SUBJECT: SEE BELOW DATE: March 23, 2017

Transcription

1 COUNCIL AGENDA: 4/4/17 ITEM: 4.1 TO: HONORABLE MAYOR AND CITY COUNCIL FROM: Toni J. Taber, CMC City Clerk SUBJECT: SEE BELOW DATE: March 23, 2017 SUBJECT: CONSTRUCTION TAX MODIFICATION RECOMMENDATION: As recommended by the Community and Economic Development Committee on January 23, 2017, accept the report and approve an ordinance to: (a) Amend Title 4 of the San José Municipal Code to create a temporary partial suspension from the Commercial-Residential-Mobilehome Park Building Tax (SJMC 4.47) to achieve a rate of 1% for the following uses: (1) Office, General Business (SJMC ) (2) Office, Research and Development (SJMC ) (3) Data Center (SJMC ) to allow the City Council the flexibility to review the uses included and verify that these sectors are being accurately represented this provision shall sunset March 31, (b) Amend Section of Chapter 4.82 of Title 4 of the San José Municipal Code to authorize the City Manager or designee to compromise or settle tax refund claims for amounts between fifty thousand dollars ($50,000.00) and a threshold to be determined by the City Council in its consideration of the proposed ordinance, with the written approval of the City Attorney.

2 CED AGENDA: zyxwvutsrqponmlkjihgfed 1/23/17 ITEM: (D) 2 CITY OF 7SI SAN JOSE uronmedam CAPITAL OF SILICON VALLEY Memorandum TO: COMMUNITY AND ECONOMIC DEVELOPMENT COMMITTEE FROM: Kim Walesh Jim Ortbal Harry Freitas SUBJECT: CONSTRUCTION TAXES DATE: January 13, 2017 RECOMMENDATION Accept report and forward a recommendation to the full City Council to approve an ordinance to: 1. Amend Title 4 of the San Jose Municipal Code to create a temporary partial suspension from the Commercial-Residential-Mobilehome Park Building Tax (SJMC 4.47) to achieve a rate of 1% for the following uses: a. Office, General Business (SJMC ) b. Office, Research and Development (SJMC ) c. Data Center (SJMC ) To allow the City Council the flexibility to review the uses included and verify that these sectors are being accurately represented, this provision shall sunset March 31, Amend Title 4 of the San Jose Municipal Code to amend section to authorize the City Manager or designee to compromise or settle tax refund claims for amounts exceeding fifty thousand dollars ($50,000.00), with the written approval of the City Attorney. OUTCOME Providing further refinement of the Title 4 definitions of Industrial and Commercial development by adding an Office category and appropriate tax rate will ensure that San Jose remains a competitive market in the region for the development and leasing of commercial real estate by driving industry companies. The new Office category included in Title 4 will include the Title 20 definitions of "Office, General Business", "Office/ Research and Development" and "Data Centers", and provide clarity and consistency to the development and business community

3 To: Community and Economic Development Committee Date: January 13, 2017 zyxvutsrponmlkjihgfedcbayxwvutsrponmlkjihgfedcba Subject: Construction Taxes Page 2 regarding the applicability of the City's construction taxes. The result is that projects designated as these uses will be taxed at a rate of 2.5% rather than the 4.5% rate for commercially designated projects. BACKGROUND On December 13, 2012, City Council directed staff to propose a plan for full modernization of the City's construction taxes to better align the taxation policies with the job goals of the City's Economic Strategy and Envision Construction-Related Taxes San Jose has four construction-related taxes, but for the purposes of this discussion only two are pertinent: The Building and Structures Construction Tax (SJMC 4.46), and the Commercial- Residential-Mobilehome Park Building Tax found at SJMC 4.47, (also known as the CRMP Tax). These two taxes have been the primary focus of this analysis as they represent a sizeable proportion of the cost of many building permits issued by the City and fund the majority of the Traffic Capital Improvement Program, that includes projects and programs such as pedestrian and traffic safety, pavement maintenance, traffic signals, and grant project required local matches. The remaining elements of project permitting costs can be attributed to administration, plan check and inspection fees, which are 100% cost-recovery, and Impact Fees (parks, traffic, affordable housing etc.). San Jose's Building and Structure Construction Tax and Commercial-Residential-Mobilehome Park Building Tax are applicable to all building permits including both new construction and tenant improvements. For the purposes of collecting these taxes, permit applications are deemed by Building Department pennitting staff to be Residential, Commercial or Industrial. The Building and Structures Tax is a special tax, the revenues from which must be used for the construction and enhancement of major collectors and arterial streets in the City. The Commercial-Residential-Mobilehome Park Building Tax is a general tax with no restrictions on expenditure, but has historically been used for transportation purposes to fund pedestrian and traffic safety, pavement maintenance, and grant project required local matches. Rates for these taxes vary based on the intended use of the building or structure being permitted. Construction taxes are collected against the valuation of the project derived from the higher of either the International Code Council's building valuation data table or the submitted valuation estimate by the project applicant. The table below outlines the tax rates applied to the different building uses by tax fund:

