Impact Zone

By Pat Curry. If you have impact fees in the markets where you build, expect more of them. If you don't have them yet, they are coming. Even if you are in a slow-growth or no-growth state. Even if they are illegal in your state. Why? Because governments don't have any money, builders do, and 'No New Impact Fees' makes a lousy campaign slogan.

"Impact fees are growing out and growing up," says James Nicholas, professor of urban planning and law at the University of Florida and a consultant who works with municipalities to design impact fee programs. "They're being used in more places, and they're getting bigger."

Home builders in high-growth states, such as California and Colorado, are routinely paying fees of $30,000 to $40,000 per unit. Fees are climbing at an alarming rate and recently, impact fees have begun to appear in such unlikely states as Montana, South Dakota, Mississippi, and Arkansas.

"I remember when a building permit in Naperville cost $2,000 to $3,000," says J. Mark Harrison, executive vice president of the state builders association in Illinois. "Now it's $17,000 before you turn a shovel of dirt."

In Miramar, Fla., Larry Kahn's impact fees run as high as $14,000 per home. Kahn, president of Lowell Homes, in Miami, says he'd just like to know how the roughly $5 million in impact fees he pays a year are actually being used.

"I'd love to know where all these fees really go," he says. "Ostensibly, they're going to build the infrastructure. Maybe they're being used in exactly the place they should be.

"I think our industry would be well-served to do some analysis. As builders, we pay the fee and don't ask the questions we should ask about where the money goes. I'm not implying any wrongdoing; I just think we should monitor it."

"I think our industry would be well-served to do some analysis. As builders, we pay the fee and don't ask the questions we should ask about where the money goes." -- Larry Kahn, president, Lowell Homes Whether it's library books (Maryland), farmland preservation (California), a new roof for a middle school (Vermont), or a regional park that hasn't even been approved yet (Arizona), builders are being asked to foot the bill. "What are municipalities trying to address with impact fees? The cynical view is whatever they can get away with," says Bob Dunphy, senior resident fellow for transportation at the Urban Land Institute's Washington, D.C., office. "They're not supposed to be used to handle existing problems. That's an issue. Most places with significant impact fees have old, unmet problems and new problems."

Stefan Markowitz, president of MBK Homes, in Los Angeles, says his company is constantly being hit with some new fee. Within the 24 to 36 months it to complete a development, it's not uncommon for fees to increase between $5,000 and $10,000 per house.

Digging for Dollars

The reasons behind the fees and the recent increases are myriad, but topping the list is the current economy. State and local governments are cutting essential services, while low mortgage interest rates have kept the home-building business booming. And nothing will end a politician's career faster than hiking taxes.

"Government is broke," says R. Randy Lee, CEO of Staten Island-based Leewood Real Estate Group and chairman of the Building Industry Association of New York City. "In the last presidential election, we were talking about how to spend the surplus; now we have a deficit. Communities here have deep financial shortfalls ... . Politicians don't like taxes. They just love the idea of charging more money to builders."

In reality, the cost of infrastructure falls to the group with the least clout -- new residents.

"Politically, impact fees are the easiest thing to do," says Keyvan Izadi, a land use planner at the National Association of Home Builders. They're sometimes called the 'Welcome, Stranger' Tax. They're not voting, so there's no impact on the political agenda. From that perspective, it's very easy to impose. They won't get a lot of opposition."

Larry Kahn, who builds in Dade, Broward, and Palm Beach counties, concurs. Building permit fees went up 50 percent in 2001 with no input from the Miramar community, he says.

Even in states where impact fees are technically illegal, local governments have found ways around them. In Virginia, it's against the law to contract for zoning, says Mike Toalson, executive vice president of the state's Home Builders Association. Municipalities can't force developers or builders to set aside land for schools or parks or pay for road improvements. So they have a voluntary system called "proffers," in which local governments request a contribution without actually coming out and saying it's a requirement.

"They're voluntary, wink, wink," Toalson says. "Local governments have become very efficient at denying rezoning requests for a broad range of public safety health and welfare services when you fail to meet their financial expectations."

Legal Boundaries

Virginia-based land use attorney Michael Banzhaf says that governmental agencies are in a panic overrapidly increasing growth and developers are the ones bearing the brunt of their inability to keep up. "Developers are common scapegoats for anything government can't fix," Banzhaf says. "Whatever they can impose on developers, they do."

