Jonathon Yu shouldn’t be an expert developer, but he’s occupied with constructing recent homes.
In 2023, the 29-year-old product manager in Sunnyvale filed plans to demolish the modest 1,000-square-foot bungalow he had purchased a 12 months earlier and replace it with a three-story, five-unit apartment constructing.
He paid a couple of thousand dollars to an architect to attract up plans, after which one other few thousand dollars to town for application fees. His parents called him crazy for spending a lot, but Yu had the cash and he wanted to construct apartments.
He lacked the financial means to fulfill Sunnyvale's next demand: to get approval for the $3 million project, he would have needed to pay $300,000 in development fees. These one-time fees are levied by local authorities to finance infrastructure improvements akin to roads, parks and schools.
“What stopped me was the development fees,” Yu said. “If I had completed the building, it would have been the cheapest new construction in the area.”
Across the Bay Area, development fees just like the ones Yu experienced often exceed six figures per unit – and developers have had little room to challenge them.
However, a recent U.S. Supreme Court ruling could cap the event fees California can charge, which some say could lower barriers to recent housing construction.
The case involved California landowner George Sheetz, who challenged the $23,420 fee El Dorado County charged to finance the road improvements the county said were mandatory for the small house he wanted to construct. Sheetz sued on the grounds that the Constitution's Expropriation Clause limited the federal government's ability to expropriate property without adequate compensation.
Previous cases have required such fees to be “roughly proportional” to a project's impacts, but California courts have required local agencies to fulfill lower standards.
In a unanimous decision, the Supreme Court found that was not true and sent the case back to state court for reconsideration. It is unclear what recent standards the California court will impose on cities, however the fees will likely be reduced.
“California cities have historically been exempt from the requirement to demonstrate work to justify their fees,” said Dave Lanferman, an attorney at Rutan and Tucker who focuses on development fee cases. “That is no longer the case.”
California has collected among the highest property taxes within the country for many years, dating back to 1978, when voters passed Proposition 13, which limited the property taxes local governments could collect. With their ability to boost revenue limited, local governments began in search of recent ways to fund services akin to schools, parks and transportation projects.
Ever since these fees were introduced, developers have criticized them, claiming that each dollar that increases the associated fee of a project makes it harder to finish..
“These fees cost us a lot of housing – housing that is never proposed,” said Dylan Casey, executive director of the California Housing Defense Fund, which sues cities and counties to force them to comply with the state's housing law.
Many developers understand that such fees are mandatory to finance growth. They might help cities acquire recent land for parks, expand their libraries or construct recent fire stations, allowing a city to take care of its level of service even when recent residents are a burden.
Critics, nonetheless, say that cities haven’t needed to justify the fees for too long – and that Sheetz can now finally force them to accomplish that.
“There is no connection between the fees cities charge and what they spend the money on,” said Matthew Lewis, spokesman for the housing policy organization California YIMBY. “This creates legal risks for cities and economic risks for developers.”
Fees like those Sunnyvale charges for parks – which range from $34,121 for a single-family home to $114,498 per unit in an apartment constructing – are unreasonable, he said.
Sunnyvale claims its fees haven’t hindered development in town. In an announcement, a spokesperson identified that town exceeded its market-rate housing goals between 2015 and 2023.
Most often, it's small housing developers like Yu who are suffering from the high fees, since developers of enormous projects already negotiate their fees with cities. (Earlier this month, Cupertino said it will waive $77 million in fees for the developers of The Rise, town's largest housing project on the previous Vallco Mall site.) Cities that don't negotiate willingly could possibly be taken to court by developers to barter a lower fee.
Lowering these fees to what developers call “more reasonable” levels could help make projects each small and enormous more profitable and stimulate housing construction. Even if cities lose short-term fees, recent housing construction could provide them with long-term revenue streams – akin to higher property and sales taxes.
“If you do nothing, that's the worst case scenario,” said Erik Schoennauer, a development consultant in San Jose. “You get no fees or housing.”
Others dispute that lower environmental fees would make a big difference within the profitability of a project. Depending on town, the fees only account for 4 to eight percent of the full cost of a project.
A study commissioned by San Jose in October 2023 showed that even when town completely eliminated development fees and other local construction taxes, most planned projects would remain unfeasible because of high construction and borrowing costs. Despite this, town in June prolonged a program that waives all municipal construction taxes and half of parking development fees for brand new high-rise buildings downtown — and it’s considering similar incentives that may apply citywide.
“The real question is what conditions do we need to create to create more housing? I don't think this is just a question of whether we raise or lower these fees,” said Jean Cohen, executive director of the South Bay AFL-CIO Labor Council. “It's a multi-pronged approach.”
“There is a fine line between whether a city is getting the fees to support the services needed for this new development and whether the fees can overwhelm a project and prevent it from being implemented,” Hudacek said.
Yu admits that the event fees were just certainly one of many obstacles he faced – financing would even have been difficult and construction costs could have skyrocketed – however the fees were what stopped him from going ahead.
“Many of these fees are death by a thousand cuts,” Yu said. “Every little dollar counts.”
Originally published:
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