San Jose pilot program will convert nearly 200 units at downtown high-rise into housing for middle-income earners

When The Fay opened in 2024, San Jose officials believed the 23-story, 336-unit high-rise could be transformative, not only by adding much-needed housing but also by boosting foot traffic near the southern gateway to downtown.

Instead, the housing development at the corner of Market and Reed Streets in the city’s swanky SoFA District faced high vacancy rates and bankruptcy, casting a shadow over other potential downtown projects.

San Jose is now turning to an innovative pilot program to help stabilize the financially distressed asset and restore investor confidence.

Under the Lower Income Voucher and Equity program approved Tuesday, the city will master-lease nearly 200 units — providing a subsidy that will lower rents and create more affordable housing for moderate-income households — and enter into an equity agreement that will see San Jose recoup all of its investment, plus interest.

“This council has made clear many times that any future vision for downtown has to include a lot of new housing,” said District 3 Councilmember Anthony Tordillos, who represents the area. “Both the staff memo and today’s presentation highlight the risk of allowing this distressed asset to have its debt be written off at below market values (and how it) could have a broader destabilizing impact to our residential market downtown, lead to decreased valuations, decreased tax revenue down the line and higher construction costs as new investment into the downtown becomes more difficult. I think that this proposal rises to meet that challenge.”

Despite being years removed from the pandemic, the office market has not recovered, hovering around the 30% vacancy mark, and city officials have eyed downtown revitalization through a more “live, work and play” dynamic.

Built by Suffolk Construction, the Fay was the first high-rise housing tower constructed in downtown since Miro was completed across from City Hall a few years earlier.

However, the city’s high hopes for the market-rate tower have not materialized. Despite leasing all 39 of its studio units, the building has struggled to fill its one- and two-bedroom units, partly due to a lack of parking. According to data from the city, the tower only leased 31% of its one-bedroom units and 41% of its two-bedroom apartments.

Housing Director Erik Solivan said that the city’s newest program is designed to invest $11.2 million over an initial five-year period, with an option for extensions, for 197 units — 150 one-bedroom and 47 two-bedroom apartments. The program would buy down rents for all 197 units to between 80% and 110% of the area median income (AMI).

That translates into a market-rate rent of $3,362 for a one-bedroom apartment split into $2,909 rent plus a $453 subsidy at 80% AMI. A two-bedroom apartment with a market-rate rent of $4,330 would equal a tenant rent of $3,484 plus an $846 public subsidy.

Rent increases would be limited to the lesser of 3% or the Consumer Price Index after an initial flat period, with rents scaling up to market-rate levels over 10 years.

Under the terms of the agreement with ASJ Development, LLC — a subsidiary holding company of Westbank — the city would receive an equity payout equaling its initial $11.2 million investment plus interest.

The city will fund the program with funds generated by Measure E — the voter-approved property transfer tax initiative dedicated to affordable housing, homelessness prevention, and support programs.

Solivan said the city intends to return to the City Council later this year to address two other distressed assets and preserve their extremely low-income units.

As part of the program, the city has also approved a tenant preference for public employees, including police officers, firefighters and those working nearby at City Hall. However, it does not mean that these units are specifically set aside for those public sector employees.

District 10 Councilmember George Casey had submitted a memo requesting that the city specifically offer 50 units to police personnel. While the city attorney’s office said San Jose could prioritize units for public-sector employees, setting aside units could have fair-housing legal implications.

Solivan said the program would help progress two of the city’s goals: creating more affordable housing and activating the downtown.

“As we’ve done some initial surveys of eligible classifications in the city, VTA, at the county, and other public sector employees, we think there is a strong demand side for this program that could hopefully lease up the building,” Solivan said.

San Jose Downtown Association CEO Brian Kurtz expressed support for the program and said the public employee preference offered a net benefit.

“Having public employees live where they work is a tremendous value, as it strengthens connections, it shortens commutes, supports local businesses and reinforces a sense of shared investment in place,” Kurtz said.