4 To: Community and Economic Development Committee Date: January 13, 2017 zyxvutsrponmlkjihgfedcbayxwvutsrponmlkjihgfedcba Subject: Construction Taxes Page 3 Use Building & Structures Tax Commercial- Residential- Mobilehome Park Building Tax Total Residential % 2.75% 4.5% Commercial 1.5% 3% 4.5% Industrial 1% N/A 1% Residential and Commercial uses are broadly defined for both taxes based on the provisions of the Zoning Ordinance. "Residential" uses is considered in terms of single-family dwellings, two-family dwellings or multiple dwellings, while "Commercial" uses are those allowed in the General Commercial Zoning District per the Zoning Ordinance. "Industrial" uses are defined differently in that twelve specific uses are explicitly called out as eligible for the lower tax rate based upon the Zoning Ordinance that went into effect at the time, September 1987, and are as follows: - Laboratories devoted exclusively to research, product development and testing, engineering development, and sales development - Manufacturing facilities - Photographic processing and developing - Mini-warehouses - Production, preservation and preparation of food products for human consumption, excluding public dining - Trade and business schools - Repair, cleaning, and servicing of commercial or industrial equipment or products - Storage, warehousing and distribution establishments - Construction and corporation yards - Repair and cleaning of vehicles, including boats, excluding gasoline service stations and repair shops installation of tire, battery, brake, muffler and shock absorber, and wheel aligning - 9 and 18 hole golf courses - Frozen food lockers Purpose and Use of Taxes for Transportation Purposes The City heavily relies on construction taxes to plan, develop, operate and maintain the local transportation system, given the very limited General Fund resources available for transportation purposes. For context on the two major transportation funds in the City's Traffic Capital 1 Residential projects are assessed taxes based on 88% of the project valuation, whereas Commercial and Industrial projects are assessed based on 100% of the project valuation. For comparison, the effective combined tax rate for Residential projects is 3.96%.

5 To: Community and Economic Development Committee Date: January 13, 2017 zyxvutsrponmlkjihgfedcbayxwvutsrponmlkjihgfedcba Subject: Construction Taxes Page 4 Program, 89% of the Building and Structure Fund revenues and 44% of Construction Excise Fund revenues come from these construction taxes. As briefly mentioned previously, these revenues fund essential transportation projects and programs including pedestrian and traffic safety projects (e.g. enhanced crossings by schools and radar speed signs), the operation and maintenance of traffic signals, streetlights, signs and markings, complete street projects that modernize the travel experience for pedestrians, bicyclists and vehicles, pavement maintenance activities, and required local matches for numerous transportation grant projects, creating great leverage of the funds. The current five year CIP invests $37M in local match dollars resulting in a return of $200M in grant dollars. Loss of revenue to these funds severely limit the City's ability to achieve key transportation priorities. It is important to note that San Jose's local transportation is facing serious maintenance backlogs for a wide range of essential transportation infrastructure of approximately $670 million, of which $521 million is for pavement maintenance alone. In addition, pavement maintenance has projected annual funding shortfalls of almost $70 million of the over $100 million annual need. However, San Jose is somewhat unique in its levy of construction taxes on development, raising concerns about competitiveness. Key neighboring cities, including Santa Clara, Milpitas, and Fremont, do not charge construction taxes. Other cities such as Mountain View, Sunnyvale and Cupertino have either a low construction tax or a flat rate across commercial and industrial projects. Neighboring cities are often less reliant on construction tax revenue because they invest General Fund money into their transportation network, which San Jose has not had the ability to do given its limited resources and significant general purpose needs. Prior Amendments Following the adoption of the City's first Comprehensive Economic Strategy in 2003, the City Council approved an ordinance in June 2004 amending Title 4 to temporarily expand the list of uses that were taxed at the lower industrial rate of 1 % to include additional uses that represent the types of industries that occur in the cities industrial areas and help drive job and general purpose revenue growth. These uses were: - Industrial Services - Retail or wholesale commercial entity, single occupant greater than 100,000 gross square feet - Sales, office furniture, industrial equipment, machinery - Printing and publishing - Base Load Facility Photovoltaic - Sale or lease of commercial trucks, buses, trailers, campers, boats, mobile homes, construction equipment - Software development - Internet applications

