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HomeMy WebLinkAbout11-15-12 Discussion Points for Evall COB IF Prog 311 West Main Room 311 Bozeman, MT 59715 PH: 406-763-4412 FAX 866-847-8033 Page | 1 DISCUSSION POINTS FOR EVALUATING THE CITY OF BOZEMAN IMPACT FEE PROGRAM PRESENTED TO BY ROB GILMORE, EXECUTIVE DIRECTOR, NRMEDD NOVEMBER 2012 311 West Main Room 311 Bozeman, MT 59715 PH: 406-763-4412 FAX 866-847-8033 Page | 2 Executive Summary The question of whether to impose or not impost impact fees is an important economic development decision that confounds many modern communities. Impact fees cut both ways when it comes to attracting new business. Infrastructure is a vital attraction to economic development but on the other hand high fees influence the investor’s ‘perception’ of cost. It is not always possible to articulate the benefits that impact fees contribute to an investment over the long term. Benefits are particularly difficult to demonstrate at the level of an individual project. The result to many investors, however; is that fees create the perception of higher costs and this perception undermines a community’s economic competitiveness. Cities and counties seeking to either establish or study existing impact fees are resigned to do so without the benefit of widely accepted or uniform standards. While the majority of U.S. communities DO use impact fees for water and sewer, the majority DO NOT use ‘development impact fees’ (defined as impact fees for services other than water and sewer). The majority of cities with a population greater than 25,000 DO collect development impact fees. This paper does not seek to address the value of charging utility fees for water and sewer. For the most part the matters of equity that surround water and sewer fees have been established and that issue is resolved in favor of charging fees. The task at hand is to balance growth opportunity on one side with the City’s need to raise capital to finance increasing demand. The prevailing trend among larger cities is to charge impact fees, but it is also a present trend to lighten fees to stimulate economic growth (overall, the collection of impact fees is declining). There is also no evidence that fee-reduction by itself actually stimulates economic growth. Conversely, there is evidence that eliminating or suspending fees creates new unexpected inequities. The call of unfairness when fees are reduced is voiced by those who may have recently paid fees or paid them in the past and now feel their investment has been lost or those that find that when impact fees were eliminated their property values diminished as a result. Professional planners will say that the argument for impact fees is not a fiscal but an equity argument. Actually, municipal-owned property is one of the most common assets that communities use to balance the equity of charging fees. In an effort to balance fees, some communities impose impact fees on developments but then offer land to investors at a discounted rate (think Mandeville). 311 West Main Room 311 Bozeman, MT 59715 PH: 406-763-4412 FAX 866-847-8033 Page | 3 The City of Bozeman has enjoyed a long period of market domination when it comes to locating key industry, but recent ‘losses’ are indicators that the advantage may be shifting as areas of the County are preparing for and receiving new growth. There are several factors and the underlying decisions to site a business are complicated. There is the argument that the City is losing simply from unequal competition. In highly desirable situations, the City may find that impact fees make it difficult to compete for new business; example Blackhawk, Simms, Right Now and other Four-Corners and West Bozeman developments. The questions that need to be asked are; is the City of Bozeman as competitive to new development as it was during the boom times? Do developers and investors share our Community’s sense of value and worth? Is the value we attribute to our community measurably greater than that of other markets? Recommendations 1. The City needs to work quickly to bring Mandeville ‘on line’ with respect to subdividing and infrastructure development. The City has land available to accommodate new growth but it needs to be made ready. Mandeville Farms, properly marketed and priced, provides the City with an effective resource to compete against competitive properties. 2. The City should prepare materials to educate future investors showing the short and long-term investor-advantages for charging impact fees when compared to other fee recovery solutions. 3. The City structure impact fees as to subsidize new facilities but not totally fund the increased demand (for example 75% of the fully amortized fee). This would serve to mitigate the competitive disadvantage of areas immediately adjacent to the City and that do not charge fees. 4. Deferring the City impact fees until the application for Certificate of Occupancy. 