Saturday, January 28, 2006

House GOP's Plan: Make Them Pay

GOP leaders in the House of Delegates have laid out some proposals - here's the WaPost take on it:
'The Republicans' bills would allow more local governments to receive payments from developers to ease the impact of building. Localities would be required to review the potential cost of new roads in their long-range planning. Lawmakers said that would lay the foundation for increasing the amount of money local governments could expect from developers.'
Would someone please defend this idea. The strategy of dumping the costs for infrastructure improvements on homebuilders reeks of shirked responsibility. Is that what frustrated suburbanites are telling their legislators? 'It's not my fault that traffic is bad, it's those new people.'

Homebuilders lobbyist Mike Toalson's quote at the end of the story is entertaining: ""We are concerned that some of these measures might result in higher housing costs," he said." I believe he meant to say, '...these measures might result in lower profits,' but no matter. How does making this industry and its customers pay more change the pattern and density of development?


At 7:59 AM, Blogger Ray Hyde said...

Well, Bacon and others have said that people ought to pay for the choices they make. If they are paying the freight, and they make choices you don't agree with, then where does the problem lie?

It looks like you are about to get your wish, as far as payment goes, but that is not going to be good enough. Next you will want them to pay full cost and live only where you think it is best.

But now you have a problem, as identified by TMT. If you want to increase the density in Fairfax, the new owners will have to pay for infrastructure there, too. That is going to be a lot more expensive than out in Warren County.

If you want people to live the way you want, you are going to have to apply some kind of force, or some kind of incentive.

How much money have you got?

At 11:28 AM, Anonymous sdh4vbt said...

Hey Bob, the money has to come from somewhere. Whether it is a billion in taxes and fees, a billion in tolls, a billion in higher home prices and the resulting real estate taxes (or as is most likely a combination) -- there are no free rides just like there are no free lunches.

I appreciate your recognition that impact fees and proffers take money out of people's pockets just as efficiently as any tax scheme.

And yes, that is exactly what many suburanites yell -- don't tax me, tax the new people (ignorant of course of the fact that the rising tide of real estate prices also lifts all boats and their taxes will go up to.)

At 1:16 PM, Blogger Toomanytaxes said...

Not quite so fast. Developers and builders, no more than anyone else in the marketplace, can automatically raise prices to recover all of the costs for higher proffers, impact fees and increased regulation. I would readily agree with you that increasing taxes or tax-like payments creates incentives for price increases. Thus, increasing these costs for industry could result in higher prices for housing.

However, most economists and business operators would likely agree that market conditions and not just a supplier's costs set prices. Recently, with generally booming conditions, housing prices have escalated in many parts of Virginia. Housing prices for both new and existing homes have increased much faster than costs or even buyers' incomes. In these market conditions, a builder could easily recover the increased costs for proffers, etc. Moreover, other market and regulatory factors, such as the widespread availability of interest-only mortgages (a full 37%+ of all recent mortgages made in the greater Washington, D.C. market have been interest-only) also assist builders recover their costs and then some.

However, when negative economic changes occur or if regulators restricted the issuance of interest-only mortgages (directly or indirectly), a seller may not be able to obtain a price sufficient to recover all increased costs or to make a desired profit level. Assume that interest rates continue upward, the federal government slows its funding of defense and homeland security contracts, and the large number of new properties, most especially condos, planned or under construction hit the market. Condo prices have stalled in many markets, and it is taking substantially longer for single family homes to sell. (I've even started noticing "price reduced" signs in Fairfax County. Haven't seen too many of those for some time, but they are back.) Under these conditions, which are quite possible, developers and builders simply may not be able to recover all of the added costs for higher proffers, etc.

A study of the then very hot housing market in California's Contra Costa County in the late 1990s demonstrates market workings. That market study showed that, especially for the highest-priced homes, developers could most easily recover costs for development impact fees. However, for many other lower-priced homes, full recoupment was not possible. In many instances, builders were forced to eat as much as three-quarters of the development impact fees.

Cost-based proffers and development impact fees could well reduce profits for developers and builders based on market conditions. A conclusion that imposition of those costs on suppliers translates into housing prices increases is not warranted. The statement is just too broad.

At 3:52 PM, Blogger Bob Burke said...

Let me try a short answer - the reasons proffers seem a suspect strategy (and an example of the finger-pointing that passes for 'leadership' these days) is that they are a disconnect what makes scattered development a problem. All proffers are is a way to find a cash flow by dipping into what looks like the deepest pockets.

At 5:04 PM, Blogger Ray Hyde said...

It is hard for me to imagine that builders will eat as much as three quarters of the impact fees. I think what happens is the builder estimates all his costs, including impact fees and adds 20% for profit. Then he looks at the resulting price, and the market price. If he doesn't think he can sell into that market, at that price, he'll move on. There is no reason to build in that market if he can get his margin someplace else.

When homes in that market are sufficiently scarce, and the price goes up, then he may act.

