Executive Summary

California is grappling with a severe housing crisis, consistently falling short of housing production goals. The state’s population has surged, while housing development has lagged, leading to skyrocketing home prices and a surge in homelessness. The lack of housing supply disproportionately affects younger generations and perpetuates inequality. The state needs to build millions of new units to address this issue effectively.

Key Challenges

• Insufficient Housing Production: The state is building far fewer homes than needed to meet demand.
• Rising Inequality: The housing shortage limits opportunities for younger Californians and exacerbates existing inequalities.
• High Rent Burden: A majority of renters in California spend more than 30% of their income on rent.
• Declining Homeownership: Homeownership rates are at their lowest in decades.
• Homelessness: California has a disproportionately high number of homeless individuals.

Policy Areas and Considerations

• Policy Approaches: The state can use both “sticks” (penalties) and “carrots” (incentives) to encourage local governments to promote housing development. The State has primarily used the stick approach. It’s time to dangle the carrot.
• Land Use: The California Environmental Quality Act (CEQA), local general plans and zoning ordinances create barriers to housing development.
• Development Costs: A stringent regulatory environment is driving development costs to unsustainable levels. Proposition 13’s property tax limitations have led to increased reliance on impact fees, which can raise housing costs. While intended to create affordable housing, inclusionary zoning leads to reduced overall housing production and should be replaced by broad-based funding mechanisms such as local or regional housing bonds.
• Rent Control: Despite successfully balancing tenant and property rights, Costa Hawkins is under attack. Stricter rent control policies will further discourage new construction and exacerbate the housing shortage.
• Construction Defect Liability: The current legal framework discourages condominium development and generally adds to higher development costs, limiting homeownership opportunities.
• Financing: Innovative solutions can help spur development, lower impact fees, deliver much needed infrastructure and provide local jurisdictions with stable revenue streams.

California’s housing crisis has been made more complex by continued government interference and overregulation, special interest groups and a bias against market-based solutions. While some policies, like rent control and inclusionary zoning, may be well intended and offer short-term relief for some, they also have unintended consequences that worsen the housing shortage in the long run.

To make meaningful progress, policymakers need to prioritize policies that encourage the production of new housing, streamline the development process, and reduce costs. This will involve reforming CEQA and zoning regulations, liberalizing land use policies, lowering or eliminating impact fees and finding alternative ways to fund local infrastructure.

Conclusion

California’s housing affordability crisis requires urgent and comprehensive action. Implementing the recommendations outlined in this white paper can help increase the supply of affordable housing, promote economic opportunity, and create more equitable and inclusive communities.

California’s Housing Crisis

California faces a formidable housing crisis, continually failing to meet housing production mandates. Housing development has not kept up with population growth. In 2020, the state had 40 million residents, yet only 14.35 million housing units or 1 housing unit for every 2.8 residents. If housing production in California had kept pace with demand, current home prices would be approximately 20% percent lower according to some studies. The housing shortage and unaffordability have also exacerbated homelessness. Over 30 percent of the country’s homeless population now resides in California.

• Over 3.2 million Californians are currently rent-burdened, defined as spending at least 30 percent of their income on rent and utilities each month (McDonald 2023).
• Unaffordable housing increases inequality, particularly among younger generations: “Lack of supply and rising costs are compounding growing inequality and limiting advancement opportunities for younger Californians” according to the Department of Housing and Community Development in 2018.
• Housing production peaked in 1970 at 228,000 units per year but has plummeted since. In 2023, the State of California issued only 111,000 permits.
• By some estimates, the state must construct 3.5 million housing units to effectively resolve this issue.
• From 2014-2023, housing production averaged 108,000 building permits each year, and ongoing production continues to fall far below the projected need of 180,000 additional homes annually.
• Overall homeownership rates are at their lowest since the 1940s.

Promises, Promises

While there’s been a lot of well-intended legislation passed over the last several years in California, the legislation hasn’t moved the needle. Until we focus on market-based solutions like lower impact fees, more liberal zoning and land use policies and fewer regulations, California will be unable to increase supply.

In 2017, gubernatorial candidate Gavin Newsom made housing his major campaign priority, stating, “As governor, I will lead the effort to develop the 3.5 million new housing units we need by 2025, because our solutions must be as bold as the problem is big.” CalMatters reported in November 2022 as Newsom wrapped his first term, just 13% of the 3.5 million homes he campaigned on building have been permitted, let alone built, and housing in California is more expensive than ever.