5. The City commit to training and educating employees whom interface with investors and developers. There is value in appreciating that the City competes to attract new business and that City attitudes, customer service, shared value for business attraction and professionalism each play a part in the business decision. 6. The City’s fee schedule should be compared against fees of other communities (See Exhibit 1). 311 West Main Room 311 Bozeman, MT 59715 PH: 406-763-4412 FAX 866-847-8033 Page | 4 Background – Impact Fees The City of Bozeman has a long established policy to embrace strategies that attribute fees to users in an equitable measure. In an effort to balance new demands with fair equity, the City of Bozeman currently applies a standardized cost to new housing, office buildings, retail, and industrial developments. The fee basis for each of the major developments above is allocated across several categories including streets, fire, water, and sewer. Impact fees are also referred to as capacity fees, facility fees and capital recovery fees. In the City of Bozeman, impact fees are collected to offset the costs of new demands for system capacity. The City Commission is reviewing its current fee structure including evaluating the program for user equity, funding future capacity and minimizing adverse impacts to economic development. The following is a summary of articles and papers related to the business of considering or reviewing impact fees. The objective is to summarize key points about impact fees, both pro and con. The following statements have been selected because they are concise and articulate both sides of the issue. It needs to be pointed out that the policies that guide the City of Bozeman impact fees already incorporate many of the points raised by these statements. Because quotes often cover multiple topics there is some unavoidable redundancy. What are Impact Fees – what is their history? Impact fees have been used since the 1920’s and were first used to manage growth and urban sprawl. Impact fees have also been used for many years in utilities and enterprise funds in the form of connection fees, system development charges, or buy-in fees.1 Impact fees were first implemented in Hinsdale, Illinois in 1947. To finance a water treatment plant expansion, the Hinsdale Sanitary District president John A. McElwain implemented a "tap-in" fee of $50 per new residential sewer line. The sanitary district was sued by the Illinois Home Building Association, but the district prevailed. The case was appealed to the Illinois Supreme Court and that court ruled that impact fees are legal if used for capital expenditures, but not legal if used for operating expenses. http://en.wikipedia.org/wiki/Impact_fee 311 West Main Room 311 Bozeman, MT 59715 PH: 406-763-4412 FAX 866-847-8033 Page | 5 There is a theory that ‘impact fees enable local government to increase the supply of buildable land to more closely match demand’. The argument is made that where two properties compete for development and one is subject to a fee and the other is not, according to the classic economic theory the property with a fee will be sold for less in order to compete. The City needs to encourage the formation of land for new development. For some developments, and in some instances, the City of Bozeman is in a position with Mandeville Farms (for example) to offer land at co\mpetitive prices and offset the economic disadvantages of its impact fee structure. Statements 1. Impact fees differ from consumptive fees in that the later provides a constant source of revenue. On the other hand, impact fees are directly aligned to new projects or major transitions and as a result are more subject to the vagrancies and the ebb and flow of economic activity. Impact fees may not be counted on to provide a constant revenue stream during times of economic stress. 2. Today, impact fees have become a popularly used method. About 60% of all cities with over 25,000 residents along with 40% of metropolitan counties place impact fees on new developments for public services or infrastructure. In some cities or states such as Florida, 90% of communities use Impact Fees. Twenty six states have implemented the use of impact fees in the western portion of the country, along the Atlantic coast, and within the Great Lakes region. (Duncan Associates, 20 February 2008). In the recent years (2008 – 2012) there is a national trend downward in the pricing of impact fees (Mullen, Nov 2010). 