BEWARE THE UNEXPECTED IMPACT OF IMPACT FEE LEGISLATION

An Expansion of Remarks to Home Builders and Municipal Representatives — March 31,1993

By STEWART H. DIAMOND

For the second legislative session in a row, the Home Builders Association of Greater Chicago has succeeded in having a bill introduced in the State Legislature regulating development impact fees. The current incarnation of that bill is known as House Bill 1118. In reaction to the introduction of that legislation, the Illinois Municipal League appointed a committee to draft competing legislation which has not yet been filed. At the request of the Speaker of the House, representatives from both groups have begun to meet in order to determine whether compromise legislation can be worked out. Further efforts to find common ground were made at a seminar sponsored by the Home Builders in Chicago on March 31, 1993. The text which follows is an expansion of remarks that I presented at that seminar. While common sense dictates that the parties continue to seek common ground, I urge the Home Builders to review this initiative and to consider whether, unlike their usual pragmatic approach to problems, they may now be building their foundation on quicksand. I also ask local governmental leaders to consider whether other forms of legislative and non-legislative relief may better solve the legitimate problems the Home Builders, in their frustration, now address through impact fee legislation.

In the January 2,1993 issue of the Chicago Tribune's "Home Guide," the feature article was entitled, "Pointing The Finger On Prices." The subtitle was "Builders Blame Municipalities For Runaway Impact Fees." The article, by Charles Hayes, was generated by a rather unusual meeting between suburban Home Builders and Chicago Tribune reporters at which a round table discussion took place on "key issues confronting the homebuilding industry." Perhaps the fact that the Home Builders buy millions of dollars worth of newspaper advertisement space a year may account for this attention to their "plight." The article states that "since the 1980s, local governments increasingly have turned to impact fees from developers to help fill the void created by the end of federal money for infrastructure." No specific examples are given in the article to support this conclusion, which most public officials would soundly deny.

What cannot be so easily denied are other complaints made by the Home Builders in the article. Various builders are quoted as saying that it takes an increasingly long time for municipalities to review plans and building permit applications. It is also stated that code changes are often made without consulting developers, and that the sin of one developer in a community may cause stricter standards to be enforced against all developers. The statement made by one of the Home Builders perhaps best expresses the frustration which appears to have led to the effort to regulate impact fees. "We're looking at so many different layers of new priorities — wetlands, hazardous substance, archaeological sites and on and on — that we begin to get numb with all of them." Unfortunately, in their "numbness" the Home Builders have attacked impact fees, which typically add only a small percentage to the cost of a home, while insuring that vital public services are available for the new citizens of the community. By seeking State legislation, the Home Builders are also opening up their over-regulated industry to a new level of unnecessary bureaucracy.

In my view, Home Builders epitomize the best in a capitalistic society. I hope my daughter grows up to be a Home Builder. Home Builders actually make something, and don't just move paper around. They provide an asset which is socially valuable and constitutes the most important investment for the majority of Americans. They expand the frontier of developed areas permitting industry and commerce to grow and revitalize. They continue the tradition under which small and medium businesses utilize flexibility and risk taking to compensate for under capitalization. They succeed in keeping groups of trained individuals together even in a cyclical business. They take pride in their achievements and in overcoming adversity. They exist within an increasingly regulated society as a group generally resisting regulations and asking governments to let market condition rather than rigid rules influence land development. Their efforts have allowed many homeowners to retire with the funds received from increased home values. Unfortunately, by asking for State regulations to rigidly regulate developmental impact fees, they are turning their backs on their own philosophy to their eventual detriment. It is a mistake to turn to gov-

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ernmental regulation as a protection for this highly decentralized and idiosyncratic industry.

It is almost as if the National Rifle Association decided that there must be a national law requiring every municipality in America to pass an ordinance regulating the sale of handguns. Why, one might ask, would the NRA abandon its hatred of regulation? To use the analogy with the Home Builders, we would be told that it was because a handfull of communities had passed strict regulations. Therefore the NRA had decided that the only answer to these abuses was to embrace regulation. It is ironic that in the January 1993 Chicago Tribune article one of the examples given of municipal over reaction was that "if someone complains about a cold floor, they make everybody change the garage foundation. Instead of having a builder fix the furnace system they will compel everybody to install cold air returns." It is this criticized type of overreaction which the Home Builders seem to have embraced. When asked to name examples of municipal overreaching through impact fees, the names of three relative small school districts are repeated. To solve this minor problem, the Home Builders have set out to impose universal impact fee legislation upon all municipalities, (except the City of Chicago) and all homebuilders throughout the State.

