OLR Research Report


December 9, 2002

 

2002-R-0903

HOW DEVELOPMENT IMPACT FEES AFFECT RESIDENTIAL DEVELOPMENT

By: John G. Rappa, Principal Analyst

Location Characteristics and Market Conditions

Party Paying Fee

Parties' Reactions to Fees

Potential Unintended Effects

Land Owner
Developer
New Home Buyer

Suburban areas in larger metro markets:

· Broad range of housing choices

· Buyers shop around for comparable, lower-priced homes

· Land use controls and DIFs vary by community

Initial home buyers and developer split fee when first imposed

Later, home buyers will pay most of fee

In the long run, owners may have to reduce prices (and absorb some of the fees) if buyers are price conscious and developers compete for their dollars

Initially absorb some of the fees, but then shifts toward building higher priced homes or moves to other geographic markets

Developers who remain will be able to add more of the fee amount to the sales price if drop in production subsequently intensifies demand

Those who left may return if demand goes up, allowing them to shift the fees forward (to the land owners) or backward (to the buyers)

Buyers and developers initially share the fee costs, but proportions vary from community to community; in long-run, buyers will pay the largest share unless landowners reduce their prices, but difference in fee amounts for comparable lots could make it difficult for owners and developers to accurately discount land value to offset fees

Construction could stop in DIF communities if developers get financing to build in other markets

Developers who remain in the market may absorb the fees by reducing lot or unit size or cut back on amenities, causing buyers to pay more for less housing

If production drops and demand increases, the price of comparable, existing homes and their tax assessment could go up

Small, isolated desirable communities or large metro area suburbs offering unique attractions:

· New home buyers ignore small or modest price increases

· Relatively unrestrictive land use controls (e. g. , higher permitted densities, smaller minimum lot sizes)

· Low DIFs

· Relatively low land prices

New home buyer

Offers land for sale without having to reduce sales price (since developer will pass fee forward to home buyer)

Tacks most of the fee amount to the home sale price

Pays the biggest share of the fee

Existing residents may benefit from certain types of fee-funded infrastructure, such as parks and road improvements

Very desirable locations in larger metro areas:

· Limited range of housing choices

· New home buyers ignore small or modest price changes

· Restrictive land use controls

· High DIFs

· Relatively high land prices

New home buyer

Offers land for sale without having to reduce sales price (since developer will absorb some of the fees by reducing the sales price and his profit margin)

Shifts toward building mainly higher priced homes

Depends on income: upper income home buyers can afford the higher priced homes, but the lower income ones will look for homes in other areas

Production of starter home drops and demand for affordable housing shifts to surrounding neighborhoods

Economic segregation could increase if low- and moderate-income housing units become concentrated in those neighborhoods

Higher priced property yield more property taxes while requiring fewer municipal services

Authors

Time Period

Location

Effects Studied

Study Design

Findings

Nelson, Frank, and Nicholas (1992), cited in Baden and Coursey

1981-1987

Sarasota County, FL

DIFs effect on new home sales prices

Empirical: How fees interact with sale price, location, lot size, and sale dates to affect housing prices in a presumably competitive market where fees are clear and predictable and guarantee adequate services to new housing

DIFs increased sales price and value of new homes

Dresch and Sheffrin (1997)

1992-1996

Contra Costa County, CA

DIFs effect on new home construction costs and sales prices

Empirical: DIFs' effect on housing prices (after controlling for quality, market changes, and community characteristics) and conditions under which developers pass DIF costs onto home buyers

DIFs increased construction costs by $ 20,000 to $ 30,000 per unit

Developers absorbed about 75% of fee costs in economically distressed areas and passed most of them onto to buyers in more prosperous areas

Skidmore and Peddle (1998)

1977-1992

DuPage County, Ill.

DIFs effect on rate of residential development

Empirical: Isolate DIFs' effects on residential growth rate from those of taxes, property values, and material and labor costs

29% or 31% rate reduction, depending on econometric model

Fees seem to lower property taxes, but not enough to offset their effect on growth rate

Baden and Coursey (1999)

1995-1997

Eight Chicago Suburbs

DIFs effect on housing prices, moderate-income housing supply, existing home sale prices, and business development

Mostly empirical: town by town comparison of fee amount for new four-bedroom single-family homes on ¼ acre lot, economic model showing how DIFs interact with housing quality and location factors to affect housing prices

DIFs significantly increase sales prices for new and existing homes, with increases ranging between 70% to 210% of fee amount

DIFs cause more than dollar-for-dollar increase due to costly regulatory process delays

Possible unintended consequences:

· Lower-income home buyers forced out of local market

· Developers encouraged to build higher priced homes

· Business have harder time attracting workers due to shrinking affordable housing supply

· Towns set unnecessarily higher fee amounts