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California Legislators Take Aim at Construction Fees to Boost Housing

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A person wearing construction equipment holds a wooden support beam while a roof is built.
A worker stands on the roof of a home under construction at a new housing development on Nov. 17, 2016, in San Rafael.  (Justin Sullivan/Getty Images)

After nearly a decade of trying to peel away the red tape holding back housing construction in California, legislators this year are nibbling away at the last of the low-hanging fruit: impact fees.

Cities impose impact fees to fund construction for new schools, road maintenance, public art installations, and other amenities. The fees vary widely based on the type of project and city — ranging from as low as $12,000 per unit to as high as $157,000 per unit.

“These can be really, really high costs that can make or break the math on a development,” said Sean Roberts, a developer and CEO of Villa Homes. “These fees create a barrier to actually getting homes built, and that’s not good for anybody right now in California.”

The constitutionality of these fees was recently challenged in the Supreme Court. Last week, the court unanimously ruled that cities should have to demonstrate the fees they are charging are reasonable. But, they left it to lower courts to decide what counts as a reasonable fee. Meaning, there won’t be any immediate changes to how much cities are charging.

In the meantime, a slate of bills is making its way through the legislature. None of the bills would actually reduce these fees. That’s because doing so would require tackling a much thornier question of how to make up for cities’ lost revenue. Instead, these bills aim to address other issues that developers have with the fees: that they don’t often know going into a project how much the fees will cost and that they are often due before projects even break ground.

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SB 937 would make payment due only once people are actually living in the new housing. AB 2144, authored by Assemblymember Timothy Grayson (D-Concord), and AB 1820, authored by Assemblymember Pilar Schiavo (D-Santa Clarita), would both require cities to post easily accessible information about the fees they charge. And a fifth bill, AB 1210, would cap the fees developers have to pay to connect new homes and apartment buildings to utility services, limiting the fees to 1% of the project’s estimated value.

As the cost of materials, labor and interest rates continue to soar, legislators see these changes as one of the last remaining levers they can pull to reduce the cost of construction and spur development across the state. And while developers generally welcome these efforts to make housing easier to build, they say there are much bigger, meatier fish to fry in the complicated politics of California housing construction.

Erik Schoennauer, a land use consultant who works with developers in San Jose, said he’s been advocating for the changes the bills propose for years. As it stands, he said, “there is no one-stop location” to understand what fees are due and when.

“The city should create a master list of all potential fees, anything conceivable,” Schoennauer said. “It’s much harder to determine what [fees] apply when you don’t even know what the maximum list is.”

AB 2144 would require cities to post information on impact fee schedules, along with a “nexus study,” which would break down the total cost of construction on a city’s website. AB 1820 mandates cities provide an estimate of the fees developers would have to pay within 10 days of a developer filing an application.

But the problems surrounding fees are much deeper than a lack of transparency, Roberts said. His company specializes in constructing prefabricated granny flats and in-law units homeowners can put in their backyards. For the past few months, he’s also been working on building clusters of small homes called cottage courts.

An aerial view of a green house with a solar panel on the roof and a yard.
While Villa Homes specializes in constructing prefabricated granny flats and in-law units, the company has started to branch out into building small and affordable single-family homes. According to Roberts, impact fees raise costs and can make these homes unaffordable. (Courtesy Villa Homes)

By design, these homes are smaller and, therefore, meant to be more affordable to purchase than a standard single-family home. But as he’s put together budget sheets for these projects, the impact fees have started to add up.

“The impact fees that we often run into in many jurisdictions don’t scale down, even though we’re building a smaller home at a lower price point,” he said. “At the end of the day, we want to get people into homes they can afford to buy and to do that on a private market without a bunch of government subsidies.”

SB 937 would push impact fees to be due once the homes are sold, but Roberts said that would only be “moving money through time.”

“The cost is still there,” he said. “It’s just going to be borne later in the project and ultimately by the [occupant].”

Sen. Scott Wiener (D- San Francisco) said he authored this bill to help developers with the upfront costs of construction but acknowledged that there is a much larger conversation still to be had about how cities rationalize exorbitant fees that can kill projects while claiming to want more housing.

“There are cities where the impact fees are way too high,” he said. “They’re out of whack, and they’re harming the ability of housing to be built.”

The high cost of these fees was at the heart of the case that went to the Supreme Court. In 2016, contractor George Sheetz was preparing to build a small home on a vacant lot in El Dorado County, but the county charged $23,000 for a “traffic impact fee,” even though, Sheetz alleged, there was no evidence the development would lead to more traffic.

On Friday, the U.S. Supreme Court ruled unanimously in favor of Sheetz, saying developers have a right to challenge the constitutionality of these fees. Though the case’s fate ultimately rests in a lower court, the high court’s ruling could mean more developers will take cities to court over what Sheetz argued was “extortionate fees.”

“The way impact fees have thus far been imposed has been arbitrary and varies widely from town to town,” Jim Wunderman, President and CEO of the Bay Area Council said in a statement. The regional business advocacy organization was one of many to submit amicus briefs in favor of Sheetz’s case. “This ruling is hopefully the first step on the path to returning some fairness in how housing and other local impact fees are charged.”

Many cities, however, rely on these fees to fund government services and city maintenance. Jason Rhine, director of legislative affairs for the League of California Cities, argues impact fees simply account for more people living in a city once the new housing is built.

“Most cities do not have a lot of excess dollars lying around in their general fund to help subsidize these [new] projects,” he said. “Developers have to pay their fair share when it comes to the impact that project is going to have on their community.”

When voters in 1978 passed Proposition 13, which limits the amount cities can increase property taxes each year, this revenue accounted for 90% of a city’s total income. According to a study from the Legislative Analyst’s Office, that share in 2016 was less than two-thirds.

“The biggest reason why impact fees are so pricey is due to municipal governments not having many ways to levy taxes,” said Muhammad Alameldin, a policy associate at UC Berkeley’s Terner Center for Housing Innovation.

Because Proposition 13 has artificially suppressed property tax revenue for decades, cities can no longer rely on property owners to foot the bill for maintaining their neighborhoods. Cities with fewer commercial centers, like San Jose or other suburban municipalities, are, therefore, in a tighter bind to find revenue.

Wiener said he was sympathetic to cities’ plight.

“We made it really hard for them to fund basic municipal services,” he said. “So, that’s why they have become overly reliant on impact fees on new housing.”

And he acknowledged that he and other lawmakers are kicking the can down the road on a much larger — and more meaningful — conversation.

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“The much broader issue is how cities are funded in California,” Wiener said. “[My] bill is not a substitute for the broader conversation.”

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