Commercial developers hit hard by the drop in property prices are looking at development impact fees to soften the blow to their bottom lines.
The price tag for sewer, road and community improvements to build a warehouse in Stockton isn’t the same as the price for erecting the same building in Sacramento or Roseville, for example. And when the market is overheated and tenants are lined up to sign leases, those variations can hover around the edges of the balance sheet. However, in a down economy, a higher transportation mitigation fee can make or break the bottom line.
“You would think, from a unit basis, the cost to put in a road or a pipe would be consistent everywhere, but that is not the case,” says Troy Estacio, senior vice president of development services for the Buzz Oates Group of Cos. Right of way, labor and improvement standards can vary. Also, many of the fees — school, environmental impact and sewer district, for example — aren’t always controlled by local municipalities. For instance, in Vacaville, sewer fees are substantial because of required improvements, and that trickles down to end users.
“You have to look at the comprehensive picture of all the costs compared to the value of the finished product,” Estacio says. He labels the San Joaquin Valley as the most competitive when it comes to fees, but adds: “If I can sell the project for more somewhere else when finished, then it might be worth higher fees. I have to look at the total burden.”
Legal decisions going back to the 1940s require municipalities to make new projects pay for their share of capital costs for public assets — no more and no less. “There is a lot of pressure to reduce fees, but that raises the question of how … we build things like roads and parks,” says Mark Griffin, program manager for public improvement financing in Sacramento. The city has reduced fees in some areas by up to 30 percent as an economic incentive and is revising the park development fee.
Competition doesn’t just require slashing prices, however. Sometimes the cost is less important than the timing.
The Buzz Oates model is to create an inventory of speculative buildings, but in an era of high upfront fees, that can lead to expensive carrying costs. “Building an industrial project in today’s environment is a ¨quasi-partnership between the developer and the jurisdiction,” Estacio says. “We have to understand the municipality’s needs and desires.”
Buzz Oates does a lot of work in the Central Valley, Estacio says, where the end goal for many local agencies is job growth and not necessarily more buildings. “We have aligned goals because we create dramatic increases in property taxes and jobs, but we need help to reduce upfront costs.”
Deferrals can help shift the cost to fit the impact. Developers still pay for the impacts they create, but they might pay when a tenant is signed and traffic begins on the roadways or sewer hookups are utilized.
Sacramento tested a one-year deferral program in Natomas, but development there froze when the Federal Emergency Management Agency designated the area a flood hazard. Placer County has also allowed some owners to defer fees until time of occupancy. “Funding is the most difficult part of a project and this gives greater latitude,” says Michael Johnson, director of the Placer County Community Development Resource Agency.
Some agencies are even basing fees on size with the idea that certain size buildings hold more or fewer people and therefore have a smaller or greater impact on infrastructure needs.
“You would think, from a unit basis, the cost to put in a road or a pipe would be consistent everywhere, but that is not the case.”
Troy Estacio, senior vice president of development services, Buzz Oates Group of Cos.
Estacio, for one, would like to see more of a correlation between fees and the market. “Labor costs, land values and construction costs have come down, so it would be appropriate to bring the price of fees down as well,” he says.
Jamie Gomes, principal at Economic & Planning Systems, which conducts real estate market analysis all over the state, says that he has noticed “jurisdictions have been amenable to having a dialogue, rolling up their sleeves to see how they can keep construction moving forward.”
Sometimes that takes the form of temporarily adjusting fees down to stay in line with the decreased cost of building infrastructure or re-evaluating actual capital costs. “Woodland, Elk Grove and Sacramento County have all adjusted at least some impact fees based on both cost and scope of improvement changes,” Gomes says. “Agencies are asking themselves can we live with less?”
Adjusting the scope could mean revisiting the general plan and revising the types of facilities and amenities planned to fit the reality of what is possible to fund.
The infrastructure cost burden has to be realistic (no more than 20 percent of the building sales price) when balanced with land, entitlement and construction costs for projects to make sense, Gomes says. “We need to bring cost structures back into alignment with the new reality of pricing, in order to get the economy back on track,” he says.
Another way cities and counties are helping developers move forward is by exploring other options for funding infrastructure. Unfortunately, the pool for many of those alternatives — redevelopment funds, general obligation bonds, assessment districts, loans and grants — is also shrinking.
One alternative is the Statewide Community Infrastructure Program, which is run by California Communities, a joint powers authority between the California State Association of Counties and the League of California Cities. The financing program allows developers to pay impact fees with tax-exempt bond issuance proceeds. It prepays the fees, so developers can obtain permits and start construction faster. It also protects the local agency from possible nonpayment that can be experienced in deferred fee programs.
And by bundling bond issuances, the program minimizes financing costs. For instance, in 2008, the city of Elk Grove participated in a $21.8 million bond with the cities of Brentwood, Livermore, Napa, Roseville, Woodland and the county of El Dorado to finance roadway fees for a Calvine Pointe commercial project. The pooled revenue bond will mature between 2009 and 2038, allowing street work to be completed and benefits to be realized before the bond has to be repaid.
While this resource has also suffered during the credit crunch, it has financed more than $141 million in impact fees since 2003 and is poised to start lending again. “We are seeing renewed interest from investors,” says James F. Hamill, California Communities program manager. He anticipates three bond issuances in 2011.
Municipalities and developers are all hoping some combination of deferred payments, and reduced or financed development impact fees could be the wedge that helps get projects off the ground in 2011 and beyond.
Walk into any coffee shop and it’s obvious that the place we call “the office” has changed. Many of the people sitting at tables are likely mixing laptops with lattes as they browse email and write reports. Some may be pitching a sale over coffee.
This year could provide some of the first expansions in bank lending since 2008. So is the market back up to speed? No. But banks are slowly and smartly increasing their appetites for commercial lending, and the Capital Region will see its share of transactions.