Policy Making and Real Estate

By : J. David Chapman / July 19, 2024

While on City Council, Josh Moore and I made approximately 20 presentations on the state of housing in Edmond. It’s difficult to spend four years in a policy-making role in a municipality where the average new home sells for more than $400,000 and not worry about housing affordability.

Housing costs are rising faster than incomes, putting greater financial stress on families. Local policymakers have a few tools available to lessen this stress. They have the ability to reform land-use regulation allowing smaller, more compact housing; increasing taxation on expensive, underutilized raw land; and expanding housing subsidies to low-income households. Unfortunately, many local politicians are doing just the opposite and proposing to increase the price of housing by imposing development impact fees increasing builder expenses as much as $25,000 per home.

I have written about these options to address housing affordability many times in this column. What I have never commented on are development impact fees. These fees are charges imposed on developers to fund public infrastructure improvements necessitated by new development.

I understand the need for increased income in municipal government. I simply think there are more appropriate ways to address the issue. There are several reasons why development impact fees are not the best alternative. First, it will certainly increase housing costs, exacerbating the housing affordability issues. Secondly, these fees can discourage development by increasing the financial burden on developers, again, creating a slowdown in construction. Third, these fees fund facilities and services that benefit the broader community creating a sense of inequity among developers and property owners. Fourth, impact fees can distort the real estate market by making certain types of development less viable – such as affordable housing projects. Lastly, regions with high impact fees might become less attractive to developers compared to areas with lower fees or different funding mechanisms. This can impact a region's economic competitiveness and ability to attract new investment.

There are a few alternative funding mechanisms might consider. The first is Tax Increment Financing (TIF). This uses future tax revenue increases generated by the new development to fund infrastructure improvements. They can also launch Public-Private Partnerships (PPPs) to collaborate with private entities to share the costs and benefits of infrastructure projects. They may also institute General Obligation Bonds. Issuing bonds to fund infrastructure, repaid through general tax revenue.

By considering these alternatives, municipalities can potentially mitigate some of the negative impacts associated with development impact fees.

Dr. J. David Chapman is a Professor of Finance & Real Estate at The University of Central Oklahoma (jchapman7@uco.edu)