Agency Rush

James Wentling, principal of James Wentling/Architects, does a lot of work in the Northeast's land-constrained, often-wealthy markets where opposition to new residential projects is the norm, not the exception.

"People will come in with every little issue that bothers them," he says.

Yet even after 28 years in the business, Wentling says some individuals stand out. Take the zoning board member in a small New England town who belonged to an organization called the American Name Society. To get behind Wentling's project, he needed a simple answer. "He wanted to know what resources we used to name the streets in the community," Wentling recalls.

Even after satisfying the board member's request, the project never happened (for reasons outside of street names). It's a story familiar to developers, builders, and architects who have faced belligerent neighborhood groups or rigid local government officials and lost.

"Our land use system of approvals is broken," Wentling says. "There's way too much power with citizens groups. Anytime you want to do a project you need to get buy-in from the neighborhood group."

That buy-in is only the tip of the iceberg. Even if developers can come to an agreement with neighborhood groups, they're often forced to carry land longer they want or spend money lobbying the local electorate for approval.

If neighborhood opposition and time-consuming processes were the only problems, it would be one thing. But once projects do get approved, there's a whole litany of issues from local and national codes to impact fees that add tremendous cost to development. It's enough to make even the most passionate builders re-examine their career path.

While it's difficult to pinpoint the exact burden that high fees place on builders, the NAHB took a stab at it in 2011. The numbers were startling—the NAHB estimated that regulations imposed by government at all levels (federal, state, and local) accounted for 25% of the final price of a new single-family home.

Once you examine the carnage from fee fights, code battles, and community turf wars, there's one clear loser, and it's not always the developer and builder, who can just pass these excess costs on. It's the consumer.

"Those fees all add up to a higher cost of entry and that makes it hard to build the affordable, attainable home, which is really the part of the housing industry that's not firing," says Dave Bartlett, Brookfield Residential's vice president of land. "As an industry we need the first time home buyer in our mix. That creates move up opportunities."

A Bias Against Housing

If there's any place in the country that needs a boost of new, affordable housing, it might be California's Santa Clara County. Situated in Silicon Valley, the region is one of the most affluent counties in the country, where the average single-family home sells for more than $1 million. But, in many cases, local governments aren't cooperating.

In San Jose, for instance, the city proposed a general plan that Kevin Zwick, executive director of the Housing Trust of Santa Clara County, says was weighted strongly against new residential housing by banning developers from building housing in certain parts of the city until office space is completed. "There are definitely government-level constraints on new residential development that are frustrating market-rate developers," Zwick says.

Like Silicon Valley, the Washington, D.C., area is a high-cost, housing-constrained market with similar issues.

"There's a dramatic shortage of buildable lots in the metro D.C. area," says Steve Alloy, president of Reston, Va.–based Stanley Martin Homes. "That shortage of buildable lots is leading to significant price increases in new-home neighborhoods."

Alloy doesn't, however, believe there's a dearth of land to build on. He contends that if localities would open up land to other uses and allow more density, housing affordability wouldn't be such an acute issue.

"In D.C., the constraints of converting land to home lots causes the prices to be much higher than they would otherwise be," he says. "If those constraints are getting stricter, it should cause prices to go up even faster."

Why do these high-cost communities, as well as many others around the country, lag in housing production when the housing need is so obvious? There isn't just one reason, but money is a primary driver.

"They don't hit commercial development the way they hit residential because their fundamental worldview is ‘residential costs us money and commercial makes us money,'" says Charles McKeag, California land division president in California for Meritage Homes. "Houses are a drag on services and everything else."

That attitude can throttle housing production and lead to housing shortages. "Affordable housing is not a problem here because Google and LinkedIn have their campuses here," Zwick says. "It's that cities aren't doing their fair share of housing while they're all chasing non-residential development."

Rob Stalzer, deputy county executive for Virginia's Fairfax County, acknowledges that commercial development generates more revenue without the expenses demanded from residential, but there's still a balancing act.

"The expectations of our citizens to provide quality services is not declining," Stalzer says. "It's increasing. We have to have a tax base to support that. People are not interested in paying more taxes. So growing the tax base is really important. Having said that, attracting and retaining residents is really important."

But local governments chasing taxes is only part of the reason that housing is underrepresented in many general plans. Often, the pesky neighborhood groups are wielding power.

"There's a dynamic in many desirable places that existing homeowners would prefer less change," says Alloy, who lists parts of Florida, California, D.C., New York, and the Pacific Northwest as places where this occurs. "Politicians tend to follow that desire."

