TWO CASES CURRENTLY BEFORE CALIFORNIA courts could alter the formula many cities and counties use to assess planning and inspection fees, common regulatory fees imposed on home builders.

In January, a superior court judge sided with San Diego–based builder Barratt American in its case against Orange County, in which the company alleged that the county overcharged home builders, and ultimately misspent, $18.5 million between 1999 and 2002. The court found justification for $14 million of the fees but ordered Orange County to repay $4.5 million by reducing future fees. As an additional penalty, the county must pay Walter McNeill, Barratt American's attorney, $1.2 million; that figure is two and a half times McNeill's costs, as allowed by state law when a lawsuit results in significant public benefit. (Orange County is appealing the ruling and did not return calls requesting comment for this article.)

Though Barratt American paid less than $50,000 of the $18.5 million collected by Orange County, company president Mick Pattinson believes it was an important case to fight. He contends that building fees add at least $50,000 to the cost of most houses in California. “Affordability is at 10 percent or less in many cities. What kind of service are we giving to buyers when we're helping to deny housing to 90 percent of the population? We have a responsibility to stand up for our customers,” he says, adding, “We were quite satisfied with the $4.5 million ruling. The principle was achieved.”

This case—and several others tried in recent years by McNeill—stems from a formula for assessing planning and inspection fees created in the 1950s, based on the value per square foot of a new home. McNeill estimates that this formula, which continues to be used by the majority of California municipalities, results in at least 30 percent to 50 percent “pure profit.”

Orange County no longer belongs to the majority. In 2003, using a computer system implemented with a portion of the $18.5 million, the county began charging fees based on the actual time and materials officials spend on projects, not the flat fee it had previously charged. Though McNeill says the hourly rate the county now charges is “way off base,” he calls its new method of assessing the fees “a step forward.”

The county's new model is similar to one used by Riverside County, which McNeill says has a more reasonable hourly rate that works for both builders and the county. “Builders don't necessarily object to fees that are fair,” he says. “They do object to fees that are many times higher than they should be.”

Barratt American also brought a similar case against the city of Rancho Cucamonga. Lower courts ruled for the city, but the state Supreme Court is expected to rule in the case later this year. Both Pattinson and McNeill say they are hopeful that a Supreme Court ruling in their favor will set a precedent for other cities and counties to modify their fee formulas.

In the meantime, the NAHB is working on model legislation to address the same issue in other states. States including Minnesota and Pennsylvania have adopted new guidelines for inspection and review fees, says Ed Tombari, a land-use planner with the NAHB. Though the group has not completed the proposed legislation, it will be specific and detailed, qualities missing from many state statutes, Tombari says. “We see a lot of states with outdated language, in terms of what municipalities can do,” he says.


Learn more about markets featured in this article: Los Angeles, CA, Orlando, FL.