Developer Fees Buy Improvements, but Home Buyers Pay

The Long Beach City Council did something surprising last spring. Surprising, at least, to home builders.

Council members took a second look at a $3,500-a-house park fee they were about to approve and they cut it by more than $800.

To reduce the fee, the council decided to work with the school district to convert under-used school playgrounds into part-time city parks. By gaining more parkland that way, the city wouldn’t need so much money to buy land for new parks.

And by cutting the fee, the council mollified local home builders, who claimed the high fee would drive the cost of new houses up--and perhaps drive some builders out of town.

The Long Beach park tariff is one of myriad so-called development fees--standardized, per-house charges placed on new construction by local governments. Also called “impact” fees, such charges now range from $3,000 to well over $20,000 a house in Southern California.

The money raised by the fees is supposed to be used for schools, roads and other public facilities that must be built or expanded to accommodate the new development.

Home builders claim such fees drive up house prices because they must pass them on to the home buyers. Local officials say that because of Proposition 13’s restrictions on property taxes, they have no other way to pay for new schools, libraries, roads and sewer lines.

Long Beach’s scaling back of the park fee did not begin a headlong rush by cities and counties to lower their development fees on new houses. By all accounts, the fees are still going up, many are being used for a broader range of purposes than ever before and they still top the list of home builders’ favorite gripes.

Nevertheless, the Long Beach action is one of several indications that development fees--many of which have been slapped on willy-nilly by local governments--will be subject to greater scrutiny and accountability.

For example, in Riverside County, large home builders took a big hit last year when county supervisors imposed a $4,300-a-house fee on development agreements--but the charge is non-negotiable, which developers hope will save them time (and money) in haggling with local officials.

At the same time, a new state law requires more accountability on how development fees are spent. This has led many local governments to separate fee revenue into trust funds to be used for specific projects--projects benefiting the developments paying the fees--rather than dumping the money into their general capital-projects fund.

In some cases, local governments must follow state laws in establishing fees.

For example, the so-called Quimby Act lays out rules that cities and counties must follow in establishing fees used to acquire parkland, as Long Beach did. School districts may impose development fees on new houses and residential expansions, but these fees are limited by law to $1.50 a square foot.

Fees Headed Higher

And a new law that went into effect this year--known as AB 1600, for the legislative bill number--requires all local governments to keep much closer track of their fee revenue.

Fees throughout Southern California are high and, apparently, still on the rise.

A survey in June by the San Diego Construction Industry Federation found that for an average house, development fees in San Diego County ranged from $3,000 (National City) to almost $24,000 (Escondido).

A similar survey in Riverside County, conducted last year by the Building Industry Assn., found that fees for the average home ranged from less than $6,000 in Blythe to almost $13,000 in unincorporated county territory.

In addition, some new fees are coming into use--such as the $1,950-an-acre fee on developers in much of Riverside County that will be used to create a habitat for the endangered Stephens’ kangaroo rat.

City and County Fees

And these fees do not include the cost of land and other public facilities that cities and counties sometimes also require from developers. For example, the CIF survey found, these dedications increase the fees in Carlsbad from $13,000 to about $23,000 per unit.

Ironically, state laws governing development fees sometimes drive them up. In 1986, the state Legislature passed the cap on school fees partly so they wouldn’t get too high. (The fee cap was part of a larger school construction finance package.) But once the Legislature specifically authorized school districts to levy such fees, virtually every school district in the state--whether growing or not--imposed them.

And park fees are often driven up by the provisions of the Quimby Act, which require that fees be tied to the cost of the parkland to be acquired.

In June, for example, the city of Oceanside raised its park fee from $740 to $3,200 a unit--over the objections of the building industry--because land prices had risen so much since the last increase in the early 1980s.

“Six or seven years of inflation and rising property values went unaccounted for,” said Douglas Williford, a senior planner with the city.

Financial Estimates

From a city’s point of view, fees are desirable because they carry little political risk; the cost is borne entirely by developers and future home buyers, not by current voters. And in urban planning and public finance circles, sophisticated methods of calculating fees are widely admired as examples of municipal self-reliance.

