand without converting prime lands for Driving and Business Support Industries
to housing.
For example, available vacant or underutilized land in North San Jose 2 and North First Street
alone could support as many as 19,000 units. This would satisfy over 40 percent of San Jose’s
total demand for multi-family housing over the next 20 years, while only occupying 122 acres in
Type 1 and Type 2 subareas.

Finding 14: There will be constant pressure to find more land to accommodate
housing in San Jose, and that there will be considerable inherent tension in
trying to adequately balance the needs of these uses, both of which are vital to
the City’s future.

Land demand for housing through 2020 is 2,900 acres compared to 2,700 acres required to
support job growth. Particularly with the current slow commercial real estate market and the
amount of vacant commercial space, near-term demand for land for residential uses will be
greater than demand for land for commercial development. There will be pressure to use
available land in the active employment subareas for residential uses.17

Finding 15: The impact of new development on both the service costs borne by
the City and the revenues collected by the City can vary significantly from
subarea to subarea.

The increment of new residents and employees that triggers certain major costs, most notably fire
service costs, varies significantly among subareas. For example, the threshold for a new fire
station in Monterey Corridor 2 is only half the level of North San Jose 5 (7,500 new residents
and employees versus 15,000). Although fire capital costs are significant, it is the recurring cost
of fire service (i.e., the annual operating expenses) that poses the main fiscal barrier to highintensity
development in North First Street and North San Jose 2.
There are also significant variations in the cost of parks, and in the cost and service population
threshold of library services. These are explained more completely in the Technical Appendix.

Finding 16: With the exception of neighborhood park costs, other service costs
are triggered only by large increments of growth.

This has significant implications for the fiscal balance of a scenario, particularly one in which the
threshold for new service is met but development beyond that point is insufficient to generate
enough revenues to offset those new costs. For example, in one development scenario (North
First Street Scenario 2), the large development increment requires two new fire stations, the
ongoing operations costs of which are the main factor behind a nearly $16 million negative
balance between recurring costs and revenues. However, the second station only serves a small
amount of development above the threshold that triggers additional service. If the scenario
included about 1,000 fewer employees (roughly 300,000 sq. ft. of office space) only one new
fire station would be required and the negative balance of recurring costs and revenues would
drop to only about $2 to $3 million.

Finding 17: Parks are among the largest capital costs associated with residential
development.

Depending on the mix of residential and commercial development in the particular development
scenario tested in the fiscal model, parks can be the largest capital cost incurred by the City as a
result of new development. Not only is the cost high, but unlike other costs, which only increase
when a relatively high population threshold is met, parks costs increase more or less in direct
proportion to changes in the population.
Fire costs can also be high, but in most of the subareas the growth increment required to trigger
the addition of a new fire station is high enough that new fire costs only set in when the level of
development is very high. Library costs, although high, require a very high population threshold
and are not triggered in any of the scenarios. Police costs do not make a significant difference to
the fiscal balance in any of the scenarios.18

Finding 18: One-time revenues from housing cannot, except in a few cases,
cover the cost of the parks that must be built to serve that housing.

This is due to the City’s policy of not forcing residential development to bear the full cost of
providing park facilities through the parkland impact fee. Only single-family houses and highdensity
condominiums are able to generate enough one-time revenues to cover the associated
parks cost, and in the latter case, this is only true when the conveyance tax stemming from
turnover (sales) is taken into account over the entire period through 2020.

Finding 19: Commercial development generates significant one-time revenues
but does not usually trigger the same level of capital costs as residential development.

Significant capital costs can be incurred if development triggers new fire costs. However,
because of the way that police, fire, and library costs are triggered, it is easier to control them
through land use policy. This does not mean it is necessary to limit the amount of total
development, but rather to create policies that add development in increments that either don’t
trigger new costs or that can generate sufficient revenues to cover those costs.

Finding 20: The fiscal balance is determined by the overall mix of land uses in
the subarea scenario, rather than by a single land use or parcel. In general, if
there is more commercial/industrial development than residential development
the scenario can yield a balance of one-time revenues and capital costs.

It is important to note that the positive balance of one-time revenues generated by
commercial/industrial development can be substantially offset by the capital costs of expanding
fire service if the proposed development scenario creates enough employment in the subarea to
push the total number of residents and employees high enough to require a capital outlay for a
new fire station. There are also significant annual costs associated with expanded fire service.
The different service thresholds in the individual subareas highlights the need to consider
scenarios in their specific context. For example, the growth increment that requires a new fire
station is smaller in Monterey Corridor 2 than in the other subareas, meaning that the ability of
one-time revenues from commercial/industrial development to offset the negative fiscal balance
stemming from housing is less certain than in other subareas despite the lower cost of parks in
Monterey Corridor 2.

Finding 21: Redevelopment Project Areas affect the level of recurring revenues
going to the General Fund.

Because all of the property tax increment in a Redevelopment Project Area flows to the
Redevelopment Agency, the level of recurring revenues collected by the General Fund is reduced,
depending on the particular land use (development type) in question.19
It should be noted, however, that the fact that a parcel is located in a Redevelopment Project Area
does not mean that there are no recurring revenues flowing to the General Fund. The total of
other recurring revenues can amount to a significant proportion of the property taxes or even
exceed them, depending on the development type. For example, R&D buildings can generate
significant revenues from their utility taxes—roughly half the revenues that would be generated by
property taxes outside of a Redevelopment Project Area. In the case of retail, which generates
sales tax, other recurring revenues usually far exceed property taxes.

Finding 22: Development in a Redevelopment Project Area generates six to eight
times as much property tax revenue for the City.