3. A recent study of 40 impact-fee-charging Florida counties (2007 to 2010) concluded: ‘this analysis has been unable to confirm any statistically significant relationship between impact fee reductions and higher rates of building permits issuance for single-family development’. (Mullen, Nov 2010) 4. Communities that have impact fees (other than the ubiquitous water and wastewater connection fees) still tend to be in the minority. (Clancy Mullen, August 2012) 5. The City of Bozeman exists as an ‘impact fee island’ surrounded by Gallatin County that for the most part does not charge fees or has fees substantially less than the City. As a result, the City’s fee structure sets up a potential competition for new development with Gallatin County. 6. Impact fees became popular when voters resisted higher property taxes and federal revenues for local public facilities declined. Local governments were forced to abandon traditional ways of financing new infrastructure and public services and move toward an alternative source of financing. (Libby) 311 West Main Room 311 Bozeman, MT 59715 PH: 406-763-4412 FAX 866-847-8033 Page | 6 7. Frank and Downing (1988) found four community characteristics that may induce the use of impact fees. First, there is a large population base. Second, the community is experiencing moderate to rapid growth. When a city is growing and its residents wish to maintain a constant level of public services, both infrastructure and current services must increase over time. The city has to decide how to finance the cost of both. Third, the community already faces high property taxes. Evidence shows that communities that devote significant tax resources to the support of growth are most likely to adopt an impact fee scheme as an alternative way of financing development. Finally, there is large capital investment to maintain. As communities grow larger, there is the necessity for a larger sewer system which is more expensive to replace and maintain. (Frank, 1988) 8. Development impact fees may raise the cost of development and conceivably will affect location decisions by residents or businesses. If those location decisions are highly price responsive (elastic demand) then such other methods as metered user fees may be more appropriate for the municipality than impact fees. (Libby) 9. High impact fees can put your community at a disadvantage in attracting new development and could shift development to neighboring cities or counties. Keep in mind, however, that impact fees do not have to be set to reflect the total cost of providing public facilities to new development the fees can legally be set at any level less than this total cost, if this is more feasible for your community. In setting fees, consider what the market will bear without discouraging growth, but balance this against the desirability of using the fees to promote the community's desired development patterns. (Guidebook, Introduction to Impact Fees, Georgia Department of Community Affairs 2012). 311 West Main Room 311 Bozeman, MT 59715 PH: 406-763-4412 FAX 866-847-8033 Page | 7 Discussion and Notes In a paper, Financing Growth in Shelby County- Who should pay? Joe Sarver does an excellent work of describing the pros and cons of impact fees and assembling arguments on both sides of the issue; the following is taken from his paper (Sarver, 2003). IMPACT FEES - RECOMMENDATIONS FOR SUCCESS (Note: most of these statements are already represented in the City’s policies and strategies). Don't use impact fees as a method of growth control. Use the impact fees to contribute the financing to provide the public facilities necessary to accommodate the growth in the community. The impact fees should merely accommodate the growth envisioned in the community's general or comprehensive plan. If that growth is inappropriate, change the plan. Determine capital improvement needs through build-out. It is essential to have complete information on capital needs. Many communities do not have a practical capital improvement plan that addresses the public facility needs for even the next five years. Impact fees based on incomplete CIPs will not generate sufficient revenues to assure that development pays its own way. Show all capital improvement needs, including those not being financed with impact fees. The identification of projects necessary to overcome existing deficiencies is needed to show the development community that they are not being asked to correct existing problems. A corollary is that the community must demonstrate that they are using impact fees exclusively for growth-related projects. Other sources of revenue must be found for projects benefiting existing residents. Develop long-range financing strategies for projects not financed with impact fees. Projects that are not financed with impact fees will need to have other sources of revenue for construction. The agency should try to identify potential sources of revenue that will be used to build nongrowth projects. The extent that the agency is successful in identifying specific sources of revenue may be an indicator to the reality of achieving the ultimate goals of the community's general or comprehensive plan. Do not attempt to finance operations or current deficiencies with impact fees. Impact fees justified by the need to offset the effects of growth should not be used for operating expenses. To do otherwise would be unethical and could result in a loss of faith. 