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Cities Cut, Delay Development Fees

The recession and slack development activity have caused about 10 cites and counties to reduce their development impact fees, while more jurisdictions have delayed collecting fees until new buildings are ready to occupy. Some interest groups regard the fee deferrals as helpful in generating local activity. But whether fee reductions are similarly stimulative is debatable.

During the construction slowdown in the early 1990s, many cities and counties cut their development impact fees as an incentive for builders. The reductions almost became a contest, as one city after another sliced their exactions to entice builders to build. The recent fee reductions have not become as widespread. In part that's because cities and counties have been taking advantage of a state law clarified last year by AB 2604 that permits local governments to delay fee collections until a final building inspection and the granting of the certificate of occupancy. Nearly 50 jurisdictions have adopted such deferrals, according to the California Building Industry Association (CBIA).

The City of Fremont has cut fees and this month is likely to approve fee deferrals as well, according to Planning Director Jeff Schwob. The fee deferral "seems to be something more people are interested in because you don't have to finance the impact fees. From what we hear from the development community, that might be more effective" than fee reductions, he said.

Schwob's finding would not surprise Richard Green, director of the University of Southern California Lusk Center for Real Estate. "Giving away tax incentives or reducing fees in the short-run I'm not convinced from the academic literature that's a very effective strategy," Green said. With housing prices "less than it costs to build a house," why try to spur new housing construction?

Still, the business of the CBIA is to spur housing construction, so the organization has lobbied at the state and local levels for lower development fees. "During the housing boom, many cities and counties sharply raised the fees they charge new-home builders and, thus, new-home buyers by ten of thousands of dollars per home," said Mick Pattinson, head of San Diego-based Barratt American and the chair of the CBIA's Impact Fee Task Force. "The average impact fee today is about $50,000 statewide, and there are many jurisdictions where the fees total more than $100,000 nearly as much as it costs to actually build many homes."

During the recession, the falloff in housing construction in California has been unprecedented from 213,000 housing units in 2004 to 65,000 units last year. The CBIA estimates that fewer than 45,000 units will be built this year. The commercial real estate market may be even weaker, especially with such retail chains as Circuit City, Mervyn's and Gottschalks going out of business, and shopping mall powerhouse General Growth filing for bankruptcy.

Cities and counties rely on building application fees to pay staff salaries, on development impact fees to finance infrastructure projects, and on property and sales taxes to fund services. To help maintain revenues, some cities have adopted their own economic stimulus packages (see CP&DR, March 2009), and impact fee cuts and deferrals are usually part of them.

In Fremont, for example, the City Council approved a stimulus package that reduced development impact fees by 10% through 2010 and by 25% in the Central Business District through 2011. The package includes a three-year business license tax exemption for clean technology companies and a doubling of the local business purchasing preference.

Planning director Schwob conceded that the modest fee cuts are mostly symbolic, although he said they reflect the lower cost of constructing projects included in the city's capital-improvement program. He doubted that any of the city's backlog of approved projects would break ground this year simply because of the fee reductions. The fee deferral, which could be implemented this summer, might have a bigger effect, he said.

Other jurisdictions have cut fees, whether for symbolic or practical reasons. Corona slashed its development impact fees by 40% for two years. Dublin reduced traffic impact fees by 3% to 11%, depending on the project; it also suspended for two years a city requirement that developers of large commercial and residential projects provide a piece of public art. The new City of Menifee and the Riverside and San Bernardino county governments are weighing development impact fee reductions of 20% to 50%.

The City of Thousand Oaks has left its impact fees untouched but slashed its affordable-housing fees to zero in hopes of making at least some market-rate projects financially feasible. Last year, it adopted a comprehensive housing program that contained an inclusionary measure requiring developers to make 10% of their units affordable or pay an in-lieu fee of $9,000 per single-family house and $25,000 per condominium. The program also added "linkage fees," of up to $4.50 per square foot for new non-residential development. In May, the city set all of these fees at zero through June 30, 2010.

The CBIA trumpeted Thousand Oaks's fee cuts as "an effort to jump-start homebuilding and its local economy." Thousand Oaks Community Development Director John Prescott characterized the move differently.

"I don't know that resetting these fees to zero is really going to jump-start anything on the residential side," Prescott said. "But it's a factor that will benefit applicants for single-family housing when they put together their pro formas."

Since the city commissioned a study to explore the effects of its comprehensive housing program and fee reductions, "the housing economy and some of the non-residential sectors have suffered," Prescott noted. The temporary elimination of affordable housing fees is simply a recognition of the current economic downturn, he said.

Unquestionably, housing in Thousand Oaks is more affordable today than it was earlier in the decade. According to city officials, the median sales price has dropped by $305,000 since the 2006 peak to $423,000. And prices are not expected to rise in the near future because of the number of foreclosures in the city.

These kinds of statistics bolster the arguments of Max Neiman, associate director of the Public Policy Institute of California. He says reducing legitimate fees in the hopes of stimulating economic development is a "desperate act," especially considering the huge number of foreclosed homes on the market.

"Do communities really need more housing construction at this point? Unless you're talking about trying to keep a developer with a desirable project from walking way, it makes no sense," Neiman said.

"In times like this, communities get more involved in economic development," Neiman added. But "this economic downturn is very, very different from others we've had. It looks much more like a classic downturn that involves a broad array of industries."

Green, of the Lusk Center, said the legitimacy of the fees is the larger issue. Some jurisdictions jacked up fees during the housing boom because developers were willing to pay nearly anything simply to win entitlements, he noted. "It was opportunistic."

Now might be a good time to reconsider whether a development's impact truly relates to the supposed burden offset by a fee, Green said. "To the extent the fee is justified, don't get rid of it now. You don't want to allow a developer to add to congestion for free," he said.

That debate is playing out in Riverside County, where supervisors are considering cutting a variety of fees that fund infrastructure projects, and where pressure is rising for the Western Riverside County of Governments to slash a regional transportation fee. Supervisors Roy Wilson and Bob Buster have balked at reducing fees, calling the idea a "feel good" move that that would hurt the county's ability to build needed infrastructure. A decision on the fees is likely this summer.

Contacts:
Richard Lusk, USC Lusk Center for Real Estate, (213) 740-4093.
Max Neiman, Public Policy Institute of California, (415) 291-4441.
John Prescott, City of Thousand Oaks, (805) 449-2323.
Jeff Schwob, City of Fremont, (510) 494-4440.
California Building Industry Association: www.cbia.org

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