Should Stamford raise building-permit fees on commercial developments over $1,000,000? The BoR votes tonight (Monday, 2/4) at 8:00 p.m.

February 4, 2019

Pop quiz:  which right-of-center elected official said the following about raising building-permit fees on large commercial developers?

 

"Fees should not be a form of taxation . . . [fees should cover the city's cost of providing a service, and not be used as a way] to 'get' somebody because they're bigger."

 

a) President Donald Trump

b) Governor Scott Walker (Wisconsin)

c) Mayor David Martin (Stamford, CT)

 

The answer, of course, given our target demographic here at Team Stamford, is (c), Stamford's Mayor Martin.  I note this in support of our hypothesis last July that "Stamford wants Republican governance. They just don't want to elect Republicans to office[,]" and to introduce a really interesting discussion about an issue seemingly as simple as building-permit fees (also, to be fair, the Mayor's comment is probably more "pro-business" than "right-of-center," without making a normative judgment about whether being pro-business is good or bad in this context; Democrats and Republicans are both capable of being pro- and anti-business in certain circumstances).

 

[The most recent Advocate article on this issue was in the Saturday paper, and is titled "Fee battle rattles city developers," but as of this posting I'm unable to find a link to it online.]

 

To start with, I agree with the Mayor's conception of fees.  Taxes and fees for using city services should be simple and transparent, and, when possible, reflect the benefit provided to the taxpayer.  Backdoor progressive taxation through graduated fee schedules does not strike me as a good way to do public policy.

 

Of course, none of these principles--agree with them or not--answer the question of whether the proposed fee increase--from $16.50 to $25.00 per incremental $1,000 over $1,000,000 of the estimated cost of the commercial development (but not residential)--is a good idea.

 

Let's examine.

 

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First, it is important to separate two distinct reasons for raising fees for development of commercial properties:  (1) to discourage development; and (2) to raise revenues.

 

The first reason, by itself, is not a good reason to raise fees.  Fees, when used as indiscriminate means to make commercial development more expensive, curb all development, both good and bad.  All of our elected officials believe in development where it makes sense to develop (yes, this leaves significant room for interpretation, but even the most vocal "anti-development" voices in Stamford support some development in some circumstances).  Accordingly, even if you think Stamford has been overdeveloped in recent years, raising fees across the board to curb further development is not an appropriately tailored solution to this problem (updating zoning regulations, a process the city is undertaking, is a better way to address this problem).

 

Therefore, if we want to justify raising fees on commercial developers, it should be because it will increase revenues.

 

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Within the "raising revenues" rationale for the fee increase, I can think of (at least) three reasons such increase could be justified:  first, as a general means to raise revenue for the city; second, as a way to more appropriately reflect the costs to the city in processing the development application; and third, to compensate the city for the increased usage of public goods the development will cause (roads, schools, sewer systems, etc.)

 

As mentioned above, I am uncomfortable with the idea of raising fees on services provided by the city just because it will raise revenues.  This discomfort does not disappear when the target of the fee increase is only commercial developers, as opposed to all developers.

 

In a comment which brings to mind Mitt Romney's (in)famous quip that "Corporations are People, my friend," Larry Davidoff, a realtor quoted in the Advocate article, mentions that "he takes "great exception" to board members' statements during the ongoing fee debate that they represent residents, not developers. . . . "Some of us residents are developers--we are no less constituents than anybody else you represent[.]"  

 

I agree with Davidoff's sentiment.  Further, even where developers are not Stamford residents, ultimately, for development in Stamford to be successful, Stamford residents must avail themselves of the properties developers build.  I am uncomfortable with government wielding political power to punish disfavored groups.  A populist agenda in support of targeted taxation of developers is just as bad as a corporatist agenda which favors developers at the expense of the common man.  Government should treat those within its jurisdiction fairly, and not discriminate on the basis of distinctions such as commercial or residential development just because of the nature of those interests.

 

Therefore, if fees are to be increased, we would need to justify them because either they accurately reflect the cost to the city of processing the applications, and/or because large developments strain public goods which the city should be further compensated for.