311 West Main Room 311 Bozeman, MT 59715 PH: 406-763-4412 FAX 866-847-8033 Page | 8 Produce a comprehensive impact-fee report, including rationale and calculations, make the report readily available to the public. Performing an extensive study prepares the agency to answer questions about the way the fees were calculated and the use to which the fees will be put. Complete documentation can be a powerful form of defense against challenges to the agency's ability to impose impact fees. Update the impact fees periodically. Impact-fee calculations should be updated often to ensure that the assumptions are still valid. The projected growth of the community, the facility needs, and the cost for providing those facilities should be verified. Reviewing the impact-fee calculations together with the capital improvement plan or budget would be ideal. At a minimum, the impact fees should be reviewed every two years, or whenever a major change occurs (e.g., major annexation or general plan revision) in the community (Thorpe., 1992). Kolo & Decker in their journal article note the disadvantages of impact fees. (Dicker, 1993) In spite of the advantages discussed above, impact fees are not without some problems, many of which can be deduced from the contentions expressed by developers. The most vocal objection ensues from the fear that impact fees have adverse effects on the housing market and/or on profit margins. This fear also has a social dimension in that low- and some middle-income earners may be priced out of the housing market should developers build the cost of impact fees into the net cost of housing. For commercial property, developers assert that consumers of office buildings and commercial space would need to increase their expected rate of return on their rent profits and capital gains as a result of paying an impact fee. In an elastic market, commercial renters may relocate some or all of their operations to cheaper locations. Rents can be raised to cover impact fees, but developers must first determine rates at which higher rents would result in vacancies. Another problem is the inequity that may result from the difficulty and complexity of adopting uniformly enforceable impact fee formulas and structures. In most cases, the fees are negotiable; therefore, even when municipalities do not intend any inequity in the adopted fee structures, the negotiation abilities and political currencies of developers and their attorneys could result in major differences or inequities in the implementation of the fees. Part of this inequity is that, depending on specific circumstances, developers rarely pay the full cost of the fees levied directly on them. The cost is often either pushed back to the land owner by lowering the price paid for land, or pushed forward to the consumer. 311 West Main Room 311 Bozeman, MT 59715 PH: 406-763-4412 FAX 866-847-8033 Page | 9 Finally, the cost or part of it can be absorbed by government through some form of public contribution. If impact fees do not accrue in the amount expected, then the ability of a municipality to finance infrastructure adequately is limited. This is true particularly where development is slow due to recession, excessive interest rates, conservative lenders, refusal by developers to build and/or willingness to build elsewhere, and an impact fee system that generates little or no revenue because of the ease with which developers can abuse it or secure exemptions from it. (Dicker, 1993) 311 West Main Room 311 Bozeman, MT 59715 PH: 406-763-4412 FAX 866-847-8033 Page | 10 Common Myths about Impact Fees Myth: Impact Fees Will Have Border Effects This argument asserts that if a developer is choosing between two parcels of land on which to build, where the first parcel is inside a city that charges impact fees and the second is in another where impact fees are not charged, the developer will choose the second parcel. The trouble is that if the owner of the first parcel does not make a sale. The owner must lower the land price to offset the fee in order to make a sale. Myth: Impact Fees Are Bad For Economic Development Related to Myth above is the argument that because impact fees raise the price of doing business, they frustrate economic development. However, just the reverse is true. First, remember that impact fees will be offset by reduced land prices and by enabling the community to more easily expand the supply of buildable land relative to demand. Now, consider what economic development really looks for: skilled labor, access to markets, and land with adequate