Local funds are holding public housing affordability changes in a harsh environment
Procedural and design hurdles prove to be just the beginning of adding new housing to America’s starving communities.
While removing red tape and outdated zoning regulations may make many homes legal on paper, local fines still determine whether those homes are actually built.
California is the poster child for this extreme situation.
Gov. Gavin Newsom and state legislators have pursued a housing glut to improve affordability. The state is in dire need of more units. However, California federal court cases reveal a conflict between local funding and state reforms
Those conflicts – and the costs to their institutions – are themselves seen as privilege, business and project risks if they stop projects or impose new costs beyond the point where their sponsors cannot keep their previous investments in place.
The latest challenge centers around the cost of local installations in San Luis Obispo. This Central Coast city is located between San Francisco and Los Angeles.
The Pacific Legal Foundation sued the city on behalf of the developers. A nonprofit law firm is challenging payments on a project that adds eight units. The scheme consists of four houses, each with a serviced accommodation
The developer paid about $100,000 in installation fees. Developers faced an alternative: deed restrictions on single parcels of income-restricted housing. That parcel — with the house and ADU — would have to be sold for $450,000 per city limit. Each cost $1.325 million to build, according to the lawsuit.
“The city gave the plaintiffs two terrible choices: give up their property rights by getting a deed-restricted IU, or pay nearly $100,000,” the lawsuit said on March 4. “Of course, there was a third option that wasn’t mentioned: don’t build at all.”
The foundation says the payments violate the US Constitution. It refers to Supreme Court decisions that call them “robbery.” The group won similar cases in Healdsburg and East Palo Alto, which resulted in refunds.
City Ordinance
San Luis Obispo enacted its own affordable housing ordinance in 1999. The city revised it in 2022 due to federal housing reforms. The goal of this law is to ensure the development of permanent affordable units in new housing projects as part of mixed income and anti-segregation efforts.
Developers of residential properties for sale or mixed use must build aggregate units equal to 10% of the total units or pay a fee in lieu based on the square footage of the residential area.
The ordinance supports the city’s Affordable Housing Fund, which uses local payments and other sources to fund nonprofit, deed-restricted projects. Since 1999, it has helped build more than 1,300 deed-restricted or affordable homes through planning, entitlement, or construction.
Payment Impact
Developers say fees often kill projects before public review. Deposits and deposits are seen as fixed costs pro forms. They need coverage from restricted rents or sales prices.
Lenders and equity partners require a minimum return, such as 5% on costs or 15% margins in San Luis Obispo. Projects that do not meet these reimbursements after funding freezes.
Fees are especially burdensome for affordable housing. According to a study by the Turner Center for Housing Innovation at the University of California Berkeley, those fees have risen sharply in recent years.
Excess dollars in replacement or below-market units reduce debt service revenue. Developers cannot always raise rents or prices in expensive markets. They offer a little for the land, but the owners often refuse the offers.
Projects stall or die before they are heard. Funds to promote small housing projects. Red ink on spreadsheets reveals where you stand.
YIMBY Push
California YIMBYs are advocating for legislation to reduce the fees that prevent housing development and are making another push this year. This team had a big win last year.
One bill would freeze housing applications across the country. The state housing department must develop the form by July 1. Cities and regions can accept it from October 1.
The estimate prevents additional costs for using the form. It prevents “penalty” payments or shipments that increase costs. Existing impact or embedded payments are always disallowed.
Another bill, passed by Parliament, awaits action by the Senate. Directs government officials to read simple codes for 3 to 10 multi-family projects. It also authorizes reports on the cost implications of building standards.
The Tension of the World
California lawmakers revised zoning laws and approval processes to promote “abundant housing.” Cities like San Luis Obispo manage these outcomes through complex structures.
Three small San Luis Obispo developers invoked state laws, including ADU laws, to acquire vacant lots. Local requirements have increased costs.
The case highlights the tension in the country. Countries simplify housing procedures.
Local funds create barriers as well, making projects only on paper.
“Unfortunately, that’s very common in American city councils,” David Deerson, an attorney at the Pacific Legal Foundation, told me. Builder’s Day.
