Dayton, other Minnesota cities trying to cope with court ruling limiting road improvement fees

A Minnesota Supreme Court ruling last summer limiting how much communities can charge developers for road improvements has led to a lawsuit and a yearlong building moratorium in Dayton, one of Hennepin County's fastest-growing cities.

Dayton brought its housing boom to a screeching halt so it could take a fresh look at how to cover the cost of new roads, gutters and other infrastructure without overburdening taxpayers.

One of those leading the charge for the Dayton moratorium was Mayor Tim McNeil, who was charged this week in an unrelated case with embezzling more than $13,000 from a committee running the city's annual festival.

Dayton City Administrator Tina Goodroad said Tuesday that the City Council was working toward policy discussions on the moratorium but that no immediate changes will be made. She said the city might have an update next month "as to when the moratorium will be lifted."

McNeil, mayor of Dayton since 2015, and other city leaders decided last fall to enact the moratorium after the high court outlawed road fees charged to developers by the city of Woodbury, similar to what Dayton does.

In a report issued Monday, the builders group Housing First Minnesota blamed such fees for skyrocketing new home costs in the Twin Cities.

The Supreme Court ruling will hinder affordable housing stock in cities that used Woodbury's fee structure, said Nick Erickson, regulatory affairs manager for Housing First Minnesota. In other cities, he said, the ruling should help open doors to cheaper fees negotiated with developers.

The high court ruled that $1.3 million in road improvement fees that Woodbury had charged developer Martin Harstad for his 180-home development violated state law. Neither Harstad, who has since backed away from the development, nor his attorney could be reached for comment.

While some fees are necessary, Erickson said, they can represent 20 percent of the cost of a new home.

But the League of Minnesota Cities, which supported Harstad's suit, believes dedicated and sustainable funding sources can be used by cities to create street improvement districts and relieve cost requirements, said Irene Kao, a lobbyist for the organization.

"There is a sense of urgency for cities," Kao said. "How much do they raise property taxes for improvements or have the developer pay for it? We hope the Legislature will pay attention."

Dayton's moratorium prompted Landmark Development, which had started a housing project there, to sue the city to cancel more than $800,000 in road fees that the company previously had agree to pay. Landmark holds that the road fees charged on their nearly 300-unit housing development are illegal, said attorney Peter Coyle.

Dayton had to renegotiate infrastructure fees for four projects under construction at the time of the ruling, resulting in significantly lower revenue for the city.

While Dayton took the dramatic step of halting new construction, cities such as Lakeville responded to the ruling by planning to change how they collect fees for road upgrades.

City officials in Lakeville, where the fee process is similar to Woodbury's, were expecting to collect more than $100,000 from a residential and industrial project under construction when the Harstad decision came down. Now the city will have to find other funding, City Administrator Justin Miller said.

There are a variety of ways cities can collect fees for road improvements: issuing bonds, assessing property owners for improvements, negotiating a contract with the developer, or having taxpayers foot the bill.

Eric Searles, Woodbury's city planner, said the Harstad ruling didn't change the city's ability to assess construction costs and bill developers. Woodbury will handle improvements on a case-by-case basis and expects developers will continue to pick up such costs, he said.

"Woodbury … is still a city builders want to be in," said Searles. "The ruling hasn't reduced any development activity."

David Chanen • 612-673-4465