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Unusual Suspects

An unusual coalition of the state’s largest developers’ association and affordable-housing and environmental groups have joined forces to beat back legislation sponsored by the California Association of Realtors.

“It’s the first time in my memory that we’ve been on opposite sides,” said Alex Creel with the Realtors group, normally staunch allies of the developers and builders.

“It’s even more odd that the builders and the environmentalists are on the same side,” Creel added.

The strange bedfellows fell in together after the Realtors sponsored a bill, SB 670 by Santa Ana Democrat Sen. Lou Correa, that would eliminate the use of an increasingly popular class of fees charged to homebuyers in order to fund environmental and affordable-housing projects.

Builders often face stiff opposition to new home subdivisions and demands that they set aside money to pay for low-income housing, or to pay for environmental restoration and open space. Over the last several years, developers have added these new fees to eliminate opposition from housing advocates and environmentalists. Those fees are passed on to homebuyers in new subdivisions.

The financing mechanism gives builders a way to spread the costs of affordable housing, environmental mitigation or the acquisition of open space out over several years–and several homebuyers–rather than having to pay it all up front, or shifting all of that cost to the first homebuyer.

Because the fees are based on a percentage of the overall value of a home, these increase dramatically as property values rise.

Fees typically range from .25 percent to 1 percent, but can be more, and are typically paid by homebuyers every time the house is sold. The fees then are deposited into a trust fund operated by a nonprofit organization that spends the money for the agreed-upon purpose.

“Development in California is an extremely difficult business,” said Kim Dellinger, legislative advocate with the California Building Industry Association. “In order to build, you need to pay for
environmental mitigation, affordable housing, roads, schools–all of these things that general society doesn’t pay for anymore.”

And the fees can help avoid legal fights with environmental and affordable-housing groups that often oppose new development projects unless the builders make concessions.

“It’s much cheaper than long, protracted litigation,” explained Sierra Club lobbyist Bill Allayaud. The Sierra Club joined the BIA, along with affordable-housing groups and Chambers of Commerce, to oppose SB 670.

But one of the main criticisms of the fees is that they can remain in place for years, even decades, and grow ever larger as the home appreciates in value.
For example, a 1 percent fee on a new $500,000 home would be $5,000. But many of these fees are in place in perpetuity. Meaning that when the next buyer purchases the home for $600,000, the fee raises in proportion. In many years, if the house reaches $1 million in value, the fee would be $10,000, and so on. “They can go on forever. Five-hundred years from now, that home would still be subject to that fee,” Creel explained.

Not all the fees are allowed to continue “in perpetuity,” but some are because they are intended to cover the ongoing costs of the projects they fund.

“We don’t think future homebuyers ought to be burdened with these things,” said Creel.

Dellinger said it was worth discussing whether there should be some time limits set on such fees. But she noted that Realtors’ fees are much higher than those connected with environmental or affordable-housing trust funds.

“I think they are concerned this is going to be negotiated against their 6 percent fee for selling a home,” Dellinger said.

Ouch. Is there anyone who can make peace between these once fast friends?
Enter Guy Houston, a Realtor, mortgage broker and Republican Assembly member whose sprawling district stretches from Livermore to Elk Grove. It pained him to see his colleagues butting heads
“I think there’s a solution, one that doesn’t give the builders carte blanche to do whatever they want, but that doesn’t just ban this practice outright,” said Houston.

His AB 1574, sponsored by the Building Industry Association, would require sellers to disclose the fees and include a description of what the fees are for. It also would require that such fees provide a “regional” public benefit or benefit the property directly. The Realtors have sponsored another disclosure bill, AB 980 by Charles Calderon, D-City of Industry, which also would strengthen disclosure rules on already existing projects. Houston said he expects the two bills will be married together in the coming weeks.

But simple disclosure rules won’t be enough to make the Realtors whole. “Disclosure is great, but all disclosure says is ‘I’m going to take your money,'” Creel complained. “Who makes sure that private individuals can’t use these things for their own vacation accounts?” he asked.

There are examples of companies out of state using (or abusing) transfer fees for private enrichment. One Florida company offers to help homeowners earn “passive income” by setting up fees to “earn 1/2 percent of the gross sales price, every time your property is re-sold, for the next 99 years.”

But defenders of the conveyance fees say that’s not happening in California, and that the funds are bound by contract to go only to benefit the original intended purpose. “I’d like to see them come up with a case where the developers are pocketing that money,” the Sierra Club’s Allayaud said in defense of his new builder friends.

Correa’s SB 670 was supposed to have been heard in the Senate Transportation and Housing Committee on April 17. Instead, Correa pulled it and it’s now rescheduled for Tuesday May 8. Creel conceded that is probably time to compromise. “If we can’t rid of these things, there should at least be some reasonable restrictions put on them.” When SB 670 re-emerges, it likely will be with the fee ban struck out. And that’s a victory for the odd alliance of builders and greens. “It’s an unusual and unusually powerful coalition,” said Creel.

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