San Jose taps developer for long vacant city-owned land – with guardrails against delays

Six years — and two failed deals — after the city of San Jose purchased the property at 71 Vista Montana for affordable housing, it has selected its third developer, and a backup, to avoid further delays.

The San Jose City Council on Tuesday unanimously endorsed a plan to allow LH Housing to lead negotiations for a final contract and begin preliminary work on the lot, with plans to develop 572 housing units. The deal comes as the city pushes to get more projects off the ground while wrestling with the region’s high housing costs.

The city originally purchased the North San Jose site in 2020 for about $23 million, but it has sat vacant for years after those two previous attempts to develop it fell apart over funding issues, according to city housing staff. While LH’s plans still designate the project as fully affordable, the units — a mix of studios to two-bedroom apartments — will cater to a range of earners, from moderate-to lower income households. Exact rent prices and unit sizes have not yet been presented.

The project features a single central parking structure with 440 spaces and will be developed using modular construction, which is typically a faster way to build, by building units at a factory and stacking them together at the lot.

LH Housing has not requested any city subsidies to finance the project, which will be funded instead by private equity and bank loans.

The developer also plans to repay the city’s original $23 million investment in four installments, one during each phase of construction.

To guard against the kind of stalled projects it has dealt with in the past, the city selected a backup developer — a move it hopes will incentivize LH to stay on track.

Included in the timeline are key deadlines requiring the developer to submit a financing proposal within three months, secure all funding within two years, and start construction within three years.

Should LH fail to meet those deadlines, the council authorized Propertyworx as its second choice and would be able to step in to take over the project.

Its proposal includes 426 rental apartments, also 100% affordable for moderate-income earners and below.

Propertyworx would also use stackable modular construction to reduce costs and lower the risk of delays. Funding for the second-choice developer would come from a mix of public and private sources.

Aside from briefly serving as a safe RV parking site during the pandemic, the lot has seen no movement since the city acquired it. Now, the San Jose hopes its newly structured deal and strict guardrails will compel developers to move fast.

“A couple of years ago, the city had invested in this site and had brought forth two projects that could not get to the financial closing line,” San Jose Housing Director Erik Soliván said. “And so we repositioned this project… to look at different ways in which we can fund eventual production at the site, and asking developer responders to think about this work differently…”

The project decision comes after weeks of city discussions on how to get cranes moving faster, as San Jose — like the rest of the region — struggles to build housing quickly enough to meet its targets.

Earlier in the meeting, the council approved a pilot program to test new finance models aimed at spurring mixed-income developments. Raising concerns about the financial sustainability of fully affordable projects, proponents said this new program will provide the tools needed to woo developers to finally break ground on thousands of approved sites citywide. Officials noted that zoning capacity — which could quadruple in residential neighborhoods next year under some proposals — is only one piece of the housing equation.