Becky Pieroni, a Phoenix attorney who specializes in master planned communities and legislative issues affecting home builders, sees the same thing happening in her part of the country. Unabated growth has led local governments to stretch well beyond the scope of necessary services to try to fund "wish list" projects, including a regional park for which there are no approved plans.

"Even apart from the nexus test, there's the benefit test," Pieroni says. "You can't point to a benefit anyone will ever get."

In Ohio, impact fees have been charged and collected off the record for years, says Vince Squillace, executive vice president of the Ohio Home Builders Association.

"It's not a battle against impact fees; it's a battle against the way they're processed. State law is very specific." -- Sandra Cathy, director of government affairs, Atlanta HBA "Some call it extortion, some call it negotiation," Squillace says. "It's gone on in the past and it goes on today ... . The art of negotiation is alive and well in Ohio." Most builder association officials say their members have no problem with paying legitimate fees for services their developments will use. As long as the fees are fair, consistent, and predictable, they consider it a reasonable cost of doing business that helps them bring a product to market.

"If a city doesn't have sewer capacity, there's not a builder anywhere that won't sit down with them to work it out," insists Jason Reid, regulatory affairs director for the Alabama Home Builders Association.

The Devil You Know

The constant need for negotiation and the lack of certainty about how fees are used has led builders associations in several states to support state legislation authorizing municipalities to collect impact fees. At least that way, builders know what the fees are going to be.

"Sometimes, it's better for builders to have impact fees," says Bob MacNamara, policy representative for the National Association of Realtors and an authority on impact fees. "There are worse things people can do to you, such as development excise taxes. Then they don't have to prove nexus; they just approve the rates."

Model legislation requires municipalities to meet the legal tests of rational nexus, reasonable relationship, and rough proportionality. (For a lesson on impact fee litigation, see sidebar on page 38.) They set out the types of services for which fees can be assessed, require them to be used to provide infrastructure directly related to the development, segregate the fees in a separate account from the general fund, and set a time limit within which the fees must be spent. They often have a formula by which the fees must be calculated and include a provision that any money not spent within the time limit has to be returned. That part often doesn't go over well.

"One of these days, some savvy person will knock on their door and say, 'Give me my money back' and there will be widespread panic," says Jack Milarch Jr., executive vice president of the New Mexico Home Builders Association.

New Mexico has had state enabling legislation since 1993; municipalities had two years to enact impact fee ordinances. Most passed the required laws; the city of Albuquerque still hasn't done it and continues to impose exactions that vary from project to project.

"You never know if you're just adding a little bit of drainage or rebuilding the freeway," says Karen Marcotte, owner of Consensus Planning and a leader in the Albuquerque real estate community's effort to work with the city on a realistic set of fees. "Home builders and developers would be willing to pay for the cost if they knew everyone else was paying the same and knew up front what the number would be."

Recent projects in the city have seen fees range from $2,000 per unit to $15,000 per unit, Marcotte says; sometimes, builders have abandoned projects because they found the costs were insurmountable.

'Smart' Growth vs. Affordable Housing

Last September, the city council voted for a set of impact fees based on growth policy goals rather than the actual cost of services. Lower fees are offered to builders who develop in the central part of the city. Those who want to build in the outer edges of the city, where Marcotte says the most land is available, will pay prohibitively high fees as a disincentive.

It's a trend that builders are reporting nationwide. In addition to using impact fees to pay for existing needs, municipalities also are using them to try to control growth.

Pieroni says that kind of strategy is ludicrous.

"City planners have no training in economics at all," she says. "I'm astounded at the hubris of thinking you can regulate market forces ... . A lot of planners don't realize that we're just middlemen. They think they're taxing developers when they're really taxing home buyers."

And at a time when local governments are begging (and levying inclusionary housing fees) for affordable housing, it is particularly ironic. The higher the impact fees, the more likely builders are to focus their efforts on high-end homes where the buyers can absorb the additional cost.

"Affordability is a huge issue" in Colorado, where impact fees add $30,000 to $40,000 to the cost of a new home, says Rob Nanfelt, government affairs director of the Colorado Association of Home Builders.