With only 17 months left in his term, California averaged 113,400 building permits from 2019-2023 for a total of 567,000 permits or just 16% of his stated goal. Based on preliminary data through June 2024, California issued 50,000 permits. At this pace, Governor Newsom will end up with 700,000 permits or 20% of his goal.

To address the housing crisis in San Jose, Sam Liccardo proposed a 15-point plan to build 25,000 homes in the next five years – 10,000 of them “affordable.” Liccardo’s plan focused on building dense, transit-oriented development in the city’s downtown and urban villages and blamed the cost of construction for the lack of supply. Liccardo also fell short of his goal. In fact, the Mayor delivered 9,200 homes from 2018-2022 and only 16,400 during his terms in office.

Now, Vice President Harris has proposed a goal of building 3 million homes nationally. The Federal government has very little ability to influence the housing market. If the next POTUS and Congress could get government spending under control, inflation would abate, and interest rates would decline. This would have the largest impact on affordability for American families. While a tax incentive may help first time homebuyers, you can’t move the needle without land use and regulatory reforms at the state and local level.

Policy Solution

Policymakers often implement regulations and programs with the noble goal of improving housing affordability and quality of life. However, these well-intentioned policies can sometimes backfire and inadvertently contribute to a decrease in housing supply, exacerbating affordability issues. It’s crucial to carefully consider the potential trade-offs and unintended effects of any housing policy, and to prioritize policies that promote the development of a diverse range of housing options at different price points. Collaboration, innovation, and a focus on evidence-based solutions are key to overcoming the challenges and creating a more equitable and affordable housing market.

Policy Approaches-Sticks v Carrots

Sticks refer to laws that allow the state to impose penalties on municipalities for noncompliance with a regulation. For example, a stick may be imposed when a municipality fails to meet a legal requirement, misses a quota, or blocks development that is rightfully and legally allowed.

Carrots incentivize municipalities to promote state housing goals by offering rewards for past or future pro-housing actions. Carrots can also expand local authority over land use decisions or reward local municipalities who meet housing production goals.

Policy Solution

Let’s start dangling the carrot and put the stick away.

LAND USE

The California Environmental Quality Act (CEQA)

CEQA requires environmental review of all housing developments that require discretionary approval unless they qualify for an exemption. By-right or ministerial projects are not subject to CEQA. Traditionally, the Legislature has not engaged in large-scale CEQA reform, and this trend has continued even since 2017 as many housing bills have been passed.

In the years before 2017, the Legislature did add more exemptions from CEQA (for example, an exemption for infill development projects). In recent years, CEQA exemptions have also been narrowly passed for specific types of projects, such as permanent supportive housing and shelters for people experiencing homelessness. However, generally speaking, the bounds of CEQA have been determined far more by judicial review than by the state legislature according to the Terner Center for Housing Innovation at Berkeley.

The CEQA review process, with its potential for challenges and litigation, can lead to delays in housing projects. These delays can translate to increased costs for developers, which may ultimately discourage housing production or lead to higher housing prices.

Holland & Knight, a prominent law firm, has conducted extensive research and published multiple studies highlighting the issue of CEQA abuse in California, particularly as it relates to housing development. Their work has revealed key points:

CEQA Litigation Abuse: Holland & Knight’s studies have demonstrated that CEQA lawsuits are frequently misused to delay or obstruct housing projects, even when legitimate environmental concerns are minimal or non-existent.

Housing as a Primary Target: Their research indicates that housing projects are disproportionately targeted by CEQA lawsuits, hindering the development of much-needed housing in California.

Impact on Housing Crisis: Holland & Knight’s findings strongly suggest that CEQA abuse contributes to California’s housing crisis by limiting housing supply, driving up costs, and exacerbating affordability issues.

Non-Environmental Motivations: Their studies have shown that many CEQA lawsuits are filed by groups or individuals with primarily non-environmental motivations, such as NIMBYism (Not In My Backyard) or opposition to specific types of housing or development.

Call for Reform: Based on their research, Holland & Knight has advocated for reforms to CEQA to curb litigation abuse and ensure that the law serves its intended purpose of environmental protection without unduly hindering housing development.

Policy Solutions

• While the Legislature has made some targeted changes such as adding exemptions for certain types of projects, broadening exemptions for infill projects would streamline the development process.
• Stronger enforcement mechanisms could be implemented to deter frivolous lawsuits and ensure that CEQA is used for its intended purpose of environmental protection, rather than as a tool for obstruction.
• Encouraging the use of alternative dispute resolution mechanisms, such as mediation or arbitration, could help resolve CEQA-related disputes more quickly and efficiently, reducing the need for costly and time-consuming litigation.