 

Rep. Cottrell (D-4) alludes to the former justification in the Advocate article, noting that Mayor Martin has told the Board of Reps that the Building Department needs revenue to provide for adequate staff and software.  However, this is a generalized revenue need, not one specific to large developments.  If anything, we should expect economies of scale in reviewing large dollar development applications when compared to small ones (in other words, it costs the city fewer dollars per million of proposed development to review a $50 million development application than a $500,000 development application).  Accordingly, I don't think this reason suffices to raise fees on large commercial developments.

 

So, that leaves one reason which could support a higher building-permit fee on only large commercial developments:  the cost imposed on all taxpayers attendant to the new development.

 

This reason is rather persuasive.  Large developments pose costs on the city that smaller developments do not.  If a homeowner builds an extra bathroom on their residential property, no externalities are imposed on the taxpayers.  When a large developer puts up 300 new apartment units in the South End, however, congestion gets worse, our roads undergo more wear and tear, and the demands posed on our public schools rise, among many other things.  

 

Recognizing these burdens, in the legislative history on the proposed fee increases, Rep. Sherwood (D-8) points to what Danbury Mayor Mark Boughton (R) has done in asking large developers to pay their fair share of costs development poses on the community.  Just this December, in connection with a developer's $17 million purchase of a 1.2 million-square-foot building, the developer agreed to pay an annual "student impact fee" estimated around $550,000 in its first year, growing ultimately to $750,000 before terminating in 2039.  These fees are in addition to the developer's $860,000 annual tax bill.

 

Here, the contemplated building-permit fee increase to a developer of an 8-figure property like the Danbury one would be an increase of a one-time payment of approximately $136,000 ($16m / $1,000 * $8.50), which pales in comparison to what Danbury is asking.  

 

Admittedly, developers--like all property owners--are obligated to pay property taxes, which support public services like schools and roads.  I remain unclear why proportionate property taxes are believed to be insufficient to cover the costs new development imposes on the community, but, assuming there's good reason why this is the case, the proposed building-permit increase can fairly be tied to the costs imposed by the developers doing the developing.

 

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Having concluded that raising fees on commercial developers is justifiably tied to the costs such developments impose on our community, the final question we must ask is, how large a fee increase is too large? 

 

A little math is in order.  

 

The Advocate cites Rep. Roqueta (D-4) discussing a $47 million project a developer recently sold for $78 million.  Let's use that development as an illustration.  Under the current fee schedule, that developer would pay $775,500 in building-permit fees ($47m / $1,000 * $16.50).  Under the proposed fee schedule, the fees on this project would rise to $1,166,500 ($16,500 on the first million of development, and $1.15m on the remaining $46m).  Just looking at fees, this is an over 50% increase in the cost paid by the developer.  But, taken as a percentage of the entire development, the increase is barely a blip--about 0.82% more than under the current system ($48,166,500 / $47,775,500 - 1.00%).

 

Further, a friend in real estate development helpfully notes that, because ground up development is riskier than simply buying an existing cash flowing real estate asset, such investments require a much higher internal rate of return (20%+ as compared to 10%-15%).  So, because modeled returns are higher to begin with, a developer will be less sensitive to the increase in up-front fees than an acquisition of an existing rent-producing asset [NB:  pretty sure I have this relationship right, but let me know if I've inverted the implications of the higher hurdle rate on ground up development.  In any event, I don't believe it's significantly material to this analysis.]

 

Therefore, I am not overly concerned this fee increase will make it prohibitively expense to build in Stamford.  In fact, if you indexed the $16 fee as it was in 2000 to inflation, it would be approximately $24 in 2019 dollars--right around where the Board of Reps has proposed the new fee be set.

 

Of course, none of this is to dispute raising fees will discourage development in Stamford.  It will.  Economic principles of supply and demand remain in effect whether we like it or not.  But, it seems unlikely this modest increase will kill development, or anything close to it, in Stamford.

 

 

 

 

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