November 30, 1989 - From the November, 1989 issue

The Housing Linkage Fee: Point/Counterpoint Debated by Experts

Housing linkage fees are currently being debated throughout City Hall as the City prepares to impose a linkage fee on commercial development up to $7.50/square foot. The Planning Report recently asked Michael Bodaken. who supports the linkage fee, and Lucinda Starrett, who represents commercial development interests in the City, to respond to some of the most pressing questions in the debate.

What, if any, nexus exists between commercial development and affordable housing to justify this fee?

Starrett: Under California law and constitutional principles, the City must prove that new commercial development creates new needs for affordable housing in the City. This cause-and-effect relationship is termed a “nexus”. The City is engaging a team of consultants to gather data and conduct a “nexus study.” Completion is not expected before May 1990.

No evidence currently available establishes the existence of the nexus required to justify the fee. Possibly the study may not find any such evidence in Los Angeles. For example, one rationale used in areas like downtown San Francisco was that new development created new jobs which attracted new people to downtown San Francisco. That theory may not be true in Los Angeles, where L.A.’s internal population growth may generate a labor pool of people who already live here, which attracts employers to the area.

Bodaken: Linkage assessments, also known as impact or development fees are defined as a “charge or exaction imposed on a developer that requires payment of money as a condition for development approval to help pay for public services and facilities needed as a result of the development.” Linkage fees are hardly novel. According to the 1988 Mayor’s Blue Ribbon Committee on Affordable Housing, housing linkage fees exist in cities throughout California and the rest of the country.

There is no need to demonstrate a 1:1 causal relationship between the development and the need for the precise number of affordable housing units created by the development. Instead, what the courts require is some type of showing that there is a relationship between the development and the need for affordable housing. This is the so-called “nexus test.”

Comparatively speaking, is commercial development a major or minor cause of the lack of affordable housing.

Starrett: The existing affordable housing problem has many causes, and new commercial development is likely to be only a minor contributor—if a nexus is established at all—to new shortages. In our dissent to the Task Force’s recommendation of a linkage fee and a notice ordinance, development representatives pointed out that the Mayor's Blue Ribbon Committee identified five reasons which have converged over the past few years to create the problem: a shortage of residential land; public resistance to new development resulting in down-zoning and growth restrictions; a labor market trend from middle income to low wage jobs; a population expansion; and the federal government’s reduction of funds for low-income housing and changes in federal tax laws affecting the construction and ownership of housing. New non-residential development is likely to be only a minor contributor—if a nexus is established at all—to new shortages.

Everyone agrees that housing costs in Southern California have become less affordable for many reasons unrelated to new non­residential construction activity. One is the increased cost of building new residential housing. Land costs are very high, particularly with low densities prescribed by the City or by neighborhood pressures. Fees, processing costs, and carrying costs engendered by delays add tens of thousands of dollars per project as it takes one to three years to obtain a building permit.

Los Angeles’ residential production costs are significantly higher than those in neighboring cities, adding perhaps 10% over the cost to produce the same unit across a jurisdictional line. Ironically, another proposed “solution” is “inclusionary zoning,” requiring residential developers to subsidize 15% of all housing produced; this will increase housing costs even more for everyone else. Unless these other causes of unaffordability are addressed, the linkage fee will be a drop in the bucket.

Bodaken: Commercial development contributes significantly to the loss of affordable housing. The first and most obvious connection between development and the need for housing is demonstrated in both office surveys and environmental review documents. Employment data demonstrates that office and industrial development leads to increased hiring for employees at all wage ranges.

Both in the downtown business district and the area known as Central City West, city studies prove that up to 25% of all new employment created by private development is at the very low wage end of the scale. Many of these employees reside outside the area of the development. Not all, but some, of these low wage employees will chose to reside in housing near the development; the increased demand for affordable housing by these employees creates a new burden on public resources. Hence, the need for an affordable housing linkage fee to create affordable housing (a similar logic recently resulted in the State of California placing a school impact fee on development projects).

Further, where commercial/private development actually directly displaces residential tenants, the burden on public resources is quite clear. Finally, gentrification caused by commercial development will inevitably lead to higher rents, creating indirect displacement. This too creates the need for more affordable housing.