Let's say the profit on a 360,000 dollar home is 20%. His cost is $300,000 and his profit is $60,000. Fauquier's suggested proffer is $30,000. If he doesn't think he can sell it for that e might take it out of his profit and drop the price to $330,000. But he can't stay in business long at 10% and he will look someplace else if he can. At 7% he can invest in the stock market and sit on the porch.

But if you ar looking at a $240,000 dollar home where his profit is $40,000, then he won't build it unless he thinks he can get full price. Would you work on a project that takes 2 to 5 years to complete and take 5%?

His cost in that home is $200,000, of which $30,000 is proffer, so the buyer is only getting $270,000 worth of labor and materials, and he may well decide to pass because the risk is too high: his real equity is too low compared to what he has to borrow.

I think that what you are really doing is putting developers in the street construction business, and they are going to want a profit for doing it.

I disagree with TMT on this: it will necessarily result in higher prices, and fewer affordable homes.

There is one caveat though. The one thing that discourages building even more than costs is uncertatinty. If under the impact fee system permits are more readily issued, then that could be a good thing for home prices.

But Fauquier's "expected proffer" (how is that for an oxymoron) is already $30,000. If they get the green light from the state, that could go up substantially, from here. If they have their way it won't mean higher priced homes, it will mean no homes.

At least in Fauquier. Maybe they will go to Fairfax, eh, TMT?

At 10:00 PM, Anonymous Anonymous said...

Toomanytaxes -- just what do houses cost in California now? And didn't they turn to proffers and impact fees in response to the "no tax" act of genius knowns as Prop 13? (And for that matter, would you also agree that adding a five percent tax on the wholesale price of gasoline wouldn't automatically add to the retail price? Thought not.)

At 11:07 PM, Blogger Ray Hyde said...

A story in Sunday's Denver Post details how a number of area developers are proposing a new district of their own to attract upscale homebuyers who love the area but hate its schools.

The piece by Allison Sherry, "Schools as Drawing Card," tells how these developers view this as strictly a business decision designed to increase the attraction and value of their property. Aurora school officials, the article notes, are aware of the idea but not involved in discussions with the developers.

If you make the developers pay for infrastructure, you will lose control of the infrastructure. They are going to pay for it and treat it as privat property.

At 11:15 AM, Blogger Toomanytaxes said...

10:00 PM You are correct. California did turn to impact fees in large part due to Prop. 13. I would also agree that market conditions or, market manipulation the case of zone pricing for gasoline, greatly affects prices. It is quite possible that, under certain conditions, an increase in the gasoline tax of five percent would not necessarily result in a five percent or penny-for-penny increase in the price of gasoline.

Increasing costs for any business, including the recent statewide tax increases, often can result in price increases for consumers, including businesses. However, my point in addressing the California study was to demonstrate that a statement being made by lobbyists in Richmond that higher proffers or impact fees necessarily force housing prices higher is not correct. It is an overstatement. Under certain market conditions, landowners, developers and builders wind up eating some of those costs, based on a documented study. Under other conditions, I'm sure that those added costs could be passed through to purchasers.

One of impacts of California's impact fees and a declining economy, was that many builders and developers saw their industry at risk. Many truly feared that their choices were either: accept lower returns (which may or may not meet their cost of capital) or stop building, in part or in whole. They attempted, unsuccessfully I believe, to change the laws to put more responsibility for infrastructure on taxpayers. As California's economy accelerated, I'm sure that the health of the real estate industry also improved.

Turning back to Virginia, I'd say that at least a plurality and, perhaps, a strong majority of voters in NoVA believes the area has been overdeveloped and that developers & builders are "public enemy no. 1." One can quarrel with the fairness of this situation, but probably not the public sentiment. There is incredible pressure on elected officials to stop what is occurring.

If I were in the industry, I would recognize the altered political conditions and work towards some changes that address public anger, but do would not destroy my industry. I suspect that the 2007 election will be about who is or who can be the toughest on development. That's not a good situation, but all the lobbyists in Richmond cannot do a thing about it.

The big problem is that development today is a win-lose situation. Some win, but more perceive themselves as losers. I'd work towards changing this equation. It would require the winners to win less, but it's better than what the industry will be able to achieve after the 2007 elections if nothing changes. Tim Kaine's proposals are, overall, ntt that strong. If I were the building industry, I'd support them.

At 3:45 PM, Blogger Toomanytaxes said...

Just one more log for the fire. In Fairfax County, all development, especially that necessitating a zoning application, is a burden on taxpayers, according to information from Fairfax County. The County has provided information indicating that, from fiscal 2003 through fiscal 2006, taxpayers will have subsidized below-cost fees for land development services, building permits and zoning services by more than $31 million.

The county executive explained the shortfall in a public meeting by saying he did not have enough confidence in his staff's figures to set fees at cost (fear of lawsuits). However, the County was able to develop cost-based fees for ambulance and other emergency services.

