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New development home buyers may be hit with growth costs
By Scott Miller
Staff Writer
The cost of suburban sprawl could soon be passed on to people who buy homes or commercial space in new developments.
That means paying for schools, roads, parks, sewer systems and other public facilities needed to accommodate urban growth. Longtime homeowners and buyers of existing property would be spared the expense.
It’s part of a measure approved by the House of Representatives this month that allows local governments to levy property taxes on new developments to pay for infrastructure improvements.
Supporters call it a win-win for everyone. Developers would have access to municipal-bond financing to keep costs down. Homeowners or other landowners, who ultimately pay for infrastructure upgrades anyway, pay for them in smaller increments over a period of time rather than upfront in the cost of their buildings. And cities and counties maintain an adequate level of service for residents.
But critics say the legislation gives developers all the control because they must agree to the tax and that governments assume all the risk by floating the bonds to pay for the improvements.
“The bill creates a developer-controlled process that doesn’t give municipalities any leverage,” said Howard Duvall, executive director of the Municipal Association of South Carolina.
Handling growth
Growth, while welcome economic development, has become hard for some communities to swallow. Dorchester County, for example, established a six-month moratorium on new development because county schools, roads and water can’t handle the congestion.
The county likely will extend that moratorium, which expires in June, at least another six months while it completes a long-range comprehensive development plan and crafts an ordinance that would require developers to pay for infrastructure upgrades.
“Let’s face it, if they weren’t building the homes and building these neighborhoods, you wouldn’t have the need to build these schools and roads,” said Dorchester County Councilman Jamie Feltner, who shares the same distaste for the legislation as Duvall.
“We’ve got elementary children going to lunch at 9:30 in the morning because the cafeteria can’t handle it. Even beyond that, I’ve had neighborhoods in my district run out of water,” Feltner said. “It’s a bad situation, and I don’t think it will be any different in June. My stance is we come up with some solutions and until we do, we don’t need to approve another development.”
Levying taxes to pay for it
One solution at the state level is House bill 4745, which allows local governments to create “residential improvement districts,” or RIDs, for public improvements. The district could include multiple land uses, including residential, commercial, industrial, institutional or a combination of those.
The county or city then would levy a property tax within the district to finance bonds for public improvements. Anyone who buys from the developer would then pay that property tax.
The revenues could be used for a variety of projects, including public buildings, recreation centers, libraries, schools, parks, playgrounds, roads, pedestrian walkways, parking facilities, bridges, storm drains and sewage. That includes construction costs as well as the cost of land acquisition, engineering, promotion and marketing.
Per the legislation, improvements must benefit the property owners paying for them. The landowner, often a developer, can make that determination, and counties and cities must approve the deal too. The two parties also would determine the value and term of the property tax.
The House approved the measure with one dissenting vote from state Rep. Heyward Hutson, R-Summerville, who said the bill gives too much control to developers. The legislation awaits debate in the Senate.
“If you include schools in RID bonded indebtedness, that infrastructure would take the size of the assessment way up so the developers wouldn’t agree to it,” Hutson said.
In addition, Hutson said, governments will be saddled with the cost of repaying bonds if banks foreclose on homes within the improvement district or if homes are never built and the revenue stream from property taxes never materializes.
“I don’t think that we will ever take advantage of that RID bill in my area, in Dorchester County,” he said.
Rep. Mick Mulvaney, R-Lancaster, who introduced the legislation, said his district has used the tool successfully already. One development in Lancaster County funded a new library, he said, and another funded a new county recreation center. North Carolina and Florida have enacted similar legislation.
“It really was as good in reality as it was on paper,” said Mulvaney, a real-estate developer.
Financial incentive to developers
The problem, he said, is that small developments don’t sign up.
“Most run-of-the-mill subdivisions are not big enough to qualify for this. The banks won’t
fund them,” Mulvaney said.
The legislation, however, allows several developers to band together to create a residential improvement district. The land does not have to be contiguous, so more developers will sign on to the tax, he said.
By joining the district, landowners are able to pay for infrastructure through “quasi-municipal” financing from banks with lower interest rates spread over longer-term loans, Mulvaney said, referring to the bonds.
“It reduces cost (for developers),” Mulvaney said. “That’s the financial carrot for the landowner to agree to it.”
Benefit to homeowners
While the developer must agree to the tax, ultimately the people who buy their properties will pay for the improvements via their property tax bills.
The tax ultimately will sunset, noted Mark Nix, executive director of the Home Builders Association of South Carolina, which lobbied for the bill.
“The new homeowner will save thousands of dollars,” he said. “The property owner is able to buy that house for a lower price because he does not have to pay all those infrastructure costs upfront.
“The builder can offer more affordable housing. The property tax is deductible on your income taxes too. Everyone wins all across the board.”
Duvall warned that it sounds too good to be true.
“What happens if the developer goes belly up before all the homes are built?” Duvall asked, saying the bonds to pay for infrastructure improvements would already be in place. “In my opinion, the city will be responsible for it. The bottom line is the public, with good faith and trust in the municipalities, is backing these bonds.”
Scott Miller is a staff writer for the Business Journal. E-mail him at smiller@scbiznews.com.
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