AMA – Expensive Connection Fees
Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce.
Today’s show is another AMA episode, that is Ask Me Anything. I love to answer your questions. And if you have a question you think is going to be of broad interest, send it in. I’ll answer it live on the air. Send your question to Victor at victorjm.com. That’s Victor at victorjm.com.
Today’s question comes from Tracy up in Washington State, who writes,
“I’m working on a 144-unit apartment project in an old jurisdiction where the city’s charging about $7,000 a unit for water and sewer connection, so roughly about a million-dollar fee. At the same time, we’re bringing the main to the site, installing all laterals, and handling all of the onsite infrastructure.
Based on public records, the sewer system is operating at about 50 percent capacity, and the fees from this one project would represent a large portion of their annual water improvement. So it’s hard to see how the fee is tied to actual impact versus funding broader system upgrades.
On top of that, they’re requiring roughly a thousand square feet of open space per apartment, plus additional private open space. That equates to over three acres out of a six-acre site, and obviously, that significantly impacts density and overall feasibility.
I’ve built in five different jurisdictions nearby and they all have different requirements compared to this project. Water and sewer in other locations would be about $2,000 to $4,000, and the open space might be 200 to 300 square feet per unit.
I feel this project is in line with the city’s goals as stated in their comprehensive plan, but the development requirements would prevent almost any multifamily project from getting built.
In your experience, how do you get a city to move on issues like this? Do you push for a development agreement, challenge the fee structure, or lean into the economic impact and just negotiate?”
Well Tracy, this is a great question. In my experience, the development agreement is the key document. It includes the rights and responsibilities of the developer.
Let me start with a disclaimer. Your question is partly a legal question and I’m not a lawyer and it’s not my role to give legal advice. You’ll definitely want to speak with a land-use attorney who’s experienced negotiating development agreements with this specific jurisdiction.
There are two things that come into play here. There’s zoning, and then there’s the site plan application. The site plan application needs to comply with the zoning, but you still need to get site plan approval. That usually comes from the planning commission; it might even be voted on by city council, depending on whether the authority has been delegated to planning commission or not.
But in addition to these top-level approvals, there’s a more important document that includes all of the terms and conditions, and that is the development agreement. It encompasses the site plan application and a whole lot more. It will include the terms, like any commitments you would make to the city. That could include things like offsite water and sewer improvements, any road improvements, sidewalks, planting of trees, or landscaping.
It defines who pays for the improvements, what the bonding requirements would be that come with those obligations, and it also includes an obligation to pay impact fees. However, the classification of the fees is important. A connection fee is not the same as an impact fee. You’ll need to get a detailed breakdown of all of the obligations in that development agreement. And yes, this is a document that can absolutely be negotiated.
Now, I don’t know your specific jurisdiction, I don’t know what precedents have been set in the past on stuff like this, but what I have seen successfully negotiated in other jurisdictions is the idea that the cost of any offsite improvements should be deducted from the impact fees. The thinking is that the impact fees are intended for municipal improvements. If you, the developer, are making municipal improvements and then donating them, then the city is effectively double-dipping when it comes to recovering their costs.
You would have a compelling argument to make that your offsite improvements should be deducted from your impact fees on a one-for-one basis. Every dollar in donated improvements should offset your improvement fees.
If the offsite improvements could potentially benefit other properties on the street in the future, you could also implement what’s called a latecomer agreement. This is where, for example, you might be extending a sewer line, and new users could benefit from that sewer line extension. Now if they happen to be building at the same time as you, then it would make sense to share the cost, and they would pay for their fair share of that communal facility. But it could be other things like common trench conduits for internet fiber, or sidewalks, or paving, anything that could benefit downstream users.
So let’s say that another developer starts two years behind you, they would owe you for their share of the communal facility that you built and donated to the city under the latecomer agreement.
If the $7,000 fee is the true cost of the connection, then you might not have much room to negotiate. Maybe another approach is to get the city connection fee to be split between a reduced-price connection fee and an improvement fee, and that improvement fee could be offset by your other improvements that you’re donating to the city.
Now when it comes to the site plan, the zoning code should determine the land coverage. That could be worded many different ways. Usually it’s documented as a floor-area ratio. In and of itself, 50 percent land coverage doesn’t scare me too much. What I would negotiate for is maybe 50 percent open space but go for building a taller structure. That’s going to be more cost-effective for you anyway.
If the floor-area ratio is truly 0.50, then you may need to look for other precedents in the area where the same zoning resulted in a higher floor-area ratio. You would have a legal argument to make that that precedent would apply to you as well.
These are, of course, legal questions that need the help of a strong land-use attorney who knows the local market and how to negotiate on behalf of the developer. You want a wartime general in this case, someone with battle scars, not a peacetime general who only knows the theory but not the practice.
I want to thank you, Tracy, for a fabulous question and for the listeners at home, have an awesome rest of your day. Go make some great things happen and we’ll talk to you again tomorrow.
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