Property manager and new developer Jeff Zell wanted to convert a rec room into two studios in a San Jose apartment building he owns.
But a project he thought would take a few months and $75,000 has turned into a two-year, nearly $200,000 odyssey of frustration, fees and false starts. City charges almost killed the project, Zell said.
The city initially assessed Zell's renovation a mandatory park fee of $48,800 — revenue designed to support public recreation spaces in San Jose. Zell balked. For that kind of money, he could buy his two tenants season tickets to the 49ers and Warriors, with money left over for a pair of annual passes to the National Parks.
Zell hasn't raised a wall or driven a nail, yet. "It just never ends," he said. He's losing $100 in potential rent every day the project is delayed. "I'm super frustrated."
Amid a state-wide housing shortage, developers say they feel increasingly burdened by unpredictable government service and impact fees that are almost three-times higher than the national average. They say it's an additional drag on residential development in a region already battling the highest construction costs in the world.
Fees are a long-time bugaboo and budget-buster for developers. But towns and cities feel the fiscal pinch of Proposition 13, which limits property tax revenues from long-time property owners. So many municipalities raise service and impact fees to make up for those budget shortfalls to pay for parks, schools, roads and other city priorities. The charges also reimburse governments for staff time spent on projects.
Fees also provide an added bonus for cities resisting growth — high add-on costs can curb development and sink projects, especially for low- and moderate-income housing, developers say.
Pro-housing bills in Sacramento this year would trim fees, and at least one includes waivers to encourage construction of more accessory dwelling units. The bills also would insist municipalities become more transparent and regularly file fee schedules with the state.
Service and impact fees in California in 2015 were nearly triple the national average, according to a study by the Terner Center for Innovative Housing at UC Berkeley. The costs add between 6 and 18 percent to the median price of a new home, according to a sample of seven cities by Berkeley researchers.
For example, Oakland charged $34,500 per unit for new apartments in a large development, while Fremont assessed $75,100 for each new rental, according to the study. For new construction in a 20-home subdivision, the center estimated fees of $62,100 per unit in Oakland and $156,600 in Fremont.
Cities and counties maintain that the fees are needed to pay for staff time spent reviewing and inspecting projects, as well as for improvements to roads, schools and water systems for a growing population.
David Garcia, policy director at the Terner Center, said the municipal charges were one of several factors driving up construction costs, along with high costs for land, materials and labor. "It's a complex issue," he said. "It's not as simple as saying, 'We should cap fees.' "
Fees can fall especially hard on homeowners looking to build a backyard unit, he said. Often, cities charge the same rate for an accessory dwelling unit (or ADU) as a single-family home, driving up costs for the granny flats and killing the project ambitions of many homeowners.
State lawmakers have ordered a review of local charges, with a report expected from the Department of Housing and Community Development in June.
Assemblyman Tim Grayson, D-Concord, authored a new bill that would require cities and counties to report fees to the state and create a database for lawmakers and developers to get a better handle on costs.
Grayson said he expects the data to give state and local decision makers a clearer picture of how to address rising costs. The goal is to bring clarity and certainty for developers, he said, and "get those housing units off paper and on to land."
Builders say more transparency in fees would lead to fewer surprises and a smoother, faster timeline for projects.
Developers pass costs directly on to new buyers, housing experts and developers say. The inflated prices also drive up values and sale prices for surrounding homes. One East Bay builder budgeted $150,000 for inspection fees on a 36-unit development, only to see actual costs reach $500,000.
Jim Ghielmetti, CEO of Signature Homes in Pleasanton, said the issues have been accumulating for years. "Fees are only part of the housing problem we have," he said.
On recent projects, Signature Homes paid about $500,000 to the City of Oakley for seven homes and $264,000 to Livermore for three homes, company records show. "We have to pass them along," he said. If not, he added, "we'd all be broke."
In San Jose, Mayor Sam Liccardo has pledged to add 25,000 homes and apartments to the city by 2022. But in March, the city revealed that it had issued about 3,000 permits for new units in 2018, far short of city leaders' goal to approve 5,000 annually.
Liccardo said the city will be looking to reduce fees for large, dense downtown residential buildings. He expects the city to consider action in June. He also wants city fees to be more transparent, giving developers a better handle on costs before investing heavily in a project.
Liccardo said in an interview the city has to seriously look at reducing fees.
But any cut in fees would be too late to help Zell. He bought the 37-unit apartment complex on Richfield Drive three years ago and looked to upgrade the property. The two-story, square building, with a leafy courtyard and pool, is two miles from the Apple campus. Tech employees rent most of the one-bedroom units.
San Jose's fee schedule has a base charge of about $10,000 for staff time and various review costs, a city planner said.
The city initially told Zell park fees would cost $24,400 per unit, a total of $48,800 to support public spaces in the city.
"Screw the city," he thought. He simmered and sat on the project for six months.
He went back to city planners, and they discovered the fees should actually be about $38,000, still too rich for Zell's budget. "I'd rather put the money in the property than give it to the city," he said.
The two sides reached a compromise. Zell agreed to build an outdoor dining space — two barbecue pits, three picnic tables and some trash cans — in the courtyard. The city dropped the fees to $19,000.
Zell hopes to start construction next month.