It's an issue that Wentling is constantly running into in the Northeast. "The more wealthy the area, the more difficult it is to build," he says. "The higher the property values, the far worse the locations are, whether it's the regulatory environment or the citizen approval board. It's terrible."

Again, the consumer is the one hit by these demands. When a local group pushes back against density, for instance, a builder is producing fewer homes on the same piece of dirt.

According to Scott Laurie, president and CEO, president and CEO of Seal Beach, Calif.–based Olson Homes, density and architecture are the two things local groups focus on. "How many you're going to be able to build and what they're going to look like," he notes. "Those are the same issues, but the neighborhoods are more organized. What you're allowed to build in these jurisdictions is no longer feasible. You just push out the affordability."

Government Shutdown

If local groups aren't delaying development, local governments are. And it often stems from rigidity or a lack of staff.

"Government staffs were gutted during the downturn," says Rick Palacios Jr., director of research at John Burns Real Estate Consulting, an independent research provider and consulting firm focused on the housing industry. "Many of them still haven't seen an uptick in hiring. I think it's a matter of them being slow in terms of getting these entitlements turned around for the builders."

That has been Fred Delibero's experience in the Kansas City area. "Short staffing has delayed both the permitting process and the inspections process as cities have been slow to add the staff needed to support permit growth," says Delibero, CEO of Summit Custom Homes. "As the market continues to grow, we're concerned the bureaucracy at the city government level will delay hiring and leave city staff overloaded, delaying permitting and inspections."

But that's not all that's stalling new developments. In Kansas City, Delibero says local building codes and local permitting processes (and inspections) have extended permitting times by three to four times in some cases.

"Before January 2014, we were able to pull permits in many municipalities in a week or less with ‘same-as' permitting processes," Delibero says. "Now, every plan has to be drawn to suit the particular lot and engineered before submittal, placing a greater burden on architectural and engineering resources and slowing the process. Newly instituted ‘plan review' processes at the cities can take one to three weeks, further delaying construction starts."

When delayed or opposed, a developer or builder has two choices—fight or retreat. If a builder decides to fight, the costs can get even higher. You don't need to be the Koch brothers to realize winning an election takes money. And there's no guarantee of winning.

Take the Palo Alto Housing Corp., an affordable developer. It proposed building senior apartments in the city. After battling the neighborhood for years, the developer put the project up for a vote and lost.

"Now nobody is clamoring to propose new affordable housing development in Palo Alto unless it's super low density, which no one can finance," says Zwick, who laments the lack of affordable housing in California.

If a developer loses, the costs could be severe. First, there's the money spent carrying the land. If a builder's internal cost of capital is 15% or 20%, then they have to add that on top on the land cost each year they hold the deal.

"Everybody is looking for return on capital that isn't sitting for four, five, or six years," Brookfield's Bartlett says. "It makes it very challenging for the larger developers and the small home builders in the niche markets."

There's also a trickle-down effect to other projects. The process has kept Summit Custom Homes mired in the dirt longer, which can cost millions in lost profit. "In the past, our company could reliably build and close on homes in under six months," Delibero says. "Now that process has extended to seven to eight months, ultimately effecting productivity and turn."

Expediency is so important that builders and developers in Fairfax agreed to pay 20% higher fees to speed up the process. That, in turn, gave the county certainty to hire more personnel to handle applications.

"If we can speed up the process by six months on a $100 million project, they're [builders] saving $3 million in carry costs," Stalzer says. "For them to spend another $20,000 on fees versus saving $3 million, it wasn't even something that was debatable."

Fee Madness

While the recession may have lengthened approval processes, it did produce one benefit for developers. "There were a lot of communities that decided to stimulate development by reducing or eliminating impact fees," says Clancy Mullen, vice president of Texas-based Duncan Associates, a consultancy on impact fees, which are fees to produce anything from water treatment plants to schools to streets.

But now, coming out the recession, many communities are trying to claw back what they lost.

"The fees are a challenge, and I don't think there's going to be any relief because what happened in the last six years or so has put a real stress on many cites' coffers and the infrastructure that they are required to maintain," says Mark Paris, CEO and president of LandWell, which is developing Cadence in Henderson, Nev. "It's definitely not going to get any better. Cities are still trying to recover and they're still trying to take care of the problems that have been untouched for the last several years."

