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HomeMy WebLinkAboutImpact Fees 2009Gary A. Van Cleve, Contributing Author. Mr. Van Cleve is chair of the Real Estate Litigation practice group at Larkin Hoffman, where he has practiced for over 20 years. He is certified as a civil trial and real property specialist by the MSBA. Road Improvements: When Are Special Assessments Legitimate? Gary A. Van Cleve February 20, 2009 What legal mechanisms enable cash-strapped local governments in Minnesota to pay for road improvements in the face of a mountainous state government deficit? Cities and counties in Minnesota derive their taxing power from the Legislature, and a common vehicle for funding local road improvements is the levy of special assessments under Minnesota Statute Chapter 429. Indeed, in these times it appears that special assessment funding is becoming more common, with many Minnesota cities considering implementation of greater percentages of funding for local road improvements through the special assessment process.1 But what authority do local governments in Minnesota have to adopt impact fees as an alternative to special assessments for funding road improvements? This article submits that there is no such authority—and discusses a recent state district court decision—SJC Properties, LLC, et al. v. City of Rochester2—that struck down one Minnesota city’s attempt to collect $1.7 million in impact fees by levying them as special assessments. Minnesota cities and counties possess carefully circumscribed authority from the Legislature to levy special assessments to pay for the costs of certain local improvements.3 The statute states that a city or county may assess the “costs of any improvement or any part thereof …upon property benefited by the improvement, based upon the benefits received.” The special assessment statute expressly identifies the types of local improvements that may be funded by special assessments—ranging from roads to skyways—and mandates procedures that must be followed and criteria that must be met for a special assessment to be adopted and levied against a property owner. Before adopting a special assessment, the local government must prepare and make available to the public a report addressing the necessity, feasibility, and cost-effectiveness of the proposed improvement. There are three fundamental limiting conditions to a city levying a special assessment to pay for a local public improvement: (1) the land must receive a special benefit from the improvement being constructed, (2) the assessment must be uniform upon the same class of property, and (3) the assessment may not exceed the special benefit.4 A “special benefit” means an increase in the market value of the property resulting from the improvement. A key, yet little known, corollary to these limitations is that an assessment that provides a future benefit to the property may be too speculative and remote to be legal.5 The Minnesota Supreme Court has recognized for nearly 100 years that if a special assessment exceeds the special benefit conferred on the property assessed, then an unconstitutional taking without just compensation has occurred.6 A property owner may appeal a special assessment to state district court and the consequence of a court’s invalidation is that the assessment is set aside. While special assessments attempt to allocate the costs of specific, defined public improvements based upon the benefits receiv ed by individual properties, impact fees, by contrast, seek to allocate to undeveloped property owners the future costs of additional public infrastructure that will be required to accommodate new development. A phrase common throughout impact fee research is “you pay, you play.” Simply put, development can occur once impact fees are paid. Common examples of development impact fees include traffic mitigation fees, infrastructure improvement fees, and fees for improving water and sewer systems.7 A Minnesota Department of Transportation (MnDOT) technical report similarly defined impact fees as one-time charges on new real estate development as compensation for the higher incremental cost of off-site capital improvements. Like on-site dedications, impact fees shift the infrastructure cost of new development back on land owners, builders, and/or the final property owner. Impact fees apply to both residential and non-residential development, and may cover a wide range of service improvements, such as roads, parks, and public safety.8 More specifically, the Minnesota Supreme Court, in Country Joe, Inc. v. City of Eagan, 560 N.W.2d 681, 685 (Minn. 1997), stated that an impact fee is a form of development exaction possessing the following characteristics: · In the form of a predetermined money payment. · Assessed as a condition to the issuance of a building permit, an occupancy permit or plat approval. · Pursuant to local government powers to regulate new growth and development and provide for adequate public facilities and services. · Levied to fund large-scale, off-site public facilities and services necessary to serve new development. · In an amount which is proportionate to the need for the