WHEN STEVE BROCK first envisioned building West Highlands in metro Atlanta in the late 1990s, the idea raised more than a few eyebrows. The site was home to the city's largest public housing project, Perry Homes. “If you were from Atlanta, you would have seen multiple murders on the 5 o'clock news at Perry Homes,” says Brock, whose company, Brock Built, has been doing land development and home building in Atlanta for two decades. “The public housing project was so bad, it repelled development. It was the poorest, roughest, toughest area of the city. People thought we were nuts.”
What Brock saw, though, was a pent-up demand in the nation's top housing market. People were sick of all-day rush hours on the interstates that traverse and surround the state capital. West Highlands had something that virtually no other site in the area could offer: a 10-minute straight shot into downtown.
Brock's partnership proposal to the Atlanta Housing Authority for a 530-acre master planned community meshed market-rate, single-family homes with apartments, condominiums, and public housing. There would be retail, parks, ball fields, green space, and a championship golf course.
All Brock Built had to do was tear everything down and start over.
“The infrastructure was crumbling,” Brock says. “There wasn't anything that was working right.”
As with nearly every municipality in the country, Atlanta didn't have funding to make the necessary improvements. The solution was to create a tax allocation district and issue bonds. By early 2004, the city had selected its legal counsel and bond underwriter and was conducting due diligence for investors before issuing the bonds.
Meanwhile, the Atlanta Housing Authority secured $7 million from HUD for the first phase of infrastructure. Currently, 124 units of multifamily housing are occupied. A second phase, which includes senior housing, is under construction, and the first 24 market-rate, single-family homes are ready to be built.
“It's the finest example I know of a public-private partnership delivering a superior product,” Brock says. “Everybody saw the plan and readily bought into it. The bureaucracy is a bureaucracy; it's a painful process. It's worth it in the end, but sometimes, it's a little miserable going through it.”
Behind The Eight Ball Across the country, builders continue to come up against these kinds of infrastructure issues, as well as ever-increasing impact fees. Even states without significant population growth or hot real estate markets have instituted impact fees, adding thousands to the cost of building a house.
At the same time, municipalities face a host of difficulties, including reductions in state and federal funding income, an increasing number of unfunded mandates, resistance from voters to increases in taxes to pay for improvements, and demands from residents for higher levels of service.
“They're behind the eight ball,” says Scott Bowers, corporate director of governmental and community affairs for Indianapolis-based C.P. Morgan. “Government is good about reacting; it's not good about being proactive.”
But attitudes seem to be shifting. Experts who monitor the world of impact fees have noted an increased willingness from governments to work with builders. They're starting to think outside the box to meet their infrastructure needs instead of merely increasing fees to builders and, ultimately, to new-home buyers.
In 2003, the NAHB, in association with several other housing organizations, published “Innovative Infrastructure Solutions,” a guide to impact-fee alternatives, such as Atlanta's tax allocation district, privatization, tax incentives and credits, and charter schools.
“Creative solutions bring about infrastructure development when local governments are tapped out for resources,” says Keyvan Izadi, a land-use planner with the NAHB and an authority on impact fees. “It's not just that alternative financing doesn't drive up the cost of housing. It also provides infrastructure in far less time and at far less expense. There's untapped potential here.”
It just makes more sense to work with local governments than duke it out, Bowers says.
“Who wants to cut their own throats?” he says. “There are really good opportunities to create better communities. ... It's just taking time to establish the relationship and ask the questions.”
Mark Osborn, land acquisitions manager for Littleton, Colo.–based Village Homes of Colorado, says he sees the trend of builders working cooperatively with local governments, especially to expedite larger projects.
Village Homes and Denver-based developer Koelbel & Co. worked with the city of Parker, Colo., and Douglas County to fund a $9.5 million, 2.2-mile road extension. Village Homes currently is developing the 684-acre Idyllwilde community for 900 single-family homes. What's unusual is that the road is being built first, to accommodate traffic that doesn't yet exist.
“This is pretty unheard of to have it before the first home is built,” Osborn says. “The city took the lead role in getting all [the parties] together. They deserve a heck of a lot of credit for putting it together.”
