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Rising use of 'impact' fees rankles new-home buyers

When Jonette Banzon and her husband, Muhammed Ahmad, sought to build a home in Elk Grove, Calif., outside Sacramento in 2004, the city made a surprising demand: To get a building permit for the approximately $500,000 home, the couple needed to pay $240,357 for road improvements around the rural property.

While the city reduced the fee -- calculated using historical data on the costs of building sidewalks, drainage systems and other street projects -- by about 40 percent, the couple still sued.

"I didn't expect (the fee) would be half the price of the house," said Banzon. Elk Grove settled with them last year by capping the fee at $9,750, an amount similar to fees paid by home builders in the city's suburban areas.

While few rocket into six figures, impact fees such as that faced by Banzon and Ahmad are popping up in a rapidly expanding number of cash-strapped U.S. municipalities scrounging for new revenue sources while federal funding for local infrastructure has become more difficult to obtain. The one-time fees, imposed on builders and often folded into home prices and passed on to buyers, are used by cities to fund construction of infrastructure such as roads, sidewalks, parks and even fire stations for rapidly growing neighborhoods. A 2006 Kansas State University survey found that 39 percent of the 292 U.S. cities responding imposed impact fees on new construction last year, up from 25 percent in 2002.

The fees also are increasing in size in cities that have used them for years. A survey this year of 152 U.S. municipalities by Duncan Associates, an Austin, Texas, consulting firm that tracks impact fees, found that the total charged in impact fees rose by an average of 77 percent from 2003 to 2007 as those governments used them to pay for additional projects such as firehouses and libraries.

With the residential real-estate boom now over in many states, the extra cost of those fees stands to draw more scrutiny from price-sensitive buyers of new homes. That could translate into more lawsuits in cases like Banzon's. "It would not shock me to start seeing some increased legal friction in this area," says David Barron, a Harvard Law School professor specializing in local-government and property law.

Property-rights advocates decry impact fees and other so-called exactions -- requirements to donate land or make concessions to gain a government permit -- as a means for local governments to avoid unpopular tax increases for all residents by singling out new arrivals to pay for city projects. Proponents say that impact fees are the fairest way to make growth pay for itself. "If these folks are going to create an impact (on city services), they ought to pay for it. That's as logical as it gets," says Mac Burdette, town administrator of Mount Pleasant, a South Carolina town imposing fees of $1,700 on new homes to finance new roads, parks and sewer lines. Mount Pleasant began charging the fees in 1987 and has increased them since.

Impact fees add roughly $10,500 on average to the cost of new homes in cities that impose them, according to Duncan. They range from $26,392 on average per new home in California to $9,939 in Florida -- two states that fund school construction partly through impact fees -- to $861 in Missouri, according to Duncan.

Legally, most impact fees are defensible. Federal-court decisions dictate that public projects funded by an impact fee must have some relation to the private project paying the fee, and the fee must be proportional to the private project's burden on public resources. Even so, lawsuits challenging allegedly onerous fees aren't rare.

In July 2004, Banzon, now a 41-year-old accountant and recent law-school graduate, and her husband, a 53-year-old accountant, bought a vacant lot in a rural pocket of Elk Grove. They envisioned a five-bedroom, Mediterranean-style house double the size of their previous home. Acting as their own general contractor, they hired subcontractors, an architect and an engineer. As Banzon navigated Elk Grove's planning and public-works departments, she learned of the six-figure fee for road improvements, tree relocation and a dozen other items.

Banzon wrote to the city council and the mayor. She appealed the fee as too large for her project, and the city reduced it to $142,715. Banzon then enlisted attorney Meriem Hubbard of the Pacific Legal Foundation, a Sacramento-based law firm specializing in property-rights cases, and sued the city in December 2005. The sides settled last year, with Elk Grove reducing the impact fee to no more than $9,750. Soon after the settlement, Elk Grove discontinued the impact fee for all rural construction.

"It was a lot of hard work," says Banzon. "But in the end, I felt vindicated." Weary from the legal battle, however, Banzon and Ahmad still haven't built their 4,460-square-foot home.

Jim Estep, interim city manager in Elk Grove, said the city revamped its impact fees last year due partly to Banzon's lawsuit. The city realized that its previous system for calculating impact fees failed to take into account that rural lots have street frontages sometimes four times the length of urban street frontages, and thus fees for rural lots shouldn't be determined with the same formula. "We had to recognize that or nobody could ever afford to develop their property," Estep says.

Pacific Legal Foundation is representing plaintiffs in several cases involving impact fees and exactions: A contractors association in North Port, Fla., sued the city in October to repeal an impact fee that funds repairs of existing roads, arguing that maintenance of existing roads isn't a need created by new development. Officials counter that much of the deterioration of the rapidly growing city's roads is caused by construction vehicles. The case is pending.

Still other cases involve concessions of rights or privileges. Carlsbad, Calif., residents Craig and Robin Griswold sued the city last year after it imposed a $114,979 impact fee for future sidewalk and gutter construction as a condition for granting a permit to add a second level to their house on a rural lot. But the city offers homeowners seeking to expand or substantially renovate their rural homes an option to postpone the payment: They can forego the upfront fee and obtain a building permit by agreeing to waive their right to vote on future street-improvement projects in their neighborhood. More specifically, they must forfeit both their vote on the future formation of any improvement district in their neighborhood and their vote on any assessment against their house up to the amount of their original fee for those improvements.

City officials say the waiver allows applicants the flexibility of deferring the cost of road improvements until their neighborhood votes to undertake them. The waiver also transfers the payment obligation to any new owner of the house if it is sold. The city's aim is to preclude residents who get the benefit of a building permit from later holding out when the neighborhood opts to pay for installation of curbs, gutters, street lights and the like on its streets, says city attorney Ron Ball.

Griswold, a 62-year-old defense lawyer, pleaded his case with city officials but got no relief. "Trying to deal with them was one of the most frustrating things I've dealt with in my life," he says.

The Griswolds eventually acquiesced, signed away their vote on the assessment-district matter and built their addition. They then sued to challenge the agreement's validity. The lawsuit labels the Carlsbad ordinance a "poll tax" that violates the 14th Amendment by forcing residents to pay exorbitant fees or forego their votes on certain matters. A judge dismissed the case in September, reasoning that the Griswolds hadn't yet been denied their vote because no assessment district had been proposed. The Griswolds are appealing.

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