San Jose’s General Plan

The San Jose General Plan serves as the city’s long-term blueprint for growth and development. It encompasses various aspects of urban planning, including land use, transportation, housing, environmental protection, and economic development. The Plan establishes goals, policies, and implementation strategies to guide decision-making and shape the city’s future.

The “Jobs First” bias within the General Plan implies a prioritization of economic development and job creation in San Jose. This approach places significant emphasis on attracting and retaining businesses, fostering innovation, and expanding the city’s employment base. The underlying rationale is that a thriving economy generates jobs, which in turn contribute to overall prosperity, improved quality of life, and a stronger tax base for funding essential public services.

San Jose’s General Plan specifically discusses and emphasizes a “No Net Loss” policy when it comes to employment land use. This means that the city actively discourages the conversion of land designated for employment purposes (such as industrial or commercial zones) into non-employment uses (like residential). The policy aims to preserve and even expand the city’s job base by safeguarding valuable land for businesses and industries.

Here’s how the “No Net Loss” policy is reflected in San Jose’s planning:

General Plan Policies: The Plan includes explicit policies discouraging the conversion of employment lands to non-employment uses.

Zoning Regulations: The city’s zoning ordinance aligns with the General Plan by making it difficult to rezone employment lands for other purposes.

Review Process: Any proposals that involve converting employment land typically face a rigorous review process, where the burden of proof lies on the applicant to demonstrate exceptional circumstances and significant public benefits to justify the change.

While the “Jobs First” bias in San Jose’s General Plan aims to stimulate economic growth and create jobs, it’s crucial to strike a balance between economic development and other essential community needs such as housing.

Policy Solutions

• Implement a General Plan that puts the basic needs of its residents on par with economic development.
• Work with the State of California and Santa Clara County to incentive the City to develop housing by keeping property taxes local and utilizing other financing mechanisms such as Community Service Districts rather than punishing them for non-compliance with their Housing Elements.
• Explore ways to make the “No Net Loss” policy more flexible, allowing for the conversion of some employment land to housing in appropriate circumstances, especially when it can be demonstrated that there is a surplus of employment land or that the land is underutilized and/or obsolete.
• Incentivize the development of housing – both market rate and affordable – by identifying opportunities to secure CEQA exemptions for priority development areas.

Zoning

Under the statewide zoning law, local governments must adopt zoning ordinances that specify what may be built on each parcel of land within its jurisdiction. The zoning ordinance must be consistent with the General Plan and its land use designations.

Zoning plays a significant role in determining the amount of housing allowed in each community. A zoning law typically has three components: 1. standards dictating the use of the parcel, 2. standards dictating the form of the structures on the property (for example, setbacks and height limits), and 3. standards addressing the impact of the property on the community (most significantly parking requirements).

In addition to zoning, several other laws associated with zoning affect the amount of housing allowed by local governments. These include the Subdivision Map, the Fair Housing Law, and the Mitigation Fee Act.

Zoning in California, as in much of the United States, began in the early 20th century. Los Angeles, in 1908, is credited with passing the first comprehensive zoning ordinance in the country. The primary motivations behind early zoning ordinances were:

Separating incompatible land uses: Industrial zones were separated from residential zones to protect public health and safety.

Preserving neighborhood character: Zoning was used to regulate building height, setbacks, and density, aiming to maintain the aesthetic and social fabric of neighborhoods.

Managing urban growth: As cities expanded, zoning was employed to guide development patterns and infrastructure investment.

While zoning was initially intended to bring order and predictability to urban development, it has also had several unintended and often negative consequences. Arguably the most pressing consequence of zoning in California has been the exacerbation of the housing affordability crisis. Tragically, zoning has also been used to exclude low-income and minority communities from desirable neighborhoods.

The unintended and intended consequences of zoning have sparked ongoing debates and calls for reform in California. Recent legislative efforts, such as SB 9 and SB 10, aim to address the housing crisis by easing restrictions on multi-family housing construction.

However, these reforms face strong opposition from some communities who fear changes to their neighborhoods’ character.

Zoning regulations often add significant costs and delays to the development process. Substantial zoning reforms could streamline approvals, reduce fees, and lower construction costs, potentially translating to more affordable housing options. A more free-market approach could lead to more innovative and efficient housing solutions, responding directly to market demands and potentially driving down prices through increased competition.

California has seen several recent zoning reforms that tie in prevailing or union wage requirements, often as part of a broader effort to streamline housing development and ensure worker protections. These reforms demonstrate a growing trend in California to link zoning changes with labor standards.