I have represented municipalities for more than 25 years. During that time, I have also represented more than a few real estate developers, principally in their negotiation of annexation agreements. Impact fees have, in my experience, played the smallest part in the success or failure of individual real estate developers. To focus on that part of a developer's cost spectrum because it appears easier to affect than lumber prices, interest rates or product demand is to waste the energy of an industry upon a quest which will have unexpected consequences. The current system really isn't broken. The ecosystem of negotiations, annexation agreements, pressure on communities to develop, and very occasionally, when required, court challenges has generally worked well for developers. The new quest for predictability, in a system where developers' negotiating skills and expertise often exceeds that of their governmental opponents, will encase the industry in a new layer of bureaucracy of its own making. Ultimately, this legislation, which would impose an excessive administrative burden before municipalities can impose impact fees, will have a backlash effect. Communities will decide that the benefits of development and expansion are not worth the process necessary to guarantee that public facilities are available for new residents. Municipalities, which have an absolute right to determine whether property should or should not be annexed to their community, will simply refuse to annex residential areas. For land already within the corporate boundaries, the municipalities may adopt an approach which seeks to restrict development even within their borders. In doing so, the communities would fall back upon their inability to provide new residents with universally sought after amenities. It is these amenities which new residents demand and the cost of which developers are fighting not to pass on.

Set out below is a parody of the Home Builders legislation. It includes many of the things which the municipalities have criticized in that legislation. Here, however the impact fee shoe has been put on the other foot. A community, which adopts such an ordinance, would agree with Home Builders that the impact fees necessary to free existing residents from the cost of development would be excessive. Rather than lowering the fees, however, this municipality has determined that the solution to the problem is to restrict development.

AN ORDINANCE REGULATING EXPANSION
OF RESIDENTIAL CONSTRUCTION

WHEREAS, this municipality and other units of government are unable to adequately provide facilities to serve the residents of new construction within the municipality; and

WHEREAS, the construction of new residential units without adequate police, fire, park, educational and library facilities will seriously and adversely impact the health, welfare and safety of existing and future residents of this community and unnecessarily add to the tax burden of existing residents; and

WHEREAS, the issuance of additional building permits can only take place when the community can provide services needed to insure the public, safety and welfare; and

WHEREAS, the municipality has been limited in its ability to provide such services by the Illinois Infrastructure Expansion Act developed by the Home Builders Association of Greater Chicago, Tax Cap Legislation, State Government Unfunded Mandates and the unwillingness of the electorate to approve tax rate increases to provide services to new residents.

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NOW THEREFORE, BE IT ORDAINED BY THE PRESIDENT AND BOARD OF TRUSTEES OF THE VILLAGE OF CAMBRIDGE HILL, SUNDANCE COUNTY, ILLINOIS, as follows:

SECTION 1: No building permit may be issued without a needs assessment and a determination that adequate facilities exist to insure that the health, safety and the recreational needs of the residents of the new construction will be available at the time that residential units are occupied.

SECTION 2: The needs assessments will be conducted by a committee 50% of the members of which are chosen by the mayor from among the chief executive officers or elected officials of the municipality and school, park and library districts and the chiefs of the police and fire department, 25% by existing local residents, 15% by potential new home buyers, and 10% by representatives of Home Builders, but no employee or officer of a Home Builder may serve on the committee. [This last item really is in the Home Builders' bill.]

SECTION 3: The committee must publish lots of notices many days apart and have lots of meetings. After the meetings, and no sooner than six months from its first meeting, the committee must complete a report. Thereafter, within 90 days, the municipality must determine whether the report of the committee has adequately shown there to be a need for additional housing within the community, and that adequate facilities to serve new residents exist. Each request for up to 100 permits must be separately made and considered by the committee.

SECTION 4: To assist the committee, the Home Builder requesting the permit must do a demographic study of the municipality and all available housing within a five-mile radius. To protect the environment, no new permits will be issued while comparable housing is available. The homebuilder must provide information as to whether all sources of revenue to be derived from the new housing are sufficient to support the level of public services needed. No permit may be issued when the level of current available services will be diminished through the addition of new construction. No permit may issue unless the needs assessment committee or the municipality find that the addition of new construction fills a need not otherwise available in the Metropolitan area including, under-utilized central city locations with existing infra-structure, and that the level of existing services will not diminish. The Home Builder must estimate the level of real estate tax increases throughout the municipality necessary to service the full needs of the proposed development when completed and for (10) ten years thereafter.

SECTION 5: This Ordinance shall be in full force and effect within one (1) year after the Home Builders Association's ill-conceived, bureaucratically complex and practically dangerous legislation becomes law.

The passage of ordinances which mirror this parody should not be viewed as the inevitable result of any criticism by the Home Builders Association of the practices of municipalities. I believe there is legislation which could be introduced and steps which could be taken by the industry which would result in local governments' support rather than its antagonism. If I were a Home Builder disturbed by some of the matters mentioned in the January 19, 1993 newspaper article, these are the steps which I would take:

1. Introduce legislation to amend the statutes to permit municipalities and real estate developers to enter into Development Agreements. These agreements would be quite similar to annexation agreements and would affect the development in areas already within municipal boundaries. A municipality and a Home Builder or other real estate developer would have the same ability to negotiate the terms of development with a community as is currently possessed by the owner of unincorporated territory. Among the items which could be part of Development Agreements would be a promise by the municipality to only increase impact, connection, permit, and other developmental fees in accordance with some objective formula. Annexation agreements frequently contain provisions which restrict the implementation of any increases to a certain number of months after an ordinance increasing the fees is passed. This permits the developer to increase the cost of its product to reflect the level of additional fees. A Development Agreement, like an annexation agreement, could last for 20 years and could assure any developer of regularity and stability in impact fee increases. Such an agreement could also place similar restrictions on changes in building codes and other standards and could, for example, require a hearing process prior to such changes so that the developers could argue that the modifications were unnecessary or similar results could be achieved in a less expensive manner.