6 To: Community and Economic Development Committee Date: January 13, 2017 zyxvutsrponmlkjihgfedcbayxwvutsrponmlkjihgfedcba Subject: Construction Taxes Page 5 - Server farms and co-location facilities - Telephone switching gears, telecommunication facilities, wireless communication facilities, antenna, and equipment The ordinance included a sunset provision of five years or until June 30, 2009 to allow the City Council the flexibility to review the uses included and verify that these sectors represented those businesses that were still driving the economy and growth in the cities industrial areas. The memorandum recommending the ordinance specifically noted that the sunset provision would provide the City Council with the "flexibility to determine if the sectors included continue to generate a significant number of middle and high paying jobs and thus merit assistance from the City." The amendment sunset on June 30, The effect of the five years of the suspension followed by two years of no suspension caused confusion in the development community and directly impacted a number of driving industry projects in process or under consideration. In January 2012, new definitions were included to help clarify what sectors were considered office/r&d to match what was occurring in our Major Employment Areas/Industrial Park Zoning Districts, and that would be eligible to pay the lower industrial rate of 1%. This modification included the following uses: - Office, research and development uses as defined by Title 20 - Data center uses - Installation of solar photovoltaic systems This provision was set to sunset on March 15, but was later extended to March , with direction for staff to return to Council with a plan to recommend changes to the municipal code to "fix" the issue long term. A full modernization of the City's construction related taxes - which addresses the underlying challenges related to implementation, sufficiently funding transportation improvements, and encouraging job creation - would require voter approval and the intent of this previous extension was to align with the potential inclusion of a measure on the November 8, 2016 ballot. Due to other competing high-priority ballots initiatives, staff believed that a potential measure may have had a negative impact on other initiatives or may have been unsuccessful, and that a different administrative approach was necessary at that time. ANALYSIS In evaluating the modernization of the City's construction taxes, staff has laid out the following principles to ensure that adjustments to the rate of tax for development (both new construction and investment in existing buildings and equipment) meets the following three City goals. 1. Competitive - Align with the types of development that the City is interested in promoting and to remain competitive with surrounding cities, which do not have these taxes and use alternate funding methods to finance major infrastructure needs.

