Coburn Crossing, currently under construction in Truckee, will be a multifamily housing complex of 138 market-rate rental apartments.

Down to the Details

Can fee adjustments incentivize more affordable housing projects?

Back Longreads Jan 8, 2019 By Steven Yoder

Leah Miller, the CEO of Habitat for Humanity of Greater Sacramento, can tell you exactly what Sacramento’s latest decision on affordable housing will mean for the people she serves. In October, the City Council voted to zero out development impact fees on affordable housing projects. Now Habitat homes each will cost $2,400-$12,000 less to build — relief that will help boost Habitat’s annual production to 16-18 homes a year.  

That’s double the organization’s current rate of helping 7-9 families build affordable homes each year, according to Miller. And help is needed: In 2018, a record 800 people applied to qualify for one of the seven Habitat homes to be built in 2019.

Statewide, impact fees are almost three times the national average and grew 2.5 percent between 2008 and 2015 … a period when they fell nationally by 1.2 percent.

“It takes about 300 different individuals, foundations and corporations each year and thousands of volunteers to build Habitat homes,” she says. “We’re thrilled to add the City to that collaboration of people who make it possible.”

Fees are the single biggest cost driver on a Habitat project, since much of the labor is donated by volunteers and the recipient families themselves. But it’s not just affordable housing developers who say fees drive up costs: In 2015, average impact fees in California were more than $23,000 for a single-family home and almost $20,000 per multifamily unit. Statewide, impact fees are almost three times the national average and grew 2.5 percent between 2008 and 2015 — and a whopping 19 percent for new single-family homes — a period when they fell nationally by 1.2 percent. California’s median home price is $572,000, more than double the U.S. median of $221,500.

Sacramento and other area jurisdictions are trying a supply-side approach to bringing down housing costs by cutting, deferring and improving the predictability of builders’ development fees. It’s a rare test of whether changing how fees work can help kick off a building boom to meet the region’s dire shortage of affordable homes and apartments.

The Fee Experiment

Sacramento’s recent waiver is the most radical effort to make it easier for developers to build, but other jurisdictions are traveling the same path. California municipalities don’t have a ton of other tools to address housing issues on the local level. The 1978 passage of Proposition 13 capped property taxes, cutting into the money that cities rely on to build infrastructure. When the state shut down its local redevelopment agencies in 2012, it removed a last steady source of funding for infrastructure and affordable housing development.  

Sacramento and other municipalities use those impact payments to cover the cost of city infrastructure for new residential development.

Together, Proposition 13 and the end of redevelopment meant cities and towns were forced to fund their infrastructure on the backs of developers constructing new housing. Builders passed the costs along to homebuyers and renters. “Fees are tied to the construction of, generally speaking, pretty useful things — traffic improvements, bike lanes, improvements to infrastructure and so forth,” says David Garcia, policy director of UC Berkeley’s Terner Center for Housing Innovation. “Because of our tax structure, it’s very hard for cities to find the money to pay for these things.”

Can changes like Sacramento’s make a significant dent in supply? Even before the waiver, the city had relatively low fees. A March 2018 Terner Center report found that of seven sample cities studied (Sacramento, Roseville, Oakland, Berkeley, Fremont, Los Angeles and Irvine), Sacramento’s impact fees were the lowest for single-family homes and second lowest for multifamily units.

But even those low fees haven’t stimulated enough building. Census Bureau data show that the city saw fewer than 900 single-family and multifamily residential units constructed per year between 2010 and 2018. A September 2017 analysis done for the city and the Capitol Area Development Authority by BAE Urban Economics concluded that the current pipeline of residential projects would undersupply affordable housing to low- to moderate-income worker households by “a significant margin.”

Garcia says there isn’t much literature on whether cutting fees can stimulate housing development because few municipalities have actually tried it. In one that did — Stockton — fee reductions designed to encourage residential development didn’t result in much building because demand was lacking, he says.

The town of Truckee may be a fraction of Sacramento’s size, but it’s in the throes of a housing crisis every bit as dire. A 2016 housing study found that the North Tahoe-Truckee region needs 12,000 more apartments or houses for its workforce. For nearly half of the region’s residents, housing costs are more than 30 percent of their income — the level at which households are considered “burdened” by their housing costs. The area’s median income for a family of four would buy a $279,000 house, but the median home price is $538,000.

But the town has made changes designed to give developers a reason to launch projects. One is fee deferrals: Instead of paying up front, developers who build workforce housing and owe more than $25,000 in fees can defer payment until approval of the Certificate of Occupancy, the last step before move-in. A case study by the Mountain Housing Council of Tahoe-Truckee, a coalition working on solutions to the area’s housing crunch, concluded that for a hypothetical 77-unit multifamily dwelling, the developer would save $171,000-$287,000 in interest.

Deferral proponents say these have an advantage over waivers like the one that Sacramento passed: They don’t leave a hole in the budget. “We don’t want to do what Sacramento did and waive impact fees,” says Truckee Town Manager Jeff Loux. “One of two things happens: Either you short the infrastructure so you don’t build the road that’s needed someday, or you try to recoup that money off the back of later developers — say, market-rate developers — which technically isn’t legal.”

During the Great Recession, Roseville’s housing boom nearly came to a halt. To incentivize growth, Roseville deferred development impact fees for select residential projects, and it proved so popular and effective at attracting new development, it has continued it ever since, says Economic Development Director Laura Matteoli.

