Where Fees on New Housing Go

Timothy L. Coyle
Consultant specializing in housing issues

If you’re a builder in California the most obvious costs you pay for a housing project’s approval are fees, development impact fees. These fees are purportedly assessed to cover the charges associated with the new housing being built. And, if you’re building anywhere near an urban area you’re paying a lot of them.

Indeed, the practice of charging fees has become the most insidious aspect of the local approval process, with excises from six to 18 percent of the home price.

To illustrate, fees in Carlsbad are about $120,000.  In Livermore, they are $128,000. A study recently completed by U.C. Berkeley’s Terner Center for Housing Innovation had the City of Irvine charging just under $150,000 in fees, while Dublin eclipsed the mark.  The study found Fremont collects $157,000. The City of Sunnyvale, on top of countless other charges, has a “sense of place” fee.

These assessments are usually made on a per-house basis though some localities have recently turned to charging by the square foot – a little bit of “hide the ball” being played.  But, the outcomes aren’t much different – in some cases they’re much worse. And, don’t kid yourself – these fees go directly into the price of the home. They aren’t absorbed by the builder – a profoundly misguided notion.

Some in California blame the proliferation of fees on the limits Proposition 13 put on the state’s property tax base.  I couldn’t disagree more. First of all, growth is good for the regions where it’s occurring and it’s the jobs and economic development it produces that increase tax revenues.  Secondly, the local costs heaped on builders have exploded over time. The California Taxpayer Association (CalTax) concludes local impact fees grew by 230 percent between 2010 and 2016 – hardly a reflection of Proposition 13.  Lastly, if a locality can’t get by financing improvements with the measure’s two percent annual adjustment or reassessment every seven or so years (the benchmark for real estate asset turnover) it’s charging too much. Property taxes have grown an average of seven percent a year, as well – ample revenue, indeed.

According to the U.C. Berkeley study, California fee-charging continues to grow at a time when it’s declining in all other parts of the country:

On average, these fees continue to rise (in California), while nationally fees have decreased. 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.

It should be said that localities charging the fees, and all do, attempt to itemize them – from paying for an overpass, or a library, or parking, or land to mitigate the project’s impact on endangered species habitat, or a sewer hook-up, or public art to protecting agricultural resources, or paying for water, or for general transportation, or new park or an elementary school – because it’s the law.

But, California’s law is hardly enforceable and, as a consequence, is rarely enforced – it would be like asking the fox to guard the henhouse.  Moreover, most local jurisdictions hold builders to “development agreements” (instead of formal “specific” plans) which, at a minimum, are moving targets.  Cities and counties are free to simply add more and more conditions to them. Plus, development agreements fly below the legal radar – they’re not subject to the state law governing the fees locals can charge.  

Another recent study commissioned by the National Association of Home Builders (NAHB) also found 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.

The biggest abuse, however, comes from just making things up and charging for them – hiding any real cost impacts.  The U.C. Berkeley study found that:

  • Development fees are extremely difficult to estimate.
  • 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.
  • Individual fees add up and substantially increase the cost of building housing.
  • Projects are often subject to additional exactions not codified in any fee schedule.

The study further found that builders easily can lose their way in the absence of transparency surrounding fee excises:

[W]ithout standardized systems to estimate development fees, builders cannot accurately predict total project costs during the critical predevelopment stage, leading many builders to rely on informal relationships with planners and building officials to obtain accurate estimates. The unpredictability of these fees may also delay or derail projects altogether.  Moreover, development fees add to the cost of construction, reducing housing affordability and hindering housing development.

The Legislature in California purports to be doing – or intent on doing – some heavy lifting this year on housing.  Arbitrary fees that the locals are able to charge, adding to the state’s high cost of housing, are surely not good in the middle of a supply shortage.  They need to be addressed too.

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