SB 35 (Weiner 2017): This law limits local governments’ ability to block certain housing projects that meet specific affordability and density requirements. To qualify for streamlined approval under SB 35, developers must agree to pay prevailing wages on the entire project.

AB 2011 and AB 2097 (Wicks 2022): These laws streamline the approval process for housing developments on commercially zoned land, under certain conditions. Both bills include prevailing wage requirements for construction workers on these projects.

Labor standards, particularly prevailing wage requirements, can significantly offset the positive impacts of AB 2011, potentially even to the point of negating them in some cases. Prevailing wage requirements can raise labor costs by 20-30%, or even higher in some areas. This substantial cost increase can make many projects financially unfeasible, especially in areas with high land costs or where developers are targeting lower-income renters.

Policy Solution

Labor standards aim to ensure fair wages and quality work. However, they also introduce cost and time pressures that can hinder the development of much-needed housing. Striking a balance between labor standards and the need to increase housing supply remains a complex challenge for policymakers in California. Fair and open competition is a core American value and should apply to all construction projects.

DEVELOPMENT COSTS

Overview

Developing new housing is a complicated process that requires years of planning and resources before the first shovel ever hits the ground. The complexities associated with homebuilding have become even greater in recent years. Research suggests that regulation typically adds 20% to 30% or more to the total cost of development. Some studies have even cited figures as high as 40%.

Most jurisdictions have been adopting, revising and enforcing building codes for decades, and an entire industry has emerged supporting and encouraging changes to existing building codes. While building codes play an important role in protecting resident safety and building integrity, they have evolved well beyond their original purpose and now are also used to promote public policies like energy efficiency and sustainability. Some regulations are essential for ensuring safety, environmental protection, and community well-being. However, excessive or inefficient regulations can stifle development and contribute to housing affordability issues.

California has some of the strictest building and environmental standards in the nation, leading to the highest design and construction costs in the United States. California consistently ranks among the most expensive states for construction costs in the United States. It often occupies the top two or three positions, alongside states like New York and Massachusetts.

Title 24, officially known as the California Building Standards Code, significantly impacts development costs in California due to its stringent energy efficiency requirements. While these standards aim to reduce energy consumption and greenhouse gas emissions, they also lead to increased expenses for developers and homeowners.

Compliance with Title 24 often necessitates more complex building designs, higher-quality materials, and specialized installation techniques, all of which can drive up construction costs. The cost impact of Title 24 varies depending on the project type, size, and specific requirements. However, estimates suggest that it can add anywhere from 2% to 10% or more to the total construction cost. This can be a significant burden for developers, especially in a state where construction costs are already high.

The ongoing construction labor shortage in California, exacerbated by an aging workforce and limited training opportunities, has also put upward pressure on wages and can lead to project delays. These shortages have further exacerbated the already high price of construction in California. California needs hundreds of thousands of additional construction workers to meet current and future demand. A study by the Associated General Contractors of California found that 80% of construction firms were struggling to fill hourly craft positions in 2022. This shortage translates to project delays, increased construction costs, and ultimately, higher housing prices.

Policy Solutions

• Streamline and standardize building codes and environmental regulations across jurisdictions.
• Implement a “one-stop shop” permitting process to reduce delays and complexity.
• Consider performance-based codes that focus on outcomes rather than prescriptive requirements.
• Invest in vocational training and apprenticeship programs to expand the skilled labor pool.
• Partner with industry and educational institutions to promote construction careers.
• Implement policies that facilitate the entry of skilled construction workers from other countries.

Impact Fees

California’s unique fiscal system contributes to its acute housing crisis. In 1978, the passage of Proposition 13 significantly reduced local property tax revenue. Local governments also lost control of property tax revenue. The state now collects and redistributes property taxes, sharing it among schools and special districts. Proposition 13’s property tax restrictions, as well as declines in other revenue sources, forced local governments to seek new funding sources.

First, local governments changed zoning and permitting processes to discourage perceived high-cost, low-revenue land uses and encourage low-cost, high-revenue uses. Residential land use is viewed as high-cost because residents consume public services, like schools.

Second, municipalities raised fees, including on new development. Municipalities charge developers numerous types of fees, such as processing fees for administrative services, specific fees negotiated in contracts, and charges for new development’s impacts on local public goods and services.

As long as current restrictions around tax revenue and other forms of local funding remain in place, California localities will rely more heavily on other sources of infrastructure funding, including impact fees, development agreements, Community Facilities Districts (CFDs), and other exactions on residential development.

We must revisit ways to better support local infrastructure and planning, including statewide tax reform.