Given the numerous revenue-producing options recommended by the Mayor's Blue Ribbon Committee on Affordable Housing, is it fair to place the burden solely on the shoulders of commercial developers?

Starrett: Providing and subsidizing housing for poorer Americans has traditionally been a public duty shared across society. Both fairness and the Constitution prohibit the City from disproportionate imposition of these “general societal burdens,” in the phrase of Justice Scalia, upon developers. Using developer impact fees to pay for infrastructure and even social programs such as art, housing and education is increasingly popular in California since new taxes—the traditional source of funds—are politically impossible to enact with voter approval. Yet public finance revenue sources which truly require every segment of our City to contribute should be pursued as vigorously as the linkage fee is now being put forward. But most importantly, funds must be spent effectively. According to a national survey, Los Angeles’ housing expenditures in fiscal 1989 already exceed $50 million, more than any U.S. city other than New York City. Over $135 million went to New York City's housing trust fund revenues when that City donated its share of the state-collected capital gains tax on real estate sales.

Bodaken: Developers worry that they are being singled out This simply isn’t so. Some examples of other current affordable housing programs include a 15% inclusionary housing ordinance; a ballot measure seeking bond relief for seismic reinforcement; and the allocation of millions of dollars of Proposition 84 affordable housing bond funds.

So no one is being unfair to developers. Indeed, it is fundamental that developers only pay for the housing need created by their projects. Further, developers need to be assured that there will be some type of relationship to the benefit provided and the burden created. Present state law requires a relationship between the use of the fee and the development Thus, the use of the fee for affordable housing in the area surrounding the project, which is more likely to be occupied by the project’s low income employees, is easily sustainable.

How will the new money be spent?

Starrett: No plan has yet been made. No projects have been identified for funding. In fact, the fee is intended as an in-lieu fee to be assessed only where the developer does not provide the required housing units. Many issues need to be resolved: Should a non-profit housing partnership, with representation from the City and tenants and developers and employers and neighborhoods, administer the funds? Should the money be limited to rental, low- or very low-income units, when many median income employees of businesses located in new development and potential home owners also need affordable housing? Should the money be spent within seven miles of the new development, as Sacramento’s linkage fee provides? How can the linkage ordinance implement rather than contradict the City's sewer allocation ordinance, housing element, jobs /housing balance and growth management policies?

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Bodaken: Housing is a problem for many social and economic groups, but it’s a real crisis for the $5,000-$25,000 income renter. This fee cannot be a total panacea for all of our housing ills. The Mayor's Committee notes that we need to triple our current resources spending over $300 million annually, to begin to make headway for those who are most victimized by the housing crisis. It's preposterous to suggest we should subsidize luxury units for the middle-class when there are 25,000 homeless on the streets, 184,000 overcrowded units, and 40,000 families living in garages.

What is the mast appropriate legislative path for the ordinance?

Starrett: The notice ordinance, if passed, legally obligates every recipient of a non-residential building permit everywhere in the City for any purpose other than parking structures—but including remodeling even where no new FAR is created—to pay up to $7.50 per square foot for housing. Though the City lacks evidence of impacts, it still wants to charge every project which goes forward between now and the date it has evidence. A tiny taco stand and a large office building receive the same notice without exceptions. Encino and South Central Los Angeles receive the same notice without exceptions. The linkage ordinance itself should reflect six months of data-gathering and careful planning: the notice ordinance does not.

The notice ordinance and linkage fee should be referred by the Council back to the Community Redevelopment and Housing Committee and to the Planning and Land Use Management Committee, which has not yet been consulted. Nor has the Planning Commission been involved. Since the fee essentially charges developers who create jobs for low-income people, it is not solely a housing issue.

Bodaken: To demonstrate the nexus, the city must conduct a housing linkage fee study. It is routine for municipalities to place developers on “notice” that studies to determine an appropriate, fair exaction fee are being undertaken and that a developer may later be required to pay that fee. Such notice ordinances have been recently upheld by the California Supreme Court (Russ Building Partnership v. City of San Francisco).

So, the first step is passing such a notice ordinance. The current notice ordinance will be debated in City Hall during the next few weeks. It already passed the Council Committee responsible for affordable housing policies, the Community Redevelopment and Housing Committee. It should be adopted. Developers want to scuttle it because it states a fee equal to the amount ultimately determined by the City Council may be imposed, but in no event shall a fee of over $7.50 per square foot be imposed on developments which proceed during the time period of the study. Housing advocates know that what developers truly want to kill is the notion of housing linkage fees altogether. In the coming weeks, the good faith of both groups will be tested in the political process.

What should be the dollar amount of the linkage fee?  

Starrett: The fee in Sacramento is $1.50 per square foot; in San Francisco about $5.00. Boston’s net present value cost is $2.50 per square foot; a 12-year payout is permitted for their $5.00 fee. Here, the total dollars to be generated or even sought have not been identified. Of course, for a mandatory fee without incentives or developer consent—unlike those in other cities and Center City West—proof is required to avoid an unconstitutional "taking." Moreover, the nexus study will examine the incremental effects of adding fees to the many which Los Angeles already assesses, because the impact on supply must influence the decision. For example, if a $5.00 number reduced annual supply to 1 million square feet (to pick an easy number), the yield is $5 million; if a $2.50 number reduced supply to 3 million square feet, the yield is a much higher $7.5 million. Identifying the number must await the evidence provided in the nexus study; it could be zero.

Bodaken: The sustainable amount for developers in areas of active commercial activity is actually much higher than $5 per square foot. In San Francisco, a study led to the conclusion that fees in excess of $8 per square foot were logically sustainable. The political compromise was just over $5 per square foot. In San Diego, the study justified a fee in excess of $15 per square foot. In August, 1989 the CRA conducted a nexus study for Density Transfers. The amount for low/moderate housing which was attributable to commercial development was calculated at $14/square foot I suspect that the LA study will come back with a similar number which is justifiable. While that number may not fly politically, it is crucial that the highest sustainable fee be imposed. To actually produce the affordable housing need created by commercial/industrial development requires imposition of a fee in active commercial areas between $6-$8 per square foot.

What, if any, will be the effect on commercial development?

Starrett: Many projects will locate elsewhere in the Southern California area; only those that can absorb additional fee amounts will go forward. Marginal and economically depressed areas will be particularly hard-hit. Some view the concept—especially the notice ordinance—as a thinly veiled growth control measure. Although economic studies in other cities have concluded that all of the linkage fee cannot be passed through to tenants, eventually some increase in office rents for existing as well as new buildings can be expected.

Bodaken: One hesitates to enter the murky area of development projection. In a recent issue of the Downtown News, it was reported that the downtown Central Business District of Los Angeles would experience a growth of 25-30 million square feet in the next two decades. Projections in the range of 25 million square have also been made for the same period of time in Central City West.

Those imposing linkage fees pose the following parade of horribles: the imposition of such a fee will inevitably lead to loss of confidence, development in Los Angeles will stall, and, major corporations and employers will relocate to Orange County, Phoenix and Des Moines. While I suspect that interest rates and anti­development measures have much more to do with development potential than linkage fees, consider Central City West, where commercial developers have essentially agreed to a linkage fee in excess of $4.20 per square foot with an additional, separate replacement housing obligation on certain developers. No one has claimed that this program will kill the golden goose over the next two decades in this rapidly expanding area.

What are examples from other cities which illustrate your points?

Starrett: Los Angeles' notice ordinance imposes a City wide fee on all projects of up to $7.50 goes far beyond that adopted by any other city. In San Francisco and Boston, linkage fees are limited to downtown business districts. Both cities assess fees only on projects which obtain discretionary approvals. San Francisco program initially allowed “credits” for production of housing for all income levels, and now requires that 62% of housing produced under the program should be within 120% of median income. Boston too allows moderate income housing, as does Seattle.

Bodaken: The costs in larger and/or West Coast cities are just over $5.00 square foot (e.g., Boston, San Francisco and Santa Monica). San Francisco requires payment as commercial certificates of occupancy are issued. In Santa Monica and San Francisco the charge is triggered by office development, but not, say, shopping malls or hotels. In Boston, the assessment is applied to all office, retail, service, institution, education, hotel/motel development with gross floor area in excess of 100,000 square feet. San Francisco, which has a rental crisis similar to L.A.'s, once used the money for middle class housing. When it became apparent that the crisis in affordable housing victimized the poor, the program was restructured to target only those who were low-income or below.

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