California cities rely on development fees on new construction to fund infrastructure, transit, and other municipal needs that new construction may exacerbate. Developers loathe it, but the fact they remain eager to build means that the payoff of creating new housing is worth the extra expense of six-figure fees.
But a paper released this month by UC Berkeley’s Terner Center For Housing and Innovation, authored by postdoc scholar Sarah Mawhorter and her colleagues, argues that the problem with development fees is not the expense but how wildly varying and unpredictable they are.
To simulate the uncertainty of building in multiple California metros, Mawhorter compared how much it would cost to create a hypothetical 100-unit apartment building and 20 single family homes in seven California cities: Berkeley, Oakland, Fremont, Los Angeles, Irvine, Sacramento, and Roseville.
They also let planners, developers, and architects give them earfuls about development fees and how they work. Here’s a look at some of the study’s conclusions:
- Developers hate fees not only because they’re expensive, but because they can make it difficult or impossible to budget a project: “Development fees are extremely difficult to estimate. 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. [...] Developers we spoke with said that it is usually difficult to piece together an estimate of fees from publicly available information. In many cities, it is not easy to obtain complete and accurate fee schedules. This problem is compounded by the involvement of multiple agencies and frequent fee updates.”
- And even if you get the full slate of fees worked out in advance, more can pop up to surprise you: “In addition to set fees, developers are often required to pay project-specific fees and exactions levied by cities to ensure approval of their project. Many of these additional fees and exactions are agreed upon through development agreements, which are negotiated at various points during the entitlement process on a project-by-project basis.”
- Of the cities studied, Fremont proved the most expensive on a per-unit basis: “Development fees for multifamily housing range from a low of $12,000 per unit in Los Angeles to $75,000 per unit in Fremont. Fees for single family housing range from $21 ,000 per home in Sacramento to $1 57 ,000 per home in Fremont, over five times as much.”
- But when building and planning service fees are tallied up as a whole, Oakland became one of the priciest place to build: The hypothetical apartment building in Oakland ran up $655,203 in fees to Fremont’s $305,993, while the single family homes accrued $536,400 to Fremont’s $234,355. Oakland’s total expense ran behind only Irvine’s, which topped $1 million. “Fees can amount to anywhere from six percent to 18 percent of the median home price depending on location.”
- Meanwhile, market forces are also making it more expensive to create housing in California: “In 2017 alone, the price of construction materials such as lumber, steel, and concrete grew by 4.4 percent. By one estimate, overall construction costs increased by 19 percent for multifamily housing and 21 percent for single family housing between 2008 and 2017, faster than the rate of inflation.”
- Mawhorter does not argue that fees are a bad thing in and of themselves. In fact, a principal reason they’re so high is that cities need them: “California cities have tightly restricted funding sources and, as a result, fees are one of the few ways that cities can pay for the indirect costs of construction. [...] Planners we spoke with emphasized that because of Proposition 13 and the more recent loss of redevelopment funding, cities have few other options to fund key services, which leads them to rely heavily on impact fees.”
- The study concludes that excess fees or a poorly planned and opaque fee structure can stifle housing development: “While each individual fee may be justifiable, together they may add up to an excessive burden on new development. [...] Architects and civil engineers mentioned that arbitrary -seeming differences in fee rates can incentivize sub-optimal design choices t o minimize fees. [...] The uncertainty around development fees can have negative consequences for projects, and can stall the entitlement process or even lead to project failures.”
You can read the full paper here.