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A way to help home builders & buyers & not spend a penny

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POSTED February 11, 2009 4:17 a.m.
The City of Manteca wants to be pro-business. They want to be accountable. They want to be transparent. And they also want to promote affordable housing.
There’s one thing the Manteca City Council can do to accomplish all four goals and it won’t cost the city a cent. All they need to do is to allow growth fees on new housing – and even water and sewer connection fees – to be paid as part of the escrow process instead of months in advance of the issuance of an occupancy permit for a new home.
It can easily cost $40,000 in growth fees and connection charges at the time a building permit is issued to build a house. A typical home can take three to four months to build. If a developer sells one home a week, they will have at least a dozen in various stages of construction at any given time. That is well over $500,000 in connection charges and growth fees they have to pay before they even get a penny for the home. And that’s assuming the deal goes through when they are finished building.
The city isn’t out anything. Even if the water and sewer lines are connected, nothing can flow to the wastewater treatment plant until the connection fees are paid and the occupancy permit issued. The city has the safeguard of keeping the water turned off. Without water, you can’t use the sewer. It seems the city is protected fairly well.
The growth fees aren’t needed until a city project is underway. Certainly a four-month delay in pocketing them isn’t going to have a big impact although it arguably will cost some interest the city could earn by socking it away temporarily in a savings account. But then again, why should the city have the money before there are people in the homes to impact the need for additional services such as community parks, fire stations and such? The same should be true of the school mitigation fees but that is an issue for the State of California and Manteca Unified School District board and not the city.
How is this pro-business? Contrary to popular belief, developers don’t usually have a ton of money lying around. They need to borrow it from a bank. It reduces the developer from tying up money and in return reduces their costs.
The transparency comes by requiring the close of escrow to include documentation that the sewer and water connections were paid along with growth fees and how much. Yes, it is collapsed into the sale price of the home but in reality the buyer is paying for it and doesn’t realize it.
The odds are buyers will be a little more aware of promises the city is making by collecting such fees and are going to be more keen on making sure there is accountability. That also fosters a bigger sense of ownership of both the neighborhood and the community. It also helps buyers to understand they are essentially paying the fees.
The affordability factor comes in tight times like now. Let’s say it cost the builder straight 6 percent interest on $40,000. That is $2,400 a year or $800 for four months. It essentially gives a builder $800 more wiggle room to compete to get buyers. It is not a lot compared to a $300,000 home, but every penny adds up.
Then there is the issue of deals falling through when the home is completed. When everything’s sizzling hot there isn’t much standing inventory.
When it is slow, that home could stand six months or a year without selling. Not only did the developer have to pay the city $40,000-plus without anyone actually occupying the home for a year but they are out an additional $2,400 in interest.
It also means developers are less likely to want to have standing inventory.  Let’s say the construction costs of four homes – labor and materials only – comes to $600,000 or $150,000 each. Under the current way connection charges and growth feeds are, they’d have to advance $160,000 to the city before getting a penny. The developer could have the option of building an additional home for standing inventory with the money. It would keep construction workers on the job and would allow the builder to be more flexible for the market.
It’s a win-win for everyone. The builder gets more flexibility and isn’t put under financial stress. The city still gets their money without extending actual services until they are needed. The buyer gets an even clearer transparent snapshot of what it costs to buy their home and what those costs really are.
It’s a little change but it can have a positive and big impact on a lot of people.
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