Greater Greater Washington

Local regulations make new housing more costly

This is the third in a 5-part series about how the Washington metropolitan area can provide housing options for its growing workforce. Read part 1 and part 2.

Obtaining local government approval of a development plan is often a complex, costly, and time consuming process. It is no wonder that new housing units in the Washington area are increasingly unaffordable for households below the Area Median Income (AMI).


Photo by Keith Williamson on Flickr.

The full approvals process can easily add $30,000-$50,000 to the cost of a new single-family unit, and $10,000-$20,000 to a multi-family unit. In certain locations and under certain circumstances, the cost can be considerably higher than that.

Almost all new housing development approvals come after a lengthy review process culminating in a public hearing. This initial process starts with the property owner paying application fees. Governments and/or residents then ask for formal proffers, negotiated contributions, and special conditions, each of which have their own cost, before giving final approval.

The land development approvals process that then unfolds adds more application, review, and inspection fees, as well as fees that are highly particular to individual jurisdictions. Applying for building construction permits also involves additional application and review fees and costs. Taken together, the layers of development review add tens of thousands of dollars to the cost of a finished housing unit.

The table below identifies commonly-used categories of fees and costs encountered during stages of development approvals. They are based on a survey of 15 Washington-area jurisdictions, and in depth case studies in Montgomery County, MD and Fairfax County, VA.

Fees and Costs commonly applied during housing development application and approval
Washington area jurisdictions, and case studies in Montgomery and Fairfax Counties
Fee or cost itemWhat it isCost per market-rate unit
Development review application feesFees for staff review of applications such as Preliminary Plan, Project Plan, Site Plan, Subdivision, Map Amend­ment, Special Exception, Development Special Use Permit, RezoningSingle-family or townhouse: $1,000-10,000; multifamily: $500-$1,000
Impact tax (Maryland)School and Transportation fees applied per unit regardless of impact$10,325 to $25,800 for a townhouse
Proffers (Virginia)Fees calculated to assess against the project its share of the cost of needed public facilities such as roads, schools, police and fire services. Must be voluntarily proffered in Virginia.$11,500 (MF) to $59,500 (SF)
Impact tax (Montgomery County Growth Policy)Payments directly related to marginal cost of school and transportation capacitySingle-family: $0 to $1,500; Multi-family: $0 to $2,900. Note: figures could be considerably higher if roads or schools are at or near capacity.
Moderately-priced dwelling units/affordable and workforce housingUnits provided at reduced sales prices or rental rates for households in defined income ranges. In Montgomery Co. 12.5% of each new residential project must be MPDUsForegone income from providing "affordable" new housing units in Maryland ranges from $20,900 to $37,300 per market rate unit in a project
Professional feesThere is an expected base of legal, archi­tec­tural and engineering services. In many cases this base is exceeded with special studies and community meetings that take the time of these professionals$250 to $17,500 per market rate unit
Special conditionsCost of meeting streetscape standards, tree cover, noise restrictions, recreation, bicycle paths and bike racks, etc.$700 to $3,000
Land development applicationsFees to apply for site plan and related permits post public hearings$400-$6,200
Building permit applicationsApplication, mechanical, electrical, and plumbing feesSingle-family or townhouse: $400-$2,350; multifamily: $1,600
Review and inspectionFees to cover inspections during land development and building constructionVaries
Water and sewerAvailability and connection chargesAvailability: $2,000 to $5,100; Connection: up to $18,000
Figures in the right-hand column are based on a July 1, 2011 baseline for fees and proffers, and specific case studies of projects in the development review pipeline.

Maryland and Virginia approach land use regulation quite differently, and each jurisdiction's charter gives it different authorities. Individual cities and counties set their own fee schedules, create their own methodologies to evaluate the adequacy of public facilities, determine their public priorities, calculate the specific impacts of proposed development projects on their budgets, and make requests for developer contributions.

Thus, the fees developers pay in the course of obtaining development approvals vary considerably, both in the types of fees and contributions, and in the amounts requested. Some jurisdictions, particularly those that continue to have large undeveloped areas or are relatively un-urbanized, use a formal proffer or impact fee system to provide basic infrastructure and core services.

In recent years, several jurisdictions have moved to a system of negotiated conditions. The development project offers to provide or pay for a large number of items not tied to specific impacts, but rather defined as "community benefits." This system has the unfortunate effect of being unquantifiable up-front, as the specific items negotiated evolve in the course of the review of the project concept, application details, and citizen reaction to the proposal.

Residents even sometimes make requests at the final moments of the approval process, during the public hearing before the jurisdiction's governing body. Developers working under this system often plead for an alternative that gives them more certainty and predictability. Some even prefer the large proffer numbers in rural or exurban counties over the ad hoc layers of requests unrelated to the project they encounter in the more urban jurisdictions.