public facilities generated by new development.9 Country Joe further noted the difference between an impact fee and a special assessment: ‘The primary difference is that special assessments represent a measure of the benefit of public improvements on new or existing development, whereas impact fees typically measure the cost of the demand or need for public facilities as a result of new development only.’10 Just as special assessments are constitutionally constrained to be no greater than the special benefit conferred on the properties that are assessed, so, too, are impact fees, as a form of exaction, constitutionally limited. The U.S. Supreme Court in Nollan v. California Coastal Commission, 483 U.S. 825 (1987), and Dolan v. City of Tigard, 512 U.S. 319 (1994), established that an unconstitutional taking occurs unless it can be shown that (a) there is an essential nexus between the exaction required and the state interest being advanced (Nollan), and (b) there is a rough proportionality between the exaction and the impact of the proposed development project (Dolan).11 As of June 2005, 25 states had adopted impact fee enabling legislation allowing local governments to establish and collect such fees.12 Minnesota is not one of these states. In the absence of enabling legislation, what authority then, if any, does a Minnesota city have to adopt impact fees? The Minnesota Supreme Court avoided answering this question in Country Joe, but the Court’s reasoning suggests that there is no such authority under current Minnesota law. In Country Joe, building contractors challenged the legality of a road unit connection charge adopted by the City of Eagan. The charge grew out of a study by the city’s consulting engineers projecting that the city would suffer a shortfall of over one million dollars to finance major street construction. The city council adopted the road unit connection charge payable as a condition to issuance of all building permits in the city. The city made a threefold argument in defending against the contractors’ challenge to the road unit connection charge: (a) the charge was a lawful exercise of its implied powers under Minnesota law, (b) the charge was a lawful impact fee, and (c) the charge was a lawful exercise of the city’s police powers. The Supreme Court first rejected the city’s argument that the road unit connection charge was a lawful exercise of the city’s implied municipal planning authority under the Municipal Planning Act, Minn. Stat. Ch. 462.13 The Court stated that because Eagan was a statutory city, it had no inherent powers beyond those expressly conferred. Furthermore, “[t]hat the Municipal Planning Act expressly confers broad municipal planning powers on cities does not necessarily imply that the legislature similarly intended to confer broad financing powers under the act.” The Court pointed out that the Legislature had expressly provided for sewer and water charges (after which the city had modeled its road unit connection charges), but had not expressly provided for road charges.14 Significantly, for purposes of discussion further below, the Court also observed [t]hat this lack of express statutory authorization was not the result of legislative oversight is evidenced by statutory provisions expressly establishing special assessments as the mechanism by which cities are empowered to finance road improvements. See Minn. Stat. §§ 429.021, subd. 1(1), 412.221, subd. 6.15 For these reasons, the Court concluded that “the authority to impose a road unit connection charge cannot be implied from the city’s municipal planning authority.” Second, the Court avoided the issue of whether impact fees are permissible under Minnesota law and whether the road unit connection charge was legally permissible as an impact fee, for the reason that the charge lacked an essential impact fee characteristic: that it be proportionate to the need for the public facilities generated by new development. The Court concluded that there was “insufficient evidence” to determine whether the proportionality element was present. Accordingly, we reserve the issue of whether impact fees are authorized under Minnesota law, but reject the city’s contention that the road unit connection charge draws its authorization as such a fee. The Court thus avoided the question of the legality of impact fees in Minnesota by concluding, based on insufficiency of evidence, that the charge did not qualify as an impact fee. Third, the Court rejected the city’s argument that the charge was not an illegal tax, as the court of appeals had held, but rather a legal exercise of the city’s police powers, which include charging fees to cover the costs of regulation. The Court concluded that because the charge went beyond the legitimate police power function of charging fees to recover costs of regulation—clearly the charge was intended to fund the shortfall in road maintenance funding—it was a revenue-raising measure: a tax. Since it was a tax, it “must draw its authorization, if at all, from the city’s powers of taxation.” The Court found no express authorization in the municipal taxing authority granted by the Legislature under