Some developers win, taxpayers lose in Minnesota Supreme Court ruling on fees cities can charge

The Minnesota Supreme Court's recent decision limiting development fees is a $1.3 million gain for the developer and a $1.3 million loss (and counting) for the property taxpayers of Woodbury.

Builder groups, including the political action committee BATC-Housing First Minnesota, will tout the decision as a major victory for making housing more affordable.

It isn't one.

Looking at a developer's profit-and-loss statement, it is easy to assume that reducing fees (or any other cost) would result in increased profits or more affordable housing. However, wherever developable land is scarce, the competitive market dictates that fee reductions will simply be offset by land price increases.

In my work on behalf of Newport residents, I regularly point out that the best way to facilitate development is to allow private developers to make money. But one effect of the limited supply of land is that cities with more valuable locations can charge higher fees without hindering development.

Developable land is a limited commodity. Developers spend more to build homes in places where new home sale prices are higher.

Location costs include land, infrastructure and municipal mandates, including fees and other requirements. These individual items are not fixed costs, as is presumed by advocates of reductions in municipal mandates as a means to increase home affordability.

Instead, the net value of a location remains the same regardless of the proportion of that value allocated to municipal mandates. This value is reflected in the combined costs of land prices, associated infrastructure costs and municipal mandates.

In a July 25 column by the Star Tribune's Lee Schafer ("Rules, fees put chill on affordable housing"), David Siegel, executive director of BATC-Housing First Minnesota, used the example of Hayward, Wis., to demonstrate that Woodbury's development fees are too high.

Based on all the new construction in Woodbury, even accounting for the now-illegal fees, private developers understood there was money to be made in Woodbury. In contrast, the lower sale prices of new homes in Hayward necessitate lower fees to facilitate private development.

With the Supreme Court's decision, New Brighton-based developer Martin Harstad and his lawyers at Larkin Hoffman short-circuited the efficient market by lowering development fees after acquiring land. The next developer buying land in Woodbury will not be so lucky.

For future developable land sales in Woodbury, any fee reductions resulting from the court's decision will be offset by increased land prices. Existing property taxpayers can expect to foot the bill for the lost fee revenue.

And Martin Harstad would have to demonstrate unusual generosity for a profit-seeking entity if he sells homes in their Woodbury development at a discount in view of the court victory.

Since fee reductions will be offset in land-price increases, there will be no net cost reduction for future developers. With no net cost reduction for developers, there will be no added new housing construction. Without an increase in the supply of new homes, there will be no price reduction for new home buyers.

So the only beneficiaries of the Supreme Court's decision are the current owners of developable land in cities with fees deemed illegal under the decision.

The undercurrent of the argument that development fees are too high is that the fees are unfair or that cities spend too much. But the prudent size and scope of government is a separate issue. Fee reductions do not equate to smaller government.

Smaller government requires less spending, and there's not a reasonable expectation that lowering development fees will result in less government spending. As the victims of St. Paul's 24 percent property tax hike this year can attest, lost fee revenue is usually made up with property tax increases for existing property owners.

In a battle of competing interests, replacing fees for new development with property taxes charged to existing property owners sounds most unfair to me.

If our legislators agree, they can override the Minnesota Supreme Court next session.

Dan Lund is the mayor of Newport.