Policy Solutions

• Replace impact fees with an excise tax on direct construction costs. The excise tax would transparent, easy to calculate and if set at the right level would lower the cost of development and increase housing supply.
• Build local capacity to use other forms of infrastructure funding. By assisting local governments to employ more politically feasible, but complex forms of financing, such as tax increment financing in the form of Enhanced Infrastructure Finance Districts (EIFDs), the state could reduce pressure on local budgets.
• The legislature could consider new programs to backfill infrastructure funding, such as providing additional funding to localities that meet their Regional Housing Need Allocation (RHNA).
• The legislature could also consider changes to the Proposition 13 framework to directly address the underlying problem and expand local access to property tax revenue and infrastructure funding.

Inclusionary Housing

Recent California reforms have increased pressure on cities to produce more below market-rate (BMR) homes, and inclusionary zoning (IZ) is viewed as one potential strategy to achieve this goal. IZ requires home builders to rent some units to lower income households at below-market prices within a typical range of 15-20% of the total number of units.

While IZ has been shown to produce limited amounts of BMR housing, it is also sometimes associated with reduced overall housing production and increased rents and/or house prices. As the IZ requirement rises, there are diminishing returns to BMR production and accelerating losses to overall housing production. Beyond a certain level, higher IZ requirements produce less BMR and less market-rate housing.

One of IZ’s fundamental shortcomings is that it does not address—and likely exacerbates—the housing scarcity that drives higher rents and home prices. It improves housing affordability for a few at the risk of worsening affordability for many, and it taxes precisely the activity needed to ameliorate the housing shortage and bring down rents – more housing development.

Policy Solutions

• Land use policy is the best suited to improving affordability in the wider housing market, while public subsidies are best for producing below-market homes. IZ seeks to produce affordable homes by substituting land use policy in place of broadly shared taxes and public subsidies. The public is paying either way, and that the costs associated with IZ are both higher and more regressive than the alternative.
• Repeal AND replace Inclusionary Zoning fees with a broad-based funding measure such as a regional bond or other financing mechanism.

OTHER POLICIES

Rent Control

The impact of rent control on housing production in California is a debated issue with studies and experts offering varying perspectives. However, economic consensus shows that stricter rent control measures discourage new housing production.

The adoption of Costa-Hawkins followed a time of radical rent control measures in several California cities, such as Santa Monica and Berkeley in the 1980s. These policies had led to a noticeable reduction in the availability and quality of rental housing and discouraged new housing investment. Costa-Hawkins, named after its authors, Jim Costa and Phil Hawkins, then members of the state Legislature, plays a crucial role in maintaining a balance in the housing market, preventing the stagnation and deterioration often seen in environments with extreme types of rent control.

Negative Impacts

Disincentivizes new construction:Rent control policies reduce the potential return on investment for developers and landlords. This makes new rental housing projects less financially attractive, leading to a decrease in construction.

Encourages conversion of rental units:Rent control incentivizes landlords to convert existing rental units into condominiums or other forms of ownership housing, which are often exempt from rent control regulations. This further reduces the rental housing stock.

Reduces the Quality of Existing Rental Stock: While rent control aims to protect tenants in existing housing, landlords have less incentive to invest in and maintain their property as they cannot recapture these costs. This results in the deterioration of existing housing stock and hurts renters longer-term.

Benefits the Few at the Expense of the Many:While policy makers believe that rent control appears to alleviate the situation of tenants living in the regulated dwellings, multiple other effects emerge. Tenants living in uncontrolled dwellings pay higher rents reducing the general welfare for a larger number of residents.

Policy Solutions

• Return to the spirit of Costa Hawkins Rental Housing Act to strike a balance between tenant rights and property rights.
• Soundly reject the upcoming “Justice for Renters Act” on the November 2024 ballot seeks to significantly expand rent control in California, potentially overriding key provisions of Costa-Hawkins and must be defeated.

Construction Defect Liability

Condominiums—homes for purchase in multifamily buildings—have long been one key entry point for homeownership. Yet despite their importance to the market as a source of entry-level homes for purchase, condominium development has significantly diminished across California in the past several decades, reducing the ability of middle-income households to achieve homeownership. The homeownership rate in California has declined from around 50 percent in 2000 to around 44 percent in 2021, with younger Californians aged 35 to 45 experiencing the steepest decrease.

Construction defect liability laws are intended to protect home buyers from bearing the cost of fixing defects in newly built homes. However, the scope of California’s construction defect liability laws poses a significant disincentive for developers and contractors to build new condominiums. They apply for ten years once construction is complete, versus only four years for rental housing.

