Saturday, October 15, 2016

The Lasting Effects of Ever Increasing Regulations and Fees on New Home Construction

Last year I wrote an article about the anti-sprinkler revolution in Maryland beginning in the Ocean City, MD area. Click Here to read the article.

Recently, a developer in Wicomico County, MD, where Ocean City is located, has been working full time to repeal not only that but also BAT septic systems in Maryland.

Developer Don Messick remembers a time about a decade ago when housing construction was booming with new subdivisions sprouting up all over Wicomico County. But the industry has been in a funk ever since the 2008 recession.

Don Messick.jpg
Don Messick and family
“We’ve really taken a hit,” said Messick, who is in business with his father and brother as Robert L. Messick Inc.

Now a proposal to repeal the county’s impact fee on residential construction as a way to boost the industry comes as good news to developers like Messick who has built numerous subdivisions including Centennial Village and Steeplechase.

The industry was hit hard, not only by the recession, but also by new state requirements for high-tech septic systems and fire suppression sprinklers, Messick said.

“With the impact fee on top of that, it’s made it a hindrance for sure,” he said.

County Executive Bob Culver first proposed waiving the fees for new home construction when he was took office in 2015, and the County Council agreed to place a moratorium on the fee through 2016. With the Dec. 31 expiration date looming, County Council members are scheduled to vote Tuesday on doing away with it entirely.

“I want to permanently repeal the impact fee in Wicomico County because it’s the right thing to do,” Culver said.

Culver said he was inspired by Maryland Gov. Larry Hogan who announced last month that his administration would lift the requirement for BAT septic systems except on land inside the Chesapeake Bay Critical Area. Critics of the BAT – best available technology -- requirement have argued that the newer systems add $11,000 to $14,000 to the cost of a new home and have not been proven to have any added environmental benefit.

“I want to make it user-friendly,” Culver said of home construction. “The market is still smarting from the combination of BAT and sprinklers.”

The impact fee combined with the high pricetag on BAT systems adds significantly to the cost of a new house, Messick said.

“Taking those out of the picture will allow families to buy a new home versus a used home,” he said.

The fee

The Wicomico County Council began considering an impact fee on new residential construction during a building boom in the county in the early 2000s, said Jack Lenox, the county’s planning director. A consultant was hired to study how new development would affect roads, schools, parks and recreation in the county, as well as the Salisbury police and fire departments.

Unlike property taxes, impact fees can only be used on something with a measurable impact, so the council eventually agreed that money would be used to help pay for increased capacity at public schools, Lenox said. The money has since been used toward construction costs at two new school buildings: James M. Bennett High School and Bennett Middle School.

The fee — $5,231 for a single-family house and $1,524 per unit for multi-family housing — was applied to all new construction in the county, including within the corporate limits of Salisbury and other municipalities in Wicomico.

The fee became effective in June 2006, but by then the boom was starting to wane. The county took in roughly $400,000 in fiscal 2018, the first year it was in effect. It peaked at $1.2 million in fiscal 2013 during a boom in new apartment complex construction, but Lenox called that year “an anomaly.”

Impact fees came into use in Wicomico County and across the country as local governments tried to deal with the effects of the real estate boom, said County Council President John Cannon.

“The mantra was ‘let growth pay for growth’,” he said.

But as new construction halted following the economic crash in 2008, county officials began looking at ways to stimulate the industry. Council members first approved relief to builders of single-family homes in the form of grants, Cannon said. They later approved a moratorium on the impact fee for all new residential construction, but it expires on Dec. 31.

Cannon said the proposal to permanently repeal the fee stands a good chance of approval.

“This is a very conservative council that won’t object to any reduction if it makes sense,” he said.


Studies of impact fees conducted during the real estate boom showed fees had a negative effect on land prices and housing markets.

A 2004 article in the publication Regional Science and Urban Economics showed that in Dade County, Florida, every $1 of fees increased the price of new and existing housing by about $1.60 and reduced the price of land by about $1.

A study of 38 cities and towns in King County, Washington, from 1991 to 2000 and another by Florida State University in 2005 showed similar results.

While impact fees can help pay for infrastructure, there also are many negative effects, including increased development costs which make it harder for low- to moderate- income households buy a new house, Wilson said.

“There is most definitely a demand for homes in Wicomico County, but we need inventory,” Wilson said in the letter. “New home construction has been weighed down by state-mandated costs associated with BAT septic systems and more recently sprinkler system regulations.”

Wilson said Wicomico County is expected to see a boost in new construction with the governor’s repeal of the BAT systems, “however, we feel that repealing the impact fee for good will make Wicomico County all the more attractive for builders and buyers.”

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