It’s a buzzword for politicians and developers: Affordability. According to the California Housing Consortium, housing is affordable if it costs no more than 30% of your monthly income. And most affordable housing developments are designed for people with household incomes of 60% or less than the area median income.

But is that realistic? Consider a family with a household income of $30,000 a year, which is just below the poverty line for a family of four. For them to have affordable housing, they would need a unit that costs only $750 per month. Average monthly rent for a 2-bedroom apartment (897 SF) is just under $3,000.

Why is it so expensive to build in California?

In the last 10 years housing costs have doubled in California. Why is it so expensive to build affordable housing in a state that also has the country’s largest unsheltered homeless population? It’s the hidden cost that most of us are unaware of. They are called impact fees. Developer impact fees are estimated to generate billions of dollars of revenues for city and local governments. In 2021, the City of San Diego’s Impact fee reportreflected nearly $500 million (1/2 billion) in impact fees. On the surface it may seem reasonable for a developer to share in the costs of a city’s new infrastructure requirements. The problem is that the developer passes these impact fees along to homebuyers, businesses, and renters.

What are impact fees? Impact fees are one-time charges imposed by local governments on new development and housing projects and these fees are supposed to fund public facilities that are needed to serve that development, such as streets, schools, sewers, parks, police, fire departments and other infrastructure related requirements.

Impact fees make housing more expensive because:

• They are one-time charges local governments put on new developments to fund infrastructure, and this cost is passed on to the buyer or renter through higher prices and rents.
• These fees add a significant amount to the total cost of a home, and in markets with thin profit margins.
• They can even discourage new construction, which further restricts housing supply and drives up costs for both new homes and commercial projects.

When landlords pass on these fees to tenants it makes rent control very difficult. In addition, building affordable housing units for the homeless have become so costly making it very difficult for developers to cost justify and take on such projects. For example of the Measure H  funds approved by LA County voters in 2016  nearly $1 billion will go towards ‘soft costs’. Initially the costs for new unit construction were approximately $500k and then skyrocketed to nearly $1million per unit in the last 10 years.

For city and local government impact fees are an enormous source of revenue throughout most of the state including Los Angeles. It’s appeal to politicians are twofold: One, these local governments do not need taxpayer approval and two these revenues can be used to keep property taxes from increasing. However, according to realtor.com median property taxes in California ranked seventh (7^th) highest in the nation last year. So, property taxes remain high as compared to the rest of the nation.

A study in 2018 indicated the following regarding impact fees:

• Impact fees were as high as 18% of the median home price and sometimes as high as $157k in some cities, according to the Terner Center.
• Estimates show that the average impact fee is approximately $37,471 for a single-family home and $21,703 for a multifamily unit, but the reliance on these fees varies significantly by jurisdiction.
• Most cities in California charge higher fees per square foot on multifamily units compared to single-family homes, which serves as a big disincentive to build new multifamily housing.
• Higher fees for multifamily homes also result from overt efforts to block the construction of new apartment buildings.
• While cities that had the lowest increases in impact fees had the greatest increases in multifamily housing.
• Conversely, cities with the greatest increases in multifamily impact fees experienced the lowest growth in multifamily housing.

California has the highest impact fees for homebuilders in the country which are more than 3x the national average. There are literally billions and billions of dollars in hidden ‘impact’ fees (soft costs) that make building affordable housing nearly impossible in California. Again, these costs are passed along to the buyer, business, and tenant.

According to a recent HUD report “The evidence that a transition from existing methods of financing growth to greater use of impact fees will have disproportionate effects on low- and moderate-income consumers in general, or racial minorities in particular, or otherwise lead to a new segregation is even thinner because the issue has only just begun to be addressed by rigorous testing and analysis.”

The HUD report goes on to state “But impact fees also can be abused—to either exclude low- and moderate-income residents or people of color from communities or exploit new homebuyers who have no vote in the community. They also can be unfair to those caught in the transition from other forms of infrastructure finance.”

The impact on California as been severe as a mass exodus of families and businesses to other states such as Texas, Florida, Arizona, and Tennessee has been occurring for years now.

Why do families and businesses leave states like California and New York?

• Cost of living and housing is significantly lower (e.g. utilities, gas, food, rent)
• Business friendly policies exist – NO state income tax and lower property taxes
• Better job market for the working class where demand for their services is higher

The affordable housing crisis in states like California will only get worse if politicians continue to keep their constituents in the dark as to where the money is really going. California carries the unenviable burden of the largest unsheltered population in the nation as well as the most expensive state for developers and homebuilder. And much of this has to do with city and local politicians charging excessive impact fees that are 3x the national average. Homebuyers, businesses, renters and the homeless are all suffering. Let’s not forget about the homeless population either.

As a former Californian (Los Angeles) I encourage you to write your local politicians, create and sign petitions, and show up to voice your concerns your city council meetings and town halls. You can request a Developer Impact Fees Annual Report like this one from San Diego. We all have a voice, and I pray that collectively we can put it to good use. It starts with us. Good luck and don’t give up on this one!