"If you're paying 40,000 on a $120,000 unit, that's 30 percent," he notes. "The more fees that are added, the less people qualify."

The situation is no different in the Orlando area, where the fees are the same for a house that costs $200,000 as a house that costs $400,000. At some point, it stops making sense for builders to even try to construct starter homes.

"I've never felt they were equitable," says Cecelia Bonifay, a land use attorney in Orlando. "It hits people in the lower end disproportionately and phases some people out on the front end."

Putting it on the Line

In Albuquerque, builders are "voting with their feet," Marcotte says, and optioning land in adjacent communities. In the long term, litigation is a possibility, although the real estate community is waiting to see how the ordinance is implemented. "We want to avoid legal action, but it may come to a point where we don't have a lot of choice," she says.

In general, and for obvious reasons, builders are reluctant to file suit against municipalities. "It's hard for a builder to sue the governmental entity that has life-or-death regulatory authority over his or her business," says Harry Savio, executive vice president of the Home Builders Association of Greater Austin. "You better be sure you can win."

But many builder associations already have reached that point. Legal challenges are under way across the country in state and federal court in an attempt to force municipalities to follow the law. The Greater Atlanta Home Builders Association has lawsuits in both state and federal court, including the first impact fee case to go to the Georgia Supreme Court.

In federal court, they're part of a unique coalition that includes a conservative legal foundation and the Sierra Club in a battle against the city of Atlanta over its use of impact fees. Millions of dollars have been collected in the northern part of the city, which includes the very affluent Buckhead area. But the money has been used to fund improvements on the south side, a depressed part of the city that has many legitimate infrastructure needs.

Roads are severely overburdened and police and fire protection are lacking in Buckhead; the Sierra Club wants to know where the impact fees for parks have gone since, as the suit alleges, the city has the least public park space per capita of any major city in the country.

"It's not a battle against impact fees; it's a battle against the way they're processed," says Sandra Cathy, director of government affairs for the Greater Atlanta Home Builders Association. "State law is very specific. If you collect impact fees, they must be used in that area to offset direct impact."

The case is in federal court, she says, because the complaint includes allegations that the fee constitutions a violation of the Fifth Amendment ban on government taking a person's property without just compensation.

In state court, home builders are fighting a fee established in nearby Cherokee County, alleging that the fees assessed in the unincorporated areas primarily benefit residents of the county's cities, who don't pay impact fees. The circuit court ruled that the fees for three of six services were unconstitutional, and three weren't. Both the builders and the county appealed; the appeals court ruled with the county. The builders have now appealed to the state Supreme Court.

"Our big problem is the home builders supported impact fees because at least we've got a guarantee of getting infrastructure built that relates to our projects," says Deron Hicks, the attorney representing the home builders in the case. "The Court of Appeals said the county can spend it where they want. I don't see a difference between that and a tax when you grant a county that much discretion."

In the fall, the home builders were waiting to learn if the Supreme Court would agree to hear the case; the appeal is not mandatory.

"We could become a state like Florida, where the fee can be very broad," Hicks says. "We thought that couldn't happen here; we have a very strict impact fee law. The Court of Appeals decision undermines that. It's very troubling."

Rough Road Ahead?

It could get even more troubling because right now, the record-low mortgage rates have allowed home buyers to absorb the additional cost of impact fees, points out Florida builder Larry Kahn. "Could it affect people's ability to buy homes when interest rates go back up? Absolutely. We should all be concerned about that."

New York City's Lee says the best defense is to take the approach of the Wisconsin home builders, whose state association maintains a legal fund to scrutinize every proposed new impact fee and has no qualms about going to court to fight an unfair or illegal fee. "The building industry is its own worst enemy," Lee says. "They look at the bottom line and if they can afford the fee, they say, 'Let's do it.' It takes a brave soul to tie up their property for a period. What does the guy say? You never want to be an interesting lawsuit."

Meanwhile, municipalities continue to struggle to fund their infrastructure needs. Cities such as Gainesville, Fla., which stopped collecting impact fees in the early 1990s, are now faced with overburdened roads, schools, and other necessary services -- and no definitive plan for providing them.

"Where are you going to get the money to fix the mess?" asks impact fee expert James Nicholas, who lives in Gainesville.

"Bake sales have been mentioned."

Published in BIG BUILDER Magazine, January 2003