Like many other cities in Minnesota, the City of Lakeville maintains a close working partnership with local builders to ensure new residential development meets established standards for the health and safety of future residents.
Lakeville City Administrator Justin Miller approaches this partnership with the principle that development should pay for development, and that the burden of cost should not be passed on to existing residents through increased property taxes. That is why the partnership involves city collection of specific fees from builders and developers.
“Cities want to grow and provide safe, stable housing for all in our community,” says Miller. “Lakeville has great relationships with the builders active in our city who value our role in home building.”
For the past several months, the League of Minnesota Cities and several member cities, including Lakeville, have taken a strong stance against attacks from the Builders Association of the Twin Cities (BATC) — which also goes by the name of Housing First Minnesota — that are creating tensions in city-developer partnerships statewide. The attacks also threaten the ability of communities to make their own decisions about how best to fund infrastructure for new residential development.
That stance comes in the wake of BATC’s compilation and distribution of multiple flawed reports designed to deliberately overstate the impact of city development fees on building costs and housing affordability. The misinformation contained in those reports could potentially result in legislative action that would limit local control over building permit fees and other fees cities collect to offset the costs associated with new development.
The League believes that BATC’s work is financially motivated, and that BATC is using cities as scapegoats for increases in costs that affect housing affordability.
“BATC’s premise is that city fees are the primary factor for the lack of affordable housing, and that is simply false,” says David Unmacht, League executive director. “This premise is not based on fact, and we believe BATC’s motive is to raise the profits of builders at the expense of property taxpayers. This issue is greater than just affordability, and the League will do everything we can to defeat legislation that limits local control or the ability of our cities to ensure that development pays for itself.”
How did we get here?
In February 2019, the Housing Affordability Institute — an extension of BATC — released a multi-page document, characterized as a “report,” blaming city fees and regulations as the primary factor behind rising housing costs in the state. Titled “Priced Out: The True Cost of Minnesota’s Broken Housing Market,” the document focused on new single-family homes built in nine cities in the Minneapolis-St. Paul market by four home builders.
“Priced Out” claimed that almost a third of the cost of a new home’s price in the Twin Cities comes from local regulations and fees. It cites builders reporting that city regulations and fees make it impossible for them to meet market demand for affordable, new construction single-family homes.
“Priced Out” called for a legislative commission on housing affordability to address the reported regulatory challenges that builders face, and ignited two legislative hearings on the topic of housing development, building codes, and fees. League Intergovernmental Relations staff, City Administrator Miller, and other municipal representatives testified at the hearings to help legislators better understand the city perspective on administration of development fees and dispel the group’s claims.
In August, the Housing Affordability Institute released a second piece, “Building Permit Fees: Boosting the Bottom Line for Minnesota Cities,” which claims that cities are overcharging for building permit fees and driving up the costs of new homes. From 2014 to 2018, BATC says, city fees outweighed city expenses by $78 million.
Like the earlier data from the Housing Affordability Institute, this report was deeply flawed and incomplete. Though it caught the attention of legislators and the news media, it was clear that the organization cherry-picked data to boost claims that cities’ regulatory frameworks and development fees are driving up the cost of housing.
In response to the reports, the League published issue background materials and talking points for member cities to use when meeting with individual legislators. Additionally, the League — along with partnering municipal associations in the state — wrote and submitted two editorial commentary pieces to the Star Tribune describing the city point of view.
While no related legislation was initiated in 2019, the League anticipates state legislative efforts that could undermine city authority happening as early as the 2020 legislative session, Unmacht says.
What is the Housing Affordability Institute?
At first glance, the name Housing Affordability Institute seems to imply that the organization is a think tank dedicated to solving the affordable housing crisis throughout the state. But League officials believe the name is intentionally misleading. The Institute was in fact founded by the Housing First Minnesota Legal Defense Fund — another organization created by BATC and directed by a steering committee of industry representatives.
BATC is using the so-called Housing Affordability Institute reports to promote legislation that would be harmful to city efforts to ensure that existing property taxpayers are not left footing the bill for new development. The League will oppose any such legislation proposed during the 2020 session.
What’s wrong with the data?
First and foremost, the Housing Affordability Institute’s second piece, “Building Permit Fees: Boosting the Bottom Line for Minnesota Cities,” omits numerous key facts. Among them:
- Building permit fees are based on valuation. State rules specifically state, “Building permit fees shall be based on valuation.” Builders say that cities can only charge fees that are “fair, reasonable, and proportionate to the actual costs of the service.” While that is true, the more specific state requirement for building permit fees is that these fees shall be based on the construction value of the residential or commercial project.
- Builders and developers are involved in determining valuation. State rules also require that when builders or developers apply for a building permit, they must provide an estimated permit value that reflects the cost of construction. Based on the information provided, the city building official then confirms the valuation is accurate.
- Building permit fee data used in the report did not adequately account for all city costs. The report failed to include other readily available data. Cities are required to report all fees and expenses related to development. To fairly analyze the data, all the fees collected and city expenses — which also include administrative, engineering, planning, and zoning expenses — should have been examined for the report but were not.
- The report contained no data from years when the economy was weaker. Residential development and the economy have been doing well the past five years. If the snapshot went back further, it would tell a very different story of many cities that weren’t able to recover their expenses related to new development with the fees collected.
Additionally, both industry reports are based on the cost to build a four-bedroom, three-car garage home. BATC claims the average price of new homes in the study was $394,726. That average does not reflect an affordable housing market or a market for first-time homebuyers.
How do cities determine building permit fees?
Building permit fees are calculated based on the cost of inspections and the valuation of the development. The fee covers the cost of inspections, but the cost for a city goes well beyond that one service.
The city’s cost includes significant staff time of highly trained professionals, like city planners, attorneys, and engineers. Based on each city’s planning and development process and the many variables that impact valuation, fees will vary and do not always cover city costs.
Most builders and developers understand that permit fees are part of the cost of doing business. Each project’s fees are negotiated and agreed upon by both parties — no fees or costs are a surprise.
Why does this matter for cities?
BATC would like to see an across-the-board reduction in building permit fees and other fees associated with new development. However, every Minnesota city is unique — from its size and economics, to its infrastructure and geology.
And metro cities are not the only cities that charge development fees. The city resources it would take to build a development in Lakeville might vary from what it would take to build it in a city like Slayton, for example — and the corresponding costs vary, too.
Slayton City Administrator-Clerk Josh Malchow supports the notion that a one-size-fits-all approach for city determination of development fees is inappropriate and unproductive.
“As local governments, we should be able to decide how to set our fees, and if our tax base should help pay for private development,” says Malchow. “It’s not for the building industry to decide on behalf of our taxpayers.”
Going forward, the League will continue to execute a strategic effort to protect city authority and to help ensure that the city perspective is well-represented in the media and at the state Capitol during the upcoming legislative session.