L.A.’s proposed fee on new construction may not be ‘one size fits all’

Los Angeles City Councilman Joe Buscaino wants more development in his San Pedro seaside district — new hotels, restaurants and apartment towers to lure visitors and attract residents.

The recent construction boom transforming L.A. has largely skipped this former fishing village, despite its ocean views and proximity to the ports of Los Angeles and Long Beach.

Now, Buscaino worries Los Angeles Mayor Eric Garcetti’s proposed linkage fee — a levy on new construction — would further slow development in San Pedro by driving up building costs. The councilman wants a lower fee in his district than in other parts of the city, including the affluent Westside.

San Pedro and several other Los Angeles neighborhoods are at the center of a new debate over a plan for a citywide construction fee. The fee would raise funds to build affordable housing and comes as L.A. faces a crippling housing crisis.

City Hall leaders are grappling with whether — and how — to charge a linkage fee, a proposal made more complicated in economically diverse Los Angeles.

As currently proposed, the citywide fee would apply to new homes, office buildings, apartment towers and other construction — charging $5 per square foot for commercial development and $12 for residential. Residential projects with five or fewer units would be charged $1 per square foot.

Several types of development, including some grocery stores, smaller homes, and affordable housing projects, are exempted.

In cases in which a home or building is torn down and replaced with a larger one, the proposed fee applies to the amount of increased square footage.

As city leaders debate the fee, some council members are questioning the “one-size-fits-all” approach.

Buscaino pointed to an economic report on San Pedro development released last year that found that market rents “are generally unable to cover the substantial new development costs” of proposed mid-rise and high-rise residential apartments in his district.

“We can’t get projects to pencil given current market conditions,” Buscaino said. “What could possibly justify adding another fee?”

Economists warn that charging different fees is fraught with risks because neighborhoods and market conditions can rapidly change in a short amount of time.

“It’s a razor-thin line between what’s hot and what’s not,” said Lee Huang, principal of Econsult Solutions, a Philadelphia-based consulting firm that has studied linkage fees across the country.

For example, a developer last year won rights to transform an old radio tower site at La Cienega and Jefferson boulevards into an upscale high-rise, a project expected to reshape the area.

Some business groups oppose any form of linkage fee, with critics arguing it would slow development as builders go elsewhere. Others question whether the fee will raise enough money for affordable housing to justify the charge.

Supporters argue that the development community would adjust, and point to other cities that have similar fees.

Ahead of a Tuesday hearing on the fee, a new city report outlined options for a fee based on geography and market conditions, including caveats about the different proposals.

A “geographic-based fee could unintentionally lead to unanticipated changes throughout the development timeline,” creating uncertainty for developers, the report said.

At the same time, it said, a citywide fee could lead to “lost revenue potential in stronger market areas or negative impacts to development in cooler market areas.”

Linkage fees or similar programs in larger cities are typically based on the type of development or neighborhood, or both.

Larger cities also often have a mix of programs to help raise money for affordable housing.

Seattle, for instance, charges $5 to $32.75 a square foot, depending on the neighborhood and whether the project is commercial or multi-family. Fees are higher in the Capitol Hill neighborhood because that area has a range of restaurants, bars and stores and can command higher rents.

San Jose charges $17.41 a square foot for rental development. At the same time, the city exempts downtown rental high-rise projects from the charge to encourage such construction.

Chicago imposes affordable housing requirements for projects with 10 or more units that get a zoning change or some other form of city assistance. In downtown, builders seeking zoning changes to add density must pay into a fund targeting underserved commercial corridors throughout the city.

A linkage fee study commissioned by city of L.A., released last year, warned that charging a citywide $5 commercial fee — as proposed now — may not be feasible in some neighborhoods with lower rents or housing prices.

Developers may find that their projects won’t bring in enough returns, the report stated. Those “low-market” neighborhoods include areas in South L.A. and the San Fernando Valley, principal city planner Ken Bernstein said in an interview last week.

City planners still suggested that fee, Bernstein said, after studying the history of building permits. Nearly half of the projects in low-market neighborhoods over the last five years would have been exempt or subject to the lowest residential fee.

If passed, the linkage fee would join a separate affordable housing program already in place in Los Angeles. Voters last year passed Measure JJJ, which imposes affordable housing requirements on developers who seek zoning changes or other major alterations to city planning rules.

The city report to be heard Tuesday suggests other options for the fee, including phasing it in over a three-year period and exempting manufacturing and industrial development.

dakota.smith@latimes.com

Twitter: @dakotacdsmith