Fees May Lead Developers to Seek Greener Pastures

The daily refrain in the United States is that we are facing a housing crisis, and the most frequently offered solution is access to more affordable housing. However, all too often, conversations surrounding affordable housing devolve into folks simply pushing for rent control or affordable housing mandates. There is a long list of reasons why these options do not work and an even longer list of better solutions. For now, let’s focus on just one such solution – increasing supply by decreasing the regulations-related expenses shouldered by developers. 

In July, National Multifamily Housing Council and National Association of Home Builders released a new study that found regulations-related expenses account for an average of 40.6% of development costs nationally. Now, the phrase “regulations related expenses” may seem a little ambiguous, so let’s unpack it a bit. There are a number of ways that regulations impact the cost to develop new properties and not all of them are completely obvious. Regulations related expenses include, among others, development fees, costs related to establishing water infrastructure and supply, and the fees resulting from increasingly popular affordable/ inclusionary housing mandates. 

Development fees encompass a rather wide range of fees. Some may be quite obvious, while others may leave you scratching your head. Frankly, the class of development fees is a bit of a catchall in which municipalities tend to group whatever miscellaneous fees that they can get away with. For example, municipalities often include in the development fee category items such as planning review fees, rezoning fees, tap fees and permit fees. They may also include things like school fees, park fees and land dedication fees along with the “forestry fee” in Denver or the “development enterprise fee” in Colorado Springs. 

These miscellaneous fees can easily add $6 million in costs to a 300-unit multifamily development prior to accounting for the costs associated with establishing water infrastructure and complying with the burdensome financial requirements of affordable/ inclusionary housing mandates. 

Water has become an increasingly prevalent issue throughout Colorado, and it may not seem, at first, like water really belongs in this conversation. However, it absolutely does. It is no secret among developers that a number of municipalities utterly failed to properly plan and address their water infrastructure, and the resulting lack of appropriate water systems is creating repercussions today. Consider this: If there is adequate water availability through a city, then a developer can anticipate water-related fees around $1.5 million for 300 units. Alternatively, if a city has not established adequate water infrastructure, then a developer can expect to pay upward of $7.5 million to $10.5 million in water-related fees for the same 300 units. 

Affordable/inclusionary housing mandates are also becoming more common and significantly more costly, so it is worth looking at a few examples in the Denver metro area to frame our discussion. Broomfield recently enacted a staged increase schedule for its inclusionary housing cash-in-lieu rates that nearly doubled the fee from 2022. In 2023, the CIL fees for inclusionary housing on a 300-unit development will cost nearly $3.32 million. By Jan. 1, 2025, the CIL fees for the same 300-unit development will increase to $6.4 million. Meanwhile, if you manage to get the approval to build the same 300 units in Boulder, you will be rewarded with CIL fees of $15.1 million for inclusionary housing. 

We saw firsthand last year the effect that overreaching regulations, and their associated costs, can have on developer sentiment after Denver approved its “Expanding Housing Affordability” policy in June 6. The policy imposes new CIL requirements on apartment developers. Following passage of the new policy, CIL for a one- to seven-story, 300-unit apartment development is $6 million in a “typical” area and $9.33 million in a “high-cost” area. The new policy went into effect July 1 and is applicable to any new development that submits an initial concept plan after that date. The policy resulted in a 395% increase year over year in initial concept plans submitted in the month of June as groups rushed to get their projects submitted ahead of the July 1 deadline. 

 Basic fundamentals of economics tell us increased production costs lead to increased consumer pricing. New housing developments are not an exception to this rule. There are a number of increasing costs related to building new housing units that we cannot control, but regulations related expenses do not fall into this category of uncontrollable costs. Just in the examples we have discussed, developers incur an additional, but largely avoidable, $20 million to $30 million in regulations-related expenses on top of the standard costs of building a 300-unit apartment complex. These expenses cannot simply be absorbed, so developers are really left with two options: They can increase their originally projected rents by 30%-45% in an effort to recoup these costs, or they can simply elect to exit the area and instead build projects where they are not burdened with exorbitant regulations-related expenses. 

Developers building new units is the best path we have to increasing our housing supply and balancing the mismatched scale between supply and demand. That said, we should be removing the barriers to build rather than creating new financial barriers by increasing already bloated regulations related expenses. To reduce the costs associated with regulatory compliance for developers, we should be standardizing the planning process to increase efficiency and predictability and removing the subjectivity and uncertainty these groups face when looking to develop in Colorado, cutting down approval times to a fraction of their current level, and strategizing to get ahead of the future needs of our infrastructure. We should be working with these groups rather than against them.