Understanding the Relationship Betweeen Development Fees, Infrastructure and Tax Revenue

Last week, the local newspaper ran an article about the city of Santa Rosa’s consideration of updating their development fees to spur housing construction.  The article explains how the city has hired an economist to review the city’s fee structure and advise how they can spur housing development to counteract soaring rents and home prices. Housing production has been minimal  and the economist reported that even though rents have been increasing, they are not yet high enough to encourage developers to start new projects. Average rent  in the city is $1.84 per square foot. The economist told the City Council that rents needed to be at least $2.50 per square foot for developers to be able to afford to build projects. The city is hoping to learn if adjusting their various impact fees will encourage new housing development.

The article notes that city impact fees are used to fund various infrastructure projects. Over the past 20 years, the city has collected $230 million in these fees. The projected cost of infrastructure needs over the next 20 years is about $1 billion.

The city is left facing a major dilemma. It needs development to pay for its infrastructure costs, but it also needs to invest in its infrastructure to make the city attractive for economic growth.

• The Press Democrat

This perfectly plays into the message of Strong Towns. Strong Towns President Chuck Marohn describes the development process in the post WWII period as a Ponzi scheme (This is a great summary of the central argument).  Because cities typically fund infrastructure projects with development fees, they need more and more development to pay for the maintenance of their existing infrastructure. Strong Towns argues that what they refer to as the ‘suburban experiment’ is now a primary reason so many cities are finding themselves in financially challenging places. Suburban development patterns generate a small fraction of the revenue, in the form of property, sales and income taxes, necessary to maintain the infrastructure that supports the development (streets, water, sewer etc.). Strong Towns argues that a return to more traditional development patterns of mixed-use, walkable places will provide for more financially resilient communities. Traditional development provides much more revenue when compared on a per acre basis than sprawling suburban development.

Urban3 is an organization that specializes in evaluating development patterns in regards to tax production and infrastructure costs. Their work supports the Strong Towns thesis that traditional mixed-use urban development patterns provide much more revenue than sprawling suburban development when compared on a per acre basis. They have developed a fascinating way to graphically present data that really shows where communities generate most of their revenue. And on the flip side, shows how little the return on investment is for sprawling development patterns.

This article comes at a most opportune moment. I’m part of a committee that is bringing Urban3 and Strong Towns to Sonoma County to complete an analysis of land use and development patterns with a focus on the areas around the SMART train station areas. The SMART train will run from northern Sonoma County into Marin County to the south where it will connect to the ferry terminal at Larkspur for those wishing to continue on to San Francisco. The train is scheduled to start service late 2016. The areas around the train stations need to be developed as high-density mixed-use neighborhoods to provide the ridership needed for the train to be financially successful. So far little, if any development has occurred in the station areas. And some of the projects that have been proposed are facing backlash against the proposed densities. If we don’t develop the areas around the stations correctly, the train is not going to be able to survive on rider fares and will require more subsidies.

It is crucial that we get this right. The data to be provided by the Urban3/Strong Towns team will provide hard data for decision makers to understand the importance of developing the station areas in a manner that will support this expensive piece of infrastructure. But also, how to create more resilient communities overall. At the culmination of their analysis, Urban3 and Strong Towns will conduct a series of public workshops and a ‘Boot Camp’ to explain their results and teach local officials how to use the analysis tools to study the impact of future development proposals. We need to take a long hard look at how we are building and the associated long-term costs. To develop in a manner that will create truly resilient places, we need to fundamentally transform the way we develop and grow our communities.