As Clovis continues to expand, the need for more infrastructure, particularly new and expanded sewer, water and recycled water facilities, is also on the rise. However, in order to pay for new, expensive infrastructure projects that are outlined in the city’s master plans, impact fees on new developments in the city will need to increase.
City staff and council members discussed these forthcoming fee increases at length at a special workshop meeting held Jan. 22.
During the workshop, city engineer Mike Harrison presented the city staff’s proposed impact fees—which are as high as a 35 percent increase for some developers—to council members. The huge increase, he explained, can be largely attributed to the need for $315 million for upcoming water and sewer projects, as well as the city’s need to pay off existing bonds.
For housing developers, generally speaking, the lower the density of housing units, the higher the proposed increase would be. For example, a developer building four units per acre would see a 26 percent increase, versus a developer building 15.5 units per acre would see a 14 percent increase. In Loma Vista, the average increase would be around 21 percent across the varying housing densities, equating to around $4,200 per home, which would translate to a 1.4 percent increase on the price of a $300,000 home.
Assistant finance director Gina Daniels broke down the sheer numbers for the city. Currently, the city’s debt for sewer is $171 million and it’s debt for water is $33 million—a total of $204 million or $9.5 million owed per year over the next 10 years. Current impact fees being collected can cover this debt, but they do not provide much extra revenue needed for future projects.
“If we look at our current impact fees for sewer and water, we have a total of $12,780 and if we multiply that by 765 units, which is a 30-year average that goes up or down at any point, we only end up collecting $9.8 million, so when you compare the $9.8 million that we would collect to the $9.5 million we have to pay out for debt service, we’re barely collecting and that is if we stay at 765 units each year,” Daniels explained.
Meanwhile, Daniels projects the city will need a total of $312 million—$120 million for sewer and $172 million for water and recycled water infrastructure—in the future. That’s a total of $516 million the city needs to pay off its debt and invest in future infrastructure.
Of course, to complicate matters, even with increased impact fees, the city would still need to impose a $7.30 monthly surcharge to all users—new and existing residents—to maintain enough cash flow to pay off the debt. This, Harrison explained, is due to residents using the sewer less than projected in the city’s master plan. Since sewer costs are spread out over all units, this means the city can’t legally charge more for the newly developed units, instead they must charge all users a fair share, meaning in this case the impact fees on developers for sewer actually need to be reduced by $1,500 per unit.
This reduction, however, only applies to the portion of sewer already in place and in need of repayment, so overall developers will still see a substantial increase in sewer impact fees to pay for future projects.
As much as a 35 percent increase to impact fees, though needed for infrastructure projects, could of course hinder development within the city. With that in mind, Harrison said the city council could consider charging existing users more than the $7.30 needed to repay the debt, or the city could development assessment districts, like Mello-Roos Community Facilities Districts. The city of Fresno, Harrison said, does a combination of these two things to keep impact fees lower.
“The city’s current policy is we’ve always lived by the mantra that development needs to pay for itself and not be a burden to the existing residents,” Harrison said. “However, most cities fund at least a portion with higher monthly fees for all users throughout the city.”
Currently, the city of Fresno’s water rate for users is twice as much as what is charged by the city of Clovis, while sewer rates are comparable. On the flip side, however, impact fees for developers are much higher in Clovis already.
Andrew Haussler, the city’s community and economic development director, provided an example of the cost difference between a 40,000-square-foot industrial space Clovis versus the cost for the same sized building in Fresno.
“For a 40,000-square-foot office building in Clovis, you’d be paying $321,000 in impact fees at this time and in Fresno that same building would cost you $190,000 in impact fees,” Haussler said.
For housing developers, Harrison said the current average cost of impact fees per unit in the Clovis Loma Vista area is $18,000 higher than the cost of the average home being built in Fresno. Part of this difference, however, is due to Clovis providing some infrastructure Fresno normally requires the developer to build itself, thus Fresno is unable to collect development fees for certain things the city does not provide.
In this way, comparing Clovis to Fresno, is almost like comparing apples to oranges. Still, the difference is not lost of local developers, who understand why costs are higher in Clovis, but say a 35 percent increase would be too burdensome to bare. In passing the cost onto buyers, developers said they believe buyers will buy someplace else.
Mike Prandini with the Building Industry Association of Fresno/Madera Counties, said there is no doubt the cost increase would cause housing developers to flee Clovis in favor of Fresno or Madera where impact fees are significantly cheaper. For many, he explained the main draw of building in Clovis is the stellar school district, which many move to Clovis for and are willing to pay higher housing costs for. But now, areas of north Fresno that are developing offer “the best of both worlds: Clovis schools with Fresno fees” making the substantial price difference between the two cities a non-issue.
“Developers believe given the choice between the two, buyers will choose the Fresno home in Clovis Unified,” Prandini said, acknowledging that even though Clovis does have superior law enforcement, as councilmember Lynne Ashbeck said she believes is equally as important to many buyers as the school district, he doesn’t think buyers will choose the higher costs in Clovis just for better police, not when you’re talking about the nicer neighborhoods of Fresno.
