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Los Angeles City Council passes Development Linkage Fee to fund affordable housing

In order to raise funds for affordable housing, the Los Angeles City Council voted unanimously in December 2017 to impose linkage fees ranging from $1 to $15 per square foot of new development. This linkage fee was passed, despite fierce opposition from developers and business groups who believe that such measures will prevent new development from taking place in the city.

Some also argued that the fees will simply be passed on to renters and unit owners.

Supporters of the measure expect the fees to generate up to $100 million for the affordable housing trust fund each year, as well as allow for roughly 1,500 affordable housing units to be created within the same time frame.

But the amount to be generated from linkage fees will be highly dependent on market conditions and developers’ willingness to push through with real estate projects despite the new fees.

The move covers both residential and commercial real estate projects.

The passage of the linkage fee is perceived by many to be the centerpiece of LA Mayor Eric Garcetti’s plan to boost the construction of new and affordable housing units in the City of Angels.

Under the plan, developers will be charged $3 per square foot in low-market areas like South Los Angeles and $5 in high-market areas like Downtown LA, Venice and Brentwood. The plan covers retail, hotel and office buildings.

The fees for buildings with residential components are much higher at $8 per square foot in low-market areas and $15 in high-market areas. The plan includes single family homes, mixed-use buildings and multi-family properties.  

Developers of residential real estate can side step these fees if they allot a certain percentage of units for low income renters. However, developers of commercial real estate projects have no way of avoiding these fees.

The least affordable city for renters and homeowners

LA was ranked the most unaffordable city for renters and buyers in the United States in an index by Wells Fargo and the National Association of Home Builders in late 2017. While it’s not the most expensive city, it is the least affordable because wages have not kept up with increases in rent and home prices.

Only 9.1% of all homes sold in the third quarter of 2017 were affordable to families that earned a median income of $64,300.

San Francisco, however, is still the most expensive housing market, with a median home price of $1.18 million as opposed to $583,000 in LA.  

SF fell to the number two spot in the index for least affordable housing markets – just 11.1% of homes sold in Frisco were affordable to buyers who had a median income of about $113,100.

Overall, California’s cities take the lead in the list of least affordable housing markets in the US. Other cities that made the list include Santa Ana, San Jose, and Santa Rosa.

The problem is partly fueled by the strong demand for housing in these cities. Strong economic growth, job gains and increasing household formations in conjunction with tighter inventories and a projection of rising mortgage interest rates for 2018 have created a higher demand for shelter.