Special Assessments Taskforce - October 12, 2018 Minutes

The Special Assessments Taskforce meeting was held in the City Commission Room at Fargo City Hall at 11:30 o'clock a.m., Friday, October 12, 2018.

Present: Gloria Palm Connor, John Cosgriff, Don Dabbert Jr., Kristy Fremstad, Curtis Goroski, Commissioner Tony Grindberg (Chair), Kevin Hanson and Bill Worth.

Absent: Jim Bullis, Kent Busek, Commissioner Tony Gehrig and Jeff Volk.

Call to Order:
Commissioner Grindberg presiding.

Approve Minutes from September 27 meeting:
Ms. Connor said there was an error in the last paragraph on Page 2 of the minutes from the September 27 meeting. She said the first sentence of that paragraph should read, “Ms. Palm Connor said the fact that national developers are not coming to the community may be actually driving the cost of homes up. …” Ms. Connor moved to approve the minutes, as amended, from the September 27, 2018 meeting. Second by Mr. Goroski. There was unanimous approval.

FM Real Estate Cost Comparison Data:
Ms. Connor shared information she compiled on regional housing prices and wages comparisons. Overall, she said, the Fargo housing market has increased 20 percent since 2013 and that figure includes bedroom communities in North Dakota such as Casselton, Mapleton, Horace and Argusville. She said she did not use information from West Fargo and Moorhead. She said the median home price plus specials in Fargo has risen from $162,683.00 in 2013 to $217,163.00 in 2018, an increase of 33.5 percent. In comparison, she said, median household income, according to data she received from the Bureau of Labor Statistics, shows the median income in Fargo was $53,541.00 in 2013 and in 2016, the last year data was available, median income was $60,009.00, an increase of 12 percent. She said she compared regional city’s median home prices with similar economic drivers as Fargo, plus specials year-to-date in 2018. She noted that Bismarck, North Dakota’s median home prices do not include specials. Other cities’ median home prices in her data she said include St. Cloud, Minnesota at $175,900.00, Rochester, Minnesota at $193,500.00, Sioux Falls, South Dakota at $210,000.00 and Bismarck at $239,000.00. Another comparison. she said, is 2017 median wages and home prices, including Fargo at $47,170.00 wages and $234,086.00 home price, St. Cloud $45,4509.00 and $169,200.00, Rochester $55,440.00 and $176,500.00, Sioux Falls $43,930.00 and $196,850.00, and Bismarck $49,620.00 and $239,798.00. She said people in the real estate business are hearing from people moving into Fargo that home prices are higher in Fargo than in other communities. She said contributors to housing prices included the economy, supply and demand, costs of materials and labor and special assessments. She said it was an interesting exercise and confirmed what Realtors are hearing. She said in 2013, Realtors were receiving multiple offers on properties, especially twin homes, which at that time is what first-time homebuyers were trying to get into. She said in 2013, twin homes were selling for about $154,000.000 with $15,000 in specials. She said now a twin home is priced at about $185,000.00 with $30,000.00 in specials and Realtors are not seeing first-time homebuyers in that market as strongly as in the past. She said the biggest takeaway from her research is that median house prices in Fargo increased 28 percent while wages increased only 12 percent. She said what she found interesting is in Bismarck, houses are more expensive and in Rochester, wages are a bit higher; however, the home prices are lower.

Mr. Hansen said as a lender he does hear from people moving to Fargo that they are getting sticker shock when they see the prices of homes. Another point, he said, is new homebuyers look at what their payment is today and they can afford it; however, in a year and a half their monthly payment goes up $100.00 or more when the specials are assessed. He said then top that with the property tax abatement that ends after three years and that is when homebuyers can become upside down.

In response to a question from Mr. Dardis, asking if there is a breakdown on specials and land value versus actual construction costs, Mr. Dabbert said the cost of the lot depends on density and what is needed is more smart growth and smart land planning. He said developers need to look at the price per square foot as well as what is in the house, for example, two or three stall garages, two or three bedrooms and more importantly, how much front footage is on the lot, which is the main driver of costs. In terms of raw land, Fargo is on par with other communities. He said developers have to look at other amenities in a development as well and consider the locations of fire stations and parks. To keep assessments down, he said, developers sometimes have to look at building more homes and smaller lot sizes.

In response to a question from Mr. Dardis, asking if the way Fargo and this area use specials, does that somehow give developers more confidence on their asking price for lots, Mr. Dabbert said it is actually the opposite due to the fact that developers are at the mercy of the City and have very little say about design and street widths and have to follow the Land Development Code. He said developers in Fargo also have to factor in other requirements such as storm retention ponds and flood control. He said developers in Rochester and Sioux Falls do not have the flood control aspect. He said if the Fargo area did not have the extra costs associated with required flood control, Fargo would be inline or even under those other cities. He said it costs about $10,000.00 per developed lot for storm retention ponds or other flood control requirements, which is just the cost of doing business in a bowl while other cities have the benefit of contour and gravity.

