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Builders: Cut growth fees in half

Also suspend bonus bucks for five years

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Builders: Cut growth fees in half

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POSTED February 2, 2010 1:53 a.m.
The head of the organization that represents almost all builders in Manteca has a message for City Hall – if you want to generate jobs slash growth fees for everything from parks to road projects triggered by the need to accommodate growth in half.

The man responsible for ultimately overseeing the building of needed infrastructure – Public Works Director Mark Houghton – noted that in doing so who is going to pick up the tab?

In a nutshell that provides the framework of what has the potential to become  one of the most politically contentious issues to come before the City Council harkening back to the mid 1980s when a deeply divided community pushed for a 1.9 percent growth cap since new homes were overwhelming the city’s ability to pay for necessary services. The council at the time sidetracked a ballot initiative by imposing a 3.9 percent growth rate just a year after growth was blamed for almost bankrupting the city because inadequate growth impact fees were being collected from developers.

The council subcommittee of Vince Hernandez and Debby Moorhead Monday continued to gather input from developers and city staff alike on trying to indentify ways to strengthen the local economy by finding ways to stimulate more home building. The goal is to send a package of possible ways to jump start housing construction to the full council in March.

Manteca in 2009 – for the second straight year – by far led all of San Joaquin County with the most housing starts with 304 single family homes being built. And as job generator, the actual physical building of the homes may not have much impact on Manteca’s 15 percent unemployment rate as a city survey last month showed most subcontractors are not based in Manteca. There is little dispute, though, that the nearly 1,000 new residents who are positioned enough financially to buy a new home in the current economy based on 300 homes being built annually would have a significant positive impact on other jobs in Manteca from health care and services to retail.

Building Industry Association of the Delta Executive Director John Beckman is advocating a temporary 50 percent cut in growth fees. Under the direction of the council subcommittee, municipal staff will run a number of scenarios on how either keeping growth fees intact or reducing the fees by 75, 50 or 25 percent will do in terms of generating home construction plus the dollar impact on the Manteca economy as well as the city.

The subcommittee will then hear input from developers and the city on the various economic models and then make a recommendation for the council on whether to slash the fees or keep them intact.

Manteca hasn’t raised fees to keep pace with actual building costs
Beckman points to other California cities that have temporarily reduced their growth fees by 50 percent in a bid to encourage home building. City Manager Steve Pinkerton cautioned that almost all of those cities, unlike Manteca, regularly updated their growth-related fees. As an example, Manteca’s government facilities fee was set at $350 in 1989 and stayed their until two years ago and jumped them up to nearly $4,000 per home after an exhaustive study showed that was the true cost of  growth’s share of the actual cost of building facilities such as a police station and library. The BIA objected to the fee increase and sued. They ended up losing in court.

Other steps the subcommittee does appear ready to recommend to the full council to consider include:

•suspending the collection of development agreement fees – or bonus bucks – that can run as high as $17,500 per home depending upon the individual agreements between the city and builders for a period of five years.

•dropping the city’s requirement that new homes be 15 percent better in terms of energy efficiency than the state’s Title IX requirements. Manteca’s requirement adds $1,500 to the cost of a typical home.

•delaying the collection of growth-related fees until such time as a final inspection is granted. Municipal staff noted this will have no impact on the city since the services aren’t needed until a home is occupied.

Pinkerton made it clear the city needs to make sure that they cover close to 100 percent of the actual cost of staff time processing development plans through user fees.

The five-year suspension of the bonus bucks payments appeared to have the support of both Hernandez and Moorhead.

In advocating for a longer period than a three-year suspension of the non-restricted bonus bucks that was discussed previously, developers noted without the longer time frame builders would simply “get their money out of the ground by building homes on the 957 finished lots and then walk away until the market becomes robust once again. A finished lot represents typically $65,964 in stranded costs ranging from fees to infrastructure and land costs that can only be reclaimed when a home is built and sold.

The five-year period advocated would open a financial feasibility window for developers who have eight single family home subdivisions approved with 3,252 paper lots to go ahead and plow money into infrascture by providing an incentive which is avoiding payment of the bonus bucks.

If not, as some developers pointed out, Manteca would merely clear up the backlog of 957 finished lots so the money invested could be retrieved and would not break ground on new projects, That, in effect, would bring new home construction grinding to a halt in three to four years.

It costs $121,079 to just finish a typical lot
The model that Houghton devised illustrates to the council subcommittee the cost of building a typical home in Manteca had land acquisition, financing, and closing costs at $18,200 per home. Project approval costs such as environmental studies and various city fees add another $1,800 per home. Offsite construction improvements – everything from streets to landscaping and sound walls – add another $11,920. On-site improvements that are basically the infrastructure within the subdivision’s boundaries from street lights, pipes, sidewalks to installing utilities and then turning them over ready to go to PG&E, Verizon and Comcast – add $23,826.

The building fees and growth fees add another $48,464.

That brings the cost to finish a lot to prepare it for building to $121,079. The house construction at $75 per square foot is a $150,000 cost plus there is a $30,000 cost for sales and marketing to bring the final tally in at $301,079.

If builders can secure $300,000 net for the home after selling costs are covered they will still lose money, roughly $1,079. In many cases homes are indeed selling below the cost of the finished lots as a way to keep developers ahead of the loans and to retrieve in-ground investments.

How developers are doing it is by essentially writing off the cost of the land – and $18,200 per home cost per home. There are tax consequences that can help somewhat but the real advantage is it significantly reduces losses per lot. If a developer can reduce losses significantly they can stay afloat.

On the flip side, the city factored in a certain growth rate to project their ability to pay back bonds for things such as the wastewater treatment plant and surface water treatment plant. The city traditionally has taken the historic growth rate and used a number that’s anywhere from 25 percent to 50 percent lower to build in cushion on top of a reserve for debt repayment when it involves financing growth-related projects.

The entire exercise was started when Mayor Willie Weatherford suggested that the city look at ways to find ways to step up home building – the biggest source of private sector jobs in Manteca – to try and chip away at the city’s 15 percent unemployment rate. The secondary impact – jobs created after people move into the new homes – is even bigger and can be attributed directly to new home building.
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