This revenue does not go to the General Fund and it is used to finance affordable housing
projects that are located throughout the City and support infrastructure and public facilities
located within Redevelopment Project Areas.
For example, the Redevelopment Agency contributes funds towards the capital costs of providing
new facilities, including parks, thus helping to make up for a shortfall of one-time revenues and/or
removing some of the long-term burden from the General Fund to cover the costs of general
obligation bonds for capital investments.

Finding 23: In general, housing can be accommodated in certain employment
areas identified as suitable without creating a fiscal drain to the City’s General
Fund, as long as it is added in the context of a comprehensive planning process
that ensures a mix of uses and adequate revenues to support needed services.

While scenarios were run for subareas that are not recommended for conversion (see
Recommendation 4), these scenarios are informative of general fiscal relationships. For example,
in North San Jose 5, a positive balance of both one-time revenues and costs and ongoing
revenues and costs is always possible as long as development adds more employees than
residents. Because only a small percentage of the subarea is included in a Redevelopment Project
Area, the flow of recurring revenues to the General Fund can easily balance out the annual costs,
and sufficient commercial development will yield a positive balance of one-time revenues and
capital costs.In North San Jose 2 and North First Street, a balance is harder to achieve because of the
property tax diverted to Redevelopment Agency programs. Although the inclusion of significant
commercial development balances out the capital costs associated with residential development,
a large increment of commercial development generates significant recurring costs. This,
combined with the fact that most of the property tax revenue flows to Redevelopment Agency
programs, leads to a negative balance of General Fund recurring costs and revenues. Only a
scenario with a relatively small increment of new development can avoid this, but such a scenario
is not necessarily the most effective use of the land available in these subareas.
In Monterey Corridor 2 a similar situation exists, but balance can be achieved as long as no new
fire station is needed. This means the overall increment of development must be relatively low.20
Above the service population threshold for fire costs, additional development will tend to lead to
greater negative imbalance of annual costs and revenues. Therefore, if employment
intensification is planned for this subarea, the service costs issue would have to be closely studied.

Finding 24: Retail development is an important consideration for quality of life
as well as fiscal reasons.

According to a recent study of San Jose’s retail sector,2 San Jose is not capturing its full retail sales
potential, and increasing the retail base is an overarching goal of the City. In most of the
employment subareas, retail can be an important component of any mix of uses, particularly one
that includes residential development, since it provides essential services that can support a
resident population. The sales tax generation of retail can provide an important boost to the
recurring revenues of any development scenario whether or not it is built in a Redevelopment
Project Area.
Although retail development is desirable in many subareas, this does not mean that large-scale
community-serving retail is appropriate. In most cases retail development should be considered a
supporting use that is part of a larger land use scheme, not a means to draw customers from
outside the area.
2 Metrovation and Bay Area Economics, San Jose Retail Model (Draft), October 2003.21

RECOMMENDATIONS

Recommendation 1: Treat the existing supply of vacant land in the active employment areas as a unique and valuable asset.

Given the level of employment growth projected in San Jose by 2020 and the resulting demand
for land, the declining amount of land available for development, and the uncertain economics of
redevelopment of underutilized land, the supply of vacant land in the active employment areas
constitutes a crucial asset for the City as it works to attract and retain a new generation of jobs.
Great care should be used when making decisions about the use of this land, especially over the
next few years. In the short term, the economy will still be recovering from the recent down cycle
and there will be limited demand to build new industrial/R&D/office space, but strong ongoing
pressure to add more housing.

Recommendation 2: Conduct ongoing research to understand how the supply of vacant land matches the needs of employers.

In order to ensure that this asset is being used in the most effective way possible to strengthen the
City’s economy, the City should gain an even deeper understanding of the needs and preferences
of the industries it wants to attract and retain, particularly since these needs and preferences
change continually. Which industries will show a preference for an environment with a mix of
uses and transit? Which ones will prefer a location that is separated from housing? Which ones
will be willing to locate in an intensely developed area and which ones will continue to prefer a
lower density campus-like environment? Which types of firms will want to locate near their peers
versus serving as “pioneers” in subareas that do not currently host similar firms, and which types
will be at a point in their development where they are willing and able to redevelop underutilized
land instead of locating on vacant land or simply renting space in existing buildings?
Although individual firms will naturally differ in their preferences, such understanding can help the
City manage its supply of vacant land (and easily developed underutilized land) and plan
employment areas that effectively meet the needs of key industries.

Recommendation 3: Actively encourage intensification of new development in
order to use the existing supply of vacant and underutilized land efficiently.

San Jose’s land supply is a competitive asset whose value to the city’s economic future should be
maximized. More intensive development means not only that more jobs can be accommodated,
but also that over the long term businesses will have more choices of locations (i.e., particularly
desirable locations within the City will be able to accommodate more jobs).
The estimates of land demand cited above assume intensification in the use of both built space
and land. Although the former is primarily a function of real estate market conditions and the
nature of the activities being carried out, and therefore largely outside the control of policy, the
22
City has tools to encourage more intensive use of land. Beyond General Plan and zoning
changes, it is important to make investments in infrastructure that supports more intensive
development, most notably transit but also parks and other amenities. As noted below, in some
subareas Redevelopment revenues can help pay for these and other services.
Finally, effective planning is essential for a variety of reasons: it helps ensure an adequate mix of
uses, it increases the likelihood that developers will move to new building types, and it makes it
easier to ensure the quality of design that is particularly important for making high-intensity
development work with transit.

Recommendation 4: The integrity of many of the employment areas should be
protected as locations for key industries and a wide range of economic activities.

The chart below summarizes the classification of subareas and the conclusions and
recommendations that apply to each type. The recommendations acknowledge the need to
respond flexibly to changing economic conditions over time within key employment subareas. In
some instances, the recommendations recognize potential future policy efforts to increase the
employment densities and building intensities for Driving Industries.