Palo Alto Weekly

Real Estate - October 5, 2012

Real Estate Matters

Building restrictions: preserving charm vs. enhancing value

by Michael Repka

Without question, Silicon Valley has some charming neighborhoods and there is an understandable desire to retain the charm and feel of the community. Occasionally, neighborhood associations or cities decide to enact building restrictions aimed at curbing new construction, especially larger or multi-floor properties. However, the imposition of building restrictions can and does have an impact on housing values and appreciation.

Woodside vs. Atherton

A short drive through the Town of Woodside and Atherton will give even the most casual observer a clear indication of the two divergent approaches to building regulations. Woodside is a charming town with a distinct 1890s feel. There are hitching posts, horse trails and a noticeable absence of traffic signals. As the tour continues down the country lanes that meander through the town, the homes that flank the roads are relatively modest, at least given the oversized lots and billionaire standard. To keep this charm and character, the town imposes strict rules on building that limit the size of structures and requires comprehensive review before one can build in the first place.

Atherton, on the other hand, is also very prestigious and home to its fair share of billionaires, but its building codes and approval process are far more "builder-friendly." As a result, a similar tour of the homes will uncover countless grand estates, which take a dominant position on the lot.

Builders generally know that they can move faster and maximize their return on investment in Atherton. By way of example, a builder was able to complete an 11,000-square-foot grand estate on slightly under an acre within less than 20 months — that is from the time of the original acquisition of the old house through the permit process, construction and completion of the new property

Woodside, on the other hand, would restrict the size of a home built on a similarly sized parcel to 4,000 square feet, not including a two-car garage, and the time to construct would be measurably longer.

The effect of this divergent treatment in building regulation is that builders aggressively seek out "tear-downs" in towns like Atherton and shy away from similar properties in towns like Woodside. Although this typically pushes up the home values, some argue that it washes out the town character and history.

Single-story overlays

A similar question comes up when looking at neighborhood or area-specific restrictions, such as limiting construction to single-story construction. Some long-term homeowners prefer to keep all homes single story because of a desire to keep the neighborhood "feel" unchanged; of a concern about the loss of privacy associated with having upstairs windows overlooking their backyards; and the desire to avoid a reduction of light. All are legitimate concerns. However, just like in Woodside, that ideal does come at a cost.

Builders in towns like Palo Alto and many of the surrounding communities need to maximize the square footage of a property, while keeping costs low. Two-story homes can be constructed more economically than one-story homes of the same square footage because of the reduced foundation and roofing costs. Additionally, the two-story homes take up less of the precious lawn area.

Builders' reluctance to purchase homes that face increased restrictions slows the gentrification process, which can have an impact on the fair-market value of homes in poor condition. However, it also has an impact on nicer homes because new construction pushes up the average price per square foot in the entire area as less desirable homes get razed to build new homes.

When considering a purchase, the impact of building regulations or proposals for new restrictions are important aspects to weigh into the decision. The "feel" and the long-term appreciation potential may very well be affected.

Michael Repka, managing broker and general counsel for DeLeon Realty, Palo Alto, formerly practiced real estate and tax law in Palo Alto. He serves on the Board of Directors of the California Association of Realtors. He can be reached at MichaelR@DeLeonRealty.com.

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