“Most people when they buy a house try to maximize their ability to borrow and pay for that home with their resources. People try to buy the top of what they can afford and when you kick it up another thousand or two or five, you eliminate more and more buyers. Then, when you start factoring in the comparison of prices in southeast Madera and Fresno, you exacerbate the problem,” Prandini said.
Matt Smith of Woodside Homes echoed Prandini’s remarks. Though he said Woodside prefers Clovis, business is business and they will build more in other cities if the cost increase is too much to bare for their market of buyers. Though it’s not entirely on the city, Smith explained that costs across the board have been climbing for developers while their revenues have not increased at the same rate.
“Our costs over the past couple of years [for land, labor, etc.] have gone up at a faster pace than our revenue has,” Smith said. “Generally, my thought is if the city of Clovis does raise fees by 35 percent, when you are already starting at a higher jumping off spot than other cities, it really does reduce the incentive to build here. In no way as I think about market forces do you raise a price 35 percent and it doesn’t affect demand at all, you raise something by 35 percent and it immediately has an effect. Are people willing to pay more in Clovis? Yes, but is that already affected in the purchase price of the land? Yes, and if you add fees on top of that it makes things difficult. We love Clovis and want to stay here and build here, but would really love to see the city of Clovis be a little bit more competitive on the fees.”
A representative of the Ricchiuti family currently working with Lennar Homes on the first Heritage Grove development, said he understands the need for future infrastructure, but suggested the city look at spreading the cost of repaying back the bonds they would need to repay with or without new development across all users in the city. He also suggested that the impact fees could be greatly reduced if the city considers reducing the amount of interest or the contingency it charges.
“The $312 million figure is a little misleading,” he said. “The $312 million is the cost of the infrastructure itself, but included in the fees that we’re referring to are interest payments and repayment of bonds and that is where I think the discussion should be. Whatever the costs are, we can discuss and figure out. I do believe there are some things that are overinflated with the water fee, but right now the big thing is it is carrying a 30 percent contingency on top of an 18 percent project administration, survey and engineering fee. So, if I have a $10 million improvement, I’m adding $4.8 million on top of that for contingency, which in the research I’ve done is very high. Then I have to pay interest, so baked into that fee is $147 million in interest. So that $172 million for water, which includes the 48 percent already, has another $147 million of interest and $25 million of repayment of the 2013 water bond, so the total is for the water infrastructure is really $344 million, not $172 million. It’s double. That’s a difference from $3,500 a unit to $7,500.”
These fees, he explained, are a result of conservative figures now in place due to the recession.
“You have numerous conservative assumptions layered on top of one another which is causing the fee amount to balloon,” the Ricchiuti project representative said. “You have costs that are engineering costs typically higher than those in the field, then you have contingency and administration and interest over 30 years and then repayment of debt. It’s all these details; this is where we can fix this problem … what if the contingency were only 10 percent (instead of 30)? Twenty percent of $147 million is $35 million, plus the interest, so we’re talking $60 million less if we cut down the contingency—that’s $2,000 a unit off of our fees just by changing that one assumption, so I think the city needs to look at these details and take a more reasonable approach.”
Todd Cook, a local businessman, suggested the city not just think of housing, but consider what higher impact fees would mean for commercial and industrial businesses wanting to come to the city as well. While housing by and large is optional, as Mayor Bob Whalen suggested current citizens don’t necessarily support the idea of Clovis becoming larger in population, Cook said the city has long had the goal of making the ratio of jobs to homes equal so Clovis is not just a bedroom community. Having high impact fees would be devastating in that they would dissuade new businesses from coming to town. Not only would new job opportunities be on the fritz, but all the sales tax and revenue the city gains from businesses would be lost as well. With that in mind, Cook said the city should consider a different fee structure for businesses versus housing developments.
“You won’t need to worry about how you’re going to pay all these fees for residential if you don’t have jobs and places for people to work so they can afford to buy the homes,” Cook said. “[With increased fees this high] you’re dead on arrival in trying to compete in industrial or office or even retail market … think about some of the names that you read in the paper and hear on the news, these huge business developments going to the city to the west who aren’t even kicking around in Clovis and you can see why, $190,000 in impact fees for a 40,000-square-foot building west of us versus over $300,000 here. Remember, if we’re going to build all these homes, we need to figure out where these people are going to work or Clovis will be a bedroom community and then you’ll need to look at police, fire and ongoing expenses that residential houses are a drain on. I agree infrastructure is a problem but I don’t know how you stomach that huge increase in a market-driven economy, but I do want to remind you about the job creation benefit and component here.”
Councilmembers agreed with Cook that attracting new business is vital.
At the same time, the councilmembers told staff they don’t want to discourage new housing developments with impact fees that are too high nor do they wish to upset residents by raising water and sewer fees too substantially.
One thing all council members could agree on was that the staff needs to return to the drawing board and come up with other solutions that perhaps put less burden on developers, but also don’t burden current water/sewer users unfairly.
Harrison said staff will continue to be in discussions with the development community to find the best solutions to making the water and sewer impact fees as reasonable as possible. He said the staff plans to return to the council with their recommendation for all the fees with the exception of water, which may take more time, in April. From there, a new fee structure if approved by council, would go into effect in the new fiscal year beginning July 1, 2018.