Santa Rosa considers revamping development fees to boost housing construction

Santa Rosa rents may be on the rise, but they’re still not high enough to trigger significant new housing construction anytime soon.

That’s what an economist told the Santa Rosa City Council on Tuesday as it began studying whether to adjust the fees it charges developers to help build city infrastructure.

For council members who had been hoping that developers might save the day by boosting the supply of apartments and putting downward pressure on rents, the opinion landed with a thud.

“That’s pretty depressing,” Vice Mayor Chris Coursey said.

Walter Keiser of Oakland-based Economic Planning Systems said as quickly as rents and home values are increasing in the city, they remain far higher in other parts of the Bay Area. Since building costs are largely uniform across the area, he said, current rent levels simply aren’t high enough to entice many developers to build here.

The average apartment rent in the city is $1.84 per square foot, according to Keiser. By comparison, San Rafael’s is $3.01, Sunnyvale’s is $3.49 and San Mateo’s is $3.91.

“You have a price-cost problem that’s going to restrict the growth,” Keiser said. “No one can afford to build much unless rents are in the $2.50 range.”

Keiser’s analysis was the first part of a two-part session studying how the city should go about adjusting its so-called “impact fees” on development. Such fees help the city pay for a variety of infrastructure needs like water and sewer lines, roads, parks, schools and affordable housing.

The fees can vary significantly depending on what part of the city a development is located in, ranging from $31,000 to $61,000 per single-family home. The southeast and southwest parts of the city have special fees of more than $13,000 per unit to address the higher infrastructure needs in those areas.

Fees for apartments are lower, but not much, ranging from $27,000 to $42,000 per unit. The city also charges an array of fees on office and retail projects on a square-foot basis.

The fees have long been assailed by the building community as excessive, unfair and responsible for inhibiting growth in the city.

All told, the fees have generated $230 million over the past 20 years. The problem is that as development has slowed, so has the city’s revenue from them. This has impaired the city’s ability to meet its infrastructure needs and likely will continue to in the future, Keiser said.

Over the next 20 years, building all the infrastructure outlined in the city’s 2035 General Plan would cost about $1 billion. But even if the city added 500 new housing units per year, well in excess of current levels, the current fee structure would generate only about $500 million in fees, Keiser said.

Compounding that shortfall are the constraints on the city’s general fund and a steep drop in state and federal transportation dollars, he said.

The city is left facing a major dilemma. It needs development to pay for its infrastructure costs, but it also needs to invest in its infrastructure to make the city attractive for economic growth.

“How do we maintain Santa Rosa as an attractive place to live and work by investing in infrastructure, which you’ve got to do?” Keiser asked.

Changing the fees, however, is delicate business. Raise them to pay for infrastructure costs and developers would be even less likely to build here, he said. Lowering them significantly to spur development is equally tricky.

The city in 2014 significantly reduced its sewer and water hook-up fees by $9,000 to $22,000, depending on the size of the lot.

“That was a good move on the city’s part, but there was no uptick” in housing because of it, Keiser said.

That’s because fees are only one part of the equation. Low job growth combined with high inventory of office and retail space means if the city eliminated all those fees tomorrow, it still wouldn’t be enough to entice developers to step forward with retail projects, Keiser said.

Other ways the city might improve the building climate include investing more taxpayer dollars in infrastructure to reduce costs for developers; making it faster and easier to review permits; finding other sources of revenue for infrastructure; and partnering with developers to bridge funding gaps stalling projects.

John Lowry, former head of affordable housing developer Burbank Housing, said the city’s fee structure is particularly onerous on developers of affordable housing because the fees make up a much greater percentage of the total project cost compared to single-family housing.

He suggested the city switch to collecting fees on a square-foot basis instead of per unit, which he said could actually increase the total number of fees collected by the city on a per-acre basis.

“I think this could be seen as a compromise and something of a win-win for affordable housing and public infrastructure,” Lowry said.

Some council members expressed surprise that the city’s soaring rents weren’t high enough to induce more developments.

Councilwoman Erin Carlstrom said that when she saw that finding, “my eyebrows just about shot through my hairline.”

There were few hints about how the fees might change, except a vague suggestion that the city might want to review the fairness of the higher impact fees in the southwest and southeast areas.

“That doesn’t seem equitable to me on the face of it,” Councilman Gary Wysocky said.

The second council session is scheduled for Sept. 22, after which the city will hire a consultant to perform a detailed review of city fees and a study justifying any proposed changes.

You can reach Staff Writer Kevin McCallum at 521-5207 or kevin.mccallum@pressdemocrat.com. On Twitter @srcitybeat.