Cost Accounting in Local Government

Do Development Fees Affect Home Sales?

At about every other Council or town-hall meeting I attend there is the question about whether development fees (planning fees, permit fees and impact fees) affect housing sales. More specifically, I am asked if the suggested fee increases deter housing sales and economic growth within that community. At the dais, I have little time to speak, so the answer is generally, “No, I have not seen any evidence that fee increases, or approving development fees higher than neighboring communities, lead to developers looking elsewhere to build.” I also remind everyone that impact fees are one-time opportunities to recover infrastructure costs.

Development impact fees are the most efficient revenue source to pay for infrastructure improvements needed because of development. Fees have legal restrictions on how they are collected and used. The development applicant will bear the full cost of the planning and permit service and directly benefit from these services. Developers paying for impact fees are proportionally responsible for their impact on the city’s infrastructure.

So many other variables, such as property size and location, land cost, zoning codes, regional construction cost, existing housing stock, rental rates, and the general economy, collectively affect the supply and demand of housing, that deciding on a project based primarily on development fees would be unrealistic.

Building industry advocates will attend the public hearings for fee updates to complain about the high cost of development fees set by cities. That’s when I hear suggestions to subsidize or reduce the development fees or there won’t be any development in town.  My response to such ideas is that the fees were established to cover the costs of the development to the city, and there is no profit. Dollar for dollar, the cost of land, developer processing, construction and municipal fees all contribute to the final cost of the house.  So, what if the solution to affordable housing was to limit the sale price of land, or mandate construction cost standards statewide?

Proposition 13 exacerbated the problem of development fees and affordable housing in California. Prior to 1978, a city could marginally increase the property tax rate to pay for capital improvements and expansions. That cost would be spread among the many taxpayers within the city. Today, the few new homeowners must bear their share of the full costs of expanded city infrastructure if they want to buy a new house in town. This allocation of costs, away from the current taxpayer, can make it harder to build starter homes as the cost of development fees treat homes equally.

So what does it mean to California? A 2005 study by the National Bureau of Economic Research found that California homeowners stay in their homes 1.4 years longer than in other states. Los Angeles homeowners stay two years longer, and San Francisco homeowners remain in their homes three years longer than in other states. To me, that means people have less job opportunity or longer work commute. For cities, longer residency means less property tax revenues under Proposition 13 and therefore more strain on roads and highways.

This topic can go on for pages, and I’ve just begun to research it academically. I’d love to hear your thoughts on it.

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