Why Would A Developer Even Bother Building A House In California?

Builders who want to put up homes in Fremont, California, a rather well-to-do town of 235,000 across the Bay from Palo Alto, have to pay the city $157,000 in development fees for each multifamily unit. Given the punitive nature of such an obstacle, and the fact that localities across the state charge steep fees, it’s a wonder new homes are built in California at all.

California’s housing shortage is so critical that the nonpartisan Legislative Analyst’s Offices has been saying for years that to keep up with demand, developers need to build 100,000 homes each year in addition to the 100,000 to 140,000 expected to be produced annually. The state’s housing stock is so deficient that it’s pushed prices into an unaffordability range that’s left nearly 40 percent of mortgage holders and almost 55 percent of renters overly burdened with housing costs.

Of course the straightforward solution is to build more homes. But state and local regulatory regimes, particularly the effects of the California Environmental Quality Act, discourage development because they take take profit out of building.

And so do those development fees. They’re nearly $150,000 in Irvine, a bit higher than that in Dublin, $128,000 in Livermore, and $120,000 in Carlsbad.

According to the Terner Center For Housing Innovation at the University of California, Berkeley, development fees in the state are almost three times higher than the national average, and “make up a significant portion of the cost to build new housing,” substantially increasing the cost of building homes.

“On average, these fees continue to rise, while nationally fees have decreased,” says a report from the center. “As the supply of housing in the state continues to fall well short of demand and housing costs continue to skyrocket, the structure and total cost of development fees has emerged as an area ripe for policy attention and reform.”

Because development fees “are usually set without oversight or coordination between city departments, and the type and size of impact fees levied vary widely from city to city,” builders are unable to “accurately predict total project costs during the critical predevelopment stage.” This unpredictability might “also delay or derail projects altogether.”

In addition to the punitive nature of the fees, there are also questions about how they are applied. They are intended to be used to cover the costs of government services that are applied during the approval and construction phases, and to fund the additional infrastructure and services, such as roads, schools, water, parking, and transportation, that are required to handle growth.

The National Association of Home Builders, however, has found, says Timothy Coyle, a one-time director of the California Department of Housing, “that some of these hundreds of millions in fees every year aren’t going toward their purported purpose.”

“Audits of several jurisdictions around the country revealed abuses of all kinds: from misappropriation of funds (mainly paying for unqualified activities) to double counting,” says Coyle, who is now a housing consultant.

But the most egregious abuse, he adds, “comes from just making things up and charging for them – hiding any real cost impacts.”

Coyle rightly suggests that if the Legislature genuinely intends to do “some heavy lifting this year on housing,” it needs to address development fees. And the lifting would be heavy, indeed. The localities will not easily give up such a gilded revenue stream.

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