New Tools Shea Homes Colorado is using a number of the tools highlighted in the NAHB guide, including special improvement districts and tax rebates, to fund infrastructure in its markets. To help a newly developing area collect needed funds for schools, Shea Homes and other builders in the area struck a deal with the school district and four municipalities to create a nonprofit capital facilities foundation.
School districts can't charge impact fees in Colorado, so the builders pay a voluntary impact fee of $1,100 per unit. The foundation's board has representatives from the cities, the school board, and the development community; in 2003, it allocated $750,000 for the design of a new high school. As a result, the school board could go to design before a bond issue, which accelerated the building schedule by about a year.
“It's a great program,” says Jeff Willis, vice president of land acquisition for Shea Homes Colorado. “A lot of times when you go into newer communities, they may just not have the funds available to do infrastructure.”
C.P. Morgan has found success by forming alliances with local fire departments, providing sites for fire stations and accommodating their runoff.
“They don't have to put a retention pond on the site, because we'll accommodate it,” Bowers says. “Sometimes it seems small, but it can have a big impact. It stems from our desire for constructive engagement. We'd rather be part of the discussion than have everyone talk around us, about us, and what they're going to do to us.”
A Model That Works That kind of creativity definitely is needed in some parts of the country, where growth, heavy governmental regulation, and short land supply are driving new-home prices to mind-boggling levels. In Chula Vista, Calif., the total cost of fees adds nearly $50,000 to the cost of a new home, says Dave Gatzke, vice president for Corky McMillin Cos., based in National City, Calif.
“The type of infrastructure we're being asked to fund continues to grow, too,” he says. “It's no longer just schools and roads and parks. It's rec centers, open space, trail systems, all sorts of goodies, which lead to very nice communities. Should builders be paying for all of them? Open space benefits the entire region and all its residents; we'd like to see broad-based funding sources that all residents pay for. Those are few and far between in the anti-tax environment of California.”
Despite his concerns about the fees, Gatzke says the money has been well-spent in his market.
“Chula Vista is a whole school ahead of the demand,” he says. “That's fairly impressive.”
The city's model has attracted the attention of Jim Nicholas, a growth-management expert at the University of Florida, Gainesville, who often consults with cities to create impact-fee programs.
“Chula Vista gets high marks from everybody for a cooperative approach,” Nicholas says. “They went to builders and said, ‘What can we agree on and let's go do that.' They put together a really nice program that combines impact fees with regular funding with special districts.”
The city also is monitoring total revenues to achieve what Gatzke calls a sustainable balance at build-out. Developers are charged with delivering communities with retail components to bring in sales-tax revenue. The city is studying the fiscal impact to ensure that growth matches need. As a result, the city's reserve fund is healthy, developers are building well-designed, high-quality communities, and the necessary services are keeping pace with the region's growth.
“Growth is a benefit that helps the city's fiscal position, and it's paid for itself,” Gatzke says.
Tim Tosta, a San Francisco–based land-use attorney who works with large developers, says the state's limits on property-tax increases demand that builders include retail space in their plans.
“I'm not looking at an urban or suburban infill project with any kind of density without a retail component,” Tosta says. “You have to do that for sales tax, and it's more attractive to the community.”
Lone Ranger Approach While some builders have seen good results from working with local governments, others, such as Phoenix-based Robson Communities, which develops master planned communities, have decided to go it alone. In its search for affordable land in the white-hot Phoenix market, the company has ventured south of the community of Casa Grande, which doesn't have water and sewer infrastructure.
“Builders are being forced to develop a 3,000-acre community outside the city limits in order not to be subject to impact fees and ‘build it for us, give it to us,'” says Steve Soriano, Robson executive vice president and CFO. “We're building our own. We'll be the water and sewer company at Robson Ranch Casa Grande.”
Through private financing and value engineering, Robson can build the facility for 10 percent to 20 percent less than it would cost the city, Soriano says. As an added bonus, doing its own sewage treatment plant will give Robson treated effluent for sprinkler systems.
Building water and sewage systems adds tremendous complexity to a project because the approvals are at the state level instead of municipal, Soriano says, “but it lets you do your project.”
Still, Soriano predicts that more large builders and developers will adopt this role as the search for land takes them into more rural areas without existing infrastructure.
“In a lot of communities, they wouldn't get it done unless the master plan developer took this on themselves,” he says. “We think our model is a good model. It lets us enter markets where we believe there's a demand and allows us to engineer around supply constraints. We can control our own destinies.”
