The subject of fees imposed by cities on area builders cannot be ignored.
Present builder fee levels are very much a reason the building industry recovery is held back. In fact, if builder fees are not substantially lowered, some types of housing markets may not recover, at least not in years, which would affect our local economy negatively. The construction of homes and commercial buildings in San Diego is a major factor in the local economy, employing more than 100,000 and generating valuable revenue for city services. Maybe now we have your attention.
Local government plays a primary role in the regulation of housing and its related costs. As such, they also have the opportunity and responsibility to promote and enact policies to stimulate and sustain the housing-based economic contributions to the region.
For many years now, fees and exactions have added to the growing cost of a San Diego home and, unfortunately, have served as a fundamental deterrent to consumers. And forcing the builders to pay fees in advance of any infrastructure-related impact has resulted in great economic burden to the very industry that supports the local economy.
The Building Industry Association of San Diego County (BIA) has been urging all governmental agencies not to increase any fees borne by new development for an indefinite period, and to suspend the adoption of new fees during this period of economic challenge. In addition, it has been asking policy makers to defer the payment of development fees until the issuance of a certificate of occupancy for commercial properties or the close of escrow for residential properties commensurate with the actual impact to community services.
Unless these fees support services or capital improvements that preserve the public's health, safety and welfare, they should not be even considered during these devastating economic times.
In the present economy, which shows at best signs of a market bottoming out, meaningful stimulus measures like fee reductions or deferrals that jumpstart construction are needed. Inaction among local governments will only lead to further job loss and even more mortgage defaults. This fuels the downward spiral of housing values.
Many in local government believe that there is no reason to stimulate new housing construction given the overhang of so many foreclosed units. Foreclosures do not create jobs. New construction does before, during and after homes are built.
Inherent in the concept of an economic stimulus measure, is the nurturing of a new beginning. With the collapse of the U.S. housing markets leading to a global economic disaster, economists of all stripes opine that a return of healthy housing markets spells broad-based recovery.
A fee primer
Fees are simply special charges on new construction and are sometimes referred to as "Welcome Stranger" costs. These fees are uniquely levied against the new home or the new office building. Basically, builder fees fall into two broad categories; user fees and impact fees.
Impact fees can be compared to the old Toll Road fares. Back in the Middle Ages, feudal lords controlled passage over their land by exacting payment for the right to use the roads they built and maintained. Similarly, local government charges developer fees to offset the proportional impact new residents or new employees make on schools, roads, water and sewer systems needed to serve these newcomers. In California, these fees came about after passage of the property tax limitation initiative known as Proposition 13 in 1978.
Before Prop. 13
Back then, it was the General Fund that paid for roads, schools and parks based on the property and sales tax revenues cities would collect. Those were the days of simple public financing methods paying for bold and large infrastructure projects, except that California was taxing people out of their homes. And homeowners are likely voters.
These were also times when projects could be conceived, planned and built in one year, and the interests of bugs and rats did not add millions to the cost and years of delay. Recently, a small fish swimming in the Bay Area Delta caused a 30 percent reduction in water delivery to all of Southern California. This underscores the point.
It took more than a decade for cities to feel Prop. 13's full effect when their general fund balances showed record-low revenue intake made worse by the state of California's appetite and proclivity to grab local tax dollars without repayment.
Enter the courts
As local tax treasuries dwindled, city hall truly started to appreciate the leverage they had over new project approvals. Soon, cities were making ever-greater demands from builders to pay for offsite infrastructure improvements at price tabs and at a scale that bore no relationship to the project's impact. This led to lawsuits. One classic example was litigation by a storeowner who was required to pay for art in public places because she simply wanted to remodel her store.
These so-called Nexus and Proportionality court cases were filed establishing the legal relationship and the true cost apportionment between a project, its required fee amount and the true project impact payment of the fee would mitigate.
The emergence of these legal fee challenges was important because they established the fair-share burden of the single project on its environment. What exactly constitutes a fair share continues to be a major conflict between the industry and "city hall." This because local and regional jurisdictions keep expanding the "fix the environment" financing role new development must play as a condition of project approval. The region's housing affordability conflict is a direct consequence of the expansion of new housing's financing role!
Lifting the fee burden to aid recovery
Today, many homes carry heavy fee burdens. And when the fees are combined with the cost of red tape and government regulation, the nontangible "planning" costs exceed $100,000. That amount will buy you a home in many other American communities. Yet in California, this expense comes before a shovel touches the dirt the home will sit on. It doesn't pay for the actual improvement of the lot, nor the house the buyer will live in.
The building industry recovery is, in part, dependent on rolling back a host of fees and exactions that were piled on as a cost of construction from the mid-80s through the end of the last building cycle (i.e. 2006). In fact, so high are these fee levels and exactions that many projects that are fully entitled, i.e. approved for construction, presently have no viability. This occurs when the cost of new construction exceeds the actual market value of these projects.
In addition, it is reasonable to expect that some type of credit crunch will continue for our industry, and for homebuyers and commercial tenants. If anything, because banks will be more conservative in their lending practices, so it follows that the average homebuyer will need to come with higher down payments and won't have as much borrowing capacity as before.
Bigger isn't always better
Can the industry get back to basics, providing new homes to largely a workforce market? The only major obstacle is city hall. Politicians and staff still expect to collect the same fees and exactions as if the market never corrected. They wrongly believe the market will simply return to what it was. It will not. The industry can't recover unless local government understands this (and does not actually and knowingly practice no-growth policies).
To make sure city hall recognizes that a return to the 1997-2006 era is an unlikely scenario, BIA launched the J.O.I.N. Campaign. This acronym stands for Jumpstart Our Industry Now and brings industry members to city halls to foster a dialogue. This dialogue is very much about proactive governance and right-sizing fees to match the true environmental and community impacts the new types of housing will make, and allowing these fees to be paid when the impacts actually occur.
City halls are starting to respond to these overtures. More than 50 across California, including the cities of Chula Vista and San Diego have made improvements. However, in many of the smaller cities, actions are taken to balance their budgets by raising fees on building activities. The result is an insignificant pool of permit applications, as evidenced by the complete drop off in planning and permit activity. Reversing this remains one of the toughest tasks for BIA. But we remain vigilant -- unless local government understands this (and does not actually and knowingly practice no-growth policies).
Winckel is CEO of the Building Industry Association of San Diego County.