infrastructure. Competitiveness for economic development will be stimulated by the new or expanded infrastructure paid in part by impact fees. Myth: Impact Fees Are Too High This argument relates that the only good impact fee is no impact fee, and any impact fee is too high. First of all, impact fees merely reflect the real cost to provide the very infrastructure to new development that development needs. Second, impact fees rarely exceed one quarter of the total cost of new facilities needed to accommodate new development; the larger share of that cost is paid from intergovernmental sources and existing tax structures. Third, impact fees (other than utility connection fees) usually run less than 5 percent of the total sales price of a new home, which is less than the customary 6 or 7 percent charged by real estate professionals. Myth: Impact Fees Are Difficult And Costly To Administer At 1 to 5 percent of total receipts, impact fees are the most efficient method of exaction. For example, researchers at the Georgia Institute of Technology recently found that government costs associated with case-by-case, negotiated exactions are four times higher than impact fee administration costs. Moreover, considering that developers incur far greater costs associated with case-by-case negotiations than local government, but there are no such costs where impact fees are involved, the developer savings can be considerable. 311 West Main Room 311 Bozeman, MT 59715 PH: 406-763-4412 FAX 866-847-8033 Page | 11 Myth: Impact Fees Are Just One More Bureaucracy Developers Have To Contend With Since developers pay fees based on a published fee schedule, gone are many of the time consuming, unpredictable, usually unfair horse trading between developers and local government for improvements. The result is several important efficiencies that accrue to developers. These include predictability of decision-making processes, certainty of infrastructure provision, streamlined decision processes, and more precise information for financial analysis purposes. (Welch, May 28, 1999) Examples of how other Communities are reviewing their impact fees Lakeland Florida: The Economic Development Impact Fee Mitigation (EDIFM) is a reduction of impact fees to encourage quality job growth in targeted high value added businesses. The EDIFM was designed to encourage Build to Suit and Speculative Building Development. There are three ways to take advantage of the mitigation: 1.) High Wage Job Creation – build to suit projects adding high wage jobs paying 115% of the average annual wage or 2.) Industrial Job Creation – build to suit projects adding more than 100 new jobs or 3.) Inventory Development – creating an available industrial building inventory for prospective companies. {City of Lakeland, FL;http://www.lakelandgov.net/Portals/CommDev/Planning%20Division/Impact%20Fees/EDIFM%20Fly er.pdf BROOKSVILLE. FL: County commissioners Tuesday took what they agreed was a bold move and suspended impact fees across the board for commercial and residential construction. By doing so, they hope to spur economic development. Commissioner Wayne Dukes first proposed the move and drew applause from a crowded audience, many of whom were builders and Greater Hernando County Chamber of Commerce members. "We've all talked at different times about trying to generate employment for the county but, quite truthfully, there's very little we can do," Dukes said. "The only alternative I can see that we can control is to suspend impact fees altogether for one year." Others were not pleased, saying the board was suspending fees to satisfy special interests. Realtor Buddy Selph read a resolution from the chamber board of directors advocating an impact fee reduction to stimulate construction and put people back to work. Selph said he's never seen the economy this bad and by cutting impact fees to zero is not only a "bold statement" but would send the message across the state that Hernando County is pro-development. The zero rates will affect commercial and residential and be in place for one year, at which time commissioners will review them and whether the reduction helped spur the housing market. 311 West Main Room 311 Bozeman, MT 59715 PH: 406-763-4412 FAX 866-847-8033 Page | 12 Budget Manager George Zoettle in assured commissioners the county could fund all operations in 2012 if all impact fees were suspended for a year. Before Tuesday's action, impact fees had been reduced from $4,848 to $2,950. Several people said the reduction devalues homes and is unfair to make other taxpayers foot the cost for infrastructure improvements. Brooksville Mayor Frankie Burnett sent a memo to the board saying city council members don't believe the reduction of impact fees is the way to go to boost economic development. "Development should pay its fair share, even during slow economic times," Burnett wrote. "It is notable that if lowering impact fees succeeded in stimulating more residential overbuilding, it would only further depress the current real estate market." 