MN Supreme Court Clarifies City Use of Infrastructure Fees for Housing Development

September 10, 2018

The state’s high court issued a decision that impacts how cities can charge for infrastructure costs related to development.

In the case of Harstad v. City of Woodbury, the Minnesota Supreme Court found that statutory cities do not have authority to impose an infrastructure fee for future road improvements as part of approving residential development.

Currently, state law (Minnesota Statutes, section 462.358, subdivision 2a) allows a city to condition approval of a subdivision application on either the developer (1) constructing or installing the improvements, or (2) providing a form of “financial security” enough to assure the city that the improvements will be constructed or installed according to the city specifications. The Supreme Court found that the city’s infrastructure fee program was outside of this authority.

Factual background of the case

Martin Harstad, a developer, submitted an application to the city for a new subdivision consisting of 183 homes on an undivided 77 acres.

Generally, the city conditions its approval of subdivision applications on the applicant’s payment of an infrastructure fee, called a major roadway assessment, that is negotiated and incorporated as a condition in a development agreement. The city had a policy “that new residential development pays its own way and that all associated costs for the installation of public infrastructure to serve new residential development be the sole responsibility of the developing property owner.” The collected infrastructure fees would be put into a dedicated account used to pay for future construction of off-site road improvements needed to support new development.

Regarding Harstad’s application, the city outlined proposed charges for major roadway and intersection improvements that would be needed to accommodate traffic generated by the new subdivision and surrounding areas. Harstad chose not to negotiate the proposed infrastructure fee and instead, he sued, arguing that the city didn’t have statutory authority to require the payment of infrastructure fees when approving subdivision applications.

Court left options intact

The Supreme Court decision leaves the following options intact for cities:

  • Require construction of infrastructure. Nothing in the Harstad decision impacts a city’s authority to condition subdivision approval on the requirement that a developer construct or install streets or other improvements.
  • Impose special assessment. This decision also does not impact authority for traditional street assessments provided under Minnesota Statutes, sections 429.021 and 429.051. The Minnesota Supreme Court specifically stated that “it is undisputed that cities have the authority to assess property for road and street improvements and that these assessments are specifically permitted by state law.”
  • Require financial security. The court also pointed out that state law gives cities the option to require assurance from any developer in the form of a financial security for the construction or installation of specific, related infrastructure projects. While there is no statutory definition for “financial security,” the court did say that it includes “all contemporary security measures that protect a city’s interest in covering the costs of completing the infrastructure or improvement in the event that a developer fails to finish a project . . . [and] are intended to be returned or released, unless the developer fails to satisfy the conditions of the contract concerning infrastructure improvements.”
  • Increase general tax levy for all residents. While the Court did not discuss this option, a city could consider increasing the tax levy to pay for needed infrastructure.
  • Deny applications for premature development. Cities generally want development in their communities. The option of denying applications because of a lack of funding for needed road improvements may not be an attractive option, but it is a viable one if the city doesn’t have the tax base or doesn’t have the willingness by residents to increase the tax levy to pay for improvements.

Limitations of the court’s decision

The decision applies only to statutory cities. The court points out that the city in this case, Woodbury, is a statutory city, and therefore it has no other powers beyond what is explicitly or implicitly provided by state statute. The court did not address the impact of this decision on home-rule charter cities.

Unanswered questions

This decision leaves a couple of unanswered questions:

  • What is the difference between improvements within development versus off-site improvements? In a footnote in the Harstad decision, the court stated it was not deciding the question of whether a city’s authority to require the construction, or the provision of financial security to assure the construction, is limited to improvements located within the proposed subdivision or whether off-site improvements may also be required.
  • What can be included in a development agreement? State law allows for development agreements. However, the court opined that the city’s program asking for an upfront infrastructure fee was not truly voluntary. The court also cautioned that the authority for cities to enter into development agreements does not mean that it has broad authority “to impose ‘other requirements’ that are inserted into development agreements, but that fall completely outside of the limits of the statute.”