Ms. Connor said she spoke recently to an engineer who had worked on projects in other communities who told her that consumers want livable communities with walking paths, ponds and other amenities, which adds costs to assessments. She said that information gave her a different perspective.

Mr. Dabbert said when a developer lays out a community, they look at how to make it affordable and appealing and that is always a balance. He said the developments with the highest specials are the nicest and those tend to fill up the quickest. He said the wage and cost inflation gap has definitely widened which is affecting the first-time homebuyer and the first-time move-up buyer. He said the unintended consequence of rolling in $30,000.00 for specials is banks do not require a 20 percent down payment; however, if the specials are included, 5 percent is the required minimum down payment.

In response to a question from Mr. Dardis, asking if he would change lot sizes and build what people can afford and what the market wants, Mr. Dabbert said he is always changing to meet the demand. He said going vertical is absolutely less expensive than wider. He said people want their space until they find out how much that space is going to cost. He said in the first-time homebuyer market, buyers are willing to have smaller side and front yards and millennials are more open to the simplistic; therefore, it is smart to think about density and setbacks and spreading the lift station and other costs over more homes. The trick, he said, it to accomplish density without it looking dense and making it look like a neighborhood.

Mr. Goroski said state income tax, property tax and sales taxes in the comparable cities has to be factored. For example, he said, Minnesota income tax is 12 percent, North Dakota is about 5 percent and in South Dakota, there is no state income tax.

In response to a question from Ms. Fremstad, asking if homes are selling above asking price, how are homes selling now compared to a few years ago and are homes selling at less than assessed value, Ms. Connor said Realtors see very few multiple offers now and that is keeping homes on the market longer. She said the average selling price is about 96 percent of list price; however, Realtors are seeing considerable price drops in higher end homes.

Special Assessments Coordinator Dan Eberhardt said Sioux Falls does not special assess new construction; however, according to the HBA in Sioux Falls, impact fees are not keeping up with the city’s progress; therefore, Sioux Falls is looking at some type of special assessments on new construction.

FM HBA Home Investment Report:
Mr. Dabbert provided copies of the National Association of Home Builders (NAHB) report on the Metro Area Impact of Home Building in Fargo regarding income, jobs and taxes generated. Mr. Dabbert said he is not prepared to present a report at this time and he provided the information now for background. He said he is on the Land Development Committee at the NAHB and that other cities are trying private bond replacement in place of specials. He said he has requested more information about that strategy and will share it when he receives it.

Bismarck Taskforce Overview:
Dustin Gawrylow, a member of the Special Assessment Taskforce in Bismarck, said his group did not go into their meetings with a plan; however, where the group ended up was to get rid of specials all together. He said the taskforce proposed a monthly street maintenance fee for street maintenance projects on local and arterial streets and an additional sales tax not to exceed 3/4 percent for the construction of expanded arterial roadways. He said after they made their decisions, the homebuilders unanimously got behind it. Additionally, he said, the group wants to revamp the storm water program to no longer hold projects in abeyance and cap the sales tax 25-mill property tax buy-down at 2018 levels. Unfortunately, he said, they discovered Senate Bill 2326, a recently passed state law that contains restrictions on how cities can change their methods of raising revenue. He said the bill was in response to concerns with communities struggling to remain competitive with fuel prices and the potential to create a gas war in communities where a similar tax does not exist. He said if it is determined Bismarck’s new revenue plan for specials is prohibited under the new law, efforts will be made to have the law changed. He said a 1/2 cent sales tax proposal and the $25 monthly fee per city residence are now questions on the November ballot in Bismarck.

Bismarck City Administrator Keith Hunke said that if the plan were adopted, it would apply to paying for future projects, not existing special assessment balances. He said the sales tax would sunset after 10 years to allow officials to review how well the process worked. He said he met with legislative officials who encouraged cities to develop language to support the tools needed to fund and sustain street maintenance and infrastructure and to develop a coalition of communities and approach the Greater North Dakota Chamber to help build support and consensus. He said city staff would also work with the North Dakota League of Cities to ensure a collective voice is carried forward during the 2019 Legislative session.

In response to a question from Ms. Fremstad asking what the plan in Bismarck is for residents who already have specials, Mr. Gawrylow said they did not come up with a system to buy down existing specials. He said, unfortunately, residents are going to have to pay their current specials and the $25.00 fee. He said there is a process to phase out specials until everyone is equal; however, that is the hardest part of the sales pitch. He said residents are not going to like paying twice.