Cities such as Carlsbad and Escondido have built financial estimates into their growth projects over the next 20 years, calculating to the penny how much each new house will cost their city in the form of road usage, water and sewer requirements, library use, and so forth.

At a meeting of the American Planning Assn. in San Diego some time ago, Tim Huntley, then Escondido’s director of finance and management, explained the municipal attitude this way:

“If we can’t expect sympathetic or even consistent legislation from the state or federal government, then we need to develop a strategy to ensure that local government can pay for the services necessary to support new development. We have a professional obligation to ensure the continued solvency of local government itself, and we have to do that in a hostile environment.”

This “hostile” environment for cities is created in large part by home builders, who consistently oppose higher fees on the ground that they increase home prices.

A Favorite Gripe

Development fees are a favorite gripe for many home builders, who say local politicians do not consider the concerns of the builders and home buyers who must pay the fee.

“When somebody else is paying the bill, any idea seems like a great one, and that’s the problem,” said Gordon Tippell, president of Taylor-Woodrow Homes in Newport Beach.

The question of whether the fee is passed through to home buyers is a matter of considerable dispute. Some builders say there is no dollar-for-dollar relationship between fees and prices, and that sometimes builders eat part of the cost.

“The price of a house is what people are prepared to pay for it, not what it cost for us to build it,” Tippell said. Other experts say a home builder may charge the same for the house--because that’s what their target market can pay--but reduce the size or quality of the house to pay for the fees.

“He may kick out some of the amenities he was going to offer,” says Rod Hanway, executive director of the Riverside County BIA.

Home Buyers Get Stuck

In general, however, experts agree that in a hot real estate market, when demand is high and prices are going up anyway, home buyers do get stuck with most of the bill for higher fees.

“I don’t think there’s any question that it’s having a substantial effect on the housing prices in Southern California,” says Michael Stegman, an urban planning professor at the University of North Carolina and co-author of “Paying for Growth,” a book about development fees.

For many builders, the biggest issue about fees is accountability.

“The concerns that developers have with fees aren’t so much with the fees themselves but with fees that may be excessive or misused,” says Randall Lewis, vice president of Lewis Homes in Upland, one of Southern California’s largest home builders.

And it is in the area of accountability that the world of fees is changing most rapidly.

To Serve Subdivision

In theory, development fees should pay only for new facilities required by the construction of a housing development--either new roads, sewers and schools within a new subdivision or the expansion of freeways, libraries and other citywide facilities to accommodate the new residents.

But, unlike Oceanside or Escondido, many communities have not used statistical analysis to determine their fee structures.

“Typically, cities don’t have a rationale for their fee,” said Bill Hendrickson, a consultant with Economic & Planning Systems in Berkeley, which does economic analysis for cities. “It’s been done arbitrarily, in the spirit of, ‘Hey, these things are connected somehow.’ Many won’t make a real concerted effort to distinguish between those improvements that benefit existing and those that benefit new development.”

However, two recent events--a court ruling and the passage of a new state law--have forced cities to become more accountable for their fees. Two years ago, in Nollan vs. California Coastal Commission, the U.S. Supreme Court ruled that development fees must be directly linked to the impact of the development paying the fees.

As a follow-up to Nollan, the Legislature passed a law that has imposed even more accountability on local governments. AB 1600, as the law is known, requires that any local government imposing a development fee--whether city, county or school district--must draw up a capital improvement plan describing what facilities will be built with the revenue, deposit the funds in a separate trust fund and spend the money within five years.

Hiring More Consultants

These requirements are not likely to result in lower fees. For example, when an Orange County judge ruled that the Newport-Mesa School District had improperly imposed $1.50-per-square-foot fees on an area where enrollment was not growing, the fees were refunded to certain developers.

The reaction among other school districts, however, was to not eliminate questionable fees but to hire more economic consultants to justify them.

“In the initial rush-rush, some districts may not have appropriately drawn the relationships between the need for the fee and the impact of the development,” said John Mockler, a Sacramento lobbyist for the Coalition for Adequate School Housing.

