Business groups worry that San Jose could scare away developers if it imposes a fee on new home construction to pay for more affordable housing, an effort to recoup a fraction of the money lost when the state closed all redevelopment agencies.

The City Council was supposed to consider the plan in December, but a coalition led by the San Jose Silicon Valley Chamber of Commerce asked for a three-month delay to give the public more time to review it.

There’s no guarantee that the fee would increase the affordable housing supply in San Jose, the chamber states in a letter to the city. Plus, San Jose’s already tied up in litigation over a similar fee, the letter notes. The California Supreme Court is reviewing a lawsuit filed against the city by the California Building Industry Association that challenges a requirement to sell 15 percent of all new housing units at a below-market rate or pay an in-lieu fee.

The proposal going before the council this year would charge anywhere from $14 to $24 per square foot for new housing. The final amount remains to be seen.

Since the state-ordered closure redevelopment agencies, which funneled one-fifth of their revenue to affordable housing projects, cities have been scrambling to find replacement funding through impact fees like this. Fremont, San Carlos, Mountain View, Sunnyvale and Santa Clara all passed similar fees, the Silicon Valley Business Journal reported. In December, Santa Clara County reassessed its role in providing affordable housing options for the lowest-income residents.

“The elimination of redevelopment and a drop in funding from the federal government and the state … all of that has conspired to create a perfect storm for rapidly rising rates of homelessness and housing poverty with rising rent,” said downtown Councilman Sam Liccardo.

James Zahradka, an attorney at the Law Foundation of Silicon Valley, says affordable housing funding in Santa Clara County dropped from $126 million to $47 million since 2008, mostly from a loss of redevelopment cash. San Jose subsidized 1,000 new affordable homes between 1998 and 2008 using 20 percent of the tax increment revenue from RDA. Now that’s gone. A fee would help generate at least some of that funding.

“I don’t want to say this is a silver bullet … but without it, they’re going to be worse off,” Zahradka said about the San Jose fee.

San Jose’s white-hot rental market—which reached a 1 percent vacancy rate—has driven up prices and led to overcrowding, he added. It’s the fourth-most expensive market in the nation, according to a recently released report by the Housing Trust Silicon Valley and Cities Association of Santa Clara County.

Countywide, 44 percent of households pay more than a third of their income in rent. Another 18 percent give up half their earnings for housing costs. Seven percent of homes are considered overcrowded, according to the U.S. Census’ definition of more than a person per room. While most new-home construction creates middle- to upscale homes, the study says about 57 percent of projected population growth over the next quarter-century will live in very-low and low-income households. Meanwhile, in this county, more than half the jobs created in the next five years will pay $11 or less. And a growing senior population means more people on fixed income who need cheap places to stay.

If the city doesn’t pass a fee, Zahradka says it will have a tough time meeting state-mandated affordable housing benchmarks. More importantly, it would allow the market to price out the poor and subject them to substandard living conditions.

“[If the city doesn’t enact this], it’s going to make it even more challenging to help them approach hitting their numbers in the housing element,” Zahradka said. “That sounds like kind of a bureaucratic thing, but what it actually means is that fewer people will live in housing that is adequate for them.”

The Housing Trust report defined affordable housing as multifamily housing subsidized for families that earn less than half the region’s median income.

There’s a downside to inclusionary fees (or impact fees), which came up in the lawsuit against San Jose. By subsidizing 20 percent of new-home construction, cities and counties force developers to overprice remaining inventory.

Before the case reached the state Supreme Court, a Santa Clara County Superior Court judge ruled that the inclusionary housing provision in San Jose lacked “a legally sufficient evidentiary showing to demonstrate justification.” In other words, it failed to prove that new market-rate housing created a need for subsidized housing. Now, without waiting for a resolution on that case, the city aims to implement a new fee just like it.

A study by the Building Industry Association found that San Jose’s inclusionary housing fees tacked on $20,000 to $148,000 to the cost of each housing unit, forcing developers to up the price of surrounding homes to make up for it. Cal Watchdog called the fees a scam, a way for municipalities to drive up assessed values to grow the property tax base.

“In the past, cities have been able to get courts to validate this swindle by only focusing on the proverbial tree instead of the forest,” Wayne Lusvardi wrote for Cal Watchdog in 2012. “In other words, cities were successful in getting courts to only look at the lack of construction of brand new affordable housing units, not the price of all new housing.”

The question is: would the market accommodate low-income buyers if cities stopped subsidizing new-home construction?

Liccardo said the impact fee merits more discussion, which the city will accommodate. There won’t likely be a decision until next year anyway, he noted.

“We need to find a solution for this in Silicon Valley,” he said.