They also cover non-structural problems such as bubbling paint, nail pops in drywall, and improper paint application. Homeowners Associations (HOAs) frequently initiate class-action lawsuits representing numerous plaintiffs for construction defects, which particularly affect townhomes and condominiums. The long-time frame and expansive coverage has led to a legal environment in which homeowners are encouraged to seek settlements rather than allowing the developer and/ or contractor to fix or “cure” the defect. Because all of this increases a developer’s risk, many choose to avoid building new multifamily homes for sale.

Policy Solutions

• Develop a right-to-repair framework that mandates mediation before litigation This would reduce legal costs and promote amicable resolution between homeowners and builders. The establishment of greater accountability in the mediation process would provide significant benefits in de-risking the cost of insurance for sale construction for GCs and subcontractors.
• Implement a graduated statute of limitations. This model allows shorter periods for resolving cosmetic defects and extends the timeframe for major structural issues, thus acknowledging the varying severity and detectability of construction defects.

Affordable Housing

Although California has more than doubled production of new affordable homes in the past five years, the state is only funding 12% of what is needed to meet its goals. Due to declining state and local funding, production of affordable homes has dropped by almost 9,000 units (38%) in the last year according to the California Housing Partnership.

Building affordable housing in California is notoriously expensive due to a complex interplay of factors. The typical cost of an affordable housing unit in the Bay Area can vary significantly depending on the location, size, and type of unit, as well as the specific funding sources and regulations involved. However, recent data suggests that the average cost per unit is exceeding $700,000, and in some cases even surpassing $1 million per unit.

High Land Costs:Land, particularly in desirable urban areas and near transit hubs, is extremely expensive in California. This significantly increases the upfront cost of any housing project, making it challenging to build units that are affordable to low- and moderate-income residents.

Labor Costs:California has some of the highest construction labor costs in the nation due to factors like prevailing wage laws, unionization, and a shortage of skilled workers. These higher labor costs directly translate to increased construction expenses.

Regulatory and Permitting Costs: The regulatory and permitting process in California can be lengthy, complex, and costly. Navigating these processes often involves extensive studies, fees, and potential delays, all of which add to the overall development cost.

Financing Challenges: Securing financing for affordable housing projects can be difficult, especially for smaller developers or projects in less affluent areas. The lack of readily available funding can further impede the development of affordable units.

Unfortunately, high land costs and a challenging regulatory environment are not unique to affordable housing. All housing in California is subject to the same burdens. In many cases affordable housing projects do not pay for land and are subsidized by market-rate developers. What explains the cost differential?

The complexity associated with affordable housing funding streams—as well as the associated programmatic rules—adds significantly to development costs. To make their projects stand out in the competitive LIHTC application process, developers are forced to incorporate higher-end design features and amenities, increasing construction costs. This can include using more expensive materials, incorporating green building technologies, or providing additional community spaces and services.

Competition also incentivizes developers to pursue more complex or challenging building typologies or to locate projects in more expensive areas to score higher on the LIHTC application scoring criteria. This can lead to increased costs due to factors like site acquisition, construction complexity, and land preparation.

Furthermore, navigating the complex LIHTC application process often requires specialized expertise, leading developers to hire consultants and lawyers to maximize their chances of securing funding. These additional professional fees add to the overall project costs.

Research also indicates that prevailing wage requirements and union labor can increase the construction costs of affordable housing projects by 20-30% compared to similar market-rate projects. Projects funded by the Low-Income Housing Tax Credit (LIHTC) program–the major source of funding for subsidized housing development–do not automatically trigger prevailing wage requirements. Prevailing wages apply only if the project also layers in other sources of funding that require either federal or state prevailing wages (which they typically do).

Prevailing wages can also be required as a condition of using state programs that override local zoning controls: for example, affordable housing projects that receive streamlined land use approvals under California Senate Bill (SB) 35 (extended and expanded with 2023’s SB 423) are required to pay prevailing wages. They can also be required by local governments, for example, when zoning approvals require local discretionary actions and result in the project being subject to a Project Labor or Community Benefits Agreement.

According to the Terner Center, approximately 60 percent of LIHTC projects awarded funds between 2008 and 2019 were subject to either prevailing wage or local project labor agreements, or both. The data from 2008-2019 also shows that only 11.5 percent of 9% LIHTC projects had fewer than 4 external sources of funding (including tax credit equity), with 80 percent of projects bringing together 4 to 8 sources of funding. Nearly 10 percent of projects relied on more than 8 funding sources. Each of these sources of funding, while necessary for the project to be built, adds to the costs of development.