Nevertheless, the Nollan case and AB 1600 do appear to be bringing more certainty and accountability to the development fee situation around the state.

That accountability may mean home buyers will be assured that the fees will be used to benefit their housing tracts--and it may even lead to lower permit processing costs by reducing negotiation between home builders and local governments.

Long-Term Contracts

Riverside County, for example, has standardized its fee schedule for large developers who work with the county on “development agreements” or long-term contracts that are usually subject to considerable negotiation.

“Rather than try to negotiate with each individual developer,” said Joe Richards, the county’s deputy planning director, “we developed a fee package that each DA (development agreement) was subject to, and the fees addressed public facilities, regional parks, open space and a long-term maintenance component of public facilities.”

As required by AB 1600, the fees go into four trust funds, which will be used according to spending plans drawn up by the county.

The $4,300-a-unit fee under development agreements is higher than the standard county development fee of about $2,700, but it’s possible that the time saved by using a standard fee rather than a negotiation could cut home builders’ costs--and the eventual purchase price.

Despite the increased accountability, residential development fees will probably continue to rise as long as Southern California’s housing market remains strong. But the rise could be stopped if Proposition 13 is reformed and/or if local governments start placing more of the infrastructure burden on commercial and industrial buildings.

Gathering Signatures

For example, the “Fair Share Property Tax Act of 1990,” an initiative proposed by the consumer organization Voter Revolt, would prohibit further increases in development fees.

The initiative, which is in the signature-gathering stage, would provide more money to local governments by creating a split property tax roll--holding the limit at 1% for residential property but increasing it to 2.2% for commercial and industrial property. The resulting $9-billion-a-year windfall could be used for infrastructure, among other purposes.

Many cities in California, both large and small, have imposed heavy development fees on commercial and industrial development.

Downtown San Francisco office buildings, for example, pay about $13 a square foot in fees for child care, transit and even affordable housing. Los Angeles has a transportation fee in certain areas and appears poised to adopt a housing fee. Many school districts have levied not only the $1.50-per-square-foot residential fee permitted by state law, but also the 25-cent-per-square-foot fee on commercial and industrial construction allowed by the same law.

Smaller cities with sophisticated growth-financing systems, such as Carlsbad, levy infrastructure fees on all types of construction. But in many cases, cities and counties that impose heavy fees on housing are going out of their way to encourage commercial and industrial development.

Encouraging Development

This is especially true in the low-cost Inland Empire, where hundreds of thousands of homeowners commute to Los Angeles and Orange counties.

“At this point, we would definitely not consider applying any kind of development fees to commercial/industrial,” said Riverside County’s Richards. “What we’re trying to do is encourage that kind of development, and that kind of thing would be counterproductive.”

SAN DIEGO COUNTY RESIDENTIAL DEVELOPMENT FEES

Representative data on total fees that must be paid in order to construct a typical, three-bedroom, two-bath, 1,715-square-foot single-family home with with a 400-square-foot garage and 240-square-foot patio priced at $179,500.

City Fee Escondido* $23,848 San Diego City-outer** $16,340 Chula Vista*** $13,163 Carlsbad $12,853 Oceanside $12,850 Encinitas $11,509 Poway $11,205 Vista $9,735 Santee $8,740 San Marcos $8,623 San Diego City-urban**** $8,234 Solana Beach $7,723 San Diego County $7,319 Del Mar $5,508 El Cajon $4,525 Imperial Beach $3,945 La Mesa $3,550 Coronado $3,525 Lemon Grove $3,375 National City $3,043

*Some areas of city have no drainage fee; their total is $13,730.

**Urbanizing area community: North City West.

***Some areas of city have a lower water fee; their total is $9,188.

****Urbanized area community: Scripps-Miramar.

Note: Totals do not include the cost of “turn-key” facilities required by some cities, and are thus understated. For example, the actual public facilities “cost” of building a new home in Carlsbad can run around $23,000. Also, amounts listed may not apply citywide. It is generally impossible to produce an exact and credible total impact fee figure for a given city.

SOURCE: Derived from the Construction Industry Federation 1988 Regional Fee Survey, updated where necessary.