311 West Main Room 311 Bozeman, MT 59715 PH: 406-763-4412 FAX 866-847-8033 Page | 13 Bibliography 1. Ross & Thorpe, Impact Fees: Practical Guide for Calculation and Implementation, Journal of Urban Planning and Development, Sep, 1992, http://www.revenuecost.com/imp_fees.html. 2. Kolo & Dicker, Practical Issues in Adopting Local Impact Fees, , State and Government Review, Vol.25, No. 3 (Fall 1993) pp197-206 3. Financing Growth in Shelby County- Who should pay? Joe Sarver, 2003 4. Terrance S Welch, An Overview of Impact Fees in Texas, A Short Course on Planning and Zoning for Public Officials and Attorneys, Southwestern Legal Foundation, Municipal Legal Studies center, Brown & Hofmeister, LLP, Dallas, TX, May 28, 1999 5. Research Associate and Professor, respectively, Department of Agricultural, Environmental, and Development Economics, The Ohio State University, Columbus, Ohio. 6. Frank, James E., and Paul B. Downing, 1988. Patterns of Impact Fee Use. In Development Impact Fees: Policy Rationale, Practice, Theory, and Issues, edited by Arthur C. Nelson. Chicago: Planners Press, American planning Association, 3-21. Compares Bozeman Development Impact Fees With 271 National Markets Exhibit 1 FACILITY TYPE Retail 271 Cities Average Bozeman 1000 sf $ 1,000 % difference Roads 5,685$ $ 9,029 159% Water 690$ $ 382 55% Wastewater 741$ $ 367 50% Drainage Parks Library Fire 402$ $ 356 89% Total 7,518$ $ 10,134 135% Office 271 Cities Average Bozeman 1000 sf 1000 % difference Roads 3,430$ 3909 114% Water 629$ 1109 176% Wastewater 690$ 963 140% Drainage Parks Library Fire 358$ 315 88% Total 5,107$ $ 6,296 123% Industrial 271 Cities Average Bozeman 1000 sf 1000 % difference Roads 2,076$ 2470 119% Water 656$ 821 125% Wastewater 765$ 713 93% Drainage Parks Library Fire 248$ 26 10% Total 3,745$ $ 4,030 108% Missoula Bozeman Belgrade Manhattan Missoula Data Point Fees Fees Bozeman Data Point - Proposed Fee Schedule Fees (55% of Posted) Belgrade Data Point Fees (50% and 33% of Posted) Manhattan Data Point FIRE AND EMERGENCY MANAGEMENT Single Dwelling Unit, Detached and Mobile Home <1200 72$ 205$ 1500 sf w/o coll 504$ 250$ reduced 50% >3200 142$ 418$ 3000 sf w/o coll Development Impact Fee for Nonresidential Development. <50,000 sf, commercial shopping center, Fee per 1,000 SF = 15,000 sf of Total GFA 2,010$ 5,203$ 14,698 sf w/o coll 5,775$ $.70 sf = 15,000 sf 5,894$ $.59 = 15,000 sf, reduced 33% >200,000 sf, commercial shopping center, fee per 1,000 sf of Total GFA 94$ <25,000 sf, Office Institutional, fee per 1,000 sf of Total GFA = 7,500 sf 1,417$ 7,392$ 7,400 sf w/o coll 866$ $.21 sf = 7,500 sf 1,000$ 0.2 sf = 7,500 reduced 33% >100,000 sf, Ofc Institutional fee per 1,000 sf of Total GFA 157$ Industrial, per 1,000 sf of Total GFA = 10,000 sf @108 1,080$ 260$ 10,000 sf w/coll 660$ $.12 sf = 10,000 667$ .10 sf = 10,000 sf, reduced 33% Warehousing, per 1,000 sf of Total GFA = 40,000 @$60 per 1000 2,400$ 1,040$ 40,000 sf w/o coll 1,980$ $.09 = 40000 sf 1,868$ .07 sf = 40,000 sf, reduced 33% TRANSPORTATION IMPACT FEE. <1200 sf,Single Dwelling Unit, Detached and Mobile Home cost per dwelling unit 814$ 1,812$ 1500 sf w/o coll 2,121$ 529$ reduced 50% > 3,200 sf, Single Dwelling Unit, Detached and Mobile Home, cost per dwelling unit 1,505$ 3,107$ 3000 sf w/o coll < 50,000 SF shopping center, Fee per 1,000 SF = 15,000 sf of Total GFA 48,075$ 78,209$ 14,698 sf w/o coll 57,255$ $6.94 sf = 15,000 sf 23,712$ 2.37 sf = 15,000, reduced 33% < 200,000 SF shopping center, Fee per 1,000 SF of Total GFA 2,331$ <25,000 sf, Office Institutional, fee per 1,000 sf of Total GFA = 15,000 21,705$ 16,919$ 14483 sf w/o coll 21,945$ $2.66 sf = 15,000 9,105$ $.91 sf = 15,000, reduced 33% >100,000 sf, Ofc Institutional fee per 1,000 sf of Total GFA 1,052$ Hospital fee per 1,000 sf of Total GFA 1,335$ Mini-Warehouse fee per 1,000 sf of Total GFA Industrial fee per 1,000 sf of Total GFA 550$ Warehousing fee per $391 per 1,000 sf of Total GFA = 40,000 sf 15,303$ 29,572$ 40,000 sf w/o coll 21,780$ $.99 per sf = 40,000 9,071$ $.34 sf = 40,000 sf, reduced 33% Transportation Impact Fee for Nonresidential Development per Unique Demand Indicator. Nursing Home (per bed) Number of beds 187$ 473$ per bed $160 bed Daycare (per student) Number of students 170$ 429$ per student Secondary School (per student) Number of students 97$ 245$ per student $57.60 per student Elementary School (per student) Number of students 67$ 170$ per student Lodging (per room) Number of rooms 444$ 1,124$ per room $382 per room Utility Fees Water ASHR 1,485$ .75 meter 5,128$ .75 meter size 1,756$ Sewer ASHR 767$ 2,708$ 4,774$ Park 831$ Comparison of Bozeman Fees with Cities along the I-90 Corridor