Builders, take a deep breath: The city council of Oklahoma City is currently considering whether to boost impact fees on new residential development for water and sewer connections, and adding more fees to cover the cost for installing streets, parks, and trails.
It certainly is an ironic turn of economic events. The housing industry seems to be barely breathing these days, leading many builders to advocate a temporary stop on impact fees until the residential construction market recovers. Yet such fees on development are alive and well across the country, and even expanding in some localities. Why? The reality is this: With far fewer homes now being built, towns and cities whose coffers were fattened by housing-related taxes and fees during the boom years suddenly face the prospect of having to scale back, delay, or even halt public works projects.
There is little dispute that the housing slump is depriving towns and cities of much-needed revenue. Riverside, Calif., for example, projects that its housing-related fees and surcharges in August 2009 will be nearly 30 percent below what they were in July 2008, and nearly 60 percent below what the city collected in May 2006, when it was one of the hottest housing markets in the country. (BUILDER will examine Riverside’s impact fees in greater depth in the magazine's December issue.) The Nipomo Community Services District in Central California has seen development activity this year slow to about one-tenth of what had been previously. Consequently, it’s highly unlikely that the District will collect anywhere near the $1.4 million in impact fees it captured during its last fiscal year. “The problem for the district—and ultimately, those who live within its boundaries—is who will end up paying for projects that would normally be covered by the development impact fees,” Bruce Buel, the district’s general manager, told the Santa Maria Times.
So, despite the dire straits their local housing markets might be currently facing, some municipalities are still trying to squeeze water from a rock:
• The Aspen Times reports that Pitkin County, Colo., is considering increased its affordable-housing mitigation fees by as much as six-fold from 2005 levels. A study commissioned by the county estimates that rising construction and land costs have significantly increased the subsidies required to make a 1,000-square-foot house affordable.
• The city council of Yucaipa, Calif., just approved a resolution that increases impact fees on residential development by $624 to nearly $29,000 per house. With those increases, the town expects to generate $169 million in fees over the next 25 to 30 years, reports the Press-Enterprise, a local newspaper.
• Oklahoma City is evaluating whether developers should pay more to help close the gap in the city’s capital budget between money raised through bond issues and what infrastructure improvements actually cost, explains Dennis Clowers, the city’s engineer and director of its public works department. He tells BUILDER that the last bond issue, in December 2007, raised $500 million for street construction alone, which he estimates “is about half of what we need” for developments that have been approved or are already underway.
Right now, Oklahoma City charges developers an estimated $266 to $535 per house for water and sewer connections (which include meter installation and inspection). Clowers claims that the “full recovery costs” for water and sewer are actually closer to $1,500 per house, based on a six-month analysis his department conducted. He’s also “quite confident” that the city council ultimately will not approve fees that capture those full recovery costs. But any increases “would be an improvement,” he says.
On the other side of the issue, one would be hard-pressed to find a builder or developer in this country who thinks cities are shortchanging themselves in impact fees, especially when those charges can exceed $100,000 per house in markets such as San Diego. But it’s a fact of life that the housing and development communities must constantly defend themselves against accusations that they aren’t contributing their fair share.
So the Home Builders Association of Central Coast in California just published the findings of a study, which claims that, between 2002 and 2007, residential and commercial developers paid $262.1 million in impact and school fees to Santa Barbara and San Luis Obispo counties. The study also shows how impact fees contributed 27.5 percent of the total annual revenue for the city of Paso Robles, Calif., during this five-year period.
The falloff in fees and taxes as a result of the housing downturn “allows builders to show how [residential] construction is an essential component in the growth of the economy,” Elliot Eisenberg, an economist with NAHB, tells BUILDER. He points to a study the association conducted in 2005, which found that the one-year impact of building 100 single-family homes in a “typical” metropolis was $16 million in local income, and $1.8 million in taxes and fees for local government. In an interview he gave to the Atlanta Journal-Constitution a few weeks ago, Eisenberg estimated that the construction of 13,000 homes in Atlanta’s nine metro counties produced $2.5 billion in income and $114 million in local taxes and fees on a recurring basis.
Such statistics still raise the question, though, of whether taxes and fees collected are commensurate with what it costs cities to provide roads, parks and other services to communities as the spring up. A study that RPI Consulting just completed for Delta County, Colo.—a fast-growing community of about 40,000 residents—estimates that a new home built in one of that county’s towns, Orchard City, creates $518 in road construction costs but contributes only $81. Each new home there also creates $164 in administrative capital costs but contributes only $18.
“I don’t know if the onus [for those costs] should be placed on developers,” Andrew Klotz, a partner with Durango, Colo.-based RPI, tells BUILDER. “But it’s a fact that single-family houses require more services” than impact fees can pay for on their own. Klotz notes, however, that the disparities in Delta County could be more a function of the area’s tax structure. Denver, he says, has a far more sophisticated tax and fee mechanism. He also points out that the HBA coauthored the legislation that allowed impact fees to be levied in Colorado in 2002 "with the goal of subtracting the ambiguity from the process.”
It’s always been a myth that home builders reflexively oppose all impact fees. The Home Builders Association of Northern California recently lent its imprimatur to a plan by Humboldt County, Calif., to introduce a $701 per house fire impact fee, the revenue from which would help pay for building and equipping a new fire house. But builders are drawing lines in the sand when they think fees are onerous. In Prescott, Ariz., the Daily Courier reports that local builders joined forces with the local chamber of commerce and other business groups to dispute a study commissioned by the city that is being used to justify a possible 19 percent increase in water and sewer impact fees to $14,076 per house. (Prescott’s city council is taking up the issue this week.)
Whether local officials are more receptive to builders’ pleas now, than they’ve been in the past remains to be seen. But if the housing market continues to sag in 2009, expect to hear louder cries from some quarters calling for the suspension or elimination of impact fees in order to sustain growth.
John Husing, an economist based in California’s Inland Empire, where the housing market is under siege from foreclosures, recently presented the county with a strategy to repair its economy. One of his recommendations calls for the county to temporarily reduce development impact fees as the best way to get builders to build homes they can sell at prices low enough to lure buyers. Husing did not return phone calls requesting comment. But County Supervisor John Tavaglioni told the Press-Enterprise that he was against lowering fees. “The reason fees were increased over the years was because we had been woefully behind in meeting demands to insure that adequate infrastructure was built,” he stated.
In Bentonville, Ark., future municipal support for impact fees—which it has been collecting only since 2002—is less clear. The city currently charges $4,750 per house in impact fees, but four of the eight candidates running for three contested city council seats have called for the fees’ elimination. The City Council recently paid $37,500 to a consulting firm to assess the fairness of fees paid by developers and builders. “It’s not meant to be a reliable source of revenue,” Denise Land, Bentonville’s finance director, admitted to the Morning News of Northwest Arkansas, especially now when the number of building permits being pulled has dwindled. She noted that through October the city had collected only $394,000 in fire impact fees this year, compared to $925,000 for all of 2007. In addition, voters last summer approved a $110 million capital improvement bond to pay for police, fire, parks airport and street projects.
One of the candidates, Matthew Zachary, who owns a local construction company, told the newspaper that he knows builders who refuse to work in Bentonville because of its impact fees. “I build in an area that is more affordable to me and most economical for the end consumer because I still have to sell the house,” he was quoted as saying.
John Caulfield is senior editor at BUILDER magazine.