7 To: Community and Economic Development Committee Date: January 13, 2017 zyxvutsrponmlkjihgfedcbayxwvutsrponmlkjihgfedcba Subject: Construction Taxes Page 6 2. Revenue Neutral - Remain revenue neutral so as not to impact the limited funding that supports transportation infrastructure build out and essential maintenance. 3. Administrative Simplicity - Create clear definitions and process steps so that the development community has a better understanding of how the City implements these taxes and so that staff has clear implementation guidelines. Need for Modernization - Changing Nature and Location of Driving Industries As highlighted by the history of work on this topic over the past 13 years, the changing nature of uses in the City's commercial and industrial buildings since the adoption of the ordinance has created ambiguity and challenges in how these taxes are applied to some of our driving industries and commercial office development. "Driving Industries" are sectors that disproportionally stimulate the local economy because they serve external markets, and generate jobs and investment in the community. These uses typically have more options as to where they invest and locate facilities at the regional, state and national level. Locally, many of our driving industries are technology-related, but in the same way that the terms "technology-related" or "tech" have become too vague to encapsulate all of the variations in uses and users in these industries, so have the definitions used to determine the appropriate tax rate throughout the City. When these taxes were enacted in the 1970s, there was a very clear understanding and difference between R&D and office uses. The perception of R&D was that it occurred in a clean room like a laboratory and utilized significant capital equipment, and that it occupied the majority of the space in the building. Today R&D is more likely to require the use of computers in an open office environment, may have some specialized equipment or conditioned space, and may be integrated with sales and administration teams in a single space. The inclusion of "office, research and development" as a definition eligible to pay the reduced rate in 2012 was intended to address some of the ambiguity between different R&D uses by defining it as "industrial or scientific research and product design that involves the use of computers and other related office equipment in an office setting, including administrative services, product design and sales." While this went some way to addressing the changing nature of tech related uses, the broader industry has continued to evolve and the nature of uses has become more blurred and harder to define by conventional terms. For example, traditional professional service firms now occupy work environments that resemble those of software companies. This continued transition also poses problems for the City from a land use perspective since the Industrial Park Zoning District, which is prevalent in key growth areas such as North San Jose and Edenvale, does not allow professional service offices but does allow software development. In addition to the changing nature of industrial uses, San Jose is experiencing change in where these uses are occurring. Following the adoption of the Envision 2040 General Plan, tech related employers have expressed interest outside of the traditional employment and industrial centers of North San Jose and Edenvale. This trend is likely to continue as the City works to attract more

8 To: Community and Economic Development Committee Date: January 13, 2017 zyxvutsrponmlkjihgfedcbayxwvutsrponmlkjihgfedcba Subject: Construction Taxes Page 7 employers to address the jobs/housing imbalance and continue to build out more employment uses in mixed-use urban villages. This locational shift is also being driven by the changing nature of how employers choose their location. Amenity-rich urban centers continue to attract the talent that technology companies are looking to hire. Over the last five years, Downtown San Jose has shifted from predominantly traditional financial and professional services firms to a majority of new leases being tech related. This is also occurring as areas such as West San Jose see additional growth due to proximity to amenities and other large/anchor tech-companies. This will likely result in employers that would otherwise be consistent with the definition of an industrial use for tax purposes, doing business outside of the City's traditional industrial areas. Staff Recommendation The prior solution to this challenge was to provide an expanded list of uses eligible to pay the industrial rate, thereby removing a financial obstacle for driving industry uses interested in locating in San Jose. As San Jose begins to realize more new construction, this could have significant negative impacts on the funds available to support the build out and maintenance of the City's transportation network. As employment uses become more office-like in nature, an alternative approach would be to consider more uses as offices and therefore tax them at the higher rate. When considering options for relocation or expansion, many companies are less concerned with the way the City classifies their use, and ultimately only consider the total cost of permitting the project. As such, considering these uses at the full commercial rate would have the impact of making San Jose more expensive and less competitive with surrounding cities that do not have similar taxes, justifying a rate lower than traditional commercial development. To address these competing priorities staff is recommending that in future, uses that are performed in an "office-like" environment be considered commercial, consistent to existing provisions of Title 4, but that Council approve a partial suspension to reduce the Commercial- Residential-Mobilehome Park Building Tax (SJMC 4.47) to 1% from 3% for office uses, thereby creating a combined effective tax rate of 2.5%, instead of the commercial rate of 4.5% or the industrial rate of 1%. Use Building & Structures Tax Commercial- Residential- Mobilehome Park Building Tax Total Commercial 1.5% 3% 4.5% Office 1.5% 1% 2.5% Industrial 1% N/A 1% To ensure consistent application of this rate, the definition of office uses will utilize the two Zoning Ordinance definitions of business offices: - Office, General Business: A "General business office" is a space within which management-level administrative services for firms and institutions are provided; or

