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The Risky Business of Land and Housing Development

Columnist: M.L. Tux Tuxhorn
September, 2017 Issue
Columnist

M.L. Tux Tuxhorn
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Over the past 40 years, I’ve been involved in the production of housing in Sonoma County. In the early years of my career, buying land, hiring planners, raising capital (cash), studying the market, hiring architects and engineers, getting bank financing, bidding the project to the subcontractors, building the streets and homes, selling the homes and eventually meeting the new home owners was incredibly rewarding. However, in the last three decades, developer/builders have been demonized as the cause of growth and environmental degradation resulting in a strong anti-growth mentality. This mentality created a complex political process, which is much more involved than most people realize.

The political process

The various government agencies a developer/builder must work with include: The Army Corps of Engineers, the Environmental Protection Agency, U.S. Fish and Wildlife Service, California Department of Fish and Wildlife and Regional Water Quality Control Board. City approvals are also required and include: design review, fire, police, sewer, water, parks, storm drainage, planning commission, city council. In addition, there are many laws and regulations such as international building codes, local building codes, earthquake calculations, soils calculations, fire codes, Americans with Disabilities Act, Cal Green, California Environmental Quality Act and many more. Each of these agencies usually requires a mitigation fee, a presentation, an expert representative and an approval. Often the developer/ builder is required to have special inspections during the construction process to observe conformance. This is a large list of agencies (discretionary approvals); however, the problem is less the list and more the changing rules.

For example, in 1989, I received a wetland delineation from the Army Corps stating that the 80 acres of land my company was developing had no wetlands. In 1993, when the delineation expired the Army Corps determined the property had .16 acres of wetlands. In 1997, when the delineation expired, the governing agencies (EPA, U.S. Fish Wildlife, Army Corps, State of California) increased the required mitigation based on new rules. The mitigation increased to a contribution of 11 acres to the State of California, construction of wetlands/vernal pools on the 11 acres and payment of $300,000 for maintenance of the 11 acres into perpetuity. Bottom line: the $0 estimated for mitigation became $1.5 million because of rule changes.

Today, the largest obstacle to housing in the Santa Rosa plain is the California Tiger Salamander. In 1989, salamander mitigation on our 80-acre development in South West Santa Rosa was $30,000. Under the current Salamander Mitigation rules, this same 80-acre project would spend approximately $8 million to mitigate for wetlands and salamanders.

These are two examples of hundreds that I have personally witnessed that I consider government overreach.

All real estate projects require front-end costs to gain approvals, and developers must spend $350,000 up front (not including the land) to try to get an approval. And yes, I said try. Local approvals are no guarantee, no matter what the zoning code and general plan says, the project still needs the votes at each board or commission level. Investors who are willing to take this kind of risk will require a large return, and there’s a strong possibility the money will be lost.

In addition, new banking rules, imposed after the 2007 banking crisis, require a developer/builder to put more money into a development project along with personal guaranties, which entails pledging my home and personal assets as collateral. This means the cost of a failed project can be catastrophic to the developer/builder.

Special interest groups come in all shapes and sizes with basic messages such as “not in my back yard,” “this project has too much traffic,” “this project ruins the environment.” These special interests will take their objection to the commissions, councils and government agencies reviewing a proposed project. Many of the governmental agencies approvals are at the discretion and subject to the interpretation of a government employee. The Army Corps, EPA, Fish and Wildlife, and State Fish and Wildlife to name a few, implement, review and approve the various congressional acts. Their approval process has no independent oversight. Only recently has the Supreme Court begun to acknowledge this type of government overreach. 

Today, housing and land development projects are risky business ventures that are severely impacted by political and governmental approvals. Many of the approvals are beyond the scope and jurisdiction of our local elected officials. The risk, capital required, uncertainty of approvals, and the long-time period to gain approvals are the initial challenges. Later as the project is constructed, the developers/builders are confronted with rising subcontractor prices, material price increases and the existing labor shortage. This industry is no longer highly rewarding only highly risky.

Sonoma County now faces a severe housing shortage that threatens our ability to maintain and attract quality jobs. A solution to the housing crisis requires action from all levels of government. Our local officials must recognize the complexity of the process and lobby state and federal decision-makers to find reasonable solutions to allow the production of houses.

 

Tux Tuxhorn passed the CPA exam in 1977, started Benjamin-Tuxhorn Companies in 1978, and served on the Santa Rosa Planning Commission from 1985 to 1991. He also developed more than 25 residential projects in Sonoma County including Bellevue Ranch, Saddlebrook, KingsMill and Windrose. Currently, he’s the chief executive officer of The Tuxhorn Company a real estate/construction/development consulting firm.

 

 

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