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Development’s Winners and Losers

Updated: Sep 16, 2020

There are four players in the development game: developers, contractors, landowners and 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 developing a parcel in a community. The developer is the risk taker who bets that he or she can buy the rights to develop, 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. Out-of-pocket costs are extremely important to developers. 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. Their goal is to earn enough money to support their family or lifestyle. Anything that threatens development is perceived to affect their livelihood, so consequently, they are allies of developers.

Landowners of developable land in the community can be anyone who sees potential in their property where others see dust. Landowners and developers will court each other until a match is found that meets the needs of both parties and that fact makes them natural allies. These three groups are obviously pro-development as that affects their financial well-being. Jointly, they represent the development community.

The fourth group is comprised of a community’s residents. Current residents have a conflicted view of development. On the one hand, they may like the amenities it generates. On the other hand, they bear the brunt of unmitigated effects such as increased traffic and less open space.

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 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 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 must 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” or both.  From a financial standpoint, the community may not have the monies to construct the infrastructure that a development requires to avoid impacting the residents. From a “quality of life” standpoint, the empty lots which were used as unofficial parks are now gone and alternatives need to be found for 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 were proposed 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 by using the development agreement were perceived as “belonging” to the neighborhood and not to the entire community. 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 would require; (3) identify the types of new development that will occur between “now” and build-out; (4) Identify a “use” factor for how the new development types will “use” the infrastructure; and, (5) spread the cost of the additional infrastructure required by new development over it based on how it uses the infrastructure.

If we can agree that development impact fees (DIFs) 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 their pockets either directly or indirectly by affecting the payment to the landowner and the employment of the contractor. 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. rather than being the “loser” who pays the impact fees for the first time.

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 may have established impact fees while neighboring communities may not have. Since the value (i.e. price) of a home is determined by the marketplace, the home in a community that has established impact fees will cost more thereby generating less profit for the developer, potentially even a loss. This is the reason why developers are so opposed to be the first to pay new or increased impact fees.

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 development community, it is all of the residents who pay, 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 city council that has rejected development impact fees has made a decision to have the residents pay for the impacts caused by new development. In a democracy, that is perfectly okay if it is understood that the non-decision is actually a decision that the residents are going to pay and will be the “losers.”

So, are all development impact fees wonderful? Potentially, but it is a process created and used by humans and not given by a burning bush. Therefore, it is up to the agency’s professional staff to generate a quality DIF report and for members of the development community to carefully review the projects required by build-out to understand why, or if, they are needed and whether the cost-sharing is fair.

The positive side of development impact fees for the development community 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 is the same as saying, “We want to be ‘winners’ and have the residents be the ‘losers’.”

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