The housing development process is complex and time-consuming even under the most favorable of circumstances. And the old adage, “Time is Money,” is dogging the developer from the onset. The longer it takes the local planning office plus a Planning Commission and/or City Council to process and approve the land use entitlements, the more the developer has to pay to the property owner in options payments if the site has not already been purchased. Even once the land is taken down, that expense is accruing interest until the project is ready for occupancy. In addition, the longer a project takes to move through the process, the longer the developer is exposed to changes in the market, further increasing risk.
During the process, the developer is spending a lot of money on architects, engineers, geologists, environmental review firms, and other consultants to prepare the plans and documentation necessary to obtain Building Permits, expenses, which have either an opportunity cost, added interest, or both. Throughout, there is a degree of financial risk: the process outlined below presumes that the project actually gets built. If the project does not get approval somewhere in the process or if the market is in a downturn when construction is finally ready to begin; making the project infeasible, the developer and its investors stand to lose a lot of money.
Virtually all housing (with the exception of Housing Authority projects) is developed – and in the case of rental projects, owned and operated as well — by private entities, whether it is market-rate or affordable housing,
In either case, the developer’s primary concern from start to finish is whether the project will “pencil.” That is: (a) will it produce a sufficient profit margin to justify the investment and risk undertaken by the lenders and investors in the deal, in the case of market-rate developers?; or (b) how big is the financing gap requiring subsidy and is sufficient soft-money available to fill it, in the case of affordable-housing developers?
There are many factors that affect the cost of development, from land costs to the range of city fees, not just the time represented by the process outlined below. Changes in any of them can affect a project’s feasibility. In particular, changes to city policy or city fees without a grandfathering process are one of a developer’s biggest risk factors. Other risk factors include: changes in the market for housing affecting assumptions made in the sources and uses of development funds and in operating revenues, changes in capital markets, and increases in the costs of construction. For a more detailed discussion of these factors, see the Costs of Development page.
Step 1: FIND A SITE. The site needs to: (a) be appropriate for housing, be large enough and have a General Plan designation allowing enough density for the product and size of project the developer wants to build; (b) be available in a competitive, high land-cost environment at a price low enough to make project financially viable ; and (c) satisfy locational requirements necessary to obtain financing (e.g., under the competitive process for 9% tax credits, extra points are awarded for proximity to transit and certain types of retail outlets). In some cases, the developer may have reason to believe that a site-specific General Plan (GP) amendment for a change from a non-residential to a residential land use designation or to a higher residential density might be possible, though this extra step increases entitlement risks and adds to the time needed to get the project approved.
Step 2: CHECK IN WITH PLANNING STAFF. Whether or not a General Plan amendment would be necessary, a developer typically confirms that the proposal is likely to receive staff’s favorable recommendation for whatever Plan amendment, if any, and rezoning, permits and other discretionary land use approvals s will be necessary. Developers consider early and consistent feedback from the Planning Department to be crucial.
Step 3: CONDUCT A FEASIBILITY ANALYSIS. Also called the “due diligence” process, the developer evaluates whether to start spending money (“option” payments) to the property owner and having plans drawn up, taking into account: (a) all the factors cited above – property size, price and location as well as the likelihood of obtaining the necessary land use entitlements; (b) the likelihood that the right kinds of financing can be obtained; (c) investigation of environmental issues associated with the site; (d) the time it will take it will take until the land-purchase contract can be fulfilled (Step 6 below); and (e) the anticipated level of community engagement or opposition that the project may face and the strategy needed to smooth the way for project approval. During this step, if it looks like the project cannot or will not work, this is an easy moment in the development process for a developer to choose to walk away. Once the project has passed the feasibility process and the developer has committed larger, non-refundable deposits, the developer is committed and very reluctant to drop the project.
Step 4: FILE APPLICATION FOR PROJECT APPROVAL. Developers don’t simply walk in the door with an application for project approval. Depending on city’s regulations and the property’s location, there are many kinds of approvals that may be needed for the project to be built, including: rezoning; conditional use permit; site-design permit and/or architectural review board approval; and/or a tentative map for subdividing the property, in the case of a for-sale project. It takes 6 to 12 months to have plans drawn and prepare the necessary documentation for the project to be evaluated under California Environmental Quality Act (CEQA) for documenting the project’s potential environmental consequences.
Step 5. THE APPROVAL PROCESS. The time that this step takes varies widely. The common elements are: (a) what and how many discretionary approvals (also called “entitlements”) are needed: and (b) whether, under CEQA, the project qualifies for a Negative Declaration (ND) or whether a far-more-time-consuming Environmental Impact Report (EIR) is required. Because each project is different and because each city’s regulations and processing practices is different, it is impossible to generalize on how long this step will take. It takes between 2 and 4 years, on average, to receive project approval , depending on the level of community engagement or opposition that the project faces.
Step 6. “TAKE DOWN” THE LAND. Up until this point, most developers have been making “option-to-purchase” payments to the property owner to keep the property under contract. Once the developer has discretionary approval of the project through the land use entitlement process, the property can be purchased with the near certain knowledge that it can be built if current development costs and anticipated near-term cost inflation are still reasonable. The problem as of mid-2019 is that costs are going up so quickly, projects may no longer pencil.
Step 7. OBTAIN AFFORDABLE HOUSING FINANCING. Market-rate developers skip this step since the financing of their projects is the relatively less time-consuming and straight-forward process of securing commitments from lenders and investors, with the caveat that there must be enough projected profit to repay those lenders/investors; otherwise the project will not pencil. For affordable housing, the primary financing tools, aside from cities and other local sources, are tax-exempt, private-activity bonds and Low-Income Housing Tax Credits. For both of these sources, there is generally more demand than
supply, so developers need to submit applications to the State in competitive funding rounds. And if a developer is not successful the first time around, it may be several months before they can apply in the next round.
Step 8. PREPARE BUILDING PERMIT PLANS. The plans previously prepared for approval under the discretionary entitlement process(es) are relatively simple and simplistic. The level of detail needed for Building Permits is incredibly detailed, down to the size of pipe for the hot-water tap in a 4th floor shower to an electrical wiring plan for the entire building. This process typically takes about nine to twelve months, though this is an average that can vary depending on the complexity of the building to be constructed. As of mid-2019, the challenge is project-cost predictability over this 12-month period and its effect on project feasibility.
Step 9. BUILDING PERMIT PLAN CHECK. Once the plans are prepared, they are submitted to the Building staff to check for compliance with the various Codes (Building, Plumbing, Electrical, Mechanical, etc.). Additionally, the plans are reviewed by the Fire Department for compliance with fire safety and prevention codes. It takes time for the initial review and there are virtually always corrections that need to be made. Some cities take longer than others to complete this process, though some jurisdictions offer the possibility of speedier, outside plan review, though at a cost to the developer.
Step 10. CONSTRUCT THE PROJECT. The length of time that it will take the developer’s general contractor to complete the project largely depends on the complexity of the building. A project with only surface parking (a rarity in these days of high land costs) can be ready for occupancy in as little as 12 months. Underground parking adds at least 6 months, more if there are multiple levels of such parking. The greater number of stories above ground means more time to get it built. (One way to achieve some time savings may be to use modular components – factory-built off-site – instead a conventional construction methods.) In general, given these variables, it will take anywhere between 12 and 36 months to have a development ready for occupancy.