Council Committee Approves Developer Tax, Amid Concern

Councilmembers José Huizar, Mike Bonin and Marqueece Harris-Dawson rallied supporters for the linkage fee at a press conference before the Aug. 22 City Council Planning and Land Use committee meeting. 

By all accounts, Los Angeles is mired in an affordable housing crisis. More than 57% of Angelenos are “cost-burdened” — defined as paying more than 30% of one’s income for housing — according to a 2017 study from Harvard University. Only Miami ranked higher in the nation.

Mayor Eric Garcetti last year last year proposed addressing this in part through a “linkage fee,” a new tax on developers that would generate funds for affordable housing preservation or creation. The most current proposal could generate $100 million in revenue annually, according to a city report. That would subsidize an additional 1,500 units being created each year, according to the study.

After hearing hours of testimony on Tuesday, Aug. 22, the City Council’s five-member Planning and Land Use Management Committee unanimously approved the linkage fee. It now moves to the full City Council, though no date for a vote has been scheduled.

“This policy is a critical piece of our comprehensive strategy to combat the housing crisis,” Garcetti said in a prepared statement after the vote.

Despite the political support, the linkage fee has divided the real estate community, where numerous individuals claim additional financial burdens on developers could slow down construction. The issue is particularly heated in Downtown Los Angeles, a hotbed of residential building.

Linkage fee supporters note that Los Angeles has long trailed cities such as Portland, San Francisco and Phoenix when it comes to levying development fees. Opponents, meanwhile, say the situation is different in Los Angeles, and that the new fee could hamper affordable housing creation long-term.

City Councilman José Huizar, whose 14th District includes Downtown, and who chairs the PLUM committee, stated at a rally before the council hearing that the linkage fee is needed to help stem homelessness in Los Angeles.

“We have an affordable housing trust fund in the city of Los Angeles. That’s good and dandy, but the funds in there are near zero. The money we expected from the state and our federal government has come to zero as well,” Huizar told the crowd at the Tuesday rally. “We have close to zero steady streams of revenue to build affordable housing in the city. That’s a shame. The linkage fee will change that.”

Under the proposal, developers of new buildings would pay $5 per square foot of commercial space created and  $12 per square foot of residential space. Projects in which a building is expanded or demolished to make way for a new structure would pay based on the increase in overall square footage. Smaller projects with five or fewer units would be charged $1 per square foot. A variety of other developments, including those that already include new subsidized units, would be exempt.

A recent study commissioned by Department of City Planning found that developers in Los Angeles currently pay about $14,700 in permits and fees for each residential unit. The linkage fee would significantly increase that total — for example, the developer of a 1,000-square-foot unit would be charged $12,000.

The city report suggests that, “the fee will not result in a significant increase in housing prices,” as the burden will be absorbed by the developer (in the form of lesser profits) or land prices.

Some real estate experts contend that the city study is flawed because it does not account for the lack of vacant land in L.A., and unfairly impacts those who buildhousing over those who, for instance, see rising property values from housing scarcity.

In a letter to the PLUM committee, urban planning professors Michael Manville and Paavo Monkkonen of UCLA’s Luskin School of Public Affairs claimed that the city’s study on the linkage fee seriously underestimates how it could discourage construction.

“Most landowners in L.A. are already earning income from their land, and if a developer offers them a lower price because of an impact fee, they might simply choose not to sell,” they wrote. “Were this to happen, the cost of the fee would be pushed back onto the developer, and housing development would slow, resulting in higher housing prices.”

Mott Smith, co-founder of development and planning firm Civic Enterprise, agreed with that assessment, and noted that linkage fees could incentivize developers to merely acquire and rehabilitate existing properties rather than build new housing, even in desirable areas like Downtown.

“We see developers mitigate risk by building to luxury demographics and higher rents. After that demand is filled, the appetite for other products could fall,” Smith said. “The linkage fee will encourage people to keep things as is, without changing the use of a property, which would trigger the fee. That’s a bad thing in a housing crisis.”

The PLUM Committee ultimately adopted a four-tier system of fees for the 35 Community Plan areas in the city. Rates would range from an $8 per-square-foot linkage fee in “low” areas to $15 per square foot in “high” areas such as the affluent communities of West L.A.

The community plans themselves are being updated by City Planning. The city report on the linkage fee recommended that the city update geographic boundaries regularly (such as every five years) to take real estate market shifts into account.

The four-tier approach goes against a recommendation from the separate City Planning Commission that Los Angeles stick with a single citywide fee to eliminate uncertainty for developers.

Still unknown is how much money would go toward new housing construction, the preservation of existing affordable housing, buying aging market-rate housing to turn into subsidized units, or to other types of rental or homeowner assistance.

Currently more than 11,770 units are “at risk” of losing rental subsidies or affordability restrictions in the next five years, according to the city Housing and Community Investment Department. In no case would linkage fee money be used to 100% finance a new project, according to the city.

The city plans to leverage the roughly $100 million a year to stimulate other funding sources and generate an estimated $276 million a year, according to the city report.