Mr. Hunke said in Bismarck there is about $25 million to $26 million on the books for specials. He said the $25.00 fee seems reasonable; however, the Senate bill snag needs to be addressed in 2019. He said the sales taxes collected from Measure 2 on the Bismarck city ballot, if passed, could be used to buy down specials, capping it at about $19.6 million, which would allow discretionary payments on special assessments. He said the taskforce in Bismarck has not found the one magic solution; however, they were able to come up with some options. He said they received the same feedback from lenders about how some homeowners are upside down after they get their specials. He said in Bismarck, the affordable housing number is $185,000.00; however, nothing is being built now at that price point.

In response to a question from Ms. Fremstad, asking if the $25.00 fee is for specials and does that include the arterials, or does the sales tax totally cover arterials so they are two different entities, Mr. Hunke said the sales tax will be used to offset and fill the gap to fund arterials and offer some subsidies to homeowners who abut an arterial.

Mr. Dabbert said the $25.00 fee and the 1/2 cent tax would also be a direct cost to developers, who are also paying a 1/2 cent tax more on materials. Mr. Dabbert said even though others will be buying goods and contributing, buying shoes and clothes vs. materials for a house is off balance.

In response to a question from Mr. Hansen asking about the storm water program, Mr. Hunke said it is practice to look at watersheds on a regional basis and some of that land is outside of corporate lands therefore they are held in abeyance. He said there is a monthly charge on all properties to pay to the utility and that revenue is used to pay specials on unannexed lands. He said having large watersheds outside of the corporate limits created an imbalance and the city will be looking at more local ponds with extra detention; however, that is all still in discussion.

In response to a question from Mr. Dardis asking about the community dialogue on the two measures, Mr. Hunke said there have been two public meetings and attendance was light. He said the Chamber, the EDC, the HBA and Realtors overwhelmingly support Measure 1 for the 1/2 cent sales tax and Measure 2 for the $25.00 fee.

Mr. Gawrylow said if developers are able to roll the specials into the price of a home, that saves buyers 20 percent to 30 percent over a 30-year mortgage and the annual payment works out to be less than half if those payments are spread over longer periods.

Finance Director Kent Costin said he attended a meeting in Minnesota recently and learned some Minneapolis/St. Paul suburbs have discussed an increase in franchise fees with the goal of reducing or eliminating assessments. He said the issue with the idea is double taxation and inequity. He said if a city did implement this, a rebate program for residents could be structured to make it more equitable. He said other communities are also trying to figure out how to eliminate specials equitably. He said a city needs to be sensitive to those who are continuing to pay specials over the next 20 to 25 years. He said an abrupt shift out of specials leaves someone else paying double. He said another example he learned is developers in Woodbury, Minnesota were charging impact fees and were taken to court and lost due to the fact they were charging too much. He said the likely cause was construction and land inflation year over year. He said it costs a lot of money to deploy infrastructure. He said there is also a state law in Minnesota, which pertains to state agencies and state procurement called “Best and Final Offer.” He said he has not had much time to gather a lot of information about it; however, the gist of the law is to call for bids or set up a spec, get people in a bid pool, screen people out in whatever manner, bring the best offers to the table and negotiate. He said Fargo’s bond counsel said it seems like an astute option.

Mr. Dabbert said if he hires a private engineering firm, infrastructure still has to be built to city spec. He said for example at Ponyland, the developer tried to do the infrastructure privately; however, the developer still had to pay a private engineer and a City engineer.

In response to a question from Mr. Worth asking what the reception has been in Bismarck to taking the city out of the picture for driveways, sidewalks and approaches and turning it over to the private sector, Mr. Hunke said there has not been much public discussion about that topic. He said Bismarck has a new city engineer who is doing some analysis; however, if the city is the contractor, residents can spread out the payments, whereas a private contractor will not take payments so it is $7,000.00 to $10,000.00 out of a homeowner’s pocket.

In response to a question from Mr. Worth asking what happens when the additional amenities in a development need maintenance or need to be replaced, Mr. Dabbert said some are taken care of by a homeowners association; however, if it is a city asset, such as a walking path and because it is in the city right of way, the improvement district is created and the residents in that district pay for it at a 70/30 ratio.

City Engineer Brenda Derrig said if a trail is in park land, the Park District does the maintenance. She said the Engineering Department works very hard on green field development to try not to have double fronting lots. Regarding ponds, she said, if it is a large project, the City will look at the original assessment district and follow the funding policy; however, typically it is not a full assessment.

Commissioner Grindberg said this meeting will be the final information-gathering meeting and future “roll-up-the-sleeves” meetings will focus on developing specific recommendations on how Fargo might reform how it pays for infrastructure improvements. He said the insight from Mr. Gawrylow and Mr. Hunke was valuable and he is anxious to see what the Fargo group comes up with. He said he would also like to discuss the Prairie Dog Fund, a pool of money from the state for cities and counties to use for infrastructure rehab.

He said a final meeting of the taskforce will likely be in December, after which any recommendations the group comes up with would be presented to the City Commission.

The meeting adjourned at 12:52 p.m.