Dirty, Sexy Money and DIF
Reporting on the Town Council’s decision to extend the moratorium for Development Impact Fees (DIF), your comments reflected a common, but significant, misunderstanding about DIF that is pervasive among members of the community and local government.
In last week’s Sheet, it was said that “Councilmembers voted Wednesday to extend the DIF (Development Impact Fee) tax break for another year to contractors who are not subject to TBID. So much for concern about the state of the general fund.”
Contrary to popular belief, DIF are fees and not taxes. Indeed, DIF cannot be lawfully (constitutionally) treated as a tax, because the fee system was not passed by a vote of the general public as required for tax measures; the DIF structure was passed by the vote of a previous Town Council. DIF cannot be used to supplement the general fund. DIF cannot be used to build whatever the Town wishes or sees fit to have. DIF cannot be used to generally maintain infrastructure as needed.
By now, many readers are probably thinking, what? Well, the true nature of DIF came to light here during the planning of a new local project.
When Mammoth Rock ‘n’ Bowl was in the final stages of planning, the moratorium on DIF had not yet been implemented. One set of fee calculations placed the DIF figure at over $580,000. DIF would have prevented the project from moving forward. Lenders will not finance DIF, because the value of the money goes to the government and doesn’t reside in the value of the completed real estate project. Accordingly, MRB began to research DIF and how the fees might be challenged.
Coincidentally, though, the moratorium came into effect, the DIF research efforts were not required, and fortunately for everyone the project moved ahead without delay. Without question, the MRB project would not have gone forward without the moratorium on DIF. If people are looking for evidence that the moratorium stimulated positive growth and development, MRB is Exhibit A.
Nonetheless, the research of DIF was both interesting and enlightening. A continuing legal education course was found on, of all things, the subject of DIF. The course was entitled “Dirty, Sexy Money: Development Impact Fees in California.” The emphasis on Dirty Sexy Money in italics was in the original title, and the course proved to be very useful.
It became clear that Development Impact Fees are just that, fees (not taxes), approved by the California legislature and allowed to be charged by local agencies and governments to mitigate the actual impacts of a particular development project. Moreover, although the Town calls them by another name, Affordable Housing Fees, these are also DIF and subject to the same set of laws. All of the applicable laws apply uniformly, whether a person is building a single family home or Intrawest is building the North Village.
Development Impact Fees are controlled by California law, the Mitigation Fee Act (MFA), beginning at Government Code section 66000. There is also a great deal of case law that has interpreted and applied the MFA. “The Act was passed by the Legislature in response to concerns among developers that local agencies were imposing fees for purposes unrelated to development projects,” according to a court case cited in the material for Dirty, Sexy Money. Thus we have the aforementioned title, Dirty, Sexy Money; the fees appear to be somewhat irresistible, seductive, and attractive to local governments.
To control local governments that might otherwise be seduced into the improper collection of mitigation fees (Dirty, Sexy Money), either knowingly or unknowingly, the MFA has two basic tests for DIF to be considered lawful and constitutional. First, there must be a reasonable relationship between the fee and a discernible, actual impact caused by the development project. This is also known as a “nexus” between the fee and an impact. Second, the fee must be roughly proportional to that impact; in other words, the fee cannot be higher than needed to mitigate the impact.
As an example, we can look to the Mammoth Rock ‘n’ Bowl project. During the planning process, MRB was required to conduct a traffic study at its own expense. If the study had concluded that a four way stop sign would be required at Old Mammoth Road and Chateau Road, this would certainly be an impact of the property development. MRB would be required to mitigate the impact, and rightly so. There would be a nexus between the project and its impact on traffic and the need for two additional stop signs. The first test would have been satisfied for the imposition of a development impact fee.
However, if the Town preferred to have a new stoplight at the intersection, and wanted to charge that entire expense to MRB as an impact fee, then the fee would have been without justification and unlawful. The second test of “rough proportionality” would not have been satisfied. The fee would have been far too high in relation to the impact on traffic and roads.
With these rules and this example in mind, it is important to understand that Mammoth’s DIF system works in a different kind of way. Impact fees in Mammoth are based on the square footage of a project. On a Town schedule, there are a number of fees charged per square foot for various purposes, such as streets, trails, transit, general facilities, and other matters. Affordable Housing Fees in Mammoth (also DIF controlled by the MFA) are similarly based on a schedule applied to a project’s square footage.
At one point in time for Mammoth Rock ‘n’ Bowl, DIF would have amounted to $22.36 per square foot, or $581,360. The fee would have been based on the Town’s schedule, regardless of whether there was any actual negative impact on the community or not. If Affordable Housing Fees had applied to MRB — they did not — these would have been $16.57 a square foot, adding an additional mitigation fee of $430,820. The total mitigation fees could have exceeded $1,000,000, even if no specific impact could be identified.
Attention should also be directed to other very important legislative requirements under the MFA. Local governments must deposit, invest, account for, and expend the fees for their intended purpose. Completion dates for mitigation projects must be identified and revisited. Unused fees, and fees that were more than required to mitigate the impact (e.g., to build a stop sign), must be refunded or credited to the developer or owner, with interest. Separate accounting funds must be created to avoid commingling of the various mitigation fees, and transfers or loans between the separate funds must also be included in accounting records. Accounting must be done annually, and five year reviews must also be conducted.
It is important to understand the legislative restrictions placed on DIF, that the fees are not taxes, and that they should not be collected to supplement our general fund or be used to pay for anything the Town needs or wants. DIF should be charged to pay for the specific impacts of particular projects. There is a need for DIF, no doubt, but under another structure, because no developer these days will take the current fee schedule seriously, and important projects for the community will be lost.
The Council did the right thing in voting to extend the moratorium on DIF. The moratorium should remain in effect until such time as a new system is in place, to ensure not only the fair application of DIF to owners and developers, but also the proper collection, investment and expenditure of the fees consistent with their intended purpose.