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The High Cost of Houses: Who's to Blame?

October 01, 1989|DENNIS SUNDSTROM | Sundstrom is chairman of Outreach of the Building Industry, a nonprofit educational organization that serves as a link between the real estate industry and the public. and

Who is to blame for the high cost of housing in Southern California today? Developers and home builders? Speculators? Market forces? Or growth and government restrictions?

Some would lead you to believe it's the fault of "robber baron" developers who are reaping enormous financial rewards while leaving middle- and lower-income people struggling to own their first single-family, detached home.

Developers are an easy target, but as with most complex issues, the finger of blame cannot be pointed at just one group. The reality is that affordable housing in Southern California has become trapped in a tangled web of economic, political and even emotional factors.

The prevailing anti-growth, "not in my back yard" sentiment, passage of taxing initiatives, environmental reactionism, cuts in federal funding, the rise in developer fees--all have worked together to hinder development in Southern California to the point where affordable housing has become almost impossible.

The passage of Proposition 13 in 1978 was widely hailed as the Boston Tea Party of its time. This "taxpayers' revolt" meant that the amount of money local government can raise through property taxes to provide new schools and community services would be severely limited.

Federal Programs Slashed

About the same time, the federal government cut back on subsidies to state and local governments, forcing them to become more self-reliant. Later, revenue sharing was eliminated, and federal grants were either cut back or abolished.

As a result of these changes, government agencies became financially strapped and politically trapped. What's the solution when funds are severely limited, yet the public still demands the same quality of services it has enjoyed over the years?

Do we forgo badly needed fire stations, schools and traffic signals? No, we cannot afford to. New, innovative ways to generate the necessary dollars must be designed.

And so the developer fee was born, a special exaction levied on developers and home builders tied to new development of residential and commercial properties. Over the past decade, developer fees have become an extremely popular way to fund everything from new highways to day-care centers.

All well and good, except the building industry is not the goose that laid the golden egg. Developer fees have increased over the years to the point where the industry cannot absorb them all.

Affordable Housing Study

In 1982, Kenneth Leventhal & Co., a major public accounting firm, prepared a study on affordable housing in Orange County for the Building Industry Assn./Orange County Region.

The report was commissioned to determine what it would cost to build a 124-unit attached project in Lake Forest. The project was built by a consortium of builders as a test of the actual costs to develop the project in 1981.

The BIA went back to Kenneth Leventhal earlier this year for an update on what the cost would be today for the same project.

The results show that the most significant rise in the cost of the total project was in the area of construction permits and fees. In 1981, a total of $257,238 was paid for fees and permits. If the same project were developed today, the report estimates that fees and permits would be $1,245,111, a 384% increase in eight years.

High Cost of Land

Some of the fees that would impact the project today were unheard of in 1981, including fees for the proposed Orange County transportation corridors and other regional transportation facilities.

The second biggest increase in the report was a 61% rise in the cost of raw land in Orange County. As the land value increased, so did taxes--at the astounding rate of 3,672%. Taxes in 1981 were $1,052. In 1989, they would be $39,680 for the same project.

The point of this exercise is to emphasize the effect developer fees have had on the cost of housing. In some areas of south Orange County, for example, these fees and permits are adding as much as $20,000 to the cost of a new 1,600-square-foot home. In one case in South County, total per unit fees have exceeded $30,000.

Developers are being charged for new highways and access roads, fire stations, schools, libraries and parks. Moreover, they're often required to pay not only for the services their developments directly impact, but also for infrastructure for the surrounding areas unrelated to the project.

At times, the exaction system borders on the ludicrous. One developer tells a story of having to pay for the installation of traffic signals for a new community. Four years later, long after the first residents had moved in, the signals have yet to be installed.

Finds Fee Ironic

My company specializes in the development of commercial facilities as well as day-care centers, preschools and private schools.

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