As the pricey California markets that he builds in have recovered, Laurie thinks local governments are asking for even more. "Everyone sees that the market has gone up," Laurie says. "It's nothing egregious, but with infrastructure, certain cities are definitely asking for more. Most of the time they will ask you to do underground power lines, put a traffic signal in, and those types of things. Cities are smart and they realize what they don't have."

You can find examples of this phenomenon across the country. In North Carolina, Chris Cates, co-owner of Fayetteville-based Caviness & Cates Communities, says when he opens a community he has to provide curbs, gutters, sidewalks, retention ponds, and park space. "The days of developing a lot and selling it back to yourself for $25,000 are over," he says. "Now it's $50,000. You can't build a $175,000 home on a $50,000 lot. The numbers don't work."

In Colorado, Todd Anderson, Chief Operating Officer of Colorado Springs–based Challenger Homes, finds the math hard to crack, as well. If a lot is $50,000, additional fees—including schools, park, and bridge fees—can push total costs up to $90,000 before he even puts a shovel in the dirt. "It's kind of hard to get a house in the low $200s when your lot ends up being 40% to 45% of the total cost," he says.

Anderson works in markets like Fountain and Colorado Springs, which have laws limiting property taxes. Ultimately, it's the builder who covers for those shortfalls.

"If you have catastrophes there's not a lot of money in reserve, which is also limited in the tax code," Anderson says. "Money to repair streets and build schools are put on the back burner. So the small municipalities will drive up the things that pertain to those fees."

But while fees are universally applied, they ultimately hit people on the bottom the hardest. "Buyers at the upper end can economize and take a smaller home and less elaborate finishes," says Paul Emrath, vice president for survey and housing policy research for the NAHB. "If prices go up by 5% or 10%, there are ways they can absorb it. On the low end, they can't absorb it. They're being priced out of a new home entirely. It's the marginal first-time buyer who is just about always more seriously impacted by these things."

Walking Away

For Laurie, the opportunity for rezoning used to be less daunting with more available opportunities and less opposition, which made projects both financially feasible for the builder and affordable for the buyer. Now he pays a premium for a buy right development, which ultimately drives the price of the home up even higher.

"What you're allowed to build in these jurisdictions is no longer feasible," Laurie says. "They just push out the affordability too far. At the end of the day, we have to build a product that people can buy. That's where it becomes more difficult."

And that's when Laurie walks. "It's not worth the effort anymore," he says. "We already know what the outcome is. Why go in? It doesn't make sense."

There are not many places in the country where it's harder to build than in California. As such, Laurie's reluctance to tackle some of Southern California's stingiest markets makes sense. But it's not just a high barrier coastal market problem. Even builders in Middle America are taking a second look at the political situation before they buy dirt.

"We have decided to pass on projects in areas where the requirements are too restrictive," Delibero says. "For example, in one local city, residents and city planners joined forces to create an ‘overlay' district within the city zoning along a stretch of moderately trafficked highway several years ago."

One locality around Kansas City requires developers to meet a minimum point standard for each project developed, taking into account things such as charging stations for automobiles, walkability, rear entry garages, density, and more.

"While those things are good for a community, the number of points needed, along with the complexity of the rules, have been a deterrent to local developers," Delibero explains. "Since the inception of those regulations, only two projects have been approved by the planning commission, and both with exceptions because the developers were unable to meet the minimum point standards. If developers walk away from projects in areas such as this with high development thresholds, then the loss in economic terms to a city is immeasurable."

Some municipalities doggedly enforce standards, forcing developers to build two-car garages even in walkable, transit-oriented communities. "A lot of the zoning codes were written in the '40s and '50s and are based on a different approach to how people live today," says Matt Koenig, a principal at Philadelphia-based BartonPartners Architects Planners. "The biggest roadblock is the amount of parking that's expected. We spend a lot of time trying to enlighten the townships that they should rethink the number of cars necessary to support some of the mixed-use or multifamily work."

If a builder can get past these hurdles and produce housing in an area with little new supply, he's going to charge a premium.

"When you're opening a new community in a city and you don't have eight other builders' flags in the city and there hasn't been new housing in 25 years, that premium makes sense with all the time and extra fees," Laurie says. "There is a cost associated with all of that."

And that just makes housing less attainable to the group with the biggest appetite. "We have plenty of millennials who want to buy," Laurie says. "But it's the price and it's the lack of affordability. In a lot of these markets, we are opening where there is no new-home competition. There's just not enough out there for them."