With Los Angeles still suffering from its most serious economic downturn in recent memory, are housing linkage fees and other exactions by local government stifling economic recovery, and how should fees be structured so they best promote government policies?
These were the central questions addressed at a November breakfast panel sponsored by The Planning Report and the law firm Alschuler, Grossman and Pines, held at the Century Plaza Hotel. The publisher of The Planning Report, David Abel, moderated the discussion with: Los Angeles City Council member Michael Woo; Michael Bodaken, housing coordinator for Los Angeles Mayor Tom Bradley; Burt Pines, Esq., a Partner in Alschuler, Grossman and Pines; and Nelson Rising, Senior Partner, Maguire Thomas Partners.
The Legal Background
The panel opened with a discussion of the legal basis for development fees. Under the Supreme Court’s 1987 Nollan decision, fees can only be upheld when there is a connection shown between the development and the problem the exaction seeks to address. The Ninth Circuit Court of Appeals recently upheld a housing linkage fee in Commercial Builders of Northern California v. City of Sacramento. The City of Los Angeles has examined this decision closely in developing its own housing linkage fee because Los Angeles hired the consultants used in Sacramento to perform the “nexus” study. /
Pines criticized the court for failing to scrutinize the actual contents of Sacramento’s nexus study. “If this level of scrutiny stands,” said Pines, “that opens the door to all kinds of fees, so long as there is any kind of study presented.” Bodaken disagreed, “I don’t think this case opens the door at all. The Nollan case still stands — there has to be a very substantial connection.” Bodaken also predicted that the Supreme Court would not review the Sacramento decision.
Other legal issues arise from TRIP fees and other transportation fees. Pines argued that TRIP fees may be illegal when imposed on top of the transportation mitigations that the developer already completed, particularly when the fee provision does not offer developers a credit option.
A Post-Prop. 13 Reality
What has driven local governments’ rush toward fees, of course, are the financing constraints on localities in the post-Proposition 13 era. “As a society we have incredible needs, but we have a government with a severe lack of resources,” said Nelson Rising. “We have a financing mechanism that would be thrown out by most Third World countries.”
Michael Woo sees fees as just one of several policies designed to address what he described as the central challenge of today’s Los Angeles: “How do we keep the middle class in this city while at the same time serving the needs of the poor and the immigrants?”
In today’s tight fiscal environment, developers grudgingly recognize that fees frequently provide the only way to fund the work of public agencies. Maguire Thomas recently agreed to pay $1 million in fees under the new Major Projects Review Fund to the Los Angeles City Planning Department for the review of the Playa Vista project. “Developers would happily pay for the cost of a Planning staff person to review EIR’s,” commented Pines, “so Nelson’s arrangement on Playa Vista is a welcome solution.”
Not All Fees Are Bad
Fees may also garner wider support when they catalyze a larger strategy to confront social ills. As Woo explained, “A housing fee linked to the city’s advocacy of mixed-use development and development around transit stations could help us to avoid the problems that made Orange County and other places unlivable.”
Rising emphasized that fees must create positive incentives. “Fees per se aren't bad. But the question is, how can you structure fees to get socially desirable behavior out of the development community? I would look at fees with credits.”
Why Now?
But even if fees are not necessarily harmful, the question remains whether this is the time to be levying new exactions. “These are not the best of times for the real estate industry.” said Pines, “and the question is whether to load up commercial developers with affordable housing and other off-site improvements.”
To Bodaken, since recessions are only temporary, the mechanism for producing housing must be in place when robust economic activity returns. “People have to look beyond the present recession and look at the economy in its longest form… Over the long haul we have to figure out a way for this housing to be built.”
Bodaken also challenged the premise that new fees deter the development that may help end the recession. “In other cities that have imposed similar fees,” argued Bodaken, “people found over time it was not the fee that detened development — it was building restrictions.” He cited height restrictions in Santa Monica and West Hollywood, San Francisco’s Proposition M growth controls, and Boston’s zoning ordinance.
As Bodaken explains, the housing linkage fees “relate to the true value of the land... Already people are taking that into account in their pro formas.” But Pines noted that many of his clients bought properties at the market price and lack the ability to add additional fees. Rising added that fees should preferably hit property owners before property valuation.
One way to minimize the impacts on the developer and on the recessionary economy is through the phasing of fees. “The ideal situation,” says Rising, “is to have impact fees phased in at such a point so that it ends up getting into the overall cost of the project without increasing the cost of the project.”
Creating Incentives
A recurring theme of the discussion was that fees cannot be considered in isolation. Panelists agreed that fees need to become part of a vision — especially a vision translated into a work program — so that all city policies remain consistent. If fees support policies that are cancelled out by other policies working at cross-purposes, the fee has accomplished little, panelists agreed.
For example, “TRIP fees can be a very creative device to encourage the types of development that is more socially desirable,” said Rising. “They’re not being used that way right now. They’re being used as a way to generate funds…” Rising argued that the city’s well-meaning policies frequently cancel each other out and penalize developers for “doing things that make good sense.”
The Planning Environment for Fees
Since the efficacy of fees in such an environment depends greatly on the other planning policies that accompany them, the discussion turned to the need for a planning vision in Los Angeles. “Part of (the problem) is due to political interference from elected officials,” said Woo. “We have a City Council whose 15 members view themselves as the 15 Planning Directors of the City of Los Angeles.”
Woo also criticized Councilwoman Joy Picus’ proposal to split the Planning Commission into four, locally-based commissions. “I think that would be a tragic mistake and I think it would... make it even more difficult to come to a broad citywide view.” Pines agreed: “Even if you were to break up the city, there’s so much diversity within those districts... that if you take it to an extreme you’d have 50 planning commissions.”
Single-Issue Planning
Responding to David Abel’s question, “Why does Los Angeles look the way it does?” Rising returned to the theme of institutional gridlock: Los Angeles looks the way it does because of single-issue planning. “When it comes to street lighting, the Police Department has strong ideas to assure safe streets. When it comes to street trees, the street tree department has definite ideas. On the width of the streets, DOT has certain ideas. And guess what — it looks like Los Angeles.”
The current frustration with single-issue myopia throughout California has focused attention on strategies for regional governance. But Woo offered cautionary words, noting the political tightrope that regional solutions must straddle: “Decentralization without some way of making potentially unpopular citywide or regional decisions, or… lifting it up to that elevated level without addressing the popular unhappiness with the existing system is politically untenable.”
Recalling that he wrote his Master’s thesis on the evolution of regional government in the Bay Area. Woo said, “I think that we in the Los Angeles area are currently at about the state of regional consciousness that the Bay Area was at around 1957…I don’t quite see what is going to be the political cataclysm that will... lead us to rethink how we make these regional decisions.”
Fees in Our Future
Local governments in this era of fiscal limits will surely continue to rely on fees. TRIP fees are becoming an obligatory part of Los Angeles specific plans, from Warner Center to Ventura Boulevard to Central City West. Cities from Pasadena to Santa Clarita to Long Beach have recently passed or are now considering impact fees on development. The Los Angeles Planning Department is becoming increasingly a “fee-for-service” agency. And the Los Angeles County Transportation Commission is incorporating a countywide transportation mitigation fee into its Congestion Management Plan.
The breakfast panel left the message that this new reality must reinforce, not contradict, a real planning vision — a vision which has been slower in coming than the fees themselves.
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