Policy Solutions

• Develop on-going revenue sources to fund affordable housing production and/or the infrastructure required.
• Repeal inclusionary housing fees and replace funding with local or regional tax-exempt bonds.
• Expand the welfare property tax exemption to include moderate income levels up to 120% of AMI.
• Incentivize the private sector to building missing middle-housing from 80-120% of AMI. Provide grants, impact fee waivers, deferred loans, etc. to fill the financing gap for this target market.
• Expand the availability of funding sources that do not trigger prevailing wage.

FINANCING

A California Condominium Act

Florida has experienced greater success in building condominiums compared to California, due to a confluence of factors that contribute to a more favorable development environment. Florida generally has a less stringent regulatory environment than California, with streamlined permitting processes and less complex building codes. This translates to quicker project approvals and reduced development costs, making condominium construction more feasible.

Florida’s Condominium Act, with provisions like allowing the use of buyer deposits for construction financing, further incentivizes condominium development. This practice can provide developers with upfront capital, potentially reducing their reliance on traditional financing and lowering overall project costs.

The law allows the use of excess deposits for “actual costs” incurred in the construction and development of the condominium property. This includes expenditures for items like: Demolition, Site clearing, Permit fees, Impact fees, Utility reservation fees and Architectural, engineering, and surveying fees

The Act also carries risks for buyers as their deposits become less secure. Florida has built in safeguards to help minimize the associated risks. While the law allows using deposits for construction, it still mandates that developers maintain certain escrow accounts to protect buyers’ funds. The required disclosure statement helps ensure buyers are aware of the potential use of their deposit. The law was recently clarified to expand the definition of “actual costs” and provide more guidance on permissible uses of deposits.

Policy Solutions

Adopt a California Condominium Act modeled after Florida with additional safeguards for consumers. For example, include a financing contingency such that the entire development is funded prior to accessing deposits in escrow.

Community Service Districts

Community Service Districts (CSDs) in California can be strategically leveraged by local jurisdictions to alleviate impact fee burdens and service requirements on new development, potentially contributing to more affordable housing, stable revenue streams for local jurisdictions and economic growth.

When planning large-scale developments or priority development areas, local jurisdictions can establish or expand CSDs to offset the costs of impacts. The CSD can then issue bonds or levy special taxes within its boundaries to finance infrastructure or services needed to support the development. This approach spreads the cost burden across future residents and businesses benefiting from the new infrastructure, rather than solely relying on impact fees charged to the developer upfront.

Policy Solution

While Community Service Districts (CSDs) in California are primarily known for their role in providing infrastructure and utilities, they can also be utilized to deliver essential services like police and fire protection and should be explored further.

Enhanced Infrastructure Financing Districts

The elimination of redevelopment agencies in California in 2012 created a significant void in local governments’ ability to finance infrastructure and revitalization projects. Enhanced Infrastructure Financing Districts (EIFDs) have emerged as a crucial tool to fill this gap.

Enhanced Infrastructure Financing Districts (EIFDs), often referred to as Enhanced Tax Increment Financing, offer a potent tool for California jurisdictions to fund infrastructure and stimulate development, indirectly contributing to easing construction costs and promoting affordable housing.

A local government establishes a geographically defined EIFD within its jurisdiction, typically targeting an area in need of revitalization or infrastructure investment to support new development. The property tax revenue generated within the EIFD at its establishment is considered the “baseline.” As new development occurs within the EIFD, leading to increased property values and tax revenues, the increment above the baseline is captured and directed into a dedicated fund.

This captured tax increment can then be used to finance a range of infrastructure improvements within the EIFD, such as streets, roads, and bridges, public transit systems, water and sewer systems, parks and open space and affordable housing projects

EIFDs enable local governments to make upfront investments in infrastructure necessary to attract and support new development, which can lower overall project costs for developers and potentially lead to more affordable housing. EIFDs provide a sustainable funding mechanism for infrastructure improvements without relying solely on general fund revenues or imposing hefty impact fees on developers. EIFDs can alleviate pressure on impact fees, which are often passed on to developers and ultimately contribute to higher housing costs. Upfront infrastructure investment can attract developers and expedite project timelines, potentially reducing construction costs associated with delays and uncertainties.

Policy Solution

While EIFDs are not without challenges, their potential to address infrastructure needs, stimulate growth, and support affordable housing makes them an asset for local governments and should be explored further.