Sample negotiated conditions with a cost impact
Dedication of right of way
Road frontage improvements
Access restrictions
Maximum number of units
Maximum square footage
Streetscape improvements
Utility undergrounding
Transportation management plan
Bicycle racks
Bus shelters
Traffic lights
Traffic calming measures
Pedestrian crossings
Stormwater management
Landscaping
Noise attenuation
On-site recreational facilities
Design specifications (materials, elevation details)
Energy efficiency
LEED or Earthcraft certification
Specialized lighting fixture designs
Restrictions on type of signage
Data wiring in each unit
Green roof/green building standards
Public art
Universal design for handicapped accessibility

Complexity adds to the cost of obtaining approvals

In addition to the direct expenses associated with the various permitting processes, obtaining development approvals is complex and risky. Completing the process often involves multiple overlapping and sequential approval steps, several community meetings to obtain public input, dealing with multiple agencies at different levels of government, and rounds of refinement or revision.

Approvals are generally very specific, and frequently rely on a proffered development plan that spells out the minute details of the project, including specific elevations and building materials. A minor change can trigger a need to go back through the process to amend previous approvals.

Timeframes for approval may be as long as 3-4 years

The layered and complex public development process means it often takes a very long time to gain full approval and start construction on a residential project. It is not unusual for a proposed development project to take 3 to 4 years to go from concept, through rezoning and associated approvals, to land development review, and finally to building permit review and approval.

This extended timeframe has its own costs. The attorneys, architects, and engineers must work with local staffs, prepare countless revisions, and explain the project in the course of community meetings (which can be large meetings covering an entire neighborhood, or be highly focused meetings involving as few as one or two particularly interested citizens). All charge their time to the project, burdening it with unpredictable extra costs.

An additional consequence is that if the timeframe is extended too far, the project risks missing its window of opportunity for market demand. For example, the last condominium building approved just before a downturn in demand for a condo product is likely to never get off the ground.

Housing costs more than it should, and we are having trouble producing units of the right type at the right locations

Costs are highest, complexity is at its peak, and timeframes are the longest in exactly the areas where many argue we need new housing units the mostin activity centers near transit. Land use plans and zoning have not evolved, but instead are frequently still redolent of greenfield development.

As a result, developers of urban mixed use projects or multi-family buildings of more than a few stories have to seek a rezoning (and in some jurisdictions, a master plan or comprehensive plan amendment). The rezoning then triggers a cascade of fees, proffers, public input cycles, and time delays. Housing affordable to people below the median income then becomes a casualty of the process.

Our earlier articles discussed how much housing, and the types of housing, the region needs. It will become increasingly difficult to produce the necessary numbers of multi-family units, rentals, less expensive units, and smaller units at activity center locations. The local government regulatory process is one factor that contributes to the mismatch between what the region needs and what can actually be built.

The detailed studies of Montgomery County, MD and Fairfax County, VA are available on the Center for Regional Analysis website.

Next in this series: What stands in the way of meeting the region's housing needs?

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Lisa Sturtevant is Deputy Director of the Center for Regional Analysis at George Mason University. Dr. Sturtevant's primary areas of research include housing, demographics, and economic development. Prior to working at the GMU Center for Regional Analysis, she spent four years as County Demographer in the Arlington County Department of Community Planning, Housing and Development. 
Agnès Artemel became interested in revitalizing cities after growing up in France and Germany, where livable and walkable have always been the norm. She is a founder of the Northern Virginia Streetcar Coalition and Alexandrians Delivering smart growth Around Metro (ADAM). Her professional focus is on market and feasibility studies, real estate development approvals, and economic development partnerships. Agnès has a Masters in urban and regional planning. 

Comments

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Ah, you forgot to add the magic word "height limit." clearly, these other regulations aren't doing anything and the magic height limit is what makes housing expensive!

by charlie on Nov 28, 2012 3:30 pm • linkreport

This article does a great job of outlining the costs of regulations but what about the benefits? For example, one of the biggest costs cited in the article is a fee to compensate for the added burden of housing on roads/schools. The obvious benefit of these fees is that we get more roads/schools to help meet the added demand. If the developers don't pay for the extra roads/schools, won't taxpayers just have to foot the bill? And, that doesn't seem to be fair when the need for the extra roads/schools is the extra development.

At least some of these fees are simply designed to make sure that developers don't get a free ride and pay for the extra services their developments will use.

by Falls Church on Nov 28, 2012 5:11 pm • linkreport

Complexity also discriminates in favor of large projects and developers, who have the experience of negotiating these rules, and can often find a way to get a waiver for certain requirements, and for whom regulations may be a smaller share of the total cost. Complexity also comes into the financing side.

All in all in the last 50 years there has been a shift away from smaller, local development, and towards bigger and bigger development.

by SJE on Nov 28, 2012 6:19 pm • linkreport

Falls Church: if we want to pay for those things, which are good, there are cleaner and simpler way than the myriad of small rules. In parts of Australia for example, new housing developers must pay a very large (many tens of thousands) to reflect the cost of infrastructure to service the new house. However, this can be levied as a single fee, rather than a dozen different fees with different rules.

by SJE on Nov 28, 2012 6:23 pm • linkreport

This is a nice little piece of analysis. A few quibbles:

It is no wonder that new housing units in the Washington area are increasingly unaffordable for households below the Area Median Income (AMI).