Philadelphia-based Toll Brothers has reached much the same conclusion.
“We've been our own utilities in many parts of the country,” says Joel Rassman, executive vice president and CFO. “We've had to build sewage treatment plants and dedicate them to municipalities to get required approvals.”
Bonding Experience Several of the alternative financing mechanisms outlined in the NAHB guide involve bonds, such as those being sought in Atlanta for West Highlands. Tax increment financing, or TIF, bonds are based on the value of the property once the improvements are made and on the increased taxes they will generate.
Bonds are “unique and attractive,” the guide says, because they generate large amounts of up-front cash to build in advance and pay over time. And they don't require voter approval. Grant Anticipation Revenue Vehicles, or GARVEE bonds, allow governments to borrow against future federal funds.
Century Vintage Homes, which builds about 1,000 homes a year in California, makes extensive use of 1913-1915 assessment bonds to finance on-site infra-structure. The company installs all the infrastructure—water, sewer, stormwater, and streets—and is reimbursed by the municipality. The home buyer makes the bond payment just as he does his mortgage payment.
“We do that on every project we have,” says Kenneth Felkel, vice president of project development for Century Vintage Homes, based in San Bernardino, Calif. “It helps a lot.”
Revenue bonds, often used for income-generating facilities, such as arenas, borrow against income the project will generate.
The concept of revenue bonds takes an odd twist in Virginia, where impact fees are illegal. Instead, municipalities assess fees through a system of “voluntary” payments called proffers. This year, the HBA of Virginia supported a bill in the state legislature authorizing local governments to issue proffer anticipation bonds, with the underwriting and pricing based on the financial resources of the builders who have pledged future proffers, rather than on local governments' ability to pay.
“We have a clear demand for new infrastructure that far exceeds the ability of local government to fund under the current tax structure,” says Mike Toalson, executive vice president of the HBA. “One county has pledges of cash proffers that total $179 million to be paid by land developers at the point when they pull permits. Of that, they have collected $44 million and disbursed about $25 million. They're sitting on about $134 million in pledges. ... Rather than have to wait to collect them, at which point they'd begin the construction of new schools, this new tool would allow them to go ahead and issue proffer anticipation notes, take the cash immediately, and begin the planning and building of new schools and fire stations now.”
At press time, the bill was awaiting the governor's signature; the law is expected to take effect July 1.
Something'S Working John DiPasquale, CEO of the Elliott Building Group in Langhorne, Pa., says he's glad that builders are getting some relief somewhere. He's paying $15,000 to $20,000 in fees per unit and wondering just what his home buyers get out of that.
“At the end of the day, I don't know if anyone gets a benefit,” he says.
He'd like to see his local governments adopt a model used in Tampa, Fla. The time payment program developed by the Tampa Bay Builders Association requires the homeowner to pay 75 percent of the infrastructure costs in a lump sum at closing or over 20 years in a lien against the property. The fees are a guaranteed source of income over time, making them bondable for the county, says Kimberly Hall, government affairs director for the association.
“In our neck of the woods, that cost is buried so far into the price of the house the buyer never sees it and just complains that housing is so expensive. It's great to hear there's hope in the world, says DiPasquale.”
Indeed, there seems to be. At West Highlands, what used to be a landfill will be home to an $11 million YMCA with football and soccer fields and miles of walking trails. There will be a park with an amphitheater and a lake with a picnic area and fountains.
It's been a long, hard haul, but Brock says the payoff will be worth it for everyone involved, from the builders to local government to the home buyers who are taking a chance on buying in an area that's still pretty rough.
“You always have the urban pioneers, as I call them,” he says. “They buy in and they're handsomely rewarded. I used to build in the Brookhaven Buckhead area seven or eight years ago. The little houses I was selling in the high $100,000s and low $200,000s are selling in the $500,000s. They'll see that happen here, too.”
Impact Fee Alternatives The NAHB report identifies options for funding needed services.
In an effort to help builders find innovative methods of financing infrastructure, the NAHB partnered with the National Association of Realtors, the NCHI, and the National Housing Endowment to produce “Building for Tomorrow: Innovative Infrastructure Solutions.”
Here are some options the researchers identified:
Learn more about markets featured in this article: Atlanta, GA.