Rethink Social-Impact Fees
I didn't get into this business to be a social worker," a developer complained to me recently. After 30 years of helping builders bring projects to completion, I'm hearing more and more of them complain that public officials aren't satisfied anymore when private developers bring projects in on time and budget. Increasingly, the public sector expects private developments to include recreation facilities, affordable housing and such.
Real estate developers have always had their share of problems. I've helped many of them solve the challenges of unseasonable weather, unscheduled union demands, fluctuating financing, last-minute client revisions, uncertain entitlements, inexplicable zoning, conflicting neighborhood issues, unreasonable deadlines and off-the-wall environmental restrictions. In Los Angeles County, as a former city manager of Bell Gardens and a community planning director for Burbank, and for the last 16 years as CEO of Kosmont Cos., I've helped more than 500 agencies and developers cope with such problems. Lately, I've seen an increasingly difficult, even unfriendly political climate and ever-more demanding community expectations, particularly in California but also nationwide.
DISCONTENTS. That's not how it used to be. When I started out it was generally accepted that expansion and development inevitably would lead to the Good Life—new jobs, more housing and recreation facilities, better schools and medical care. I have a client now–and he's just one of many with similar tales—who says that society isn't content any more with step-by-step progress to these good things. Today, the developer is expected to deliver all these benefits and more as part of the development package.
What could I tell my client who doesn't think that his willingness to put capital at risk should throw him into the world of social work? What do I tell my clients who ask for my advice on how to comply with a seemingly never-ending flow of restrictive legislation that greatly complicates projects and piles cost upon new cost?
I tell them the truth. Times have changed. When I started as a city manager 25 years ago, approvals were almost an over-the-counter event. But in the last five years, I've had to negotiate park space as part of small apartment projects, art contributions as part of industrial parks, a museum as part of a shopping center, and a fully appointed scouting wilderness camp as part of a raw-land sale. With California struggling with a $24-billion budget deficit and local governments unable to afford essential capital projects, developers and investors can count on demands for more of these social contributions. After all, a growing population needs new housing, schools, roads, water supplies and so on.
You'd think that higher taxes could pay for these social necessities. But taxes seem especially anathema in California, where exasperation with ever-increasing taxes led to the 1978 passage of infamous Proposition 13. It prevents communities from raising property taxes without voter consent. Two later bills—Prop. 62 in 1986 and Prop. 218 in 1996—further tightened those restrictions. Consequently, voters unwittingly put their city halls in the development business.
Now, cities are competing to attract new tax-generating businesses. The most popular source of new revenue has been the giant retail or "Big Box" store. I call this phenomenon "cash-box zoning." It's a temporary expedient to solve an immediate problem by irrational means. To attract a Big Box, many communities have been handing out zoning concessions, tax rebates and tax postponements, even free land—just about anything to attract a new Costco or Wal-Mart. More often than not, such a community finds itself with excess retail capacity, while a community next door ends up underserved. And when projects are heavily subsidized, the drain on the public treasury is considerable. Last year in Los Angeles, one large mixed-use project received $44 million in such subsidies.
As politicians hand out subsidies to some, they are surcharging others in response to community activists who see developers as deep pockets. A project may be forced in one way or another to 'buy' its approval. So my plaintive client had a point: Developers are being called upon to deliver not just buildings but also higher wages, health benefits, affordable housing, parks and playgrounds, new roads and adequate water for the foreseeable future. Politicians sense a popular cause, thinking they can play the role of "neighborhood protector" while substituting developer dollars for public dollars.
POWER PLAY. How's this for an example of planning by politicians? In Sacramento, there's a bill pending to force regional sharing of local sales-tax receipts. Supporters say it would foster regional cooperation, but critics call it a power play by a core city to share in the prosperity of satellite communities. I see it as another legislative attempt to mend a ruptured artery with a single Band-Aid. Politically motivated sales-tax sharing isn't the remedy for the damage caused by incongruous tax structures, land-use legislation and voter initiatives.
Instead, every state should have an economic development program based on sound land-use and quality-of-life policy choices. Furthermore, each state should rationalize its tax structure to properly fund the construction of infrastructure, while neither rewarding some municipalities nor penalizing others unfairly. As we can see in Los Angeles and elsewhere, shortsighted, expedient tax and planning decisions can't contain the tensions in our increasingly populous, fractured, underserved communities any longer.