9 To: Community and Economic Development Committee Date: January 13, 2017 zyxvutsrponmlkjihgfedcbayxwvutsrponmlkjihgfedcba Subject: Construction Taxes Page 8 within which services to individuals, firms, or other entities are provided. Examples of a general business office use include but are not limited to offices within which the following services are provided: real estate, insurance, property management, title companies, investment, personnel, travel, and similar services, and including business offices of public utilities or other activities when the service rendered is a service that is customarily associated with office services. (SJMC ) - Office, Research and Development: "Office, research and development" is an establishment engaged in industrial or scientific research and product design that involves the use of computers and other related office equipment in an office setting. The facility may also include administrative services related to product design or sales, but does not include laboratories, manufacturing or assembly. (SJMC ) In the past, uses that are unclear, or developments that do not have a specified user at the time the construction taxes are paid, have had the commercial and industrial applied inconsistently. As such, commercial uses have pre-paid the industrial rate, and vice-versa. By creating a new definition that is agnostic to location with the city and that focusses on nature of the environment rather than narrow industry types, staffs recommendation will ensure that the new rate is applied more consistently without making San Jose uncompetitive and without impacting revenues to the Transportation Capital Improvement Program. Data Centers Data centers are an important part of San Jose's driving industry ecosystem. In addition to being an important piece of private sector infrastructures that supports many of the companies that the City is actively trying to attract, data centers also generate considerable secured and unsecured property taxes for the City. Because of the significant capital investment required to construct data centers, the permit valuation is often high, resulting in significant development costs for data center developers. Staff is therefore proposing that they also be included at the 2.5% combined construction tax rate. Implementation As companies and developers come to the City to obtain building permits, their projects are deemed by Building Department staff to be either Commercial or Industrial for purposes of calculating appropriate construction tax rates based on the Title 4 use definitions. This determination of the tax rate can have significant implications on the cost of permitting developments, as the difference can result in the applicant paying four and a half times more on the construction taxes due on a project. As such, the predictability and consistency of these tax costs are important considerations in promoting economic development. The process for assessing whether a use is considered Industrial or Commercial relies on the submittal of an industrial use designation form when an applicant pulls a building permit and is

10 To: Community and Economic Development Committee Date: January 13, 2017 zyxvutsrponmlkjihgfedcbayxwvutsrponmlkjihgfedcba Subject: Construction Taxes Page 9 required to pay all appropriate fees and taxes. This represents a number of implementation challenges for the permitting staff responsible for making this determination, which include: - Differing characterization of industrial/office/r&d projects, o Internally, by Building, Planning or OED, o Externally, by broker, tenant, property owner or contractor. - Level of understanding or awareness of the construction taxes or the cost implications of incorrect project definition. - Multiple actors from the development team are interacting with Building Department staff throughout the process (architect, general contractor, sub-contractor, tenant, property owner, broker, and lobbyist). - Because the Industrial definition is very use specific, the Commercial rate has become the default for projects that don't submit the industrial use form. - When a developer or property owner constructs a building or undergoes "market ready" improvements, the ultimate user is unknown. - When circumstances change or mistakes are made, the municipal code currently requires Council authorization for refunds over $50k. Over the last two years, these challenges (along with the changing nature of driving industries detailed above) have impacted a series of projects resulting in the need for several significant refunds to be approved by City Council. All of these instances have arisen from new, speculative construction or renovation projects marketed to accommodate driving industry companies across different parts of the City. In most of these cases, the improvements are not tenant specific, the developers and contractors are referring to the project as "office", the projects are located in mixed-use areas, and developers have been unaware of the difference in definition for tax purposes. As such, over 1 million square feet of development has been built or renovated under the commercial designation which, depending on the ultimate tenant of the building, may be industrial under the current definition. The creation of a separate designation and tax rate specifically for Office uses (both technology and non-technology related) will reduce the likelihood that significant refunds of this type will be required in the future. In addition, OED staff will be coordinating closely with the Building Department on current tenant trends in commercial real estate and provide additional support and training. Refund Authority On October 4, 2016, City Council directed staff to return with an Ordinance granting the City Manager authority to approve all refunds, with the written approval of the City Attorney, where the calculation of the refund amount is addressed by application of the Municipal Code. In cases where construction taxes have been paid above the determined rate, the Council approval process for refunds can be time intensive and can tie up resources for the applicant. Staff has included a recommendation to approve an ordinance that amends the current provisions for processing tax refund claims that require City Council approval for amounts exceeding $50,000. The new provisions would give the City Manager or his designee authority to issue refund claims for the

