Fee-ble Construction Market?

by Proforma Construction Inc, June 14, 2012

An opinion piece by Mark Gerton

The majority of the public is unaware of what developers face. The misconception is that they make huge “windfall” profits at the public’s expense. Nothing could be further from the truth. But, to put developers’ endeavors into context, one should remember that profit is the reward for taking the risk of doing business. Developers face enormous challenges and spend tremendous amounts of money on the risk that their development will first be entitled, then, will be successfully built. There is never a guarantee this will occur and the risk is increasing with the advent of new regulations and overbearing fees.

The escalating cost of development due to government and public fees (not to mention regulations) began to escalate with the passage of Proposition 13, the property tax initiative. Cities and counties lost considerable amounts of revenue that paid for schools, roads and general local improvements. As a result, they began to charge fees to make up for the loss. This put the burden on developers for the incremental increase in costs to municipalities for each new user of infrastructure (roads, parks, sewer, water, schools, etc.). At the time, the fees were implemented in a reasonable fashion for the most part and certainly justifiable if necessary services were to be maintained.

Today, however, fees have become the leverage of special interest groups. Local municipalities use fees to regulate growth and to steer development toward their desired goal for your land. State requirements play an ever increasing role in added fees and expenses for endless studies that usually come up with a conclusion that you need to pay more fees for this or that item that is perceived to require mitigation. In the past, developers were willing to endure the process and the expense (which could add years to the development entitlement process) because the real estate market was strong enough for developers to recoup their costs. Nowadays, there isn’t any pot of gold at the end of the rainbow. The ultimate cost of construction makes the final product worth less than the cost to build it.

Below is an example of a project Proforma Construction, Inc. is currently designing and may be submitting for approval. The question boils down to whether or not we (as a company and a developer) can afford to proceed with this particular project in light of what the development fees are. The project is a total of 19,527. With all the fees listed below (which is incomplete) the cost estimated by the city is between $584,000 and $588,000, or a total of about $30 per square foot. By the time you add in the missing stuff, it’ll be $31/sq. ft. ($600,000). Clearly, these fees contribute significantly to putting the construction industry position of stagnation. The list of fees below is verbatim.

What the state of California and the local municipalities fail to recognize is, when development is thriving, more and more revenue is being generated. They don’t have to be so greedy because there is more of a pie from which to take a slice. Currently, the fees are punitive. Each of us should be asking ourselves whether the current system is reasonable. If the answer is no, then we each have a choice of whether or not to be compliant and complacent, or to demand change.


Here is the estimate you requested.  It is based on the following information and assumptions.  We will tweak it as the project becomes more concrete.

  • (O) Office area is 6,655 (from pdf titled A1_site-Phasing plan)
  • (H) Hangar area is 12,588 (from pdf titled A1_site-Phasing plan)
  • Impervious Surface is 71,031 (calculated from pdf fbo_site_areas)  107,028 sf -19,527 sf -16,470 sf =71,031 sf

(†) City Development Impact Fees:

  • City Storm @ .28sf = $19,889
  • Sanitary Sewer (H) @ .27sf = $3,399

(O) @ 1.06 sf = 7,049

  • City H2O Meter [(2@ 1”) @ 9,116 ea] = $18,232
  • Low Income Housing (H) @ 80/1,000sf = $532

(O) @ 579/1,000sf = $7,288

  • Traffic Impact (H) @ 4,305/1,000sf = $28,628

(O) @ 13,724/1,000sf = $172,758

  • *Art In Public Places = .33% of project valuation
  • Human Services (H) @ 2/1,000sf = $13

(O) @ 7/1,000sf = $88

Subtotal = 257,876

*Add .33% of project valuation (unknown at this time)

  • Building Permit Fee
    • (H) Type IIIB or VB = $12,000 / IIIA or VA = $15,500
    • (O) Type IIIB or VB = $12,500 / IIIA or VA = $13,500

Subtotal = $24,500 / $29,000

Outside Agency Development Impact Fees:

  • County Storm @ 1.00sf = $71,031
  • (†) Park Facilities (H)  @897/1,000sf = $5,965
  •                                    (O) @2,418/1,000sf = $30,438
  • County H2O Meter [(2@ 1”) @ 57,325 ea] = $114,650
  • School Fee (H and O) @ .51sf = $9,811
  • (†) Tri-Valley Trans (H) @2,760/1,000sf = $18,354

(O) @4,090/1,000sf = $51,485

Subtotal = $301,734

Total between $584,110 and $588,610

Our fee deferral program allows for all city impact fees to be deferred until first utility meter release.  I’ve put a (†) next to those fees in the program.  The fee deferral program is currently good until June of 2013.


If you have any questions concerning the topic of this article, or are in need of consultation on a commercial construction project, please contact us today!