Minn. Stat. § 412.251 for a road unit connection charge. Moreover, the Court concluded that the tax enabling legislation’s catch-all provision, allowing cities to impose “other special taxes authorized by law,” failed to provide authority since the Court had concluded for the above-described reasons that the charge was not “‘so authorized by law.’”16 While Country Joe did not decide the issue of the legality of impact fees in Minnesota, it did clarify and confirm that the nature of municipal corporations as limited statutory creations restricts cities to the powers expressly granted by the Legislature under state statute. In particular, cities cannot create financing mechanisms in reliance on inherent or implied powers and in the absence of express statutory authority that sanctions the revenue-raising scheme. SJC Properties v. City of Rochester presents a corollary to these principles, demonstrating that a city cannot legally adopt an impact fee for road improvements and purport to impose the fee through the special assessment procedures of Minn. Stat. Ch. 429. SJC Properties is a judicial appeal of over $1.7 million in special assessments levied by the City of Rochester (Rochester) against 200 acres of contiguous parcels of undeveloped property owned or controlled by developer Frank Kottschade (collectively, SJC property). A regional transportation planning process and Rochester’s creation of a funding mechanism to finance city portions of the transportation improvements provide the backdrop for the special assessments levied against the SJC property. Regional Transportation Planning and the Creation of Transportation Improvement Districts in the City Ten years before Rochester levied the special assessments, a joint council of the city, Olmsted County, and state government issued a study report outlining recommendations for regional transportation improvements along the Trunk Highway (TH) 63 corridor on the south side of Rochester. The study recommended a freeway design for the TH 63 corridor, with uninterrupted mainline traffic flow, controlled access throughout the corridor and local access to TH 63 provided by grade-separated interchanges. The SJC property lies at the southwest corner of TH 63 and 40th Street SW, an intersection that the study recommended for improvement to a grade-separated interchange. The study further recommended that 40th Street SW, a two-lane, low-traffic road, be eventually expanded to four lanes to the west of TH 63—the portion of 40th Street that bounds the SJC property on the north. In 2003, Rochester established a transportation funding task force to provide recommendations for funding future transportation improvements in the city. The task force recommended a variety of funding mechanisms, including seeking approval of a one-half percent sales tax increase from the Legislature, levying special assessments, and establishing transportation improvement districts (TIDs) in the city. Based on these recommendations, the city council adopted by resolution a TID program. Before the city adopted the TID program, the city attorney had advised the city council that TID fees could not be imposed on developers without their consent and must be voluntary, because the TID fees could be deemed to be impact fees for which there was no express authority in Minnesota law. Rochester’s TID program authorized the city to create TIDs for “any geographic area of the city experiencing or anticipating new growth and substandards streets.” In addition, the resolution granted authority to establish interchange TIDs, under which the city purportedly could seek to collect costs related to the construction of interchanges. Undeveloped land within an established TID would be charged a fee—to be imposed at the time the property owner sought development approval—that would be based upon a formula attempting to attribute and quantify the impact of development of the land upon area transportation infrastructure. The formula for TID fees that was devised by the city engineer and adopted by the city council first determined an estimate of the total cost for projected transportation improvements needed in a TID as a result of development of undeveloped land in that district. Then the fees to be charged to the undeveloped property owner would be calculated based upon a formula that took into account the acres of developable land on the site, the zoning of the land, and the projected traffic that would be generated by the site when fully developed. The SJC property became part of what Rochester established as the Willow Creek Transportation Improvement District (Willow Creek TID). When the city established the Willow Creek TID, it identified all developable property within the district, determi ned the nature and extent of development that this land could support, projected the amount of traffic the fully developed land wou ld generate, and, in turn, projected the total cost of the transportation improvements that would be needed within the Willow Creek TID to support the increased traffic from development. This exercise produced a figure of some $15 million that the city projected for the cost of