A proposed construction linkage fee is nearing approval and, if approved, will increase commercial construction costs by $5 per square foot. The proposed new fee would be aimed at funding affordable housing projects, but the development community is ardently opposed to the fee. This is the most recent in a series of policies to help increase affordable housing in the city, including Measure JJJ, which requires all developers seeking exemptions to the general plan allocate a portion of the project to affordable units. To find out more about the linkage fee, the pros and cons and the current status, we sat down with Andrew Starrels, partner with Holland & Knight LLP and a member of the firm's West Coast Land Use and Environment Group, for an exclusive interview.

GlobeSt.com: What is the proposed L.A. construction linkage fee?

Andrew Starrels: The City of Los Angeles is considering imposing a significant new fee on most construction projects. These are called “linkage fees” because they attempt to connect new development to the severe need for affordable housing in the city by providing a sustainable funding source. The fees apply to virtually all new commercial and residential construction, and will be collected when a building permit is issued and deposited into the City's Affordable Housing Trust Fund. As originally proposed, the fees would amount to $12 per square foot of new residential construction and $5 per square foot of commercial development. This will represent a significant assessment on nearly all forms of development in the hopes of creating more housing affordability. The measure is sponsored by affordable housing advocates and political leaders, including the Los Angeles Housing and Community Investment Department and nonprofit and for-profit developers of affordable housing. Los Angeles has one of the most dire shortages of affordable housing in the U.S., as very limited supply and rising land costs have combined to create a doubly burdensome situation for poor and working class families. Wage growth and the cost of living have simply not kept pace with the rising cost of real estate, especially in high-value coastal areas, even as the economy recovers.

GlobeSt.com: Why is the development community against this new fee?
Starrels: Most developers and other participants in the development process believe that despite the critical shortage of affordable housing in L.A. and the well-meaning intentions of the constituencies supporting linkage fees, the ordinance will do relatively little to provide affordable housing. By significantly increasing the fees required to construct all types of real estate development (the proposed ordinance exempts very small projects, government and institutional developments and for-sale housing projects that already contain an affordable component), the linkage fees will significantly increase the cost of development projects. Developers argue that these additional costs will necessarily be passed on to residents in the form of higher rents and prices, thereby exacerbating housing unaffordability. Some opponents to linkage fees have argued that developers will avoid development opportunities in L.A. altogether, shifting their efforts to areas with lower land costs. I don't see developers fleeing the city en masse, but they will be forced to charge higher rents for what they build. In fact, the more likely result is that high-demand areas will continue to attract development, but at higher costs, while the increased fees will make development in transitioning or infill areas, and along transit corridors where the need for housing development is great and unmet, more difficult to “pencil.” Ironically, then, the effort to create funding sources for more affordable housing will make development, and housing in general, less affordable.

GlobeSt.com: What do advocates of the fee say?

Starrels: Affordable housing advocates support linkage fees by pointing to the lack of housing affordability throughout Southern California and the increasing disparity between housing costs and demand. There also seems to be a sentiment among government leaders that the shortage of housing is so severe that something – whatever the effectiveness – needs to be done. Los Angeles is one of the most expensive housing markets in the U.S. Most housing advocates look at inflating housing costs and the failure of job and wage growth to keep up with housing costs and see funding resources to build affordable housing as a political imperative. By their way of thinking, the free market forces of commercial real estate development cannot be relied upon to provide the affordable housing that L.A. needs.

Los Angeles' housing crisis is severe, and has been a long time coming. In pure supply and demand terms, the State Legislative Analyst's Office recently concluded that in order to keep housing prices consistent with the rest of the nation, Los Angeles would have had to add over 1 million housing units over the last 30 years. Obviously, that hasn't happened, so prices continue to increase as supply is constrained. In Los Angeles today, the vacancy rate among apartments, which is the housing source of necessity for most low income and working class residents, is among the lowest in the country. But the imposition of these fees will fundamentally affect development project costs, especially for larger projects that present the opportunity to add significant numbers of housing units. Take the example of a typical multifamily project containing 600 or so apartment homes, which could contain potentially 600,000 square feet of buildable space. If the linkage fee were $10 per square foot, that represents an increase in fees of $6,000,000.

GlobeSt.com: What is the current status of the proposed linkage fee?

Starrels: An initial draft of the linkage fee ordinance was prepared last year and the first public hearings were conducted in October 2016. Earlier in 2017, the fee ordinance received support from the City's Planning Commission, and the City Council's Planning and Land Use Management Committee recommended approval of the project in August 2017, suggesting certain revisions to vary the fees charged in various areas of the city and to different project types. The next step in the process with be final redraft of the ordinance, with City Council consideration of the measure expected to take place before the end of 2017.

GlobeSt.com: What is the proposed L.A. construction linkage fee?

GlobeSt.com: What do advocates of the fee say?

GlobeSt.com: What is the current status of the proposed linkage fee?

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Developers Brace for New Construction Linkage Fee

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