Cost Accounting in Local Government

Development’s Winners and Losers

There are four players in the development game: developers, contractors, land owners and current residents. Each plays a critical role and each has goals that are not necessarily shared by the others.

The developer is the entrepreneur who sees potential in the development of a parcel of property. The developer is the risk taker who bets that he or she can buy the rights to develop a parcel, hire a contractor to build the development and sell/lease it to buyers/tenants at a profit. As the risk taker, the developer can lose everything, win big, or end up somewhere in between. Costs are extremely important to developers as they come out of their pockets. Some develop to leave a legacy, others to acquire a fortune, and most because developing is what they know how to do to make a living. Often the developer goes where the opportunity is the greatest, which can make their association with a community tenuous at best.

Contractors are the local workers who construct the development conceived by the developer. Their livelihood is based on the existence of development. Anything that threatens development is perceived as a personal threat, so consequently, they are allies of developers.

Land owners of developable land can be realtors or the rancher/farmer who is ready to retire or move to an area more remote from civilization. Often they are the long-term speculator who sees potential in property where others see dust. Land owners and developers will court each other until a match is found that meets the needs of both parties.

These three groups are obviously pro-development as that is their career and it affects their financial well-being.  The fourth group is comprised of a community’s current residents, who have a conflicted view of development.

The current resident is someone who already lives in the community and, along with the business community, pays taxes for current services. The individual resident may have limited clout in the local legislative body where businesses and other special interests often contribute money and time to elect candidates for office. Only when sufficient numbers of residents are aggravated about an issue can the strength of their electoral numbers overcome the financial advantage of their perceived adversaries.

In the early stages of a community’s growth, open land is plentiful and development is scattered and sparse. Developers who work in this environment rarely encounter opposition for modest developments or for developments that meet a particular need of the community. However, at some point in the growth of a community, it becomes more and more apparent that new developments are impacting the existing residents. The signs are subtle at first: a longer commute to work or to the store because of the volume of cars on the road or because an intersection takes so long to get through. That open space across the street or down the block that the kids could play in is now filled with homes or stores and the kids have to find a new place to play. The little Carnegie Library that served the community so well in its early days is now overwhelmed by local school children seeking books that their school libraries can no longer afford.

It is generally at this point that the professional staff of a community recommends development fees to the legislative body. The impetus can be financial or “quality of life.”  From a financial standpoint, the community may not have the monies to construct the infrastructure that a development requires to avoid impacting the current residents. From a “quality of life” standpoint, the empty lots which were used as unofficial parks are now full of homes and alternatives need to be found for youth recreation.

What has happened is that a community has reached a “tipping point.” Obviously, every development that has occurred in the past has had an impact. But, suddenly, “It’s my development that is going to be charged. Where the guy who developed before the impact fees made lots of money, I may now go broke.”

No one questions that there is an impact from building thousands of new homes in a small community. But, it is a lot harder to see the impact of building three homes on a small parcel.

The Development Agreement process was the initial method used to obtain infrastructure funding from a developer. However, the development agreement was not always the fairest way to mitigate the impacts of a development. Many communities found that the facilities constructed, using the development agreement, were perceived as “belonging” to the neighborhood and not to the community as a whole. At the same time, other impacts were too small to be addressed in the development agreement, such as library books, or else they were too large to be thought of as impacts, such as the need for a larger sewer trunk line servicing the entire community.

Believe it or not, the development impact fee process was designed to be the fairest for all developments: neither overcharging the large development nor undercharging the small development. The process is simple: (1) identify the cost of additional infrastructure that will be necessary to support the community at build-out; (2) split the cost of the additional infrastructure between what the existing community requires and what new development requires; (3) identify what new development will occur between “now” and build-out; (4) Identify a “use” factor for how the new development “uses” the infrastructure; and, (5) spread the cost of the additional infrastructure over the new development based on how the new development will use the infrastructure.

If we can agree that development impact fees are, conceptually, the fairest way to allocate impacts to developments, why is the development community often seen as opposed to them? The obvious answer is that the cost of the impact fees is coming out of the developer’s pocket. Therefore, if a community is at the “tipping point,” the rational developer would like to be the last one to develop before the impact fees are imposed.

An argument is often made that impact fees increase the price of homes. In a perfect world, that would be true as every home being built has an impact on its community’s infrastructure. However, we don’t have a perfect world. Some communities have established impact fees while neighboring communities have not. Since the value of a home is determined by the marketplace, the home in a community that has established impact fees may not be marketable at a price where the impact fee is in addition to the developer’s costs. In such cases, the developer pays the fees out of his/her own pocket.

Nevertheless, once the tipping point is in the past, new developments will all be paying the impact fees and these costs will then be included in the price of homes. Is this bad? I don’t think so because the costs will have to be paid by someone. If it isn’t the owner of the new home, it is everyone else in the community who is paying, either overtly by having some of the taxes that would have been used for police and fire diverted to capital projects, or covertly such as a longer commute time with increasing road rage. What this means is that a community that has rejected development impact fees has made a decision to have the entire community pay for the impacts caused by new development. In a democracy, that is perfectly okay as long as it’s understood that the non-decision is actually a decision that the existing community is going to pay.

So, are all development impact fees wonderful? No! Often when staff and the legislative body develop the list of projects required by build-out, the list includes projects that inflate the cost and are unnecessary. Or, projects that the existing community needs are attributed to new development. Members of the development community should carefully review the projects to understand why, or if, they are needed and whether the cost-sharing is fair.

The positive side of development impact fees for developers and land owners is that projects and land in a community where the infrastructure has kept pace with development will command a higher price than in a community where residents are unhappy with their facilities. Unfortunately, the marketplace does not immediately make that adjustment so those at the “tipping point” will not see the benefit.

Impact fees are another price of civilization. It is no different from our paying taxes to have a professional firefighter standing by rather than depending on our neighbors to put out our fire with garden hoses. Nevertheless, at each tipping point, there are winners and losers. We need to understand that when the development community fights to develop without paying its fair share of infrastructure, it’s similar to the “open range” philosophy that all grazing land and water should be free. In case you haven’t noticed, the times they are a-changin’.

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