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Issues & Insights

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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J. Frank Bullitt

J. Frank Bullitt has been writing professionally since 1986. After covering local news for years, and putting in some time in Washington, D.C., he began writing opinions in 1998, covering a wide variety of domestic and international topics from a limited-government point of view.

15 comments

  • Outstanding article. Another why I–a resident here for 33 years–will be moving within 4 as soon as my youngest is out of high school.

  • Outstanding article. Yet another reason why I–a resident here for 33 years–will be moving within 4 as soon as my youngest is out of high school.

  • For the same reason that an acquaintance of mine restores vintage travel trailers in California: because there are enough customers there with gobs of money and no sense of restraint on costs or overhead. Such people literally believe that higher cost always means they’re getting more. Ergo, more taxes means you’re getting more stuff from governments. Higher house cost means you’re getting more house and house-y stuff. It’s a mental inversion of the laws of economics. But when you have a bottomless trust fund, there are no laws of economics on a day-to-day basis.

    Savvy California builders include proviso clauses into their home contracts that put the buyer on the hook for additional fees, not the developer. Now the laws of economics kick in: when there is no downside to additional cost and therefore no restraint, additional costs become rampant. UC-Berkeley’s Terner Center notes that, “builders must rely on informal relationships with planners and building officials”. In other words, a system ripe for– nay, rife with– corruption and underhanded dealing. Particularly when the fees are subject to the cost-plus structure of the contract, there is actual benefit to the developer for sky-high fees that are hidden or obscure at the contract outset.

  • 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.

    Back when the US was a growing country – say, first 2/3 of 20th century – those costs were mostly covered by municipal bonds, backed by the nearly-sure knowledge that the increased tax revenues from those developments would pay for them over time.

    Today’s obscene ‘development fees’ are more a result of local governments having spent themselves into a bonding-capacity hole: the increased tax revenue will be there as it was before, BUT government greed and vote-buying for re-elections has sucked the bonding capacity dry. No sane lenders would fork over, knowing that the cupboard is bare now and will remain in future.

  • Thank You for starting this site. When you offer subscriptions please contact me as I will happily sign up. I was broadsided by IBD losing your talent. Monday I will be canceling my subscription. Your editorials were the first read for me daily until IBD went Saturday only. It took me a while, but now I am going to cancel. I would happily reallocate my $$ towards your talent. Patrick Mulqueeney

  • I’m a native Southern Californian and have lived here all my life and have seen the changes so I say this with some authority: it has become almost impossible to live in California.

    I’m also a huge proponent of California being broken up into 2 states. Reason being is that inland California is far different from coastal California. The LA to San Fransisco corridor in particular is where the overwhelming majority of liberals live who dominate state politics.

    To support that contention, look at a voting map of California. It’s mostly red (conservative/republican) until you get to the coast.

  • This article is VERY useful to me. I’ll be sharing it extensively on CA Facebook pages and a couple websites (with full attribution). THANKS!

  • For Californians there are a number of good states to move to. But one factor to consider is the longer term likelihood that the selected refugee state will remain sane.

    Currently politically attractive states that are moving in the WRONG direction include AZ, NV, TX, FL, MO and probably NH. All will likely become Democrat in the next 10-15 years — thanks to demographic shifts.

    My favorite state remains TN, all things considered. Especially eastern Tennessee.

    Other attractive options are SC, SD, WY, ND, OK, AL and AR.

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About Issues & Insights

Issues & Insights is a new site formed by the seasoned journalists behind the legendary IBD Editorials page. Our goal is to bring our decades of combined journalism experience to help readers understand the top issues of the day. We’re doing this on a voluntary basis, because we believe the nation needs the kind of cogent, rational, data-driven, fact-based commentary that we can provide. 

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