11 To: Community and Economic Development Committee Date: January 13, 2017 zyxvutsrponmlkjihgfedcbayxwvutsrponmlkjihgfedcba Subject: Construction Taxes Page 10 above $50,000, with the written approval of the City Attorney and coordination with the City Manager's Budget Office and Department of Transportation. EVALUATION AND FOLLOW-UP On December 13, 2012, City Council directed staff to propose a plan for full modernization of the City's construction taxes to better align the taxation policies with the job goals of the City's Economic Strategy and Envision A full modernization of the City's construction related taxes which addresses the underlying challenges related to implementation, funding transportation improvements and encouraging job creation, requires voter approval and staff considered recommending the inclusion of a measure on the November 8, 2016 ballot. Due to competing ballots initiatives, staff believed that a proposed measure would be unsuccessful and therefore held off pursuing that outcome. While staff is requesting a five-year time limit on the partial suspension to provide for further modification at a later date, staff will continue to monitor and analyze the collection and implementation of these taxes and will return to Council should a future ballot measure be appropriate. Following Council's recommendation and to ensure transparency on significant refunds (those over $100,000), staff will report out to the City Council on refund activity on an annual basis through an information memo to the Council. BUDGET IMPACT The Building and Structures Construction Tax (SJMC 4.46), and the Commercial-Residential- Mobilehome Park Building Tax (SJMC 4.47) fund the majority of the Traffic Capital Improvement Program. Revenues from these taxes are dependent on the level and nature of construction activity moving through the building permit process. Based on historical analysis of the past five years permitting activity, staff anticipates that the partial suspension and clarification of use definitions will result in revenues remaining neutral or experiencing a modest increase. PUBLIC OUTREACH. This memorandum will be posted on the City's website for the January 23, 2017 Community and Economic Development Committee agenda. COORDINATION The memorandum has been coordinated with the City Attorney's Office and the City Manager's Budget Office.

12 To: Community and Economic Development Committee Date: January 13, 2017 zyxvutsrponmlkjihgfedcbayxwvutsrponmlkjihgfedcba Subject: Construction Taxes Page 11 CEOA Statutorily Exempt, File No. PP (a), CEQA Guidelines Section Rates, Tolls, Fares, and Charges. /s/ KIM WALESH Deputy City Manager Director of Economic Development /s/ JIM ORTBAL Director, Department of Transportation /s/ HARRY FREITAS, Director Planning, Building and Code Enforcement For questions please contact Chris Burton, Sr. Business Development Manager, at (408)

13 Construction Taxes City of San José Construction Taxes

14 Construction-Related Taxes Building & Structure Construction Tax (B&S) Chapter 4.46 Tax Rate of Building Valuation Residential: 1.54% Commercial: 1.50% Industrial: 1.00% Commercial- Residential- Mobilehome Park Building Tax (CRMP) Chapter 4.47 Construction Tax Chapter 4.54 Tax Rate of Building Valuation Residential: 2.42% Mobile Home Parks: 2.42% Commercial: 3.00% Residential: $75 - $150 Per Unit Commercial: $0.08 /sf Industrial: $0.08 /sf Residential Construction Tax Chapter 4.64 Residential: $90 - $180 Per Unit

15 Use of Tax Revenue Building & Structure Construction Tax (B&S) Chapter 4.46 Commercial- Residential- Mobilehome Park Building Tax (CRMP) Chapter 4.47 Construction Tax Chapter 4.54 Residential Construction Tax Chapter 4.64 Revenues are reserved for developing the General Plan Transportation System. This revenue funds key transportation infrastructure in support of economic development. The Construction Excise tax is a general purpose tax not restricted in its uses. Per City Council Policy the revenues are dedicated to the Traffic CIP. The revenue is used for a number of programs in support of the City s general plan to develop a pedestrian, bicycle, and transit environment. Acquisition, construction, capital improvements/ maintenance of Libraries, Fire Stations, Parks and PW Facilities Reimburse people that construct public streets/highways at their sole cost/expense, and street maintenance.