future transportation improvements it believed would be needed for the Willow Creek TID. Transportation improvements in the immediate vicinity of the SJC property included the expansion of 40th Street SW from a two-lane to a four-lane road, which became the city-funded portion of the improvements, and the construction of a grade-separated interchange at 40th Street SW and TH 63, which was a state and federally funded project. During the entire period of Rochester’s regional transportation planning process dating back to 1995, Kottschade had been attempting to develop the SJC property and, to that end, had made numerous development proposals to the city. At the time the city adopted its TID program and the Willow Creek TID, Kottschade had before the city a proposed commercial development for some 70 acres of the SJC property adjacent to TH 63. The city approved a general development plan and gave preliminary plat approval to this proposal, subject to Kottschade entering into a development agreement with the city. The development agreement included a requirement that Kottschade pay over $1.7 million in TID fees that had been calculated by the city based upon the developable acreage within the SJC property, the zoning, the projected traffic that full development would generate, and the total cost of all transportation improvements that the city determined would be required within the Willow Creek TID. When Kottschade objected to the TID fees, the city invoked Minn. Stat. Ch. 429 to levy the precise amount of the TID fees as special assessments against the SJC property. Kottschade exercised his statutory right to appeal the assessments to Olmsted County District Court, where the appeal was tried before the court in January 2008 and decided in July 2008. The SJC Decision Because Rochester had levied the TID fees as special assessments, the fees were subjected to judicial scrutiny under the legal standards applicable to special assessments. Primarily, this meant determining whether the amount of the special assessments exceeded any special benefits conferred on the SJC property.17 A “special benefit” means an increase in market value of the property resulting from the improvement. Another legal consideration in special assessment appeals is whether the assessments are “uniform upon the same class of property.” That is, whether all properties that have specially benefited have been treated the same. Key issues at the special assessment appeal trial were what portions of the 40th Street SW transportation improvements, if any, provided special benefit to the SJC property; what was the highest and best use of the SJC property before and after the 40th Street SW improvements; and whether the assessments were uniform. Appraisers, traffic engineers, and civil engineers gave testimony related to these issues. The city argued at trial that both the improvements that widened 40th Street SW from a two-lane to a four-lane road and that created the grade-separated interchange at 40th Street SW and TH 63 should be considered in determining the special benefit conferred upon the SJC property. The district court found that the only improvements appropriately considered in determining the amount of special benefit conferred on the SJC property were those improvements that were funded by the city, which excluded the grade-separated interchange—a state and federally funded project. Moreover, the district court found that the expansion of 40th Street SW to four lanes provided only limited benefit to the SJC property because topographic challenges precluded any access point from the SJC property to 40th Street SW except at the northeast corner, near TH 63. The court further found that the traffic levels on 40th Street SW to the west of this access point (which led traffic away from, not toward, the city proper) did not justify a four-lane road to the west—either currently or even in the year 2025, which was the traffic- projection year relied on by the city. The district court also found that the highest and best use of the SJC property before the 40th Street SW improvements was mixed commercial and residential development, rejecting the city’s contention that before the 40th Street SW improvements, street infrastructure and access were insufficient to support any development except low-density residential. The district court found the following facts that undercut this city argument and supported the court’s findings: Rochester had rezoned significant portions of the SJC property fronting TH 63 from low-density residential to commercial-industrial use; Rochester had approved a general development plan proposed by Kottschade for a 70-acre commercial development prior to the special assessments and the 40th Street SW improvements; Rochester had approved a preliminary plat for the proposed commercial development; and Kottschade had established at trial that he had two legal access points for the SJC property, the minimum access necessary for commercial development. The district court further found that the special assessments were not uniform in that the city only levied the assessments against undeveloped land within the Willow