California’s housing crunch has left developers feeling like they’re digging money pits. Thanks to some sneaky fees, the money pit goes even deeper than expected.

With developers, homeowners and renters squeezing lawmakers in all directions, Sacramento is buzzing with bills aimed at alleviating the state’s affordable housing shortage. One easily overlooked legislative goal this year includes reforming a critical part of the housing approval process: impact fees.

Deep impact

Impact fees are levied by local governments against new developments to offset the fiscal impact new residents occupying these units will have on public infrastructure. The collected fees go toward providing and maintaining vital public services like utilities, schools and roads.

The problem with impact fees in California is that they are difficult to pin down. A 2018 Terner Center for Housing Innovation report substantiates developer complaints that impact fees:

  • are extremely difficult to estimate;
  • are set without oversight or coordination between city departments, causing them to vary widely between cities;
  • substantially increase building costs; and
  • sometimes go undisclosed in fee schedules.

The report also reveals that development fees add up to 18% to the cost of new units in some cities. California’s development fees were nearly three times the national average in 2015. This spells disaster for an already hamstrung housing market.

California’s construction starts fail to keep pace with population growth, driving up home and rental prices. Unpredictable impact fees exacerbate this problem by further discouraging much-needed development. After all, how can a developer pencil out a project if the fees keep changing?

Pending legislation

Skyrocketing building costs are forcing lawmakers to search for relief in every corner of their legislative toolbox. The objective: tamp down development costs to encourage low- and moderate-income housing development statewide.

Assembly member Tim Grayson sees a solution in Assembly Bill 1484 (AB 1484). Grayson, whose Bay Area district is nestled against the epicenter of California’s housing crisis, introduced the bill in February 2019. It would prohibit cities and counties from imposing an impact fee on a housing development unless the fee is published on their website before the application is submitted.

AB 1484 hopes to achieve greater transparency by compelling cities and counties to clarify the fees they impose. By making this information more accessible, cities and counties will be forced to stick to their published fees and end flimsy and surprise fees.

While the bill awaits a hearing in the California Senate Appropriations Committee, Grayson plans to amend it with recommendations from a more recent August 2019 Terner Center report. He’ll need to move quickly as the bill is due on Governor Newsom’s desk by mid-September. Read the bill text in its current form here.

What’s a county to do?

Impact fees are a necessary part of maintaining cities and counties. Local governments can’t just cap impact fees across the board; that would damage communities’ access to public services and possibly force cash-strapped areas to block new development entirely.

Instead, local governments should begin by increasing fee transparency so developers can better prepare for impact fees.

Originally referred to as “exactions,” impact fees were first codified in the Mitigation Fee Act of 1987. It adopts the “reasonable relationship” test in which impact fees need to have a reasonable relationship to the impact it mitigates. But with such poor fee transparency, how can developers determine if a fee is reasonably related?

Greater transparency makes costs more predictable and new development easier to realize. The 2019 Terner Center report, which was funded by the California Department of Housing and Community Development, weighs a few recommendations with the same goal, including:

  • tightening oversight of how cities determine the relationship between a project and its impact on a community, as well as the connection between those impacts and fees charged;
  • creating stronger feasibility standards for determining what fee amounts new developments could reasonably absorb; and
  • improving other local funding options for infrastructure.

But impact fees are not the only financial drag on California construction. The 2019 Terner Center report focuses on impact fees under the Fee Mitigation Act, but these are only the appetizer. Impact fees fall under a larger umbrella of development fees. These range from permit processing, affordable housing, and site-specific fees.

Diagnosing high prices

Even so, unpredictable and overzealous development fees are only a symptom of a greater disease.

Local governments have finite opportunities for generating revenue. Since Proposition 13’s passage in 1978, California counties have relied more and more on impact fees to provide revenue. Prop 13 limits the property taxes a county can collect to 1% of a property’s assessed value.

Without this vital funding instrument, local governments need to make up the lost revenue from property taxes with more creative tools, like impact fees.

The Terner Center recognizes as much. In their 2019 report, they propose amending Prop 13 to expand local access to infrastructure funding. While a statewide tax reform plan would require closer analysis, it’s a possible solution to high development fees and sluggish housing development.

Impact fees have become a significant hindrance to new low- and moderate-income housing production thanks to limited funding options. Californians cannot continue to allow local governments to impose such significant fees with broad strokes. Transparency in development fees is critical to stimulating housing production.