16 Use of Tax Revenue Construction Tax Revenue for Transportation Purposes Construction Tax Revenues Construction Tax Uses Pavement & Traffic Maintenance Pedestrian Safety & Traffic Calming Projects Local Complete Streets Grant Funded Projects Local Match Traffic Signals & Timing Projects

17 Types of Building Use Residential: - One-family dwellings, two-family dwellings or multiple dwellings Commercial: - Those allowed in the General Commercial Zoning District per the Zoning Ordinance. Industrial: - Laboratories devoted to research, product development and testing - Manufacturing facilities - Photographic processing and developing - Miniwarehouses - Production and preparation of food products - Trade and business schools - Repair, cleaning, and servicing of equipment or products - Storage, warehousing and distribution - Construction and corporation yards - Repair and cleaning of vehicles, - 9 and 18 hole golf courses

18 Prior Amendments June 2004 additions (sunset June 30, 2009): - Industrial Services - Retail or wholesale commercial entity, single occupant greater than 100,000 gross square feet - Sale or lease of commercial trucks, buses, trailers, campers, boats, mobilehomes, construction equipment. - Software development. - Sales, office furniture, industrial equipment, machinery - Printing and publishing - Base Load Facility - Photovoltaic - Internet applications - Server farms and co-location facilities - Telephone switching gears, telecommunication facilities, wireless communication facilities, antenna, and equipment January 2012 additions (sunset March 31, 2017): - Office research and development uses - Data center uses - Installation of solar photovoltaic systems

19 Modernization Principles: Adjust the rate structure on these taxes to achieve three things: 1. Competitive Align with the types of development that the City is interested in promoting and to remain competitive with surrounding cities, which do not have these taxes and use alternate funding methods to finance major infrastructure needs. 2. Revenue Neutral Remain revenue neutral so as not to impact the funding that supports infrastructure build out and pavement maintenance, and 3. Administrative Simplicity Create clear definitions and process steps so that the development community has a better understanding of how the City implements these taxes and so that staff has clear implementation guidelines.

20 Need for Modernization: Changing Nature of Use Industrial Commercial Research & Development Laboratories devoted exclusively to research, product development and testing Office Office space within which management-level administrative services for firms and institutions are provided; or within which services to individuals, firms, or other entities are provided.

21 Need for Modernization: Driving Industry Locations

22 Staff Recommendation: Use Building & Structures Tax Commercial- Residential- Mobilehome Park Building Tax Total Commercial 1.5% 3% 4.5% Office 1.5% 1% 2.5% Industrial 1% N/A 1%

23 Staff Recommendation: - Office, General Business: A "General business office" is a space within which management-level administrative services for firms and institutions are provided; or within which services to individuals, firms, or other entities are provided. Examples of a general business office use include but are not limited to offices within which the following services are provided: real estate, insurance, property management, title companies, investment, personnel, travel, and similar services, and including business offices of public utilities or other activities when the service rendered is a service that is customarily associated with office services. (SJMC ) - Office, Research and Development: "Office, research and development" is an establishment engaged in industrial or scientific research and product design that involves the use of computers and other related office equipment in an office setting. The facility may also include administrative services related to product design or sales, but does not include laboratories, manufacturing or assembly. (SJMC )

24 Staff Recommendation: Accept report and forward a recommendation to the full City Council to approve an ordinance to: 1. Amend Title 4 of the San José Municipal Code to create a temporary partial suspension from the Commercial-Residential-Mobilehome Park Building Tax (SJMC 4.47) to achieve a rate of 1% for the following uses: a. Office, General Business (SJMC ) b. Office, Research and Development (SJMC ) c. Data Center (SJMC ) To allow the City Council the flexibility to review the uses included and verify that these sectors are being accurately represented this provision shall sunset March 31, Amend Title 4 of the San José Municipal Code to amend section to authorize the City Manager or designee compromise or settle tax refund claims for amounts exceeding fifty thousand dollars ($50,000.00), with the written approval of the city attorney.

25 Questions: