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Greenbelt Alliance In the News

September 29, 2002

Tangle of red tape inflates costs for homebuyers in the East Bay

Developers say that high fees force them to increase prices

The hardest part of building homes in the Bay Area has nothing to do with construction. Pouring the concrete for a foundation is a breeze. Putting nails through wood is the easy part. Installing the plumbing and electrical wiring is child's play. Topping it all off with a roof is a snap - compared with what comes before the actual building of the home.

For better or worse, residential development in Northern California often takes years, even after a developer has staked out a swath of land for that dream project. Developers must run a marathon obstacle course from the moment they seek permission from government to build on the site until shovels actually begin to turn the dirt. These delays, with a lawsuit or two thrown in for good measure, can add significantly, builders say, to the price of homes in the Bay Area.

In fact, the actual cost of construction of a home in the Bay Area is a much smaller component of the total cost of a home compared with the rest of the nation. The cost of land, and fees imposed by local governments to cover services, are much greater here than elsewhere. Conversely, builders here make a heftier profit on a home, compared to elsewhere in the nation.

So Byzantine is the process to build a housing tract in the Bay Area that builders joke that the real battle begins only after city or county officials have blessed the proposed development. "The current regulatory environment adds to the time to take a project from dirt through entitlement, through sticks and bricks, and sell it to a consumer," said Phil Serna, a vice president with the San Ramon office of the Home Builders Association of Northern California. "The longer that takes, it costs more for the consumer."

Developers pillory what they perceive to be excessive red tape, driven primarily by concerns for the environment, preservation of open space and protection of wildlife. Builders also decry the potent combination of environmental advocates and neighborhood associations that join forces in anti-growth campaigns targeting new projects.

Not so fast, replies a representative of an environmental group. Evelyn Stivers, a field representative with Greenbelt Alliance, said the regulatory process is not the principal culprit behind skyrocketing home prices. She contends that developers wouldn't reduce their profit margins, even if fees were lower and the development process dramatically streamlined.

"Home builders are not going to discount a house, even by $5, if they thought they could sell it for $5 more," Stivers said. "The idea the developers are setting their prices based on the environmental community's opposition is disingenuous at best."

East Bay battles
Still, it's clear that a growing number of developers have been forced to run a gantlet of opposition, lengthy review processes and lawsuits. Among the notable local development wars recently:

• Mountain House, a 4,700-acre built-from-scratch town between Livermore and Tracy in west San Joaquin County, landed in one of the most protracted battles. The project first surfaced in the late 1980s, but only began construction last year. It will have up to 16,000 homes and 40,000 to 45,000 residents, San Joaquin County officials estimated. Mountain House also will include retail and offices. San Joaquin County approved the plan in 1994, but Tracy officials railed against it. State wildlife officials and a labor union sued to block the development. Alameda County also eyed litigation over traffic snarls. Infrastructure construction began in 2001, and the first homes should start to rise by the end of the year.

• Tassajara Valley, consisting of thousands of acres of ranches and farms in southern Contra Costa County, has been at the center of controversy for more than a decade. The more recent skirmishes involve Alamo Creek, a 767-acre, 1,400-unit housing development east of Danville. Developers of the project overcame numerous hurdles and protests at public hearings to win approval from Contra Costa County. But in August, soon after the county's endorsement, Danville filed a lawsuit to try to torpedo Alamo Creek.

• Cowell Ranch, originally envisioned as a 5,000-home project next to Brentwood, was ultimately scuttled following a 15-year battle to develop the site that triggered a firestorm of environmental protests and opposition from county officials. The charitable foundation that controlled the ranch agreed to sell most of the site to the Trust for Public Land, which in turn crafted a deal that will make the property a state park.

With battles like these in mind, it's little wonder that a number of developers refuse to declare victory in building a subdivision until they can overcome any lawsuits filed to block the development.
"We have a kind of joke in the development business, that you had better budget for lawsuits," said Duane Grimsman, general manager of Trimark Communities, the master developer for Mountain House. "Lawsuits just become part of your budget, because they are quite common."

Burgeoning fees
Either way, it's clear that building homes - and the sales price - involves much more than hiring workers and constructing the residence. Land and fees are huge drivers of the cost. A study by the Home Builders Association found that in the Bay Area, land for the home accounts for 40 percent of development and construction costs, compared with 20 percent nationwide.

That means the cost of land for a newly built Bay Area house with a median price of $453,000 would be about $181,200. A new U.S. home with a median price of $170,500 would have a land cost of just $34,100. Developers concede they also extract a considerably higher profit from the homes they build in the Bay Area. Profits for a Bay Area house are about 11 percent, compared with 9 percent nationwide.

"Builders are looking for a higher profit because the risk is higher here, probably higher than anywhere in the United States," Serna said.

The cost of land also can swell if projects are delayed. Home builders often have to pay for options on property they want to develop. They sometimes must borrow money to finance their payments on the options. Impact fees and regulatory costs account for 11 percent of the cost, compared with 4.5 percent nationwide, according to the Home Builders Association. That means the price of that typical house in the Bay Area would include $49,830 in fees and regulatory costs, while nationwide that amount would be just $7,672. The figures include not only the direct fees, but also other quantifiable costs associated with the government review and approval process.

The cost of actual construction as a percentage of the sales price is much lower in the Bay Area than the rest of the nation: 22 percent compared to 54 percent.

Stivers of Greenbelt Alliance points out that rising home prices are not restricted only to regulation-happy regions. Even areas that are believed to be anything but a hotbed for red tape can experience a super-heated residential market, she said.

"Housing prices in rural Nevada have exponentially increased, and that's not because of regulatory costs," Stivers said. "The fact is, developers can get more for the house when it's in a suburban development. The profit margin is so much greater to buy agricultural land, convert it to an urban use, and sell it, rather than when developers convert in-fill parcels in urban areas."

It's no surprise that land prices are a big factor in the Bay Area. One need only consider the allure of the region and the hilly geography and waterways that limit land that can be easily carved into subdivisions. Then there are those high-paying jobs created by Silicon Valley and its East Bay and San Francisco outposts.

Why so high?
But what about those fees? Why are they so much higher here than in other parts of the country?
A number of historic forces are behind the rise in fees. The passage of Proposition 13, a recession in the early 1980s, and a housing boom in the same decade all combined to make fees a pillar of government revenue. And these costs are passed along to buyers as part of the price of a house or, for that matter, an apartment.

Prop. 13, passed in 1978, curbed skyrocketing property taxes that had hammered homeowners in the 1970s. It eventually siphoned off sources of revenue for cities and counties. Local agencies first were reluctant to raise fees, but eventually turned to that when it became clear that the state of California, wrestling with a recession, would no longer bail them out to replace the lost property tax revenue.
Then came the housing boom of the 1980s, making it palatable for cities and counties to charge hefty fees to developers -- who passed these costs to buyers. What's more, local governments had found a key buttress to prop up their faltering tax bases, according to a 1999 study by the state's Department of Housing and Community Development.

"When the economy recovered in 1984, and housing embarked on a five-year period of double-digit price appreciation, builders found they could pay higher fee costs and still make healthy profits," the state agency's report said.

From 1983 and 1996, development-related fees and service charges as a share of local revenue rose from 13 to 18 percent. These included fees for zoning, plan checks, engineering, sewer connection, sewer service, water connection, water service, planning and zoning changes, zoning permits and construction permits. More recently, school fees and a variety of traffic-related fees have sprouted around the state. The state housing agency's study also listed about 30 different fees that were charged by selected cities and counties in California. None of the jurisdictions surveyed charged all 30 of the fees in the 1999 study, although many of them charged dozens of different categories of fees that year.

And fees look to be headed for record levels. Earlier this year, one Livermore project marked the first time a Bay Area city exacted fees of more than $100,000 per unit. The fees for the upscale Alden Lane project in Livermore were $118,000 a unit, on homes costing $700,000 to $800,000.
While it appears that fees and land prices add a tangible and considerable cost to every new home in California, less certain is the impact from the delays involved in steering a project through the political and legal minefields that major developments must face.

When projects go under
But the proponents of the original Cowell Ranch project see a clear-cut fallout -- a more expensive housing market -- because of the delays and protests that forced the S.H. Cowell Foundation to scuttle its plans for Cowell Ranch.

Mary Metz, president of the S.H. Cowell Foundation which was attempting to develop Cowell, said the replacement of thousands of homes with a state park will inevitably lead to increasingly expensive housing elsewhere.

"This is part of the phenomenon that makes it so difficult to build housing in the Bay Area," Metz said. "It drives the price of housing up. Homes become less affordable."

But Tim Donahue, chairman of the Sierra Club's Delta Group, believes Cowell Ranch's main drawback was that, had it been developed, it would have far outstripped local road capacity.
"That project would have added thousands and thousands of cars to a freeway system that is already a failure," Donahue said.

As intense as these battles have been, some observers believe they are no more than the proverbial tip of the iceberg. Builders, environmental advocates, owners of existing homes, buyers and government officials will have to come to grips with the reality that growth is not going to vanish.
For better or worse, builders will continue to scout for land, win options to buy open spaces where they believe growth is coming, and then attempt to craft a development plan that will pass muster.
Local officials took that sort of pragmatic approach when they pondered the fate of Mountain House during the 1990s. George Barber, a former San Joaquin County supervisor who approved the new town, said officials knew they had to deal with being in the path of progress.

"People are coming here and we had to decide where they would go," Barber said.

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