The local development community is split over Los Angeles Mayor Eric Garcetti’s proposed fee on new development to raise money for affordable housing projects.

It’s long overdue and welcome news for developer Isela Gracian. That’s because Gracian heads the East Los Angeles Community Corp., which has built 600 affordable housing units at 12 apartment projects, almost all within the city. The group has at least five more projects in planning stages; without Garcetti’s proposed fee, she said some of those projects might never get completed.

But for developer Shawn Evenhaim, that same recently announced fee proposal is unwelcome news. Evenhaim is chief executive of California Home Builders, a Canoga Park developer of market-rate multifamily housing. He said Garcetti’s proposed fee would add to an already oppressive pile of development fees and could force him to drop at least two projects that he’s considering buying property for.

This divisive proposed fee for affordable housing – dubbed a “linkage fee” in planning parlance – would, if approved, be levied on new development. It could generate up to $100 million a year for affordable housing.

Competing agendas

On one side are affordable housing developers, mostly nonprofits that cobble together grants and other public monies to build units where tenants whose incomes are below federal poverty thresholds pay subsidized rents. They have seen those other funds disappear over the years, most recently when Gov. Jerry Brown moved to eliminate redevelopment agencies. Now they see Garcetti’s proposed fee as the only dedicated revenue source they can tap for future projects.

“It would provide us with much greater confidence and allow us to proceed with these planned projects,” Gracian said.

On the other side are market-rate developers. Some build entirely market-rate projects; others include units that meet federal affordability standards in exchange for the right to exceed local density rules for their projects. All agree that a mandatory linkage fee on new development projects would raise costs and force them to either drop projects or pass on the fees to homebuyers and renters.

“In areas where you can raise prices, that’s what we’ll have to do,” Evenhaim said. “But in areas where the local market keeps prices in check, it will mean we will simply not be able to build as many units.”

Fee back in play

The linkage fee at the center of the developer split is not a new idea; in fact, it has been implemented in Oakland, San Diego, San Francisco, San Jose, Chicago and Boston. And it has come up for discussion before in Los Angeles, but each time opponents have successfully quashed the idea.

But this time might be different as homelessness in Los Angeles County has reached record levels. Skyrocketing rents and gentrification in many communities have forced many low-income renters to double up or move onto the streets. Developers of all stripes recognize that something must be done.

Garcetti chose the annual housing conference sponsored by the Los Angeles Business Council in October to unveil his plan for the linkage fee. He called it the centerpiece of his administration’s affordable housing plan.

“Through this linkage fee, the city of Los Angeles will finally have its own ongoing funding stream exclusively for affordable housing,” Garcetti said. “That will represent a dramatic shift in how we build thousands of units and house thousands of families.”

Garcetti added that the fee would apply to “new development.” Whether that would be limited to projects that have a residential component or extend to purely commercial and industrial projects remains to be seen. Also unclear is whether there will be any hardship exemptions.

Most importantly, the fee level itself has yet to be set. Garcetti gave a wide range in his speech of $37 million a year to $112 million a year. Early next year, the city will select an outside consultant to study the issue and present options to the city Planning Commission and ultimately the City Council.

Taxing problem

Local business and industry groups have taken to calling the linkage fee a tax on development, a tax that would both make housing more expensive and discourage developers from moving forward with some of their projects.

The building industry contends that market-rate developers should not be singled out to pay for a major societal problem.

“We don’t ask farmers to pay for food stamps so why should we ask housing providers to pay for housing subsidies?” asks Tim Piasky, chief executive of the L.A.-Ventura chapter of the Building Industry Association of Southern California.

Carol Schatz, chief executive of the Central City Association, which consists primarily of downtown L.A. business interests, said she believes the impact will spread beyond multifamily housing.

“The linkage fee will likely be applied to all new development, not just residential, so its impacts may be far reaching,” Schatz said. “We know already that Los Angeles is a difficult place to build. Land and labor costs are very expensive and the entitlement process is byzantine. This will be one more added cost in a developer’s calculation of whether to build in L.A. or elsewhere.”

If they do decide to build here, “some developers will have no choice but to pass on some of the fee costs to home/condo buyers, making housing that much less affordable. It hits the middle class especially hard,” Schatz added.

But affordable housing developers and advocates say the linkage fee is long overdue here. Tim O’Donnell, Century Housing’s senior director of policy and advocacy, said he worked for several years in San Diego and saw how little impact the linkage fee there has had on market-rate development projects.

“It did not significantly affect new development there 25 years ago and it is still in effect,” he said.

But perhaps no company better reflects the division among developers than Related Cos. of California. Related, perhaps best known for the massive Grand Avenue project in downtown Los Angeles, is one of the few local companies that builds both market-rate and affordable housing projects.

Offering his thoughts on Garcetti’s proposed fee, Related Chief Executive Bill Witte said, “No developer wakes up in the morning hoping development fees are going to go up. But is the housing crisis a compelling reason to be having this discussion? Absolutely. As a development company that is a long-term investor we have to think about the future sustainability and viability of the cities where we build and an adequate supply of affordable housing is a key component of that.”