“As an incentive to our residential developers, we offered a fee deferral, and that really kept us going,” Matteoli says of those recession years. “We had the lion’s share of the number of permits pulled within the city, averaging about 600 single-family developments, and the majority of those used the fee deferral.”

(Sacramento Mayor Darrell Steinberg’s office didn’t return requests for comment on the budget impacts of the city’s recent move. But a report by city staff projected that an average of 100 affordable units per year will apply for the waiver, and “additional City funds may be needed to backfill revenue losses.”)

Alternative Adjustments

Truckee has made one other change designed to incentivize developers to build smaller and more affordable units. The usual practice is to assess the same fee for every housing unit regardless of size: a 2,000-square foot two-bedroom apartment pays the same as a 1,000-square-foot one-bedroom. That policy deters developers from building the smaller unit, since there’s a financial disincentive.  

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Instead, as of March 2018, Truckee is calculating traffic and public facilities impact fees based on square footage. For multiunit projects, the savings from this change should get builders’ attention: The Mountain Housing Council calculates that under a per-unit system, a hypothetical multifamily project of 15 apartments of 1,000 square feet each would pay $375,000. Under the per-square-foot plan, that would be $270,000.

Loux says it’s too soon to tell whether Truckee’s adjustments are having an effect on developers’ willingness to build, but the fee deferral policy appears to have factored into getting a new apartment project underway. Next spring, Triumph Development will finalize Coburn Crossing, a multifamily housing complex of 138 market-rate rental apartments , including 33 studios and 54 one-bedrooms. Triumph co-founder and principal Steve Virostek says the fees on that project ran as high as $500,000, so the deferrals were critical, saving them substantially on upfront equity and interest costs. “Employee and workforce housing projects need every bit of help they can get, so those were less dollars out of our pockets upfront, which made the deal easier to swallow,” he says.

Truckee developers have an additional fee-related ask. They’d like to see a housing coordinator hired who could help them navigate the fees charged by the 18 special districts in the North Tahoe-Truckee region, like public utility, school and water districts. Kristi Thompson, of Truckee-based MWA Inc., says that one big developer was stymied by that maze of special districts — he had to go back to his partners to rework the financing when one district gave him an incorrect estimate, an outcome that a housing coordinator could have prevented, she says. Alternatively, a Mountain Housing Council study suggested the creation of a single-fee point where developers could go for accurate estimates and a one-stop permit processing center that would let them pay all of their fees at once.

Early and accurate assessments of what they’ll owe in fees also encourage developers. The Terner Center report noted that of the seven cities studied, only Roseville had fee schedules that were detailed enough to let a developer estimate costs in advance. In the others, schedules were so hard to find that calculations for a hypothetical project were well-nigh impossible even with the help of municipal officials, according to the authors. Placer County is trying to help builders navigate that problem by creating an online fee calculator that lets them plug in various scenarios and get an accurate estimate, says Shawna Purvines, principal planner at the county’s Community Development/ Resource Agency.

The Value of Signaling

There’s wide agreement that Sacramento’s waiver decision is the boldest yet in using fee changes to get affordable housing built. Garcia says he hasn’t heard of another city of comparable size doing anything similar. And Purvines says she’s watching the results closely: “For Sacramento to figure out a way to be able to offset or defer or waive impact fees on behalf of affordable housing is an amazing move, and I’ll definitely be looking at what they did to reach that conclusion.”

Fees may be a small piece of the bigger housing puzzle, but they could be the difference in getting an individual project built. An August 2018 Mountain Housing Council-commissioned report concluded that housing development is driven less by fees than by market forces like real estate prices, costs and interest rates. In the Truckee region, the biggest cost drivers for multifamily developments are construction, financing and transaction costs — fees made up just 6 percent of the total. Still, they could be a deciding factor in where to develop, the report concluded. “I don’t think there’s a silver bullet. There’s no one thing that’s going to stimulate housing,” says the council’s Seana Doherty.

But Doherty sees another function of fee reductions — signaling. In her role, she talks regularly to a team of area developers about the barriers to launching housing projects. For developers, “Fees are a symbol of sort of ‘do you want us to come?’ and ‘Are you working with us or are you working against us?’” Doherty says. “They told us that it’s really a psychological thing. If you’re slapping on this high fee that really doesn’t make sense, then it just doesn’t seem like …  you really want the project to move forward.”

In Sacramento, the signal appears to be flashing green. Given the rising costs outside the city’s control, like construction materials and labor,  “Everything they can do will make a difference,” says Jim Lofgren of the California Apartment Association of the city’s fee and permitting reforms. “When I’ve spoken with developers, they’ve complimented the city for their efforts.”  

One of those is Nikki Mohanna, the Sacramento developer of a new 11-story mixed-use residential and retail building at 19th and J streets, who’s also launched a second mixed-use residential project at 10th and K. She applauds a recent change in the city’s transportation fee — one of the largest of the impact fees — from a per-unit to per-square-foot calculation. She says that change shows the city is listening. She goes to meetings between city officials and developers once or twice a week for collaborative discussions.

“Amazing projects are being proposed,” Mohanna says. “Five to 10 percent [in costs] can make the difference in them getting built.” 

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