Affordable Housing Bonds

Affordable housing bonds are often considered one of the most equitable ways to finance the construction of affordable housing for several reasons:

Broad Public Support and Shared Responsibility: Bonds are typically backed by the full faith and credit of the issuing entity (e.g., a city, county, or state), meaning they are supported by the taxing power of that entity. This approach ensures that the cost of building affordable housing is shared by the entire community, rather than falling disproportionately on certain groups or individuals.

Stable and Predictable Funding Source: Bonds provide a stable and predictable source of funding for affordable housing development, allowing for long-term planning and project implementation. This is in contrast to other funding sources that may be more volatile or subject to annual budget fluctuations.

Lower Cost of Capital: Bonds generally offer a lower cost of capital compared to other financing options, such as private loans or equity investments. This translates to lower interest rates and reduced financing costs for affordable housing projects, making them more financially feasible.

Community Investment and Economic Benefits: Bond-funded affordable housing projects can generate significant economic benefits for communities, including job creation, increased property values, and improved neighborhood stability. These benefits are often distributed more equitably than those associated with market-rate development, which may primarily benefit higher-income residents.

Flexibility and Customization: Bonds can be structured in various ways to meet the specific needs of different communities and housing projects. This flexibility allows for greater customization and responsiveness to local priorities and challenges.

Transparency and Accountability: The issuance and management of bonds are subject to public scrutiny and oversight, ensuring greater transparency and accountability in the use of public funds for affordable housing development.

The $20 billion bond for Bay Area affordable housing, also known as Regional Measure 4, was a proposed general obligation bond aimed at addressing the severe housing affordability crisis in the region. The bond aimed to finance the construction and preservation of an estimated 72,000 affordable homes over the next 15 years, effectively doubling the current production and preservation rate. The bond would have been funded through a surcharge on property taxes in the nine-county Bay Area.

The bond was initially slated to appear on the November 2024 ballot, requiring approval from two-thirds of voters. In August 2024, the Bay Area Housing Finance Authority (BAHFA) decided to withdraw the bond measure from the November ballot. A lack of trust in the government’s ability to spend the bond proceeds efficiently and effectively almost certainly played a significant role in the decision to withdraw the $20 billion affordable housing bond from the November 2024 ballot.

Policy Solution

While the bond measure is on hold, the need for affordable housing in the Bay Area remains urgent. Local governments, nonprofits, and developers continue to explore other strategies and funding sources to address this critical issue. Restoring public trust in government will be critical to any bond’s future success.

Sources

1. https://ternercenter.berkeley.edu/wp-content/uploads/2023/02/State-Land-Use-Report-Final-1.pdf

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3. https://ternercenter.berkeley.edu/wp-content/uploads/2023/12/Development-Math-2023.pdf

4. https://ternercenter.berkeley.edu/wp-content/uploads/2024/07/Construction-Defect-Liability-July-2024-Final.pdf

5. https://cayimby.org/wp-content/uploads/2024/06/Impact_Fees-Report-06112024-v3.pdf

6. https://cayimby.org/blog/a-comprehensive-study-of-rent-control/#:~:text=Rent%20control%20negatively%20affects%20housing,conflicting%20results%20from%20different%20studies.

7. https://ternercenter.berkeley.edu/wp-content/uploads/2024/04/Inclusionary-Zoning-Paper-April-2024-Final.pdf

8. https://cayimby.org/wp-content/uploads/2024/06/Impact_Fees-Report-06112024-v3.pdf

9. https://www.hcd.ca.gov/policy-research/plans-reports/docs/impact-fee-study.pdf

10. https://ternercenter.berkeley.edu/wp-content/uploads/2023/04/New-Pathways-to-Encourage-Housing-Production-Evaluating-Californias-Recent-Housing-Legislation-April-2023-Final-1.pdf

11. https://ternercenter.berkeley.edu/wp-content/uploads/2023/02/State-Land-Use-Report-Final-1.pdf

12. https://www.hcd.ca.gov/policy-and-research/addressing-variety-housing-challenges

13. https://caanet.org/justice-for-renters-act-threatens-to-upend-californias-rental-housing-market/#:~:text=Maintaining%20the%20Costa%2DHawkins%20Rental,ensuring%20a%20balanced%2C%20functional%2C%20and

14. https://chpc.net/wp-content/uploads/2024/03/California-Affordable-Housing-Needs-Report-2024-1.pdf

15. https://ternercenter.berkeley.edu/wp-content/uploads/pdfs/LIHTC_Construction_Costs_March_2020.pdf

16. https://ternercenter.berkeley.edu/wp-content/uploads/2024/08/Low-Income-Housing-Tax-Credit-Construction-Costs-An-Analysis-of-Prevailing-Wages-August-2024.pdf