May 04, 2008
Impact Fees
As the E-R reported, development impact fees are set to increase on new construction.
Jurisdictions typically raise development impact fees to cover higher costs associated with providing services and infrastructure to support new growth.
”Development impact fees are one-time charges applied to offset the additional public-service costs of new development. They are usually applied at the time a building permit is issued and are dedicated to provision of additional services, such as water and sewer systems, roads, schools, libraries, and parks and recreation facilities, made necessary by the presence of new residents in the area….They are essentially user fees levied in anticipation of use, expanding the capacity of existing services to handle additional demand.”
Almost every time a jurisdiction, whether the school district or city, considers raising development impact fees, the Building Industry Association (BIA) tends to raise ojections.
The E-R published this quote from Jason Bougie of the BIA:
”When asked, Bougie said the cost of development impact fees goes directly to the buyer of the home. "It's absolutely built into the cost of a house, there is no doubt the homebuyer pays those fees; it's not a secret or anything," Bougie said. ”
There’s been much research on this topic of development impact fees and their impact on the homebuyer.
I think Bougie is partially correct, but his perspective only provides one side of the equation.
Development impact fees can affect both the home price and the profit margin for the developer.
While the homebuyer may pay for a share of development impact fees, the developer may pay too in the form of reduced profit margin.
My belief is the share of development impact fees that get passed to the homebuyer depends on the local or regional housing market condition.
When the housing market is slow or depressed (less demand on housing supply), higher development impact fees tend to have a greater effect on the developer’s profit margin since the developer cannot pass on higher costs as easily by inflating home prices.
When the housing market is hot, like during the late 1990s and early 2000s, developers can more easily pass on higher development impact fees onto the home price because increased home buying demand pushes up housing prices.
In short, the share of development impact fees either passed onto the homebuyer or affecting the developer’s profit margin depends on the local or regional housing market condition.
Today’s Scrabble word is regrate, or to buy up in order to sell for a higher price in the same area.
Posted by dan_nt at May 4, 2008 08:15 PM
Comments
When I hear the media talk about developer fees, they always focus on the impact it has for home prices. I think that is dilution of the real impact of the increase.
I think it would be more fair if we looked at the impact on commercial development too.
I think the citizens of Chico are less concerned about home prices (that are mostly paid for by people coming from out of the area) and more concerned about having a place to work that is easy to get to.
On one hand the city is trying to encourage businesses to come to Chico, but the other hand is raising the price of business and the price of opportunity.
Developers need to make a profit and we should appreciate that. If they can't make their projected profit in a specific amount of time, then they will invest their money improving some other community.
Good design comes from the opportunity that developers have to spend above their profit. A business can function in a trailer just as well as it can from marbled halls.
I am afraid that the character of our community is about to be sold out from under us because we think that increasing the cost of a new house by $1000 seems trivial.
Posted by: tj at May 5, 2008 09:31 AM
tj,
There are three never-ending debates facing Chico: where we grow, how we grow, and who pays for growth.
Some might argue that "should we grow" is another larger question, but there hasn't been an absolute no-growth mobilized constituency and elected officials advocating that position in decades.
As for the topic of "who pays for growth," I've offered my perspective on this topic in the past.
Posted by: dan_nt at May 5, 2008 09:52 AM
“…that are mostly paid for by people coming from out of the area…”
Aside from the tax being applied to the new homes being purchased by locals and new arrivals to the area, you can not escape a fundamental rule of economics which states that increasing the price of one product shifts some demand to replacement products, EG: existing homes and rentals, which applies upward price pressure to existing homes.
“On one hand the city is trying to encourage businesses to come to Chico, but the other hand is raising the price of business and the price of opportunity.”
Good point.
Our lack of suitably zoned land with proper infrastructure, high regulatory hurdles (navigation costs, time and uncertain outcomes), land costs, impact fees, etc, severely discourage private sector job growth.
I know of one good sized local employer, faced with the need for a significant facility addition and the associated impact fees of a big building, who is finding it very difficult to continue resisting the pressure to move their local operation out of the state.
Of course we are still faced with the very real need of finding methods to pay for needed public infrastructure.
Posted by: Mark Sorensen at May 5, 2008 01:04 PM