At 4:01 PM, Blogger Ray Hyde said...

I agree. Home prices may not go up as much as the proffers amount to: the building industy's position is an overstatement. That doesn't men that it is totally incorrect. There is plenty of evidence that the single biggest cause of out of line home prices is government interference, most recetly the Harvard Study by (Glaser?).

But they are not going to eat all the costs either. Anyone who thinks they are sticking it to the building industry, or claims we should, based on current anti-industry sentiment is kidding themselves.

As you point out, some of the costs come from landowners, who are probably current residents. To that extent, at least, current residents still pay the price.

In Fauquier the first round of purchases in their PDR program cme from money proffered by Dominion Electric in excahnge for a power plant. Some officials then claimed the PDR's cost the county nothing in higher taxes. What really happeened was that they shifted some of the taxes over to people's electric bills.

Impact fees and proffers have a similar effect in muddying the accounts. If the impact fees build infrastructure that benefits all, then the accounts are further muddied.

You have said before that many people think Fairfax is full, or that development should wait until the infrastructure catches up. I'm surprised EMR hasn't weighed in on this. If they do halt construction until the infrastructure catches up, then who will pay?

At 7:08 PM, Blogger Ray Hyde said...

Here is another take on making them pay.

"The New York Times reviews a debate over a proposed toll road in Colorado. Opponents can't argue that it will be subsidized as the tolls will pay for it. So they resort to more esoteric arguments."

"The worst thing we can do is widen the highway," says state Representative Gary Lindstrom. "We need to keep the congestion so people will be interested in the transit." The upcoming election will reveal if Coloradans agree that congestion is a good thing, as Lindstrom is running for governor.

Credit to Randall O'Toole

At 8:16 PM, Blogger Toomanytaxes said...

Ray Hyde, I don't disagree. As I indicated, market forces determine if, when and how much costs anyone can recover. Moreover, anyone within the production chain is eligible to profit or lose money.

I would expect that many times the costs are passed along to the buyer. But, just as remodeling a bath or adding a sun-room to one's house does not guarantee a seller can recover his investment dollar-for-dollar, the argument being made by the lobbyists in Richmond that the imposition of impact fees or restrictions on development are automatically passed through in the form of higher prices for housing is simply wrong and should not be made.

A developer friend of mine strongly believes that the landowner often pays for impact fees and other regulatory restrictions in the form of lower prices or, at times, an inability to sell the parcel at all. His company, which does business all over the East Coast, looks at these regulatory costs as it does any other costs. If he can sell for prices that cover all of his costs and earn his cost of capital, he builds. Sometimes, he just doesn't buy the land and build in a location. Other times, he gets the property for less, thus, passing along some of the regulatory costs to the existing landowner.

The political problem in Virginia stems from: escalating property taxes, a declining quality of life, and segments of the business and political communities that say the only alternative is continued building and an acceptance of even higher taxes for non-fixes of the infrastructure problems. The political problem will stay until some of the symptoms recede. Quite a few Virginia voters heard Tim Kaine say he'd attack the symptoms by stopping building until the infrastructure catches up.

Virginia still needs a "win-win" situation.

At 6:30 AM, Anonymous Anonymous said...

This string is too long already, but one more point. Agreed, builders probably cannot pass along the full cost of proffers in many cases, but will pass as much as they can. One constraint: the cost of housing in the next county over. Expanding the proffer system to more than 250 Virginia localities means they may face the same costs in the county next door and therefore the builders will have an easier time -- raising their prices.

Don't get me wrong. This could be part of the solution. But proffers on a subdivision will not pay for the arterial system, bring more mass transit, close the maintenance gap, or as Burke points out will not make a dent in the settlement patterns. But I don't think a county can say, pay proffers if you build here, but no proffers if you build where we prefer.

At 7:58 AM, Blogger Toomanytaxes said...

Higher proffers will not fix all problems. I would note, however, that the interchange between I-66 and the Fairfax County Parkway was largely (totally?) paid by developers' proffers. All it takes is committed public officials.

Likewise, mandatory impact fees or, even, an adequate public facilities law with teeth cannot fix all of Virginia's problems. But they would help. Moreover, those who cry doom and gloom (and even the death for the building industry and Virginia's economy) ought to be required to explain why Florida has had very strong APF legislation for years and still prospers. BTW, there's state income tax in Florida either.

This is the time for change. We need a fair law that alters the developers/builders/contractor/land-use lawyers win - darn near everyone else loses equation. Tim Kaine's proposals, which are being patroned by Republican members of the GA, are very small steps that should be supported by the real estate industry. If these measures do not pass, the 2007 election will bring many new faces who will be openly hostile to development, and a strong likelihood that the bills introduced in 2008 would be draconian.

The citizens' hostility is both bi-partisan and rapidly growing. The old Richmond remedy of campaign contributions and sports outings will only inflame it. It's time to rally behind Kaine's proposals.


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