Creek TID. The evidence through traffic engineer testimony showed, however, that a residential area north of 40th Street SW accounted for the vast majority of the traffic on 40th Street and, accordingly, had benefited from the 40th Street improvements. The court found that the Rochester policy of assessing only undeveloped properties and not developed properties within the Willow Creek TID was “unfounded” and “unsupported.” “No meaningful fact or reason was given as to why developed properties would not be benefited by a new road, bridge, and amenities such as sidewalks and a bike path.”18 Ultimately, the district court recognized that the assessments failed all legal tests because the city never devised the fees a s assessments, but rather as impact fees based on the city’s TID formula. The TID formula is not one that looks at special benefit based upon a market approach but is rather a formula that starts with the projected cost of a project and divides that cost amongst the properties deemed to be benefited based upon projected traffic usage as determined by the size and zoning of the property and the projected trips associated with that size of zoned property.19 Accordingly, the district court concluded that the TID fees established by the city for the SJC property were in the exact same amount as the special assessment ultimately levied against Plaintiffs’ property, $1,716,586.34. TID fees cannot be imposed involuntarily as they are not authorized under Minnesota law. The TID fee has the characteristics of a road impact fee, which is not legally sanctioned.20 For these reasons, the district court set aside the special assessments in excess of $1.7 million. The SJC decision demonstrates that attempting to clothe an impact fee as a special assessment cannot bestow a legal imprimatur on the fee because of the divergent nature and purposes of impact fees and special assessments. Rochester’s TID fees are the culmination of a process in which the city has attempted to implement a formula to meet the projected costs of future transportation improvements in a designated area of the city (a TID) by having developers pay for the impact of their developments on transportation infrastructure based on the TID fee formula. The TID calculation is devoid of any consideration of the extent to which the developer’s property has received any special benefit, that is any increase in value, as a result of the transportation improvements. This disconnect between the inherent nature of special assessments and impact fees proved fatal for Rochester when forced to defend its impact fees under the measure of legality provided by special assessment law. Simply put, Minnesota cities should not be attempting to adopt and impose impact fees for road improvements unless the Minnesota Legislature—as 25 other state legislatures across the country have done—adopts enabling legislation with uniform and fair standards for implementing such fees. 1 See, e.g., “Assessments: Not a special feeling,” 1/27/08 Minneapolis Star Tribune. 2 SJC Properties, LLC, et al. v. City of Rochester, Olmsted County Dist. Ct. File Nos. 55-C6-05-1988/1991/1992/1994/1995/1996 /1997, July 3, 2008, appealed Sept. 2, 2008, and pending as App. Ct. File No. A08-1536 (“SJC Properties”). 3 M INN. S TAT. Ch. 429. 4 Carlson-Lang Realty Co. v. City of Windom, 240 N.W.2d 517, 519 (Minn. 1976). 5 In re Village of Burnsville Assessments, 287 N.W.2d 375, 377 (Minn. 1979) (“we cannot agree that it would be justified to assess a property owner for benefits he may not receive for 15 to 20 years, if at all”). 6 State ex. rel. Oliver Iron Min. Co., 151 N.W. 545, 547 (Minn. 1915); see also Carlson-Lang Realty, 240 N.W.2d at 519 (“An assessment that exceeds the benefit constitutes the taking of property without fair benefit in violation of the Fourteenth Amendment.”). 7 N. Deal, “Traffic Impact Mitigation Fees: Should California’s Department of Transportation (Caltrans) have legal authority to impose?” Mineta Transportation Institute, San Jose State University College of Business at 7 (June 2005) (“Caltrans Report”). 8 B. Ryan, “Local Road Tax Options: Is Minnesota Really That Different?” MnDOT (May 2006), at 11. 9 See also Caltrans Report at 11-12 (citing 13 technical criteria established by HUD for effective impact fee legislation). 10 Id. (quoting B. Blaesser & C. Kentopp, Impact Fees: The “Second Generation,” in 1991 Zoning and Planning Handbook at 267 (emphasis added by court)). 11 Cf. Country Joe, 560 N.W.2d at 685 (“By definition, an impact fee must be ‘in an amount which is proportionate to the need for the public facilities generated by new development.’” (citation omitted)). 12 Caltrans Report at 2. 13 Country Joe, 560 N.W.2d at 683-84. 14 See MINN. STAT. § 444.075, subd. 3 (authorizing sewer and water charges). 15 Country Joe at 684. 16 Country Joe at 687; see M INN. S TAT. § 412.251(11) (catch-all provision). 17 MINN. STAT. § 429.051; Buettner v. City of St. Cloud, 277 N.W.2d 199, 203 (Minn. 1979). 18 SJC Properties , supra note 2, Conclusion of Law No. 6. 19 SJC Properties , supra note 2, Mem. at 29. 20 SJC Properties , supra note 2, Conclusion of Law No. 9.