This glib assertion needs some support. Buyers are willing to pay what they are willing to pay--they don't bid up the price just because of the developer's administrative burden. But declines in profitability should be reflected in lower land prices (except where land sells for its value for agriculture).

Land is not cheap and in many places it is still pretty expensive. In much of PG Co, where land is somewhat cheaper, housing prices are still downn 35% so "increasinhly unaffordable" mostly results from higher unemployment rates.

In recent years, several jurisdictions have moved to a system of negotiated conditions. The development project offers to provide or pay for a large number of items not tied to specific impacts, but rather defined as "community benefits."

Exactions that neither serve the needs nor mitigate the effect of a development are generally unconstitutional under Dollan v City of Tigard, so maybe the authors have an idea about how to challenge an egregious case when it occurs.

by JimT on Nov 28, 2012 9:19 pm • linkreport

@JimT--buyers are willing to pay what they're willing to pay...at a given level of housing supply. If you make it difficult and expensive to build housing, less will be built, and what does get built will end up costing more.

by Dan Miller on Nov 29, 2012 8:26 am • linkreport

@Dan Miller: Why wouldn't those extra costs just be reflected in lower land prices?

by JimT on Nov 29, 2012 8:46 am • linkreport

I'm still confused why we bother with affordable housing at all. The more we intervene with the housing market through stabilisation, quotas, targets et al, all we do is actually limit the supply of housing further to the point that prices go up for everyone else. The best we can do to buffer further price increases is to loosen up zoning restrictions so we can build more, even with the height act in place (which isn't the issue). No more six-story units where there should be nine, you get the idea.

by Phil on Nov 29, 2012 9:33 am • linkreport

@SJE

Great point. The problem is much more the complexity of the rules rather than the actual fees required to pay for the services rendered.

@Jim T

Good point re: land prices. The reason land prices don't decline is because even at today's prices for land and regulations, its profitable to build. The question then is why isn't more supply coming on line?

In the long run, if buyers are bidding up prices beyond the bare minimum required to make a reasonable profit, more supply supply should come on line, driving prices down to a more reasonable level. The biggest likely impact of these regulations is creating a lag between supply and demand since it takes longer to navigate the regulations to meet demand. That lag can be devastating because it creates a boom-bust cycle as supply over or undershoots changes in demand due to the lag.

by Falls Church on Nov 29, 2012 10:03 am • linkreport

"@Dan Miller: Why wouldn't those extra costs just be reflected in lower land prices? "

probably both lowers land prices AND raises rents. It depends on the demand elasticity if I remember my Econ 101 correctly. showing, graphically, how different demand curve shapes will cause the incidence (who gets hurt) of the loss of utility between consumers and land owners, is I think, one of the classic intermediate micro problems.

by AWalkerInTheCity on Nov 29, 2012 10:12 am • linkreport

Falls Church: exactly! Having myriad complex rules only leads to more employment for bureaucrats and lawyers, and less money for services and development.

by SJE on Nov 29, 2012 10:57 am • linkreport

@Falls Church

Your idea of lags increasing the boom-bust cycles makes sense to me. And while that might mean that prices are sometimes artificially low (maybe now?) it would also increase the total costs over time.

@Awalkerinthecity: I am faking microeconomics so apologies to real economists, but I think it depends on both demand elasticity and supply elacticity. In places where you can not create land, the supply of land is completely inelastic. So "rent" to the land owner might reflect changes in demand and construction costs.

But I guess there are other places where land can be "created" and in those places I agree that in that case increased costs should be partly and maybe totally reflected in higher prices. By "land created" I mainly mean existing neighborhoods being converted to higher density or different uses.

How that compares to all the other uncertainties, is not clear. The inability of TOD to get going in PG Co seems to largely reflect skepticism about the demand in those locations now--though in the past maybe it was an extreme and distasteful version of what this post explores.

by JimT on Nov 29, 2012 1:12 pm • linkreport

I think I see the problem - the supply of LAND is inelastic - but the supply of land to development (and a fortiori, the supply of units) is not. In classic urban economics there is a reserve use - as agricultural land. If the land rent is lower than the ag value, it will remain agricultural. So even if the 'development obstacles" are simply between generic development and non development, the supply of land to development is not inelastic. IF the development costs are not fixed for developing an acre of land regardless of whats on it, but add cost to say converting a parking lot to a multistory building, or make it costlier to build a town house development than a farmette on a 10 acre lot, the elasticity of supply to the particular market will only become more dramatic.

Note a Henry George type tax is supposed to be on the value of land regardless of whether or not that land is actually developed, which is why its claimed to fall only on the landowner. An approach that appears to be vaguely inspired by this would be DCs policy of having a punitive property tax rate for vacant properties (I am not familiar with the details). Admin costs to developing "vacant" land would work in reverse.

by AWalkerInTheCity on Nov 29, 2012 1:39 pm • linkreport

@charlie

What makes you think that height limit reformers don't also support repealing other regulations as well?

by Shane on Nov 29, 2012 9:23 pm • linkreport

Great post, but I found this part hilarious:

"Must be voluntarily proffered in Virginia."

Must be a lot of generous developers in that state!

by Michael Hamilton on Nov 30, 2012 3:52 pm • linkreport

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