LOS ANGELES—New ordinances and requirements employed over the last couple of years are making development in Los Angeles more challenging and expensive, according to Artem Tepler, founder of development firm SCHON | TEPLER Group. Measure JJJ and increased Park and Dedication Fees under ordinance 184,505 are the latest requirements to affect development in Los Angeles.

Measure JJJ, also known as Build Better L.A. is going to decrease development and increase rents, which will impact both developers and the community, according to Tepler. “Measure JJJ will basically mean that none of the construction is going to pencil,” he tells GlobeSt.com. “On all of the projects that we do, even if we could get the land for free, none of our projects are going to pencil at today's rents if you have to use union labor. This measure is going to decrease the supply and rents are going to skyrocket even further. We have been seeing 5% rent growth, and with this measure, it is probably going to be double that.”

Measure JJJ had two components: an affordable housing mandate and a union labor mandate. It is the latter that is giving developers pause. “I have no issue with the affordable housing on every project,” adds Tepler, whose firm focuses on small apartment projects with less than 50 units. “The issue is that there is also a labor union requirement. Beacon Economics came out with a report that shows the pricing is 100% to 200% more in some trades. Labor costs and materials costs are half of the cost of building a project, and this makes labor costs 50% more. If we are building at $250 per square foot and the labor costs go up by 50%, then we are at $325 per square foot. Even if we got the land for free, which we never would, those numbers wouldn't pencil.”

Larger projects almost always use union labor, so those projects won't be affected. However, Tepler says that smaller projects in markets like West Los Angeles and Hollywood are all non-union jobs. Those projects are all going to see significant increases in labor costs. “There is going to be a lot less supply and rents are going to come up. Maybe one day, it will pencil with these labor costs, but today, it won't pencil,” he adds.

Looking at the bright side, Tepler does see one potential benefit to the measure. “This could be a good thing because it could lead to the city upgrading its zoning,” he says. Measure JJJ only affects projects that require a zoning change. At the moment, that is almost all projects, but if the city updates its zoning, fewer projects will be affected by the measure.

In addition to Measure JJJ, parks fees are also increasing. Starting January 11, 2017, Park and Dedication Fees are increasing to $7,500 per unit for Subdivisions and $2,500 per unit for Non-Subdivisions, and will increase again in 2018 to $10,000 per unit for Subdivisions and $5,000 per unit for Non-Subdivisions. “I really appreciate the fact that they are phasing it in. They are giving everyone enough time to adjust to it,” says Tepler. “We have time to submit our current projects. When it does go into effect, it only increases our construction costs about 1%. That can easily get absorbed into our costs at about $2 to $3 more per square foot. This actually doesn't affect us, and I look at it as a good thing.”

With such a nominal increase in overall costs, Tepler doesn't believe that this ordinance will have a significant impact on developers, and may drive land costs down. “This is going to improve the parks, and the money is coming from landowners, not only developers,” he adds. “If you work backwards, you solve for how much profit you are willing to do the deal for. If developers aren't willing to do it, then the landowners will have to take less for their land.”

He thinks well-meaning legislation, like Measure JJJ and AB-2222, which passed in 2014 and restricts the usage of state density bonus laws, are the most harmful to developers because they end up exacerbating the problem by increasing development costs too dramatically. “All of the legislation is well meaning, but it is really crazy,” says Tepler.

Instant Insights /

Developers Cope With New Regulations, Fees

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