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What you should know about development fees and the fight for affordable housing

Development fees play a major role in the fight for more affordable housing.

California needs to build more affordable housing to bring down the high rental and real estate prices.

In the most basic terms, supply and demand is the reason California is experiencing a housing crisis. The state simply can't keep up with building at the pace of the demand for housing.

It may sound easy to just start laying out the tracks for new housing but it's much more complex than just constructing new buildings.

Development fees play a major role in the fight for more affordable housing. Developers face many roadblocks with the fees and end up taking their business elsewhere to avoid the headaches. This is one of the reasons California is facing a housing shortage.

So, what exactly are development fees?

Development fees, also known as impact or service fees, are collected by cities to pay for services needed to build new housing. The fees help offset the impact of new growth in the community and include steps such as environmental testing, securing zoning, inspections and obtaining building approvals and permits.

The idea behind development fees is that private developers should be paying for the services needed fo their projects without having to rely on taxpayer money. This is also a way for cities to generate revenue.

Development fees make up a big portion of the cost to build new housing in California cites.

How do development fees impact California cities?

Development fees can be either a deal maker or deal breaker for builders. Last year, Sacramento had one of the highest development fees in the nation, according to Builder, an online building news website.

In fact, the six highest market fees are all in California. Development fees are rising in California as the national average actually decreases. Between 2008 and 2015, California fees rose 2.5 percent, while the national average decreased by 1.2 percent during that same period, according to the 2015 National Impact Survey.

In a more recent report, the Terner Center for Housing Innovation at UC Berkeley analyzed seven California cities-- Oakland, Fremont, Los Angeles, Irvine, Roseville and Sacramento-- to examine the total fees charged by each city, the makeup of the fees and the information on development fees available to builders.

Sacramento and Roseville were on the lower end of estimated development fees per unit for single and multi-family projects but the broader problem lies when comparing costs to the other cities researchers looked at.

Terner Center analysts found that development fees in California cities for multifamily housing range from a low of $12,000 per unit in Los Angeles to $86,000 per unit in Fremont. Fees for single family housing range from $28,000 per home in Sacramento to $171,000 per home in Fremont, over seven times as much.

The broad range makes it very difficult to estimate development fees since there are no standard costs in cities across California. The Terner Center report notes, without standardized systems to estimate these fees developers can't accurately predict total project costs, which is critical for the pre-development stage. Many developers aren't willing to take the risk of starting a project without knowing the costs and decide to take their projects elsewhere.

Developers often run into costs not codified in any fee schedule as well as individual fees which can all drive up total costs and reduce housing affordability. Additionally, analysts found development fees are usually set with no oversight or coordination between city department, further complicating the already disorganized process.

If development fees don't derail a project altogether, it can change the initial design in order to adjust to higher prices. For example, some developers opt for building less units in order to cut down on per-unit fees.

Of the seven cities analyzed only Roseville was able to provide a list of all fees and fee schedules which allow developers to estimate all fee costs in advance. In Sacramento, fee schedules were scattered and hard to find or even outdated, according to the report. Sacramento can provide an advance development fee estimate but it still doesn't add up to a full estimate after individual fees.

Since there is no formal standard system for development fees, developers must rely on informal relationships with planning or building officials. This can be a disadvantage to smaller development companies with less connections, according to the Terner Center report.

What are the solutions to the development fee roadblocks?

One of the most important changes necessary to lift the burden of unknown development fees is for cities to develop standards for determining the amount of fees that can be charged. Terner analysts urge legislators to adopt a statewide standardized system.

Cities should also adopt a fee transparency policy with up-to-date fee schedule information in an easily accessible public format, just as the city of Roseville already does.

Additionally, researchers suggest for cities to set a clear framework of when fees can be charged or changed during the development process. This way, developers aren't scrambling to pay for additional unforeseen fees.

The Terner Center report also recommends cities to find alternative ways to pay for the costs of growth in order to reduce city dependence on development fees. Legislators would need to find a way through state and federal funding and by making changes to property tax restrictions such as Proposition 13.

Last September, Gov. Brown signed into law 15 new housing bills designed to tackle the housing crisis.

The bundle includes bills which authorize financial incentives for cities to plan neighborhoods for new development and also authorizes state grants or loans for a local government to do planning and environmental reviews to cover a particular neighborhood. Developers receiving money will have to set apart a certain percentage of homes for low-and-middle-income residents.

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