The Statute authorizing annexation agreements

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which is found at Chapter 65, Section 5/11-15.1-1 of the Illinois Compiled Statutes 1992 sets out a broad series of subjects which can be contained within annexation agreements and ends with the phrase "any other matter not inconsistent with the provisions of this Code, nor forbidden by law." This would also apply to Development Agreements. Developers have become used to negotiating the terms of annexation agreements and have generally been successful in including in those agreements the minimum requirements necessary to lessen the risk already present in a most risky business. The amendment of State law to permit Development Agreements should be pursued by the Home Builders before they urge a rigid procedure for the development of impact fees applicable to nearly all municipalities. Communities are likely to react to the current legislation by uniformly adopting ordinance provisions drafted by regional or State governmental organizations leading to the payment of uniformly high fees. To date this has not happened. The Home Builders are seeking uniformity. They may get more than they like.

2. Home Builders complain about the long period of time that it takes municipalities to review and approve or reject engineering drawings necessary to approve plats of subdivision and building plans. Under the Freedom of Information Act, or through questionnaires sent to members, the Home Builders Association should produce a chart listing the period of time necessary for each community to review the submission of plans and permit applications. The mayors, managers and administrators of most Illinois communities would not be pleased with the peer pressure which they would feel if their communities were listed as the slowest to respond to appropriate submissions. One other benefit of a statute permitting Development Agreements would be that such agreements could specifically provide that plans not reviewed within a certain reasonable period of time would be considered to be automatically approved.

3. Although embarrassment and peer pressure may force some communities to shorten their review time the Home Builders have it within their power to appeal to the better side of the governmental personality rather than the worse side. Most communities are not pleased at delays by their staffs or employed professionals in reviewing documents submitted by Home Builders. What alternatives do they have? Home Builders groups could offer regional review facilities of independent minded experts who could help communities which were overburden or understaffed in the review process. Since the cost of the reviews are always borne by the developers, these efforts toward producing quality facilities available to perform these functions would be well accepted. Once reviews of this nature are found to be acceptable by the communities, similar entities can be developed to report on requests by developers for modifications in municipal building codes, and to permit the use of innovative materials and techniques not yet permitted in local codes. Most municipalities have little or no philosophical commitment to provisions within their local codes which over time have become obsolete. In small and medium size communities, neither pressure from labor unions nor the views of staff members unsupported by wide experience are likely to overcome the report of a practical and independent building code reviewing entity. If the Home Builders had spent as much time and money in this area as in seeking to impose impact fee restrictions, the financial pay back to the industry would be significantly greater.

4. The industry should develop regional bureaus to address the complaints of home buyers. In the absence of such a bureau, frustrated home buyers have no choice but to appear in large numbers at the meetings of municipal governments. Appearances by these home-buyers often occurs over an extended period of time with the Home Builder appearing infrequently or not at all. Under these circumstances, it is not surprising that the governing bodies often take the side of their residents and seek to impose rigid solutions which are often costly to the Home Builders. If the municipalities could require their citizens to first follow the procedure of a

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Home Builders' complaint bureau, which was empowered to solve individual problems before they became community problems, the cost to Home Builders would likely be reduced.

5. In many instances, municipalities are imposing costs upon Home Builders which they are required to do as a result of State legislation. Home Builders should jointly lobby with local governmental entities to prevent or reduce unfunded State mandates on municipalities and those governmental bodies which principally are the recipients of impact fees. Although communities continue to deny that impact fees are being used to fund costs other than those arising out of the development process, Home Builders could reduce even the chance of this happening if they became more helpful to communities by joining them in resisting unfunded mandates.

CONCLUSION

Perhaps the Home Builders have gone too far down the legislative path to turn back. The purpose of this article is to indicate that Home Builders are expending their energies in the wrong direction. Residential units sell when new residents are assured of excellent schools, parks and library services, along with police and fire protection. Preventing governments from providing such services is as shortsighted as buying a 60-acre tract and refusing to purchase one dilapidated home that sits at the entrance to the new subdivision. I would also ask the Home Builders to consider whether the ultimate effect of the creation of a Statewide procedure for the development of impact fees is not likely to be the near-uniform imposition throughout the State of the highest fees sustained through a court test or through word-of-mouth transmission. At the moment, communities are still, by and large, using a relatively conservative needs test and, for example, increasing the per acre value of land used in impact fee formulas only infrequently. The actions of the Home Builders will bring impact fees much more to the attention of many communities than is currently the case. It will also subject Home Builders to yet another level of bureaucracy which in this case is of their own making. In addition, once the issue of impact fees has reached the General Assembly, players, beyond the original combatants, may force the passage of legislation which neither party is happy with. Primarily for that reason, I suggest that the parties, who are still talking to one another, take several steps backwards and determine whether legislation of a permissive, rather than a mandatory, nature or the development of other reforms, might better serve the needs of government and industry alike. •

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