Swan Song

Acknowledging the contribution of my partners, I can fairly say there are almost 150 housing units in the East Bay for which I can claim credit. Were it not for my impetus and effort, they would not exist. I am grateful for having found an economic activity which is creative, satisfying and which has been, at least until recently, remunerative.

Real estate development is the confluence of art, science and money, three things for which I have a particular proclivity. It has been with great dismay that, over the years, I have found that this trio is in fact a quartet. Metaphorically, art, science and money can blend together in sweet harmony. When the fourth voice is added, cacophony prevails. The unwelcome member of the quartet is government.

I bought a church in Oakland in 2021 to convert to housing. It is 2025 and I finally have a building permit. The most frustrating aspect of this experience is that the project as finally approved is exactly what was proposed three plus years ago. All of the tribulations and contortions endured did not result in a better project.

Superfluous City requirements and untold delays have likely turned this project into a loser. While it may marginally work out in the long run, I am now at a point where  breaking even will be a relief. For years, I have wanted to convert a school or church to housing. I have looked at a dozen properties. There were always zoning issues. As enamored as I am of this project, I wish I had never started it. The cacophony of the quartet has drowned out my swan song.

First off, I financed half the purchase price of the church. Interest payments have been about a half-million dollars. Assuming the opportunity cost of the cash half of the  purchase price is as good as the bank’s interest rates, my opportunity cost is another half-million dollars.

Added to this are normal carrying costs, except they have been endured for four years rather than a more reasonable one year. This includes insurance, property taxes,  utilities, etc.

Then there were the impact fees. The acknowledged need for more new housing notwithstanding, cities opt to add impact fees to permit fees, ostensibly to
compensate for the negative impacts of added housing. For example, there is a  transportation impact fee. Even though the four new townhouses proposed will generate less vehicular traffic than the church did, it is just assumed that there is a negative impact of transportation and a mitigating fee is justified.

The most annoying cost which the City assessed, however, was Affordable Housing Impact Fees. For the four units proposed, the bill was $120,000. Economics 101, of course, says that when there is shortage, adding to supply lowers prices. The  justification for the Affordable Housing Impact Fees was just the opposite. It is hypothesized that adding more housing exacerbates the housing crisis.

When imposing these fees, a mere assertion of a linkage does not suffice. There has to be a nexus study. When imposing the Affordable Housing Impact Fee, the City hired an economist to establish this nexus. The logic supporting this fee is beyond faulty; it is just plain silly.

The argument goes like this:
• New housing draws more consumers,
• More consumers increase the demand for goods and services,
• More goods and services sold means more employment,
• Service employees don’t make a lot of money,
Therefore …
• New housing should be taxed to provide affordable housing.

Somehow, the buying power of a couple dozen new Oakland residents warrants a $30,000 per unit surcharge on development. Really? This is silly on its face but let’s look at the alleged impact. If two dozen new residents spend half an hour a day shopping, they would demand about 2,000 hours a year from retail service providers. That’s the equivalent of one full-time job. More accurately, however, it would be a demand for a hour a year on the part of 2000 already-employed workers. There is virtually no added housing demand for low-paid workers. Even if there were, does this justify impact fees totaling $120,000?

The need for a meaningful nexus between the impact and the fee was reiterated by the US Supreme Court last session in the case of Sheetz v County of El Dorado. In this
ruling the Court pretty much declared impact fees unconstitutional. Based on this case, I had protested the Oakland Affordable Housing Impact Fees as  unconstitutional.

My attorney is the LA lawyer who won the case before SCOTUS. While my case is strong, it remains to be seen how Oakland will respond. I will keep you posted.
In the meantime Oakland, on the verge of bankruptcy for years, has tapped the fund for affordable housing funded for $5.7 million so as to balance the current budget. I
cannot explain the nexus between a housing impact fee collected one year but used to fund a budget shortfall years later.

Bottom line: Every cost in the development process is ultimately borne by the users of the property, be they buyers or renters. Every project is built with borrowed money or a cash investment. The buyers and/or renters ultimately pay for the cost of  development. An extra charge of $30,000 adds to the development cost. Based on
a 6% mortgage rate, the cost to the ultimate user for an extra $30,000 is about $180 per month for 30 years. (This assumes the mortgage rate as a measure of real interest
costs and the opportunity cost of any cash investment.)

But that is not the end. In addition to arbitrary fees, there is the cost of processing through the government bureaucracy and the added carrying and interest costs of
excessive processing time. It hard to accurately measure the total cost of slow  processing. Nevertheless, I believe the added cost of a four-year process compared to a more reasonable one-year process is well over a million dollars. This means the cost of the process adds about $1,500 a month to ownership of finished townhouses.