Fees Add Up to Big Headache, Extra Costs for Homebuilders
By NIDAL M. IBRAHIM
Almost one-third of the price of a $300,000 home in Carlsbad can be attributed to various fees and surcharges imposed on builders, according to a recent Northwestern University housing study.
The Carlsbad example,$90,000 of the $300,000 price tag was fees,is not that surprising, according to Laer Pearce, president of Laer Pearce & Associates, a Laguna Hills-based public relations firm that specializes in land use issues.
Carlsbad, he said, is a regulatory nightmare. “But Orange County is not that far behind,” Pearce said.
In Orange County, the median price for a new home in February was $465,000,roughly $120,000 of the price tag is permit and license fees levied on developers and homebuilders. These fees are passed on to consumers.
Fees levied by local, state and federal agencies are shaping up as one of the major battlegrounds in the fight to increase housing affordability in the state.
At its broadest level, the battle pits homebuilders against a myriad of regulatory agencies,from city governments to state administrators to federal regulators. At the ground level, however, the fight shapes up as one of local planning departments against individual homebuilders seeking to move forward on various residential construction plans.
One of the fiercest critics of the fees is Lucy Dunn, executive vice president of Hearthside Homes, a homebuilding unit of Irvine-based California Coastal Communities Inc. that hopes to build 388 homes on the mesa overlooking the Bolsa Chica wetlands in Huntington Beach.
“It’s part of the problem because the rule of thumb is that for every $1,000 (added to the cost of home) you knock out 20,000 potential customers,” she said. “You can see that in the affordability of homes, we’re the worst in the U.S. and yet our population is growing.”
In fact, builders may eventually have to seek relief at the state and federal levels, as OC’s cities may find themselves caught in a financial vise, sources said. Those interviewed for this article agree that it’s the state that precipitated the rise in permitting fees by redirecting important sales tax revenues from city to state coffers, a move designed to alleviate a cash crunch at the state level during the recession in the early 1990s.
“What’s happened is that because the state of California is taking financing away from cities, they’re more aggressive in how they apply fees to homebuilders,” said Lynne Fishel, chief executive of the OC chapter of the Building Industry Association in Irvine. “They try to use that as a new revenue stream.”
Fees are levied by cities to help pay for services to new residents, said Mike Parness, city manager for the city of San Clemente and president of the Orange County City Managers Association.
“The philosophy behind the fees that are placed on development is to make sure you can recover the costs so the new development pays for itself,” he said, adding that cities want to make sure that existing residents aren’t subsidizing the processing and development of new housing.
Fees vary city-by-city. Parties agree it would be difficult and inaccurate to rank the cities according to building fees,different cities levy different types of fees. In some cases, the city might not even keep the fees, despite acting as the collecting agent. That is the case with the city of San Clemente and funds collected for the Orange County Transportation Corridor Agencies, Parness said.
About 25% to 30% of the fees collected from new homebuilders in San Clemente are passed on to that agency, he said.
“When people write the check, a lot of what we do is serve as a conduit,” he said.
Parness agrees with Fishel that the state’s diversion of sales tax dollars away from cities to Sacramento has contributed to the rise in fees. Add to that the restrictions on raising property taxes that date back to the passage of Proposition 13, and cities are left with few options to fund their activities, he said.
“They basically have eroded the property tax and put all of the incentive on cities to go after sales tax,” Parness said. “There’s no incentive for cities to go out and entice developers to build housing. The more residential you build, the further in the hole cities go.”
Still, Parness added, “state law also says that when exacting fees, particularly review fees, you’re not supposed to be covering more than it costs to process the development. The fees are multi-layered and cover a broad range of issues, from seismic requirements to water quality to endangered animals to road construction.”
Fishel likens the fee system to “death by a thousand little cuts,” blaming state and federal agencies.
“I would say the lion’s share of the cost of building homes is related to the EPA (Environmental Protection Agency) and Fish and Wildlife,” he said.
“Once you get through those agencies, there’s a regional water quality board. There’s a whole layer of entities that you have to deal with before you even get to the city level.”
The problem will get worse until state and federal authorities grant relief, said Hearthside Homes’ Dunn.
“The key is changing the revenue structure for the state of California to where cities are not dependent on sales tax revenue for their sources and that general property tax,a fair share of property tax revenue,goes back to local government so that cities don’t have to basically extort new developers to pay for existing services,” she said.
No such action is imminent, according to Laer Pearce.
“Nothing is happening on the California regulatory front to lower the cost of housing,” Pearce said. “Every new regulation is worse than the one before and adds more cost.”
While Dunn believes structural reform is needed at the state level, she says that cities also need to adjust their approach and be more accepting of housing that is not single-family detached.
“This is where I will anger the cities, (but) the cities are not doing their fair share to house their own people,” she said. “They’re petrified of high density (housing) and will not stand up to NIMBYs.” (Not In My Back Yard)
